THE ECONOMIST

The world’s three biggest engine-makers hit a snag

Thu, 03/22/2018 - 16:48

It never walks. But does it run?

IT USED to be the world’s two biggest makers of airliners that would invariably deliver new designs late and over budget. A decade ago the cost of Airbus’s A380 superjumbo soared by about €5.5bn ($6.6bn) after engineers got its 330 miles of cables in a jumble. Boeing’s rival 787 Dreamliner exceeded its forecast costs by a whopping $20bn, give or take; its parts, once assembled, did not fit together properly. But just as both planemakers are mending their ways—Airbus’s A350 and A320neo and Boeing’s 737 MAX arrived in a much more timely and economical manner—manufacturers of the engines which power the aircraft are beginning to stall.

On March 15th Boeing revealed that the new engines, the largest ever made, for its new 777X wide-body airliner had completed their first test flight. But GE, the American engineering giant that built them, is already three months behind with their development, because of hiccups with the...Continue reading

Europeans fret that Chinese investment is a security risk

Thu, 03/22/2018 - 16:48

“WE ARE not naive free traders. Europe must always defend its strategic interests,” said Jean-Claude Juncker, the president of the European Commission, last year as he introduced plans to screen foreign investment into the European Union. America has had such rules since the 1970s; they are set to tighten further. The EU used to be more relaxed about acquisitions by foreigners. Now it too is toughening up.

The target is China, whose firms have been on a shopping spree (see chart). Purchases of fripperies such as football clubs and hotels have been curbed by the Chinese authorities, but investment continues to flow into technology and infrastructure, notes James Zhan of the UN...Continue reading

The EU wants to make finance more environmentally friendly

Thu, 03/22/2018 - 16:48

TO GAUGE an issue’s importance, a guest list is a good place to start. The one for a conference in Brussels on March 22nd to discuss the European Union’s “action plan” on sustainable finance features heavy-hitters including Emmanuel Macron, France’s president, and Michael Bloomberg, a former mayor of New York who campaigns on climate change. Given that sustainable finance is well-established, what action does the EU think is needed?

Investing with an eye to environmental or social issues, not just financial returns, has become mainstream in the past decade. According to the Global Sustainable Investment Alliance (GSIA), $23trn, or 26% of all assets under management in 2016, were in “socially responsible investments” that take account of environmental, social and governance (ESG) issues. New asset classes have sprung up. According to SEB, a Swedish bank, the issuance of green bonds, the proceeds of which are invested in environmental projects, reached $163bn in 2017, up from less than $500m in 2008.

Yet standards are a...Continue reading

Corporate citizens of somewhere

Thu, 03/22/2018 - 16:48

WHEN it comes to companies and their passports, there is a flutter of activity in the air—and a reek of hypocrisy. This month Qualcomm, an American-domiciled tech giant which does 65% of its business in China, booked most of its profits last year in Singapore, and pays little tax at home, successfully lobbied the Trump administration to block a hostile takeover on the ground that its independence was vital to ensure American strategic supremacy over China. The predator was Broadcom. It is listed in America but domiciled in Singapore, where it gets tax perks. On November 2nd, four days before its bid, it announced a burning desire to shift its legal base to the home of the brave.

In Europe, Unilever, which a year ago demanded that the British authorities help it fend off an unwelcome takeover by Kraft Heinz because it was a national treasure, is shifting its sole base to the Netherlands (at present it is split between London and Rotterdam). The consumer-goods firm says it wants to simplify its...Continue reading

What if China corners the cobalt market?

Thu, 03/22/2018 - 16:47

COBALT derives its name from Kobold, a mischievous German goblin who, according to legend, lurks underground. For centuries it vexed medieval miners by lookinglike a valuable ore that subsequently turned into worthless—and sometimes noxious—rubble. Once again it is threatening to cause trouble, this time in the growing market for batteries for electric vehicles (EVs), each of which uses about 10kg of cobalt. The source of mischief is no longer in Germany, though, but in China.

It is widely known that more than half of the world’s cobalt reserves and production are in one dangerously unstable country, the Democratic Republic of Congo. What is less well known is that four-fifths of the cobalt sulphates and oxides used to make the all-important cathodes for lithium-ion batteries are refined in China. (Much of the other 20% is processed in Finland, but its raw material, too, comes from a mine in Congo, majority-owned by a Chinese firm, China Molybdenum.)

On March 14th concerns about...Continue reading

Can’t hardly wait

Thu, 03/22/2018 - 16:47

LIKE teenagers, central bankers long to feel normal. For many of them (the central bankers, that is), the past decade has been an unusually angst-ridden one. They stumbled through it, confused by the way their policymaking bodies were changing, unsure what to do with their interest rates, embarrassed by their burgeoning balance-sheets. Teenagers often seek to quell their anxiety and insecurity by imitating behaviour they regard as normal. So too for central bankers.

But the desire to normalise policy, and leave crisis-era measures behind, could distract central bankers from their main goals, namely to support growth and control inflation. The Bank for International Settlements, a global club for central bankers, recently urged officials not to let market jitters discourage them from raising interest rates. Yet at worst, chasing some elusive notion of normal could put the global recovery at risk.

What central bankers mean by normalising policy is clear enough. As Peter Praet, the chief economist of the European Central Bank (ECB), explained in a recent speech, to normalise is to end their reliance on “unconventional” or “non-standard” tools such as quantitative easing (QE, the printing of new money to buy assets). It means returning to a familiar world in which adjustments to interest rates are their main policy lever.

Central bankers make no...Continue reading

Wall Street looks overvalued

Thu, 03/22/2018 - 16:47

FEW measures of stockmarket valuation are as controversial as the cyclically adjusted price-earnings ratio, or CAPE. American equities have looked expensive on this measure for most of the past 20 years, which is why many bulls tend to dismiss its usefulness. It is pretty clear that the CAPE does not help investors to time the market.

But a new paper* from Research Affiliates, a fund-management group, explains why many criticisms are overblown. The strongest case for the measure is that a higher ratio tends to be associated with lower long-term returns. A study of 12 national markets shows that a 5% increase in the CAPE, from 20 to 21, say, tends on average to reduce the total ten-year expected return by four percentage points.

The attraction of the CAPE is that it smooths out the vicissitudes of the profit cycle. In a recession, profits can plunge even faster than share prices. So if you look only at the ratio of a share price and the previous year’s profits, the market can look very expensive....Continue reading

Beware of performance figures

Tue, 03/20/2018 - 17:17

GOLFERS are familiiar with the concept of a "mulligan" - the chance to retake a shot. Give an averagely talented player enough mulligans and he or she will get one close to the hole. And a version of the mulligan exists in fund management too.

Readers will be familiar from past blog posts with the idea that actively-managed funds cannot be relied upon to beat the index. Many of these studies are conducted in the US market, which is probably the most efficient (and thus hardest to beat) in the world. But the same is true in Europe.

Figures from S&P Dow Jones Indices show that, over the 10 years to December 2017, less than 15% of euro-denominated European equity funds beat their benchmark; for emerging market funds, it was less than 3%; and global funds, under 2%. For sterling-denominated funds, less than...Continue reading

Airlines in America are in a race to improve their meals

Mon, 03/19/2018 - 19:28

IN THE 1950s—when the International Air Transport Association (IATA), a cartel of airlines, used to set fare levels and service quality on international routes—there were few differences between major carriers. One way to persuade passengers to choose one airline over another was to offer better meals as entertainment on board. And so an arms race to serve fancier food on transatlantic flights broke out. It came to an end in 1958, when SAS, a Scandinavian carrier, was fined $20,000 by IATA for serving open sandwiches that, contrary to IATA’s rules, contained overly fancy ingredients such as ox tongue, lettuce hearts and asparagus. The quality of food on board flights has fallen greatly since. Liberalisation of the aviation industry in the 1980s and 1990s, with IATA losing its power over fares, has meant that most carriers now compete on price rather than service quality. 

But there are signs that some airlines in America may be getting into a new arms race—or, put another way, a...Continue reading

Why China is swooping on Georgia’s airline industry

Thu, 03/15/2018 - 19:03

IN ANCIENT times, traders on the Silk Road connecting China with Europe rarely ventured into the northern Caucasus region that is now home to Georgia. Diverting from established routes through Armenia and Anatolia to the south served little purpose unless conflict made the trackways impassable. Today, advances in transport and logistics mean that geography is less of a hurdle for traders. But friendly relations are just as important. Having signed free trade agreements with China and the European Union, Georgia is keen to pitch itself as a trade and transit hub for President Xi Jinping of China’s One Belt One Road initiative. A new rail line passing through the city adds to its appeal, halving the time it takes to carry freight from China to Turkey. Foreign direct investment by Chinese companies has ballooned.

Hualing Group, the largest such investor, has spent hundreds of millions of dollars developing real estate, logistics infrastructure, and sea and ground transport facilities in the country. Its attention...Continue reading

AT&T’s merger with Time Warner goes on trial

Thu, 03/15/2018 - 16:50

AN ANTITRUST trial over AT&T’s $109bn acquisition of Time Warner, which begins on March 19th, will have more keen observers than one courtroom can handle. Disney, Comcast, 21st Century Fox, Verizon, Charter Communications, CBS and Viacom will be watching. So will Netflix, Amazon and Google.

The reason is simple. If AT&T wins the case against the Justice Department, and the “vertical merger” of the distribution and content businesses goes through, a wave of consolidation deals will follow. Companies that rely on large numbers of people to watch video will want to bulk up to compete with each other and Silicon Valley’s mightiest.

Comcast may make a hostile bid for Fox’s assets, setting off a bidding war with Disney, which has already agreed a $66bn deal with Fox. (Comcast already wants to buy Sky, a European satellite provider that is part of the Disney-Fox transaction.) Other pay-TV and mobile firms, like Charter and Verizon, will feel emboldened to go after content companies such as CBS or Lionsgate. All are...Continue reading

The reckoning at Theranos

Thu, 03/15/2018 - 16:50

“The Next Steve Jobs”

“THE Next Steve Jobs” is how Inc., an American business magazine, described Elizabeth Holmes when her photograph appeared on its cover in 2015. They may share an affinity for black turtlenecks but the reputations of Ms Holmes and Apple’s celebrated late boss could not be more different. On March 14th Ms Holmes was accused of fraud by America’s Securities and Exchange Commission (SEC). She has agreed to pay a $500,000 fine, not serve as an officer of a public company for ten years and turn over much of her stake in Theranos, the startup she founded (she has neither admitted nor denied wrongdoing).

Only a few years ago Ms Holmes, who is 34 years old, was touted as the world’s youngest self-made female billionaire, a shatterer of Silicon Valley’s reinforced-glass ceiling. She graced magazine covers and speechified about Theranos, which was trying to upend diagnostic testing by using pinprick amounts of blood rather...Continue reading

Germany’s two biggest utilities strike a deal

Thu, 03/15/2018 - 16:50

Windy with a chance of profits

WHEN Johannes Teyssen took control of E.ON in 2010, it was Germany’s second-biggest company after Siemens, an industrial giant. From its headquarters in chic Düsseldorf, the utility looked down on RWE, its longtime rival, based in Essen, a down-at-heel former coal-and-steel town 40 minutes’ drive away.

The illusion of superiority did not last. The following year Angela Merkel, Germany’s chancellor, reacted to the meltdown at Fukushima in Japan by starting a process to shut down Germany’s nuclear-power plants, on which both companies relied. Other aspects of the Energiewende, or energy transition, added to their woes, as lavish support for renewables clobbered the country’s wholesale electricity prices. The companies’ profits slumped, as did their share prices (see chart).

