Philippa Kaur

Many who have met Satya Nadella like him. For those who haven’t, a skim through his autobiography endorses the view that the boss of Microsoft is an intelligent, decent sort of person. He is unassuming, with a passion for cricket. He is a listener, who encourages employees to share their personal as well as professional dreams. He writes about Buddhism, but not in a new-agey way. His son was born with cerebral palsy, so Mr Nadella seeks to understand suffering. At times, there is something gleefully Tigger-like about him, when he can barely contain his excitement about Microsoft’s new technologies. He describes one such “eureka moment” the first time he put on one of the firm’s HoloLens mixed-reality headsets and, thanks to a live feed from NASA’s Mars rover, visualised himself walking on the red planet. It was, he wrote, a glimpse into the future. “The experience was so inspiring, so moving, that one member of my leadership team cried.”Once again Mr Nadella is giddy with “this-is-the-future” euphoria. On January 23rd Microsoft announced its third investment, estimated at $10bn, in OpenAI, the company behind ChatGPT. The advanced artificial-intelligence (AI) tool lets users ask questions and get human-like, often funny responses. In the past few months it has grabbed headlines and become part of the zeitgeist. In no time, the wizardry of the technology, however error-prone, has led to its portrayal as a potential Kodak moment for Alphabet-owned Google, a boon to cancer research, the end of coding as you know it, and a nail in the coffin of the exam essay. In other words, it’s the tech hype cycle on steroids. At the risk of sounding churlish, it is worth noting that seven years after Mr Nadella’s HoloLens epiphany, the whole mixed-reality buzz at Microsoft has gone deathly quiet. HoloLens was reportedly affected by the firm’s 10,000 recent lay-offs. That said, ChatGPT is already so accessible and intuitive to use that it is hard to imagine it will be a flash in the pan. It is not difficult to see how Microsoft, with its strength in cloud computing and business software, could use OpenAI’s underlying GPT models to rejuvenate a whole range of products. And Mr Nadella, for all his mindfulness, burns with an ambition to restore the company to the pinnacle of tech innovation that it vacated with the onset of social media and the smartphone. Could this be his moment? Microsoft’s share price suggests not. It has barely advanced since November 29th, the day before OpenAI publicly launched ChatGPT (save for a brief rally after Microsoft reported quarterly earnings results on January 24th that were a bit better than expected). Given the risks of an economic slowdown, which is cooling demand for Microsoft’s software and cloud services, investors have too many short-term concerns to pay much heed to Mr Nadella’s promises of AI-flavoured jam tomorrow. Yet they shouldn’t underestimate his missionary zeal. He led Bing, Microsoft’s search engine, when Google was on a tear. He led its cloud provider, now called Azure, when it was an also-ran to Amazon Web Services, owned by the e-commerce giant. He has long nurtured a passion to leapfrog his west-coast rivals. That makes him impatient with AI research for its own sake. He wants it embedded in products that wow customers. Hence Bing, with a mere 7% of search queries in America, will shortly incorporate ChatGPT to wrestle share away from Google. GitHub, Microsoft’s coding tool, is using OpenAI technology in its Co-pilot product, aimed at accelerating the work rate of software developers. Microsoft is likely to overhaul products like Office and Windows with GPT technology, so that chatbots can take the drudge out of creating PowerPoints and Excel spreadsheets. As for the cloud, Microsoft benefits because OpenAI has built and trained its GPT models on Azure, and it can offer state-of-the-art chatbot services to Azure’s customers. The more they are used, the better they get. Microsoft will not have the field to itself, nor will it be a winner-takes-all market. Among other cloud providers, Alphabet, for one, has foundational models that are more powerful than GPT. For now, though, its ability to compete is constrained. Alphabet, loathed by critics of surveillance capitalism, bears a big reputational risk if human-like AI amplifies the biases and privacy concerns of current consumer technology. It is under regulatory fire: a lawsuit filed on January 24th by America’s Department of Justice and eight states calls for the break-up of Google’s ad-tech business. Moreover, the cost of the average Google search is exceedingly cheap; adding ChatGPT-like searches, heavy on computing power, would raise it. As for Microsoft’s business-software competitors, such as beleaguered Salesforce, they are trying to cut costs and cannot hope to match Microsoft’s advanced AI investments, says Mark Moerdler of Bernstein, an investment firm.First innings In short, Microsoft has a valuable head start and Mr Nadella is loth to squander it. The big question, however, is not who will win. In these early days that would be like asking, at the dawn of the 19th century, who will come out top from the Industrial Revolution. It is more a matter of how well-equipped is any company to handle the potential implications of introducing technology that will do work previously done by humans, but with neither the ability nor the moral compass to check the reliability of its work. The risks of propagating errors or, worse, misinformation, are serious. So is the danger of societal backlash if knowledge workers feel their jobs are threatened—though if the technology succeeds, over the long term it is likely to be a boon to job creation.Microsoft’s initial approach to the potential pitfalls is shrewd. Investing in OpenAI puts ChatGPT at arm’s length if something goes wrong. But eventually, with GPT infused in all of its products, it will bear a big responsibility for the outcome. In that case, the attention will focus on Microsoft’s own moral compass—and Mr Nadella’s human decency will be put to the test. ■ More