In 2016 E.ON recorded its biggest-ever loss, moved its headquarters from Düsseldorf to Essen, and reinvented itself as a renewable-energy business and a household...Continue reading

Unilever picks Rotterdam

Thu, 03/15/2018 - 16:50

PROUDLY overlooking the River Thames, Unilever House looks more royal palace than office building. Built on the site of a Tudor estate, for nine decades it has been the London home to Unilever, one of the world’s largest consumer-goods firms. Since a merger of British soapmakers and Dutch margarine merchants in 1929, Unilever has been a dual-nationality company. It is legally domiciled in Britain and the Netherlands, with headquarters in both the London building and in Rotterdam.

The appeal of dual citizenship has faded. After a year-long review, on March 15th Unilever’s board announced plans to move its legal base to Rotterdam. (The firm will continue to have a listing in London, and claims no British jobs will be lost.) Many in the City of London finger Britain’s decision to leave the European Union for the move. But Graeme Pitkethly, the firm’s chief financial officer, insisted Brexit was “absolutely not a factor” in the decision. Over the past decade Unilever has been shifting its production facilities nearer to its customers in...Continue reading

Which firms profit most from America’s health-care system

Thu, 03/15/2018 - 16:50

EVERY year America spends about $5,000 more per person on health care than other rich countries do. Yet its people are not any healthier. Where does all the money go? One explanation is waste, with patients wolfing down too many pills and administrators churning out red tape. There is also the cost of services that may be popular and legitimate but do nothing to improve medical outcomes. Manhattan’s hospitals, with their swish reception desks and menus, can seem like hotels compared with London’s bleached Victorian structures.

The most controversial source of excess spending, though, is rent-seeking by health-care firms. This is when companies extract outsize profits relative to the capital they deploy and risks they take. Schumpeter has estimated the scale of gouging across the health-care system. Although it does not explain the vast bulk of America’s overspending, the sums are big by any other standard, with health-care firms making excess profits of $65bn a year. Surprisingly, the worst...Continue reading

Online starlets are refashioning Chinese e-commerce

Thu, 03/15/2018 - 16:50

Ms Jiang and Mr Liang, salespeople of the year

LIANG TAO shifted 80 pink Givenchy bags in 12 minutes. Becky Fang offloaded 100 turquoise Mini Cooper cars in just five. Both are wanghong, literally “red-hot on the web”. Every day millions of Chinese trawl social media for wanghong posts or tune in to live-streams for opinions on everything from a French fashionista’s essentials to rampant sexism in China. The fans are helping this new breed of Chinese internet star to monetise their popularity—and to shake up the country’s e-commerce industry in the process.

Unlike conventional luxury-and-beauty brand ambassadors, many wanghong have built their fan bases through compelling online content rather than a famous name. Some of the most successful are not especially glamorous. “Pudgy Luo” is a middle-aged man who discusses everything from Chinese emperors to 3D printing on his talk-show. MC...Continue reading

Renault-Nissan-Mitsubishi has become the world’s biggest carmaker

Thu, 03/15/2018 - 16:50

RENAULT unveiled the EZ-GO, a concept for a robotaxi, at the Geneva motor show, which opened on March 5th. Nissan, in conjunction with DeNA, a Japanese software firm, recently began trials of driverless taxis in Japan. The two companies are pursuing their own paths towards the future of mobility. Yet both are bound together in a close alliance, which celebrates its 20th anniversary next year. In 2016 they were joined by Mitsubishi. Last year the trio sold 10.6m cars between them, one in every nine worldwide.

It is a unique carmaking liaison, neither a full merger nor as loose as the many tie-ups forged to spread the cost of developing pricey pieces of technology. Each firm remains autonomous but shares a growing number of links in the supply chain with the other two. It all looks hugely successful. In 2017 Renault-Nissan-Mitsubishi overtook Volkswagen (VW) as the world’s biggest car company (if lorries are included, the German firm is narrowly ahead).

Yet enthusiasm for the alliance among...Continue reading

America’s public markets are perking up. Can it last?

Thu, 03/15/2018 - 16:50

FOR years, discussions of America’s public markets have usually featured a lament for their dwindling appeal. According to Jay Ritter of the University of Florida, the number of publicly listed companies peaked in 1997 at 8,491 (see chart). By 2017 it had slumped to 4,496. True, many of the companies that went public in the internet’s early days should never have done so. But the decline worries anyone who sees public markets as the best way for ordinary investors to benefit from the successes of corporate America.

The mood right now is more buoyant. Bankers and lawyers who usually chat with journalists in their offices are on the road...Continue reading

Protectionism may impede Delta’s expansion plans

Thu, 03/15/2018 - 16:50

AS AMERICA’S oldest airline still aloft, Delta makes much of its southern roots. At its biggest hub, Atlanta airport, the company museum recounts how it became the world’s second-biggest carrier. The answer: by buying up domestic rivals. With few takeover targets left at home, Delta’s chief executive, Ed Bastian, is looking abroad. But his plans for more foreign joint ventures (JVs) face regulatory headwinds.

Last year Mr Bastian announced a flurry of JVs. In May Delta launched one with Aeromexico and in June another with Korean Air. In July Delta formed one of the world’s biggest JVs with Virgin Atlantic of Britain and Air France-KLM, a European group. In December it sealed one with WestJet, Canada’s biggest low-cost carrier. It wants closer relations with China Eastern and GOL of Brazil, two airlines in which it owns shares. And on March 12th it emerged that Delta and Air France-KLM plan to bid for Air India, an ailing flag carrier. If all these deals come off, one passenger in eight...Continue reading

A startling amount of land in Japan has no official owner

Thu, 03/15/2018 - 16:50

Property, period

THE tsunami of 2011 left gaping holes reminiscent of war zones in the landscape along the coast of Tohuku, in the north-east of Honshu, Japan’s main island. Car navigation systems gave directions to landmarks that had vanished into the sea. The subsequent reconstruction effort hit an unexpected roadblock: missing landowners. Officials were stunned to find that hundreds of plots were held in the names of people who were dead or unknown.

The deluge threw the problem into particularly sharp relief in Tohuku, but it is widespread elsewhere too. A report last year for the government by a panel of experts estimated that about 41,000 sq km of land, or 11% of Japan’s surface, was unclaimed, most of it in rural regions. By 2040, it warned, the area could more than double. The cumulative cost in lost productivity could be as high as ¥6trn ($56bn).

The countryside is littered with vacant plots and empty houses. Some date from Japan’s great post-war...Continue reading

Do credit booms foretell emerging-market crises?

Thu, 03/15/2018 - 16:50

ON THE morning of December 7th 1941, George Elliott Junior noticed “the largest blip” he had ever seen on a radar near America’s naval base at Pearl Harbour. His discovery was dismissed by his superiors, who were thus unprepared for the Japanese bombers that arrived shortly after. The mistake prompted urgent research into “receiver operating characteristics”, the ability of radar operators to distinguish between true and false alarms.

A similar concern motivates research at the Bank for International Settlements (BIS) in Basel, Switzerland. Its equivalent to the radar is a set of economic indicators that can potentially detect the approach of financial crises. A prominent example is the “credit gap”, which measures the divergence between the level of credit to households and non-financial firms, expressed as a percentage of GDP, and its long-term trend. A big gap may reflect the kind of unsustainable credit boom that often precedes a crisis. Anything above 9% of GDP is reason to worry, according to Iñaki Aldasoro, Claudio Borio and Mathias Drehmann of the BIS.

The biggest blips on the oscilloscope include Canada (9.6%), Singapore (11.1%) and Switzerland (16.3%), according to the latest readings, released on March 11th. But the one that has kept everyone’s eyes peeled is China, with a gap of 16.7% in the third quarter of 2017 (the latest...Continue reading

A lose-lose trade war looms between America and China

Thu, 03/15/2018 - 16:50

PRESIDENT DONALD TRUMP has not yet started a global trade war. But he has started a frenzy of special pleading and spluttered threats. In the week since he announced tariffs on steel and aluminium imports, countries have scrambled to win reprieves. Australia, the European Union and Japan, among others, have argued that, since they are America’s allies, their products pose no risk to America’s security. If these appeals fail, the EU has been most vocal in vowing to retaliate, in turn prompting Mr Trump to threaten levies on European cars.

In China, ostensibly the focus of Mr Trump’s actions, the public response has been more restrained. Officials have said the two countries should strive for a “win-win outcome”, a favourite bromide in their lexicon. As a rival to America, China knows that an exemption from the tariffs is not on offer. It also knows that it needs to conserve firepower. If this is the first shot in a trade war, it is, for China, small bore. Its steel and aluminium exports to America amount to roughly 0.03% of its GDP, not...Continue reading

A primer on blockchain-based versions of central-bank money

Thu, 03/15/2018 - 16:50

BITCOIN, Ethereum, XRP, Stellar, Cardano: the infant world of cryptocurrencies is already mind-bogglingly crowded. Amid the cacophony of blockchain-based would-be substitutes for official currencies, central banks from Singapore to Sweden have been pondering whether they should issue digital versions of their own money, too. None is about to do so, but a report prepared by central-bank officials from around the world, published by the Bank for International Settlements on March 12th—a week before finance ministers and central-bank heads from G20 countries meet in Buenos Aires—offers a guide to how to approach the task.

The answer? With care. For a start, it matters who will be using these central-bank digital currencies (CBDCs). Existing central-bank money comes in two flavours: notes and coins available to anyone; and reserve and settlement accounts open only to commercial banks, already in electronic form (though not based on blockchain) and used for interbank payments. Similarly, CBDCs could be either widely available or tightly...Continue reading

United Airlines kills another pet

Wed, 03/14/2018 - 22:44

GULLIVER recently wrote about a pet that suffered a grizzly end after it was not permitted to fly. Spirit Airlines refused to allow a hamster on board as an emotional-support animal and it ended up being flushed down an airport toilet. But sometimes it is more dangerous for an animal to be permitted to ascend to 35,000 feet. Particularly, it seems, if it is flying on United Airlines.

On March 12th, on a flight from Houston to New York, a United Airlines flight attendant knowingly stowed a French bulldog in the overhead compartment, where it died, the family that owned the dog alleges. United quickly apologised to the family for what it called “a tragic accident that should never have occurred, as pets should never be placed in the overhead bin.” The airline promised an investigation “to prevent this...Continue reading

Prudential, a British insurer, demerges

Wed, 03/14/2018 - 21:45

WHEN the underpinnings of an industry change, the effects may seem slow and limited for a while, only to prove surprisingly speedy later on. Europe’s life-insurance industry provides a case study. The demerger announced on March 14th of Prudential is the latest in a flurry of activity prompted at least partly by shifts in European regulation over two years ago. Britain’s largest insurer (unrelated to the American insurer of the same name) is splitting off its British and European business into M&G Prudential, which will be largely focused on asset management. The remainder of Prudential will be left as an insurer in Asia, America and Africa.

Life insurers have been hurt by a prolonged period of low interest rates, prompting them to move towards investment-like products that leave more risk with policyholders, and away from products with guaranteed returns, such as annuities. More stringent capital requirements in the European Union for insurers from the beginning of 2016, under a set of rules called Solvency 2, mean that life insurers...Continue reading

Will British airlines lose their rights to fly to America after Brexit?

Sat, 03/10/2018 - 22:48

THERE has been much chatter among frequent flyers in London this week about a front-page splash in the Financial Times claiming that British negotiations with America to replace the EU-US Open Skies Treaty are in trouble:

The US is offering Britain a worse “open skies” deal after Brexit than it had as an EU member, in a negotiating stance that would badly hit the transatlantic operating rights of British Airways and Virgin Atlantic. British and American negotiators met secretly in January for the first formal talks on a new air services deal, aiming to fill the gap created when Britain falls out of the EU-US open skies treaty after Brexit, say people familiar with talks.

The talks were cut short after US negotiators offered only a standard bilateral agreement. These typically require airlines to be majority owned and controlled by parties from their...Continue reading

Pakistan’s Murree Brewery shrugs off restrictions on its products

Thu, 03/08/2018 - 16:55

Tipple from a teetotalitarian land

QUARTER-LITRE bottles of whisky whizz down a conveyor belt past Mukhtar Ali, a quality-control employee at Pakistan’s Murree Brewery, the only legal beer-and-spirit maker in this Islamic country. Nearby labourers pack Vat No.1, a cask-aged spirit, into boxes. An elderly man with a long beard tapes them up. Asked over the roar of imported German machinery if they have ever taken a sip of the amber liquid, each shakes his head. “It’s haram,” (meaning forbidden), says Mr Ali.

The 155-year-old institution causes some spluttering nonetheless. Founded for British troops of the Raj, it can sell only to the 3% of the 207m-strong population that is comprised of foreigners and non-Muslims. But many of its products end up in Muslim hands, as illustrated by the predilections of the former prime minister, Zulfiqar Ali Bhutto, who ordered a nationwide ban on alcohol in 1977. “He was the biggest consumer of Murree in...Continue reading

An arcane business structure loses its charm

Thu, 03/08/2018 - 16:55

WHEN British soapmakers merged with Dutch margarine merchants to form Unilever in 1929, the logic was clear. Both firms shared a key ingredient, animal fat, and were starting to step on each other’s toes as they diversified. Unilever is one of the world’s largest consumer-goods firms. A dual-nationality company, it has headquarters in both Britain and the Netherlands and is regarded as a national treasure in both places.

Before the month is out, however, it is expected to plump for Rotterdam as its sole headquarters (Britain’s quandary over Brexit is doubtless a factor). It is not alone in rethinking its arcane arrangement. According to FTI Consulting, a business-advisory firm, of the 15 companies that have used a “dual structure” at one time or other over the past 25 years, only six remain. Some, such as Royal Dutch Shell, an oil giant, unified their structures in the mid-2000s. RELX, an Anglo-Dutch publishing firm, did so last month. BHP, an Anglo-Australian mining firm, faces investor pressure to do the same.

“Siamese...Continue reading

Markets fret about America’s turn toward protectionism

Thu, 03/08/2018 - 16:55

IN THE run-up to the presidential election of 2016, investors were nervous about Donald Trump. They liked his tax-cutting, anti-regulation promises, but fretted about his foreign and trade policies. Some dubbed the two agendas “Trump lite” and “Donnie Darko”.

Almost as soon as it became clear that Mr Trump would become president, the markets decided to believe in the optimistic version. His tweeting and decision-making may have been erratic, but investors seemed to forgive the president his peccadilloes as a wife might her errant husband: “He may not be faithful but he’s a good provider.”

Fears about trade conflict almost disappeared. In last month’s survey of global fund managers by Bank of America Merrill Lynch, just 5% regarded a trade war between America and China as the biggest risk facing the markets, compared with 45% who worried about a return of inflation or a crash in the bond markets.

The announcement of tariffs on steel and aluminium on March 1st thus...Continue reading

Ericsson and Nokia are now direct rivals. How do they compare?

Thu, 03/08/2018 - 16:55

“SUCCESS is toxic”, says Risto Siilasmaa, Nokia’s chairman, as snowflakes swirl in the wind outside. Asked what lesson to draw from his firm’s collapse, which started a decade ago, he underlines the dangers of doing too well. In its heyday, Nokia was a monster; its market capitalisation surpassed $290bn in mid-2000 and by 2007 it accounted for 40% of global handset sales. Yet its dominance in hardware, which encouraged a relaxed attitude towards software, bred failure. It is now worth $33bn.

No executive at Ericsson, Nokia’s big European rival based some 400km to the west near Stockholm, would put it quite that way. But the experience of the Swedish firm has been strikingly similar. Early this decade Ericsson provided 40% of the world’s mobile infrastructure and its market capitalisation hovered above $40bn. Now both numbers are about half that.

The two firms are also direct competitors once again, which invites assessment of who is ahead. Another question is whether European...Continue reading

CFIUS intervenes in Broadcom’s attempt to buy Qualcomm

Thu, 03/08/2018 - 16:55

IT WAS only five months ago that President Donald Trump lauded Broadcom, a chipmaker, as “one of the really great, great companies” for announcing its plan to move its legal headquarters to America from Singapore. With such praise in the bank, the firm’s chief executive, Hock Tan, may have expected his subsequent offer for a rival, Qualcomm, to enjoy an easy ride. Its course has been anything but smooth. The $142bn bid, which would be the largest-ever tech deal, was rebuffed by Qualcomm’s management. Broadcom next turned to shareholders, asking them to elect its nominees to Qualcomm’s board at a meeting scheduled for March 6th.

Then, in a dramatic twist, the Committee on Foreign Investment into the United States (CFIUS), which oversees the national-security implications of foreign transactions, stepped in to delay the meeting while it conducts a review. It had been drawn in by Qualcomm, in what its furious suitor has branded a “desperate” attempt to prevent the vote. The panel’s surprise intervention suggests a more activist...Continue reading

America’s companies have binged on debt; a reckoning looms

Thu, 03/08/2018 - 16:55

AMERICA’s companies have been powering ahead for years. Amid growing profits, the recession that began in 2007 seems an increasingly distant memory. Yet the situation has a dark side: companies have binged on debt. For now, as the good times have coincided with a period of record-low interest rates, markets have been untroubled. But a shock could put corporate America into trouble.

No matter how it is measured, the debt load looks worrying. When calculated as a percentage of GDP, the total debt of America’s non-financial corporations reached 73.3% in the second quarter of 2017 (the latest available data). This is a record high. Measured against earnings before interest, tax, depreciation and amortisation (EBITDA), the net debt of non-financial companies in the S&P500 hit a ratio of 1.5 at of the end of 2016, a level not seen since 2003. And it remained nearly as high in 2017 (see chart).

To be sure, things are less worrying than they were before the financial crisis. According to a recent analysis by S&P Global Ratings, a...Continue reading

Mining data on cab rides to show how business information flows

Thu, 03/08/2018 - 16:55

AS COMPUTING power has grown, it has become easier to uncover information hidden inside datasets that seem totally unconnected. Some recent studies have used this approach to reveal business-related information flows. One linked the movements of 18th-century share prices with the arrival of ships bringing news. Another looked at the relationship between business activity and the movements of corporate jets. A third mined White House visitor logs for the names of executives and examined their companies’ subsequent stockmarket returns.

A paper in this vein published on March 5th pores over a dataset released by New York City’s government covering more than 1bn cab rides between 2009 and 2014. David Finer, a graduate student at University of Chicago’s Booth School of Business, analysed trips connecting the headquarters of big banks and the Federal Reserve Bank of New York. He extracted trips starting at commercial banks and at the New York Fed that converged on the same destination around...Continue reading

A Chinese oil baron is reportedly detained by the authorities

Thu, 03/08/2018 - 16:55

Ye Jianming in bloom

STAFF had routinely been directed to pore over their chairman’s speeches and learn from them. One which Ye Jianming, the 40-year-old founder of CEFC, delivered last autumn—“Only One Step From Midsummer to Harsh Winter”—was a historical tale meant to motivate the troops. In it he compared his firm’s swift rise to that of Hu Xueyan, a 19th-century merchant banker. Hu amassed a fortune trading in salt, tea, arms and silk through close ties to China’s imperial elites, then fell from grace and went bankrupt.

Mr Ye did not mean the lesson to be pertinent to his own situation. CEFC was then enjoying its own midsummer. As China’s largest private oil group, it had just won a 14.2% stake in Russia’s state-backed oil firm, Rosneft, paying $9.1bn for one of the most significant shares of the world’s largest listed oil firm by production. Industry analysts outside China had been scrambling to study CEFC since early 2017 when it joined national...Continue reading

Active fund managers hold fewer and fewer stocks

Thu, 03/08/2018 - 16:55

THE past decade has been tough for conventional “active” fund managers, who try to pick stocks that beat the market. They have been losing business to “passive” funds—those that try to replicate a benchmark, like the S&P500 index. Passive funds have much lower fees.

Figures from Inalytics, a company that analyses fund managers’ portfolios, suggest that active managers are changing strategy in response. The average number of stocks in global equity portfolios has halved, from 121 to 61 (see chart). In a sense, active managers have become more active, making bigger bets on individual stocks. This makes their portfolios less like the index, meaning they can beat the market by a larger margin. But they can also do a lot worse. The portfolios examined by Inalytics have outperformed, but in the long term the average manager is unlikely to do so, since the index reflects average performance.

Moreover, managers incur costs and the index does not. The result of more active management...Continue reading

Inside Warren Buffett’s deal machine

Thu, 03/08/2018 - 16:55

SOME things about Warren Buffett never change, including his non-stop jokes, famous annual letter and his reputation as the world’s best investor. What is less understood is that over the past decade Mr Buffett’s company, Berkshire Hathaway, has sharply altered its strategy. For its first 40 years Berkshire mainly invested in shares and ran insurance businesses, but since 2007 it has shifted to acquiring a succession of large industrial companies.

In some ways it is hard to criticise Berkshire. Its shares have kept up with the stockmarket and its standing is exalted. It is the world’s seventh-most-valuable publicly traded firm (the other six are tech concerns). But Mr Buffett’s behemoth is a puzzle. Its recent deals have had drab results, suggesting a pivot to mediocrity.

It has been quite a spree. Since 2007 Berkshire has spent $106bn on 158 firms. The share of its capital sunk into industry has risen from a third to over half. The largest deals include BNSF, a North American...Continue reading

How digitisation is paying for DBS

Thu, 03/08/2018 - 16:55

MOST banks gush about digital technology, fearing all the while that some born-digital usurper, large or small, will do to them what Amazon has done to retailers, Uber to taxi-drivers and Airbnb to hoteliers. Some have reorganised themselves to become nimbler, copying startups by forming small teams to generate, test, reject and improve ideas at speed. Apps are improving, new products are appearing and online marketplaces are being built. Only a few are turning enthusiasm into money. One of those is DBS.

Singapore’s (and South-East Asia’s) biggest bank is a stockmarket darling. Its share price has roughly doubled in the past two years, outstripping the gains of Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB), its main local rivals (see chart). The price exceeds DBS’s net book value per share by 50%. That owes something to the city-state’s buoyant economy—GDP rose by 3.6% last year, the most since 2014—and recovering housing market, and to the doubling of the dividend when DBS reported fourth-quarter results...Continue reading

Will China’s Belt and Road Initiative outdo the Marshall Plan?