Chief executives of the world’s biggest firms left Davos on January 20th after a week of jaw-jawing in highish spirits. The mood at the annual gabfest was, if not upbeat, then at least no longer sombre. Behind closed doors, CEOs conceded that, although the war in Ukraine remains a humanitarian tragedy, the risks to the world economy look for now to be contained. Central banks have got serious about inflation. If a recession in America and Europe strikes, it should be manageable. The Chinese delegation sent the clearest signal in years that China is not just reopening after its harsh “zero-covid” regime but also reintegrating with the world. Globalisation may not be in the rudest of health, but news of its demise appeared, to the snow-swept bosses, exaggerated.Back on earth, things look dicier. “Earnings season is going to be the confessional event,” says Jim Tierney of AllianceBernstein, an investment firm, referring to the month or so when most companies report their quarterly results. The profits of America’s banking giants, which kicked things off in the past week or so, had fallen by 20% year on year. Investment bankers received a particularly severe drubbing, as dealmaking collapsed amid economic uncertainty. In early January Goldman Sachs gave around 3,200 of its workers the boot. Profit estimates for large American firms are plunging more precipitously than a black ski run. In the last three months of 2022 analysts revised their fourth-quarter earnings forecasts for the S&P 500 index down by 6.5%, twice as much as the typical downward revision. Wall Street’s collective wisdom about the past quarter now points to a year-on-year decline in profits, the first since the depths of the pandemic in 2020 (see chart 1).For many companies, costs are rising faster than sales. Businesses are finding that it is harder to resist wage rises than to persuade customers to bear rising costs. This will compress margins at a rate that has yet to be fully digested by analysts, who collectively still predict profits to grow in 2023. If the American economy does slide into a recession, as many economists expect, profits will almost certainly slide further still. Since the second world war earnings per share have fallen by an average of 13% around periods of economic contraction, calculates Goldman Sachs. The first thing to which firms will be confessing is the weariness of consumers. In firms’ conference calls with analysts at the end of last year, many spoke of weak demand, as shoppers reined in spending on discretionary items. Procter & Gamble, whose products range from nappies and detergents to dental floss, has reported falling sales volumes across its businesses in the fourth quarter. It managed to meet earnings expectations only because it increased prices by 10%—and plans further rises in February.Yet the chorus of bosses advertising such “pricing power”, last year’s favourite boast, will be quieter this earnings season. Although households are still spending excess savings built up during the pandemic, they are increasingly fishing for bargains. American consumers skimped on everything from restaurants to electronics in December, causing retail sales to decline by 1.1% on a seasonally adjusted basis, compared with the previous month. Constellation Brands, which makes and distributes Corona beer for drinkers in America, said on January 5th that it plans slower price increases this year. Many retailers are discounting goods to clear inventories. The prices of Tesla’s cars are lower globally by as much as 20%.As demand falters, firms are owning up to excessive costs—their second confession. Technology companies, which saw appetite for their products slow last year from earlier pandemic-induced highs, are doing so with special zeal. Apple’s boss, Tim Cook, is taking a 40% pay cut this year. Twitter is auctioning off its neon-bird wall art. Less symbolically, on January 18th