Thu, 03/08/2018 - 16:55

SEVENTY years ago America passed the Economic Co-operation Act, better known as the Marshall Plan. Drawing inspiration from a speech at Harvard University by George Marshall, America’s secretary of state, it aimed to revive Europe’s war-ravaged economies. Almost five years ago, at a more obscure institution of higher learning, Nazarbayev University in Kazakhstan, China’s president, Xi Jinping, outlined his own vision of economic beneficence. The Belt and Road Initiative (BRI), as it has become known, aims to sprinkle infrastructure, trade and fellow-feeling on more than 70 countries, from the Baltic to the Pacific.

Mr Xi’s initiative, which also has geopolitical goals (see Banyan), has invited comparison with America’s mid-century development endeavour. Some even suggest it will be far bigger. But is that credible? The Marshall Plan,...Continue reading

Sweden tries to increase gender equality on Wikipedia

Thu, 03/08/2018 - 11:50

EVER since Julian Assange, founder of WikiLeaks, referred to Sweden as a “hornets’ nest of revolutionary feminism” and as a “Saudi Arabia of feminism”, Swedes have worn this as a badge of honour. Now its foreign ministry has an ambitious plan to increase gender equality on the internet.

Its precise target is Wikipedia, a user-generated online encyclopedia on which some 90% of the content is created by men. Of its biographies, 80% are about males. On International Women’s Day on March 8th (as The Economist went to press) the Swedes were hosting “WikiGap” edit-a-thons and seminars in 54 of its embassies, from Abuja to Vilnius, in partnership with Wikimedia, the foundation behind the platform. The hope was that participants would write more entries about notable women.

“Knowledge is power,” explains Margot Wallström, the foreign minister, and because these days knowledge and information come from the “clearly unbalanced” internet, this is a...Continue reading

Investment by women, and in them, is growing

Thu, 03/08/2018 - 11:33

MARCH 8th, International Women’s Day, always brings a flood of reports about gender inequalities in everything from health outcomes to pay and promotion. But one gap is gradually narrowing: that in wealth. As money managers seek to attract and serve rich women, and as those women express their values through their portfolios, the impact will be felt within the investment industry and beyond.

According to the Boston Consulting Group, between 2010 and 2015 private wealth held by women grew from $34trn to $51trn. Women’s wealth also rose as a share of all private wealth, though less spectacularly, from 28% to 30%. By 2020 they are expected to hold $72trn, 32% of the total. And most of the private wealth that changes hands in the coming decades is likely to go to women.

One reason for women’s growing wealth is that far more of them are in well-paid work than before. In America, women’s rate of participation in the labour market rose from 34% in 1950 to 57% in 2016. Another is that women are...Continue reading

An attempt to revise the Dodd-Frank Act reaches a milestone

Thu, 03/08/2018 - 11:33

AFTER 25 hearings, thousands of pages of comments and many unworkable bipartisan working groups, America’s Senate has finally produced a possible consensus bill to tweak the Dodd-Frank Act, the vast swathe of banking regulation passed soon after the 2008-09 financial crisis. On March 6th, in a technical move that counts as significant progress in Washington’s creaky bureaucracy, 16 Democrats and one independent joined Republicans in voting to allow several hours of debate before passing the bill on to the Senate leadership.

Amendments may yet be added and the entire edifice could fracture, but the vote, after years of effort, suggests a bill might now pass. If it does, it would then have to be reconciled with a different bill passed by the House of Representatives. But this now seems possible as well, if only because the alternative would be no amendment to Dodd-Frank at all.

One certainty is that, whatever the bill’s fate, there will be disappointment. Bernie Sanders, a socialist who ran for the Democratic Party’s presidential nomination, said passage would create massive economic disruption. Elizabeth Warren, a Democratic senator since 2012 who helped ensure the current law’s expansive scope, said the proposal was a “punch in the gut to American consumers”, and “bank lobbyists …dragging us back to the bad old days”.

Dodd-Frank...Continue reading

The real problem with pensions

Wed, 03/07/2018 - 17:51

PAYING for pensions is like one of those never-ending historical wars; a confusing series of small battles and skirmishes that can obscure the long-term trend. The latest conflict is in Britain where university lecturers are indulging in strike action over changes to their future benefits.

Let us start by making the long-term trends clear.

1. People are living longer and retirement ages have not kept pace. This increases the cost of paying pensions 

2 Interest rates and bond yields have fallen. This increases the cost of generating an income from a given pension pot

3. Private sector employers have reacted to this cost by closing their defined benefit (DB) schemes (which link pensions to salaries) and switching to defined contribution (DC) schemes (which simply generate a savings pot)

British universities have reacted in a similar way; they are proposing switching future benefits to a DC basis. To avoid confusion, this means...Continue reading

President Donald Trump wants tariffs on steel and aluminium

Fri, 03/02/2018 - 12:31

WHEN President Donald Trump tweeted “We want free, fair and SMART TRADE,” on March 1st, trade-watchers groaned. Later that day, after months of back-and-forth between the protectionists and the globalists in the White House, he appeared to deliver the tariffs he has long been promising. He announced tariffs of 25% on imports of steel and 10% on those of aluminium. He promised protection “for a long time”, adding “you’ll have to grow your industries, that’s all I’m asking.” According to the New York Times, he told the assembled executives from steel and aluminium firms whom he met before the announcement that he did not intend to exclude any country from the tariffs.

Mr Trump’s bid to nurse America’s steel and aluminium industries to health could benefit some workers. There is a global glut of both metals, largely driven by an enormous expansion of China’s production capacity since the early 2000s. That created trade flows to America that over 420 separate anti-dumping and countervailing duties could not fully...Continue reading

A history of the Trump slump

Fri, 03/02/2018 - 11:28

LOOKING back from the vantage point of 2025*, economic historians are starting to write their analyses of the Trump slump. It seemed to appear from nowhere with the economy growing at around the trend rate (2.3% in 2017) and the stockmarket booming. The abrupt change came in March 2018 when President Donald Trump decided to impose tariffs on steel and aluminium imports. Both China and the European Union (EU) retaliated in kind without trying to escalate the tensions. It might have ended there.

But unfortunately, the president's more mainstream advisers like Gary Cohn had been sidelined by a more aggressive group that saw the trade deficit as the key measure of economic progress. In this mercantilist view, any American deficit was proof of cheating. Unfortunately, the president had also enthusiastically passed a tax-cutting programme which resulted in demand sucking more imports into the country. The trade deficit widened rather than declined. So in late 2018, just before the mid-term Congressional elections, an enraged President passed a general...Continue reading

Digital money has made it harder to tip the hotel housemaid

Fri, 03/02/2018 - 10:15

Last summer, Uber at last started allowing its customers to tip their drivers. There was nothing actually preventing them from tipping before. At the end of the ride a passenger could have pulled out his wallet, fished around for change and handed the driver a few dollars. But it would have seemed absurd to do so, when everything else about the transaction was handled through a few taps of the app. The app didn’t enable tipping, so riders didn’t tip.

All of this highlights the conundrum for hotel housekeepers. Increasingly, people book hotel rooms through their computers or phones. They pay, and often pre-pay, with their credit cards. They get around town with app-based ride-hailing. There’s a good chance they don’t even carry cash. And yet to tip the housekeeper—or the bellhop or concierge—there’s no option but cash.

It is probably no coincidence, then, that tips are tight for housekeepers. According to the New York Times, fewer than...Continue reading

Comcast announces a surprise offer for the British television firm

Thu, 03/01/2018 - 16:44

HAVING failed to get Rupert Murdoch’s attention before, Brian Roberts, chief executive of Comcast, certainly has it now. On February 27th the American pay-television giant said it would make a £22.1bn ($30.7bn) offer for Sky, the European satellite broadcaster, potentially disrupting Disney’s agreed $66bn purchase of much of 21st Century Fox.

The surprise announcement comes as Fox, which owns 39% of Sky, is trying to get regulatory approval in Britain for its own purchase of the remaining 61% of the satellite broadcaster, which it would then hand over to Disney after shareholders and regulators approve that deal (perhaps by the end of this year). By putting himself in the middle of that complex transaction, with an all-cash offer 16% richer than that of Fox, Mr Roberts is causing people to wonder what his goal is. He had tried to outbid Disney for Fox’s assets in the autumn, but gave up due to a lack of engagement from Mr Murdoch. He may now only be after Sky, or he may intend to make a still bigger hostile bid to top...Continue reading

Some airport terminals are learning from the luxury-hotel business

Thu, 03/01/2018 - 16:44

Harder to expense

THE private-jet industry advertises itself as the height of luxury for the rich. But travelling through the ramshackle, ugly buildings it used to use as terminals was rather like going commercial. No longer. At one of Dubai’s newest facilities for private jets—built by Jetex, a fast-growing chain—passengers strum guitars on hammock-shaped sofas around a coffee table dressed up as a campfire, before being whisked away to their planes in limousines. Others amuse themselves playing table football or having elaborate spa treatments.

It is unsurprising that such a facility has emerged in Dubai. But the boom in luxurious terminals that look more like playpens for adults than somewhere to fly from is spreading. Jetex has opened 39 of them in more than 20 countries since 2005. Adel Mardini, the firm’s boss, is clear about how he wants to disrupt the industry. He says he wants airport facilities to feel “like a five-star hotel”.

Often...Continue reading

Capital is on its way to America, but for bad reasons

Thu, 03/01/2018 - 16:44

ACCORDING to President Donald Trump, money is pouring into America from abroad. The tax reform he signed into law in December means American firms can no longer defer paying taxes on profits left sitting in foreign subsidiaries. The change has led to some uplifting headlines. Apple said that it would make a one-off tax payment of $38bn relating to its past accumulation of $252bn in foreign earnings. Presumably, it will now start to bring this cash home. “Huge win for American workers and the USA!” tweeted Mr Trump. Yet despite the prospect of large-scale profit repatriations, the dollar has been strangely weak of late. Since the start of November, when tax reform began looking likely to pass, the greenback has fallen by about 3%. What is going on?

Start with the fact that repatriations are mostly not true capital inflows. An analysis by Zoltan Pozsar of Credit Suisse finds that, as of March 2017, American corporations had amassed around $2.2trn of earnings in overseas subsidiaries. About half was...Continue reading

New research suggests the dollar’s level drives world trade

Thu, 03/01/2018 - 16:44

AGUS SACCHAL sells sheets and blankets from a warehouse in Buenos Aires, for which he is paid in Argentine pesos. While the pesos go into his wallet, two other banknotes are stuck to his office window. One is a ten-yuan note from a visit to China, where he went in search of cheap textiles. The other is a $5 bill, pinned next to an invoice, also in dollars. Though he does not trade with America directly, when importing he uses the greenback.

Argentina’s rocky financial history makes the dollar’s dominance there unsurprising. Still, it is an extreme case of a wider phenomenon. After gathering data on 91% of the world’s imports, by value, Gita Gopinath of Harvard University found that America accounts for nearly 10%. But its currency is used in over 40% of invoicing.

Recent research suggests that this creates a link between a weak dollar and buoyant trade flows—and vice versa. Trends since 1999 are suggestive (see chart). During 2017 the dollar depreciated by 7% against a basket of other currencies, as global trade flows surged...Continue reading

A new boss for McKinsey

Thu, 03/01/2018 - 16:44

THE Jesuits, the US Marines and the Freemasons: McKinsey has been compared to them all, at one time or other. The firm prides itself on being the most prestigious management consultancy, sending out its bright, young footsoldiers to advise executives and policymakers on tricky strategic issues. It is everywhere, counselling 90 of the top 100 firms (as ranked by Forbes magazine). Among its many government assignments it is helping Britain to leave the EU, Lebanon to fix its economy and the Saudis to wean themselves off oil.