Microsoft announced plans to lay off 10,000 people. Two days later Alphabet, Google’s corporate parent, said it would sack 12,000. These cuts do not entirely reverse tech’s pandemic hiring binge, but a Silicon Valley venture capitalist thinks it will provide “air cover” for more tech firms to trim their payrolls and shore up their cashflows. Companies’ third confession concerns the fate of any profits that will be made. This earnings season is also a time for firms to lay out their spending plans for the year ahead. In aggregate, large American businesses tend to split their outgoings evenly between shareholder payouts (through dividends and share buy-backs) and investments (research and development, capital expenditure, and mergers and acquisitions). In the era of cheap money, before central banks started raising interest rates to quash inflation, the payouts were often financed with debt. Now that money is expensive, such borrowing is likely to subside. As for dealmaking, plenty of acquirers are still sorting out the mess created by transactions struck at peak prices during the pandemic merger boom. Write-downs acknowledging the fall in value for some of these are more likely than announcements of replenished war chests and a desire to strike more deals. That leaves investments. The 21st century’s mega-trends—decarbonisation, digitisation and decoupling between China and the West—argue in favour of mammoth spending on climate-friendly technology, robots and software, and non-Chinese factories. One European industrial boss contends that, as a result, capital spending should withstand the impending downturn better than usual. Maybe. For the time being, though, most companies remain cautious. After American firms’ capital expenditure ticked up in the third quarter of 2022, one tracker of corporate spending plans, compiled by Goldman Sachs, points to continued growth but at a considerably slower pace. Many companies are likely to defer significant spending decisions until the economic uncertainty lifts. Ericsson, a Swedish maker of telecoms gear, warned that its American customers are increasingly holding off on new network investments. Dell shipped nearly 40% fewer PCs, which it sells chiefly to corporate customers, in the fourth quarter, compared with the year before, according to IDC, a research firm. Logitech, which makes keyboards, webcams and other desktop-related hardware, now expects revenues to fall by as much as 15% in the fiscal year to March, down from its previous estimate of no more than 8%. Makers of software, such as Microsoft, and chips, such as Intel, could also be affected by crimped digitisation budgets.Like all earnings seasons, this one will spring positive surprises. A few have already sprung. United Airlines increased its prices without putting off holidaymakers and business travellers. Netflix smashed expectations by adding 7.7m new subscribers in the fourth quarter, partly thanks to a new, cheaper, ad-interrupted service. The beleaguered streaming service, which has lost roughly half its market value since its peak in autumn 2021, has issued bullish profit forecasts for 2023. On January 19th Reed Hastings stepped down as Netflix’s co-CEO, possibly because he believes the worst is over for the company he founded 25 years ago. Such perkiness will, however, be the exception rather than the rule this year. In aggregate, positive earnings surprises have been getting less positive in recent quarters (see chart 2). Having reached an all-time high as a percentage of GDP last year, post-tax corporate profits look overdue for a correction. And they may have further to fall. High debt and low taxes, which propelled corporate profitability for decades, are no longer the tailwinds they were, as interest rates rise and the appetite for deficit-funded tax cuts diminishes. Real corporate life takes place at less rarefied levels than the Swiss Alps. ■ More