Occasionally the company needs new leadership itself. On February 25th the result of a long election process was made public. Kevin Sneader, the Scottish chairman of McKinsey’s Asia unit, will replace Dominic Barton as managing partner—the top job. He inherits a thriving business. The firm remains by far the biggest of the premium consultancies (see table). Over the past decade, annual revenues have doubled to $10bn; so too has the size of the partnership, to more than 2,000.

Continue reading

Two oil majors face a trial in Milan over a controversial deal in Nigeria

Thu, 03/01/2018 - 16:44

Better uses for $1.1bn

RESOURCE-RICH Nigeria has long ignited interest from oil firms, but it can be a dangerously combustible environment when it comes to the risk of corruption. Two firms caught up in scandals are Royal Dutch Shell and Eni, Italy’s state-backed energy group. In 2010 both entered into deferred-prosecution agreements with America’s Department of Justice after being implicated in separate Nigerian bribery schemes. But those pale beside a case involving the two companies that is set to go to trial in Milan on March 5th.

The case centres on the purchase of a big offshore oil field known as OPL 245, and touches the top ranks of both firms. In the dock will be, among others, Eni’s current CEO, Claudio Descalzi, and Shell’s former exploration chief, Malcolm Brinded. Also on trial are the firms themselves, charged with failing to prevent bribery. The individuals face jail if convicted; the companies face fines. All deny wrongdoing.

In 2011...Continue reading

Automation will drive interest rates higher, a new report concludes

Thu, 03/01/2018 - 16:44

REAL interest rates in the developed world have been low ever since the financial crisis of 2008-09 (see chart). The global economy might have struggled to recover had that not been the case; higher rates would have caused many more companies and homeowners to default.

Central banks are now starting to push rates slightly higher. And according to a new paper* from Bain, a management consultancy, the trend towards robotics will push them higher still—at least for a decade. That could be a shock for the financial markets.

Bain estimates that by 2030 American companies will have invested as much as $8trn in automation. As companies scramble to borrow money in order to buy machinery and robots, the resulting investment boom will drive up rates.

Automation will boost productivity, which has grown sluggishly in recent years. This slowdown may have been caused by the shift from manufacturing to services, where productivity gains are harder to achieve. Between 1993 and 2014, the American...Continue reading

American companies snub the National Rifle Association

Thu, 03/01/2018 - 16:44

FOR all the controversy that the National Rifle Association (NRA), America’s gun lobby, arouses, Americans of all political stripes have tended to regard it as nearly unassailable. The NRA and its 5m members have therefore been valued customers for companies, too. But after the latest school shooting, at Marjory Stoneman Douglas High School in Florida on February 14th, that has started to change. Not only has the political discussion shifted, but corporate America has reacted.

Snubs from big business began just a week after the shooting. On February 22nd First National Bank of Omaha, a bank, said “customer feedback” prompted it to stop issuing NRA-branded credit cards. Angry customers and riled-up activists, students from Marjory Stoneman Douglas foremost among them, have pushed a campaign to #BoycottNRA on Twitter, piling pressure on companies. In the span of just a few days, several firms ended their discounts for NRA members, including Delta and United, two airlines; MetLife, an insurer;...Continue reading

Russia’s credit rating rises; Brazil’s falls

Thu, 03/01/2018 - 16:44

BRAZIL and Russia, the third- and fourth-biggest emerging economies, have much in common beyond their size. Each boasts annual GDP per person of around $10,000, which depends more than either would like on natural riches. After commodity prices tumbled in 2014, their economies shrank and their currencies sank. Their central banks have fought hard against the ensuing inflation, driving it below 3%. That has allowed both to cut interest rates, contributing to modest economic recoveries.

But their fiscal fortunes have diverged. Brazil’s credit rating was cut by Fitch on February 18th, making its sovereign bonds even “junkier” (ie, more speculative). Russia’s rating, by contrast, was raised a few days later by S&P Global, which became the second agency to rate Russian sovereign debt as “investment grade”.

That might seem an odd description for a country embroiled in two wars and encumbered by sanctions. But Russia’s upgrade is not hard to justify. Though its approach to geopolitics is adventurous, its approach to...Continue reading

Hong Kong and Singapore succumb to the lure of dual-class shares

Thu, 03/01/2018 - 16:44

FOR Charles Li, Alibaba was the one that got away. The head of the Hong Kong stock exchange (HKEX) courted the Chinese e-commerce giant when it sought a venue for its listing five years ago, but he could not push through rule changes wanted by Alibaba to keep control of the company in its leaders’ hands. It opted instead for an initial public offering (IPO) in New York. “Losing one or two listing candidates is not a big deal for Hong Kong,” he wrote at the time. “But losing a generation of companies from China’s new economy is.” Since then he has been determined to make the next big catch.

It is finally within his grasp. After a debate that has trundled on for several years HKEX is, in the coming weeks, poised to allow companies to issue shares with different voting rights. Known as dual-class shares, these give founders the ability to control their firms, even as minority owners. This should make Hong Kong the favoured destination for the next wave of Chinese tech firms to go public, from Xiaomi, a smartphone maker, to Ant Financial,...Continue reading

Narendra Modi wants to boost formalisation. How is he faring?

Thu, 03/01/2018 - 16:44

WATCHING money drain from your bank account has never been so much fun. On WhatsApp, a messaging service ubiquitous in India, sending rupees is now as easy as posting a selfie. Set-up is a breeze, because all Indian banks have been corralled onto a common payment platform on which anyone, from Google and Samsung to local payment firms and banks themselves, can build their own user interface. Money zips instantly from one bank account to the other, without any need to set up a pesky digital wallet or download some new app. At least outside China, there is no simpler way to shift money today.

WhatsApp’s offering is being rolled out gradually. The number of transactions routed through the United Payments Interface (UPI), the system on which WhatsApp and the rest are riding, has soared from almost nothing in early 2017 to over 150m a month in January. On current trends, UPI transfers will overtake cash withdrawals from banks within weeks. Some 665bn rupees ($10.2bn) will have shifted hands—or...Continue reading

Labour-monitoring technologies raise efficiency—and hard questions

Thu, 03/01/2018 - 16:44

BOSSES have always sought control over how workers do their jobs. Whatever subtlety there once was to this art, technology is now obliterating. In February Amazon received patents for a wristband apparently intended to shepherd labourers in its warehouses through their jobs with maximum efficiency. The device, were Amazon to produce and use it, could collect detailed information about each worker’s whereabouts and movements, and strategically vibrate in order to guide their actions. Using such technology seems an obvious step for firms seeking to maximise productivity. Whether workers should welcome the trend, or fear it, is harder to say.

Workplace discipline came into its own during the Industrial Revolution. As production came to depend ever more on expensive capital equipment, bosses, not keen to see that equipment sitting idle, curtailed their workers’ freedom, demanding they work during set hours, in co-ordination with other employees, at a pace dictated by the firm. Technology creates new...Continue reading

Are China’s state giants reformable?

Thu, 03/01/2018 - 11:33

AMONG investors it is fashionable to say that China’s state-owned enterprises (SOEs) do not matter much any more and that entrepreneurs now power the world’s second-largest economy. But China’s SOEs are still hard to avoid. They account for 40% of its stockmarket and a third of its investment, and they dominate heavy industry. On the global stage, SOEs’ appetites sway commodity prices and many are expanding abroad.

These empires of men and machines account for 45 cents of every dollar of debt in China, so their health determines whether the country’s financial system will escape a crisis or blow up. And SOEs have become a loaded gun on the negotiating table between China and America. Treasury officials argue that China has broken the promises it made upon joining the World Trade Organisation in 2001 about further liberalising its economy. According to one negotiator, it is “abusing the system” by subsidising SOEs which in turn rig markets, dump cheap exports abroad and deter foreign...Continue reading

German cars have the most to lose from changes facing the auto industry

Thu, 03/01/2018 - 11:33

GERMAN carmakers have much in common with the self-confident roadhogs who favour their vehicles. The cars they produce, with sleek design, doors that close with a satisfying thunk and roomy interiors swagged with leather and technology, are the dominant force at the upper end of the car market worldwide. At home, too, they are the purring engine of the economy; carmaking is by far Germany’s biggest industrial sector.

But cars are changing. Electric power and autonomous vehicles will alter radically the way they are used (see special report). The difficulty in adapting threatens not only future revenues and profits at the big three—Daimler, BMW and Volkswagen (VW)–but also Germany’s status as a mean economic machine.

For now they are ahead. Brands built on unmatched quality mean four-fifths of the world’s premium cars have...Continue reading

China starts unwinding Anbang, its would-be financial giant

Thu, 03/01/2018 - 10:48

Terminal velocity

“WHEN it comes to the meaning of life, we will all return to zero one day.” So philosophised Wu Xiaohui, a Chinese tycoon, as he reflected on his success in 2015. Little did he realise how soon his words would be proved true. He founded his firm, Anbang, as a small car-insurance company just over a decade ago. By 2017 it ranked among the world’s biggest insurers, with some $300bn of assets, including stakes in hotels and financial firms in America, Europe and Asia. But then, even more vertiginous than its ascent, came its fall. On February 23rd China’s government said it had taken over Anbang and would prosecute Mr Wu for economic crimes.

Rarely in corporate history has a giant grown and collapsed so quickly. But Anbang’s tale is also interesting for what it reveals about China’s economic landscape. It is the clearest demonstration that regulators are serious about defusing debt risks that have built up in recent years. And it reveals the murky...Continue reading

Jerome Powell's game of Kerplunk

Wed, 02/28/2018 - 15:06

THERE is an old children's game called Kerplunk. It is similar in concept to Jenga. Marbles are poured into a plastic tube through which sticks have been threaded. The players take it in turns to remove the sticks with the aim of avoiding the fall of marbles. The normal pattern is for a few marbles to drop until the unlucky player removes the strut that keeps up the rest. A noisy crash ensues.

Jerome Powell (pictured), the new chairman of the Federal Reserve, may be that unlucky player. Janet Yellen, his respected predecessor, managed to pull out five sticks (ie, raised rates five times) before she departed, leaving both the economy and the markets in fine shape. Doubtless, Ms Yellen was not happy when President Donald Trump denied her a second term. But it may have been a blessing in disguise. The task of the central banker gets a lot more difficult from here.

Mr Powell's first Congressional testimony as Fed chair yesterday was seen as bullish on the economy...Continue reading

Forecasting congressional votes could yield juicy returns

Wed, 02/28/2018 - 12:59

STOCK traders hang on central bankers’ every utterance. They scan news sites for market-moving events, such as terrorist attacks, and monitor President Donald Trump’s tweets for hostility towards publicly traded firms. Curiously, though, few analyse goings-on in Congress, which can shift the course of the world’s largest economy. Jonathan Strong, a former reporter (including at Roll Call, a sister publication of The Economist), hopes to change that.

With the help of 0ptimus, a firm of Republican data wonks, he has spent three years building Legis, an algorithm powered by vast quantities of data and a neural network (a computer system modelled on the human brain), which predicts the outcome of congressional votes. Each of the 44 votes it has forecast so far has been correct. Last year a hedge fund (which does not want to be named) began trading derivatives using its predictions.

According to legend, carrier pigeons brought news of the Duke of Wellington’s...Continue reading

A brawl on a cruise ship raises worries about security at sea

Tue, 02/27/2018 - 12:44

THE cruise industry sells itself as a relaxing way to travel, a world away from the hassle, queues and crime of travelling on land. Yet not all holidays look like the brochure, and cruises are no exception. Earlier this month one such voyage, nicknamed the “cruise from hell”, came to a resounding end in Melbourne, Australia. Dozens of brawls had broken out on board the Carnival Legend, a ship owned by the world’s largest cruise firm, many of which had apparently been instigated by a family group of 23. It appears that the crew struggled to control the situation. One video seems to show crew members kicking a passenger on the ground. Another passenger told reporters that she had heard the captain respond to the violence by saying, “What do you want me to do about it, throw them overboard?”

Carnival, the cruise firm that operated the ship, says that it is investigating what happened. But this is far from an isolated incident. In fact, less than two weeks ago,...Continue reading

A brawl on a cruise ship raises worries about security at sea

Tue, 02/27/2018 - 12:44

THE cruise industry sells itself as a relaxing way to travel, a world away from the hassle, queues and crime of travelling on land. Yet not all holidays look like the brochure, and cruises are no exception. Earlier this month one such voyage, nicknamed the “cruise from hell”, came to a resounding end in Melbourne, Australia. Dozens of brawls had broken out on board the Carnival Legend, a ship owned by the world’s largest cruise firm, many of which had apparently been instigated by a family group of 23. It appears that the crew struggled to control the situation. One video seems to show crew members kicking a passenger on the ground. Another passenger told reporters that she had heard the captain respond to the violence by saying, “What do you want me to do about it, throw them overboard?”

Carnival, the cruise firm that operated the ship, says that it is investigating what happened. But this is far from an isolated incident. In fact, less than two weeks ago,...Continue reading

Money stolen by Bernie Madoff is still being found

Mon, 02/26/2018 - 18:51

WHEN bankruptcy trustees were appointed over a hectic weekend late in 2008, there seemed no end to the losses caused by the collapse of Bernie Madoff’s Ponzi scheme. Cash in the bank was no more than $150m. But the losses have been less, and the assets available for compensation greater, than had been feared.

On February 22nd Irving Picard, the bankruptcy trustee overseeing the liquidation of Mr Madoff’s firm, announced that a fund set up to reimburse customers would make its ninth distribution, of $621m, bringing the total handed out so far to $11.4bn. Another $1.8bn is held in reserve for contested claims. This is on top of a separate distribution of $723m last November from a separate fund run by the Department of Justice. Another $3bn remains to be distributed in that fund and the bankruptcy trustees hold out hope that substantially more will be recovered and returned.

Mr Madoff, who will turn 80 in April, is serving a 150-year sentence in a North Carolina prison. At his...Continue reading

Money stolen by Bernie Madoff is still being found

Mon, 02/26/2018 - 18:51

WHEN bankruptcy trustees were appointed over a hectic weekend late in 2008, there seemed no end to the losses caused by the collapse of Bernie Madoff’s Ponzi scheme. Cash in the bank was no more than $150m. But the losses have been less, and the assets available for compensation greater, than had been feared.

On February 22nd Irving Picard, the bankruptcy trustee overseeing the liquidation of Mr Madoff’s firm, announced that a fund set up to reimburse customers would make its ninth distribution, of $621m, bringing the total handed out so far to $11.4bn. Another $1.8bn in held in reserve for contested claims. This is on top of a separate distribution of $723m last November from a separate fund run by the Department of Justice. Another $3bn remains to be distributed in that fund and the bankruptcy trustees hold out hope that substantially more will be recovered and returned.

Mr Madoff, who will turn 80 in April, is serving a 150-year sentence in a North Carolina prison. At his...Continue reading

The rapid rise and fall of the Anbang empire

Fri, 02/23/2018 - 15:26

RARELY in corporate history has a giant come and gone so quickly. Anbang was founded in 2004 as a small Chinese car-insurance company. By the start of last year it ranked among the world’s biggest insurers with some $300bn of assets, including stakes in hotels and financial firms across America, Europe and Asia. Given another ten years, boasted Wu Xiaohui, its swashbuckling founder, Anbang’s scale would “exceed your imagination”. But then, just as vertiginous as its ascent, came its fall. Alarmed at its debt-fuelled expansion, regulators started blocking its overseas deals, reined in its insurance business and detained Mr Wu. On February 23rd its disgrace became complete: the Chinese government announced that it had taken over Anbang and would prosecute Mr Wu for economic crimes.

The insurance regulator said it had intervened because illegal operations could have “seriously endangered” the company’s solvency. It did not spell out the exact nature of Anbang’s alleged...Continue reading

The rapid rise and fall of the Anbang empire

Fri, 02/23/2018 - 15:26

RARELY in corporate history has a giant come and gone so quickly. Anbang was founded in 2004 as a small Chinese car-insurance company. By the start of last year it ranked among the world’s biggest insurers with some $300bn of assets, including stakes in hotels and financial firms across America, Europe and Asia. Given another ten years, boasted Wu Xiaohui, its swashbuckling founder, Anbang’s scale would “exceed your imagination”. But then, just as vertiginous as its ascent, came its fall. Alarmed at its debt-fuelled expansion, regulators started blocking its overseas deals, reined in its insurance business and detained Mr Wu. On February 23rd its disgrace became complete: the Chinese government announced that it had taken over Anbang and would prosecute Mr Wu for economic crimes.

The insurance regulator said it had intervened because illegal operations could have “seriously endangered” the company’s solvency. It did not spell out the exact nature of Anbang’s alleged...Continue reading

Snap, chatter and pop goes the share price

Fri, 02/23/2018 - 11:48

KYLIE JENNER, a model and reality TV star best known for being the, er, second most famous Kylie in the world, managed to cause a stir on Wall Street. With this idiosyncratic tweet

sooo does anyone else not open Snapchat any more? Or is it just me...ugh this is so sad

she knocked back the share price of Snap, the parent company of the video- and picture-sharing app. Ms Jenner’s influence in the target market is deemed to be huge; she has 24.5m Twitter followers, and her message has (at the time of writing) been retweeted 58,000 times and “liked” by 310,000. 

Snap’s share price fell 6%, reducing the company’s market value by $1.3bn. The decline was not just down to the influence of Ms Jenner, who recently gave birth to a daughter Stormi, named after the weather/porn star/grime artist. Investors were already worried about the impact of a recent app redesign. More than 1.2m people signed a...Continue reading

Snap, chatter and pop goes the share price

Fri, 02/23/2018 - 11:48

KYLIE Jenner, a model best known for being the, er, second most famous Kylie in the world, managed to cause a stir on Wall Street. With this idiosyncratic tweet

sooo does anyone else not open Snapchat any more? Or is it just me...ugh this is so sad

she knocked back the share price of Snap, the parent compnay of the video- and picture-sharing app. Ms Jenner's influence in the target market is deemed to be huge; she has 24.5m Twitter followers, and her message has (at thew time of writing) been retweeted 58,000 times and "liked" by 310,000. 

Snap's share price fell 6%, reducing the company's market value by $1.3bn. The decline was not just down to the influence of Ms Jenner, who recently gave birth to a daughter Stormi, named after the weather/porn star/grime artist. Investors were already worried about the impact of a recent app redesign. More than 1.2m people signed a petition calling for the...Continue reading

A pharmaceutical firm bets big on a cancer drug

Thu, 02/22/2018 - 16:47

WHEN Ken Frazier, chief executive of Merck, an American pharmaceutical giant, started his job in 2011, he had a hard decision to make. The firm had promising new drugs—such as Januvia, for diabetes, and Gardasil, a vaccine against cervical cancer. But the pharma industry was struggling with dismal returns on R&D and investors were questioning if companies were overspending on science. Some surrendered and started buying in drugs instead. But Mr Frazier opted to carry on backing his labs and promised publicly to spend on R&D for the long term, not for the stockmarket’s immediate gratification.

An opportunity to implement the pledge soon arrived. Merck’s merger with another pharma firm, Schering-Plough, in 2009, had brought it an obscure new cancer drug. At first Merck’s scientists were unimpressed and relegated the drug to a list of assets to be licensed out. There was widespread scepticism at the time about whether drugs that attacked cancer using the immune system would...Continue reading

Chinese cities are competing to woo overseas entrepreneurs

Thu, 02/22/2018 - 16:47

The coffee’s on us

WHEN Maria Veikhman, founder of SCORISTA, a Russian credit-scoring startup, was considering expansion abroad, China immediately came to mind. She believes the scope there is vast, for two-fifths of Chinese have no credit records. Ms Veikhman settled in Tianfu Software Park, a state-owned incubator in Chengdu, capital of Sichuan province where city authorities “offer almost everything for free”. Complementary facilities range from office space, basic furniture and logistics services to detailed guidance on entrepreneurial methods.

Chengdu aims to catch up with Beijing, Shanghai, and Shenzhen, which at present are in a different entrepreneurial league—together they have over a hundred unicorns, or private startups worth over $1bn. The south-western city allocated 200m yuan ($30m) in 2016 to an innovation-and-startup fund for overseas founders, and hands out up to 1m yuan in cash to well-capitalised foreign startups and joint ventures. If the...Continue reading

A pharmaceutical firm bets big on a cancer drug

Thu, 02/22/2018 - 16:47

WHEN Ken Frazier, chief executive of Merck, an American pharmaceutical giant, started his job in 2011, he had a hard decision to make. The firm had promising new drugs—such as Januvia, for diabetes, and Gardasil, a vaccine against cervical cancer. But the pharma industry was struggling with dismal returns on R&D and investors were questioning if companies were overspending on science. Some surrendered and started buying in drugs instead. But Mr Frazier opted to carry on backing his labs and promised publicly to spend on R&D for the long term, not for the stockmarket’s immediate gratification.

An opportunity to implement the pledge soon arrived. Merck’s merger with another pharma firm, Schering-Plough, in 2009, had brought it an obscure new cancer drug. At first Merck’s scientists were unimpressed and relegated the drug to a list of assets to be licensed out. There was widespread scepticism at the time about whether drugs that attacked cancer using the immune system would...Continue reading

Chinese cities are competing to woo overseas entrepreneurs

Thu, 02/22/2018 - 16:47

The coffee’s on us

WHEN Maria Veikhman, founder of SCORISTA, a Russian credit-scoring startup, was considering expansion abroad, China immediately came to mind. She believes the scope there is vast, for two-fifths of Chinese have no credit records. Ms Veikhman settled in Tianfu Software Park, a state-owned incubator in Chengdu, capital of Sichuan province where city authorities “offer almost everything for free”. Complementary facilities range from office space, basic furniture and logistics services to detailed guidance on entrepreneurial methods.

Chengdu aims to catch up with Beijing, Shanghai, and Shenzhen, which at present are in a different entrepreneurial league—together they have over a hundred unicorns, or private startups worth over $1bn. The south-western city allocated 200m yuan ($30m) in 2016 to an innovation-and-startup fund for overseas founders, and hands out up to 1m yuan in cash to well-capitalised foreign startups and joint ventures. If the...Continue reading

One of Russia’s most successful private entrepreneurs sells–to the state

Thu, 02/22/2018 - 16:47

IN THE Russian business community Sergei Galitsky served as a rare example of a self-made billionaire who rose with relatively little state help and outside the natural-resources trade. He built his retail company, Magnit, from scratch into Russia’s largest network; it has more than 16,000 stores. Rather than moving to Moscow, he kept his headquarters in his hometown of Krasnodar, where he also founded a football club. On February 16th he made a telling exit, announcing he would sell nearly all of his shares in Magnit—29.1%—to VTB, a state bank.

That Mr Galitsky (pictured, above) decided to sell is the result of a tough business cycle and some strategic mistakes. More remarkable is that he found a buyer not on the domestic private markets, or from among foreign investors. Selling to a public-sector bank reflects the growing role of the state in the Russian economy. Russia’s federal anti-monopoly service puts its share at 70%. Yet the retail sector had largely been insulated from the trend. Now...Continue reading

Europe’s flourishing gunmakers

Thu, 02/22/2018 - 16:47

Beretta hits its sales target

IT WAS a blunder by Heckler & Koch, a big German gunmaker. On February 15th the firm apologised for a “mistake” after its American subsidiary posted a Valentine’s image showing a handgun surrounded by ammunition arranged in the shape of a heart. The image went out to social media shortly after a deadly school shooting in Florida.

The post was also a reminder that although Europeans often criticise lax firearm-ownership laws across the Atlantic, the region’s firms are increasingly present in America’s market for small arms—defined as revolvers, pistols, rifles and shotguns. Americans buy far more such weapons than any other nationality and their appetites have been growing steadily. This year they are likely to buy 14.5m such firearms, notes Jurgen Brauer of Small Arms Analytics, a consultancy. Europeans have proved deft at grabbing a sizeable portion of all this.

Continue reading

The spoils from American corporate tax reform are unevenly spread

Thu, 02/22/2018 - 16:47

“IT’S always a lot of fun when you win,” President Donald Trump enthused after his tax package was approved by Congress in December. Company bosses nodded along. The centrepiece of the reform is a drastic cut to the corporate-tax rate, from 35% to 21%, taking it below the rich-country average. Although its impact is partly offset by some revenue-raising measures, the congressional Joint Committee on Taxation estimates that American business will gain around $330bn from the reform over the next ten years. Yet within that are sizeable variations in terms of which firms and industries benefit most.

The biggest winners are more domestically oriented companies. These typically face higher effective tax rates than American companies with a big presence overseas, which do business in lower-tax countries. Bosses are also evaluating other new measures. So-called “full expensing”, for example, helps those with big spending plans by allowing them to deduct investment costs up front. But...Continue reading

OPEC mulls a long-term alliance with Russia to keep oil prices stable

Thu, 02/22/2018 - 16:47

OIL bears beware. On February 20th Suhail al-Mazrouei, OPEC’s rotating president and energy minister of the United Arab Emirates, said the 14-member producers’ group is working on a plan for a formal alliance with ten other petrostates, including Russia, aimed at propping up oil prices for the foreseeable future. If it comes to anything, it could be OPEC’s most ambitious venture in decades.

The result will not be, he insists, a “supergroup”. The notion of Saudi Arabia and Russia joining forces as the Traveling Wilburys of the oil world may be a bit jarring. It remains an idea in “draft” form. But whatever its chances, it attempts to shift a belief widely held by participants in oil markets: that non-American oil producers are helpless against the shale revolution.

That belief has strengthened because of a renewed flood of American shale production in the latter part of 2017 after prices of West Texas Intermediate climbed above $50 a barrel. The International Energy Agency...Continue reading

Economists cannot avoid making value judgments

Thu, 02/22/2018 - 16:47

AMID the name-calling and bluster that mar many fights between economists are a few common tactics. Belligerents may attack the theory used to support a claim, or the data analysis used to quantify an effect. During the debate over President Donald Trump’s tax bill, to take a recent example, economists bickered over which side had more credibly calculated the economic effect. They did not, for the most part, argue about whether it was morally acceptable to pass a regressive tax reform after years of wage stagnation and rising inequality. To do so would strike many economists as entirely un-economist-like. Yet economics has not always been so shy about moral philosophy. As well as “The Wealth of Nations”, Adam Smith wrote a Theory of Moral Sentiments”. Great 20th-century economists like Paul Samuelson and Kenneth Arrow also took questions of values very seriously. Their successors would do well to take several pages from their books.

Modern economists have attempted...Continue reading

A banking centre seeks to reinvent itself

Thu, 02/22/2018 - 16:47

ON A clear day, sunset over Lake Zug is magnificent. Snow-dusted mountains cut through the orange glow above and are mirrored in the lake below. “Zug is our spiritual home,” says Jeremy Epstein, from Washington, DC, who has just taken 40 foreigners to tour the small Swiss town south of Zurich. They came not for sunsets, though, but to find out how Zug has become known as “crypto-valley”—meaning the home of many firms dealing in crypto-currencies and related activities.

Switzerland’s famous banking secrecy is falling to a global assault on money-laundering and tax evasion. But financial security remains in demand. The country should seek to become the “crypto-nation”, said the economy minister, Johann Schneider-Ammann, last month. Zug aims to be the capital of that nation.

To that end, Switzerland is maintaining loose rules for crypto-businesses, even as other countries are tightening theirs. An industry is developing to store tangible crypto-assets, such as the hard drives...Continue reading

Economists cannot avoid making value judgments

Thu, 02/22/2018 - 16:47

AMID the name-calling and bluster that mar many fights between economists are a few common tactics. Belligerents may attack the theory used to support a claim, or the data analysis used to quantify an effect. During the debate over President Donald Trump’s tax bill, to take a recent example, economists bickered over which side had more credibly calculated the economic effect. They did not, for the most part, argue about whether it was morally acceptable to pass a regressive tax reform after years of wage stagnation and rising inequality. To do so would strike many economists as entirely un-economist-like. Yet economics has not always been so shy about moral philosophy. As well as “The Wealth of Nations”, Adam Smith wrote a Theory of Moral Sentiments”. Great 20th-century economists like Paul Samuelson and Kenneth Arrow also took questions of values very seriously. Their successors would do well to take several pages from their books.

Modern economists have attempted...Continue reading

A banking centre seeks to reinvent itself

Thu, 02/22/2018 - 16:47

ON A clear day, sunset over Lake Zug is magnificent. Snow-dusted mountains cut through the orange glow above and are mirrored in the lake below. “Zug is our spiritual home,” says Jeremy Epstein, from Washington, DC, who has just taken 40 foreigners to tour the small Swiss town south of Zurich. They came not for sunsets, though, but to find out how Zug has become known as “crypto-valley”—meaning the home of many firms dealing in crypto-currencies and related activities.

Switzerland’s famous banking secrecy is falling to a global assault on money-laundering and tax evasion. But financial security remains in demand. The country should seek to become the “crypto-nation”, said the economy minister, Johann Schneider-Ammann, last month. Zug aims to be the capital of that nation.

To that end, Switzerland is maintaining loose rules for crypto-businesses, even as other countries are tightening theirs. An industry is developing to store tangible crypto-assets, such as the hard...Continue reading

The Santander experiment

Thu, 02/22/2018 - 16:47

TAKING a business onto the global stage is hard. Doing it with banks can be suicidal owing to their complexity and leverage. For over 100 years an assortment of adventurers and visionaries have almost always tried one of two approaches. Either they spread firms thinly over scores of countries and focus on servicing big companies and facilitating trade. This is the way of Citigroup and HSBC, and the path that China’s big lenders are racing down. Or they focus on investment banking from hubs; think of JPMorgan Chase or Deutsche Bank in New York, Hong Kong and London. Both blueprints have often resulted in buckets of tears.

In the 1990s a “third way” emerged from provincial Spain; creating a global retail bank with a deep presence in many countries, allowing true economies of scale. The pioneer was Santander, a middle-weight bank from the Bay of Biscay. Today it is the king of the euro zone: the bloc’s largest lender by market value, with 133m clients, mainly in Brazil, Britain, Mexico and...Continue reading

Europe’s flourishing gunmakers

Thu, 02/22/2018 - 16:47

Beretta hits its sales target

IT WAS a blunder by Heckler & Koch, a big German gunmaker. On February 15th the firm apologised for a “mistake” after its American subsidiary posted a Valentine’s image showing a handgun surrounded by ammunition arranged in the shape of a heart. The image went out to social media shortly after a deadly school shooting in Florida.

The post was also a reminder that although Europeans often criticise lax firearm-ownership laws across the Atlantic, the region’s firms are increasingly present in America’s market for small arms—defined as revolvers, pistols, rifles and shotguns. Americans buy far more such weapons than any other nationality and their appetites have been growing steadily. This year they are likely to buy 14.5m such firearms, notes Jurgen Brauer of Small Arms Analytics, a consultancy. Europeans have proved deft at grabbing a sizeable portion of all this.

Continue reading

One of Russia’s most successful private entrepreneurs sells–to the state

Thu, 02/22/2018 - 16:47

IN THE Russian business community Sergei Galitsky served as a rare example of a self-made billionaire who rose with relatively little state help and outside the natural-resources trade. He built his retail company, Magnit, from scratch into Russia’s largest network; it has more than 16,000 stores. Rather than moving to Moscow, he kept his headquarters in his hometown of Krasnodar, where he also founded a football club. On February 16th he made a telling exit, announcing he would sell nearly all of his shares in Magnit—29.1%—to VTB, a state bank.

That Mr Galitsky (pictured, above) decided to sell is the result of a tough business cycle and some strategic mistakes. More remarkable is that he found a buyer not on the domestic private markets, or from among foreign investors. Selling to a pubic-sector bank reflects the growing role of the state in the Russian economy. Russia’s federal anti-monopoly service puts its share at 70%. Yet the retail sector had largely been insulated from the trend....Continue reading

The spoils from American corporate tax reform are unevenly spread

Thu, 02/22/2018 - 16:47

“IT’S always a lot of fun when you win,” President Donald Trump enthused after his tax package was approved by Congress in December. Company bosses nodded along. The centrepiece of the reform is a drastic cut to the corporate-tax rate, from 35% to 21%, taking it below the rich-country average. Although its impact is partly offset by some revenue-raising measures, the congressional Joint Committee on Taxation estimates that American business will gain around $330bn from the reform over the next ten years. Yet within that are sizeable variations in terms of which firms and industries benefit most.

The biggest winners are more domestically oriented companies. These typically face higher effective tax rates than American companies with a big presence overseas, which do business in lower-tax countries. Bosses are also evaluating other new measures. So-called “full expensing”, for example, helps those with big spending plans by allowing them to deduct investment costs up front. But using debt will become less attractive, as interest payments are no longer fully deductible.

Some firms experienced high volatility in their earnings for the final quarter of 2017 thanks to the treatment of so-called “deferred tax assets”. These are past tax losses carried forward to set against future tax bills, and such assets have shrunk in value because of the lower...Continue reading

Protestantism might be good for the wallet, after all

Thu, 02/22/2018 - 16:47

Spirit and flesh

CAN religion make people wealthier? In 1905 Max Weber, a German sociologist, argued that it had happened in Europe. Protestants did not invent capitalism in the 16th century, he suggested. But, by discarding monastic asceticism and embracing the notion that diligence and self-improvement are pleasing to God, they became particularly good at it.

Weber’s idea is unfashionable these days, partly because so many non-Protestant countries have become rich and partly because of a cause-and-effect problem. Were Protestants truly better at business, or were ambitious, business-minded people drawn to Protestantism? One way of settling that question is through a randomised controlled trial of religion. A National Bureau of Economic Research working paper released on February 19th reports on an experiment in the Philippines that suggests Weber was onto something.

International Care Ministries (ICM), an evangelical charity, tries to help the...Continue reading

Changing the guard at HSBC

Thu, 02/22/2018 - 16:47

YOU spend 38 years at a mighty global bank, the last seven as chief executive. As boss you clean up a stinking mess, the legacy of ill-conceived acquisitions and shoddy practice. You shell out billions in fines and legal costs. You shed businesses and cut jobs by a quarter. You build a solid capital base. You maintain dividends. On your last day, you announce decent results, with revenue growing after five years of shrinkage and profits up nicely. The market’s parting gift to you? The share price falls by 3%.

Analysts had expected better from Stuart Gulliver’s final report as boss of Britain’s HSBC, the world’s seventh-biggest bank by assets, on February 20th. They were surprised by charges for impaired loans to two companies, thought to be Carillion, a failed British contractor, and Steinhoff, a troubled South African retailer, and miffed that HSBC put off buying back more shares. That, the bank said, must wait until it has raised $5bn-7bn of “additional tier-1” capital...Continue reading

Japan’s central bank chooses continuity over tradition

Thu, 02/22/2018 - 16:47

GOVERNORS of the Bank of Japan (BoJ) tend not to linger long in their post. Twenty-two people have headed the institution since 1914, compared with 16 at the Federal Reserve and 12 at the Bank of England. The last time a BoJ governor won a second term was 1961, when Japan’s economy was growing by over 11% and inflation was over 5%. As Richard Werner, the author of “Princes of the Yen”, a history of the central bank’s failures, points out, by tradition the job alternates every five years between a candidate backed by the finance ministry and a “true-born” BoJ insider.

This tradition will be broken by the reappointment of Haruhiko Kuroda, who was nominated for a second term on February 16th. If he completes it, he will become the longest-serving governor in the BoJ’s history.

With luck that might be long enough for him to reach the central bank’s elusive inflation target of 2%, a goal set five years ago which he had hoped to meet by 2015. Although the BoJ has...Continue reading

Donald Trump mulls restrictions on steel and aluminium imports

Thu, 02/22/2018 - 16:47

TEN months ago the Trump administration took aim at steel and aluminium imports, giving itself a year to decide whether they threatened national security and, if so, what to do about it. On February 16th it concluded that America is indeed under threat. The president has until mid-April to choose whether to respond.

The reports handed to Donald Trump by the Department of Commerce, which led the investigations, describe America as effectively under siege. Its steel industry might struggle to respond to a crisis similar to the second world war, they fret, as foreigners are filling a third of American demand for steel, even as 28% of national capacity lies idle. The share of primary aluminium (the kind smelted from ore, rather than recycled metal) that is imported is 91%, and 61% of local smelting capacity lies cold. Doubters can point out that the Department of Defence requires a tiny slice of American steel supply, and that America’s largest supplier for both metals, Canada, is an ally (see...Continue reading

OPEC mulls a long-term alliance with Russia to keep oil prices stable

Thu, 02/22/2018 - 16:47

OIL bears beware. On February 20thSuhail al-Mazrouei, OPEC’s rotating president and energy minister of the United Arab Emirates, said the 14-member producers’ group is working on a plan for a formal alliance with ten other petrostates, including Russia, aimed at propping up oil prices for the foreseeable future. If it comes to anything, it could be OPEC’s most ambitious venture in decades.

The result will not be, he insists, a “supergroup”. The notion of Saudi Arabia and Russia joining forces as the Traveling Wilburys of the oil world may be a bit jarring. It remains an idea in “draft” form. But whatever its chances, it attempts to shift a belief widely held by participants in oil markets: that non-American oil producers are helpless against the shale revolution.

That belief has strengthened because of a renewed flood of American shale production in the latter part of 2017 after prices of West Texas Intermediate climbed above $50 a barrel. The International Energy Agency...Continue reading

The long-term returns from collectibles

Thu, 02/22/2018 - 16:47

BONDS, shares and Treasury bills are all very well, but in the end they are just pieces of paper. They are not assets you can hang on the wall or display to admiring neighbours. Many rich people like to invest their wealth in more tangible form; property, of course, but also collectibles such as art, fine wine and classic cars.

Is that wise? Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School (LBS) have run the numbers for their annual analysis of the financial markets in the Credit Suisse global investment-returns yearbook. Some of these assets have done rather better than others (see chart). Fine wine delivered the best returns; surprising to cynics who might assume that, in the long run, the value of wine vanishes as it turns into vinegar. Really old wine often has historical resonance. A bottle of Chateau Lafite Rothschild from 1787 was sold for $156,450 in 1985 because it was thought to belong to Thomas Jefferson.

Estimating the returns from these assets, after...Continue reading

Russian meddling is only one challenge facing the social-media giant

Thu, 02/22/2018 - 12:03

IN ITS early days Facebook embraced the motto “move fast and break things” to describe its engineers’ strategy of rapid innovation. “Move slowly, and try not to break anything else” seems to be its new creed. In the last year Facebook has contended with several controversies, including charges that it helped spread false news, unwittingly facilitated Russian meddling in the 2016 election and fanned political polarisation (see Briefing). After denials of responsibility and little action, Mark Zuckerberg, its boss, has talked of “fixing” Facebook in 2018. It will be a huge task.

Russia’s alleged manipulation of Facebook users will harm the company. On February 16th special counsel Robert Mueller filed conspiracy and fraud charges against 13 Russians for interfering in America’s 2016 election; Facebook was mentioned no fewer...Continue reading

Why low returns are inevitable

Wed, 02/21/2018 - 16:20

WHEN the stockmarket is close to a record high, the chances are that recent returns will have been very strong. The terrible tendency among investors is to assume that those returns will contiue. But the higher you go, the harder it is to keep rising at the same pace. 

When I visited America for a story on pensions last autumn, I was struck by how few people failed to grasp this point. Public pensions have return targets of 7-8% for their portfolios. When challenged they tend to cite their 30-year record of achieving those numbers. But that record makes it less likely, not more that they will hit their targets. 

The easiest way to think of this is via the bond market. In 1987, the yield on the ten-year Treasury bond was just under 9%. Since then it has fallen to its current level of just under 3%. So not only did bond investors get a high yield in their early years,...Continue reading

Latvia’s top banking official has been accused of taking a bribe

Tue, 02/20/2018 - 18:55

ILMARS RIMSEVICS, governor of Latvia’s central bank for the past 17 years, had been due to retire next year. Instead, he is facing calls to resign. On February 17th he was detained by Latvia’s anti-corruption authority on suspicion of taking a bribe of at least €100,000 ($123,000). The prime minister, Maris Kucinskis, says the allegations are so serious that Mr Rimsevics cannot possibly return to work. Mr Rimsevics, for his part, is staying put. Released on bail on February 19th, he denies the allegations, saying he was set up and is facing death threats.

Just a few days earlier, in an unrelated case, the US Treasury had proposed sanctions on ABLV, one of Latvia’s largest banks. It claimed ABLV had “institutionalised money laundering” and facilitated transactions with North Korea, which is under sanctions. In the days that followed €600m was withdrawn by the bank’s customers. On February 19th, seeking to stabilise the institution, the ECB froze payments by ABLV....Continue reading

Will Comast try to outbid Disney for Fox?

Thu, 02/15/2018 - 16:48

WHEN Disney struck a deal just before Christmas to buy much of 21st Century Fox for $66bn, it was a career-defining moment for the two firms’ bosses, Bob Iger and Rupert Murdoch. A third media mogul, Brian Roberts of Comcast, was left out in the cold. Having tried and failed last autumn to get Mr Murdoch to take a higher offer, Mr Roberts may now be preparing a still richer bid to upend the deal.

It is not hard to understand his motivation. Comcast is in an awkward position at a time when the media landscape is shifting. With millions of consumers dropping pay-TV for the likes of Netflix, media companies have suddenly become either buyers, to achieve scale, or sellers, to exit. Mr Roberts has always been a buyer, building the cable business his father started into a diversified empire through acquisitions, including AT&T’s broadband business in 2002 and NBC Universal in 2011. Comcast now has heft in a number of businesses—broadband and cable, television networks, a film studio...Continue reading

Indian teaching startups make work for idle thumbs

Thu, 02/15/2018 - 16:48

TO ANY outsider it looks as if the children have been hypnotised by yet another smartphone game. As the spying elders in a TV ad try to break the spell, the sprogs flash a grin at their screens. “It’s maths, dad,” giggles a fifth-grader to her father. The company behind the ad, Byju’s, sells an educational smartphone app which has been downloaded 14m times since its launch in 2015.

Byju’s is one of many education technology (or “edtech”) startups that have emerged in India in the past few years. Their target is vast—some 260m pupils in schools and over 30m graduates who train in order to pass entrance tests for a seat in medical, engineering and elite management institutes. KPMG, a consultancy, reckons the industry will grow eightfold to be worth around $2bn by 2021.

Much of the expected growth is due to India’s woeful record in primary-school education, where teachers are scarce, infrastructure crumbling and the culture one of rote learning. Almost half of...Continue reading

Opportunities are opening for electrified commercial vehicles

Thu, 02/15/2018 - 16:48

Pulls a heavy weight of expectation

ELECTRIC commercial vehicles were once a common sight in Britain’s towns and cities. A fleet of 25,000 battery-powered milk floats roved the early-morning streets delivering a crucial part of the nation’s breakfast. Short ranges and low top speed were unimportant for a milk round but near-silent running meant customers could sleep. Their demise came as supermarkets expanded, but electrification of business vehicles is gathering pace anew.

Just as better battery technology is bringing down the cost and boosting the range of passenger electric vehicles (EVs), those advances are making electrification of commercial vehicles more appealing. The purchase price is still far higher than a comparable vehicle with an internal combustion engine (ICE). But businesses are more focused than ordinary motorists on the total costs of ownership, and on other reasons to shift to electric power.

Much attention has been paid to...Continue reading

Japanese businesses are struggling to keep up standards

Thu, 02/15/2018 - 16:48

KUMIKO HIRANO has noticed a disquieting change when she goes to her neighbourhood konbini, one of Japan’s ubiquitous convenience stores. “No one is around and I have to use a loud voice to get someone to serve me,” says the 48-year-old worker in Tokyo. “It irritates me.”

This might not seem a big problem, but Japan prides itself on the standard of customer service, which approaches the level of bespoke attention elsewhere. Taxi drivers, who often wear white gloves, sometimes get out to bow when they drop off a passenger. Staff in shops and restaurants are unfailingly polite. Shoppers can order on Amazon and take delivery reliably the same day. Now Japanese are having slowly to adapt to levels of service long suffered by the rest of the world.

The human touch is becoming rarer. Lawson, another konbini chain, is automating payment during the small hours at selected stores. Some restaurants and supermarkets are following suit....Continue reading

Recent tax reforms in America will hurt charities

Thu, 02/15/2018 - 16:48

DESPITE its oft-professed pro-market orthodoxy, America has always had an unusually large non-profit sector. Americans gave $390bn to charity in 2016, with the bulk of contributions coming from individual donors. Historically, revenues at non-profits tend to track GDP growth. The recent tax reforms imply that despite strong economic growth, charitable contributions in America are poised to fall for the first time since the financial crisis.

The most significant threat to charities comes from changes to income tax. American taxpayers can choose either to “itemise” specific expenses, such as charitable gifts or mortgage payments, or take a “standard deduction”. In an effort both to simplify the tax code and to lower overall tax rates, the Republican-led Congress almost doubled the standard deduction to $12,000 for individuals and $24,000 for married couples. This will make filing taxes a lot easier for many. But it also means that far fewer Americans will have a financial incentive...Continue reading

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