China’s clampdown on its best and brightest tech companies came quickly in late 2020. Two years later authorities in Beijing are swerving rapidly back towards more predictable policymaking. On January 16th DiDi Global, a ride-hailing firm, said it would soon be allowed to resume taking on new customers after an 18-month pause during which regulators banned it from growing. A week earlier Ant Group, China’s payments and fintech giant, revealed that Jack Ma, the country’s most prominent entrepreneur, no longer held controlling rights in the company which he co-founded. Mr Ma’s ceding of control was rumoured to be one of the final steps toward political approval of the company. Shortly afterwards a senior Chinese technocrat said the tech crackdown was drawing to a close.Listen to this story. Enjoy more audio and podcasts on More

Casting blame is natural: it is tempting to fault someone else for a snafu rather than taking responsibility yourself. But blame is also corrosive. Pointing fingers saps team cohesion. It makes it less likely that people will own up to mistakes, and thus less likely that organisations can learn from them. Research published in 2015 suggests that a Shaggy culture (“It wasn’t me”) shows up in share prices. Firms whose managers pointed to external factors to explain their failings underperformed companies that blamed themselves. Listen to this story. Enjoy more audio and podcasts on More

“How long is your runway before takeoff?” That is how venture capitalists (vcs) begin meetings in India these days, says Ananth Narayanan, founder of Mensa, one of the country’s newest unicorns (companies worth in excess of $1bn). Until recently the main question that mattered for India’s startup scene was valuation. But the mood has changed. Plunging share prices at companies that have gone public have made vc firms much warier about investing. Prizing unrealistic valuations has given way to worrying about how quickly startups might begin to make money. So far Mensa, which buys stakes in digital brands, is one of a handful of such firms that makes a profit.Listen to this story. Enjoy more audio and podcasts on More

Job adverts hint at its imminent arrival but Tesla is yet to confirm recent reports that it will set up a new electric vehicle (ev) “gigafactory” in Monterrey, a Mexican city close to the American frontier. The rumours have nonetheless set wheels in motion. Noah Itech, a Chinese supplier of automation equipment to the American car company, is building a $100m plant in the city. If Elon Musk’s firm sets up in Mexico it will be the latest in a long list of companies that have chosen to build vehicles in a country that borders the world’s second-largest car market.Listen to this story. Enjoy more audio and podcasts on More

For a company worth $430bn that straddles one of the world’s most dangerous geopolitical flashpoints, there is something endearingly unflustered about Taiwan Semiconductor Manufacturing Company (TSMC). Both America and China covet its unmatched ability to make advanced chips. It’s a far bigger supplier to the former than the latter, but if either superpower, through economic pressure or brute force, fully stifled its independence, the fallout would be immense. Many of its fabrication plants are on the west coast of Taiwan and perilously exposed to a Chinese invasion across the Taiwan Strait. Yet it refuses to be panicked. “If there is a war then, my goodness, we all have a lot more than just chips to worry about,” its 91-year-old founder, Morris Chang, said in a podcast last year. His successor as chairman, Mark Liu, insists that peace is in everyone’s interest.Listen to this story. Enjoy more audio and podcasts on More

Young people have always perplexed their elders. Today’s youngsters are no different; indeed, they are baffling. They have thin wallets and expensive tastes. They prize convenience and a social conscience. They want their shopping to be at once seamless and personal. They crave authenticity while being constantly immersed in an ersatz digital world. As these youngsters start spending in earnest, brands are trying to understand what these walking paradoxes want and how they shop. The answers will define the next era of consumerism.Their absolute numbers are formidable. The European Union is home to nearly 125m people between the ages of ten (who will become consumers in the next few years) and 34. America has another 110m of these Gen-zs and millennials, a third of the population. The total annual spending of households headed by American Gen-zs and millennials hit $2.7trn in 2021, around 30% of the total. Although they are the group with the least to spend per head today, by 2026 American Gen-zs (those born between 1997 and 2012) may make up the majority of the country’s shoppers.A good place to start dissecting the psyche of the young consumer is to consider the economy that has moulded them. At the older end of the scale, today’s 30-somethings came of age in the midst of the global financial crisis of 2007-09 and the ensuing recession. Their younger peers had a bit more luck, beginning their careers in years when tightening labour markets had pushed up wages. Until, that is, the covid-19 pandemic upended many of their lives.These two big shocks, of the sort that their parents were mostly spared in a more benign economic era between 1990 and the mid-2000s, have fostered pessimism among the young people who experienced them. A study by McKinsey, a consultancy, published in 2022, found that a quarter of Gen-zs doubted they would be able to afford to retire. Less than half believed they would ever own a home. Uncertainty about the future may be encouraging impulsive spending of limited resources in the present. The young were disrupted more by covid than other generations and are now enjoying the rebound. According to McKinsey, American millennials (born between 1980 and the late 1990s) spent 17% more in the year through to March 2022 than they did the year before. Despite a short-term rebound from the dark days of the pandemic, their long-term prospects are less good. American millennials and Gen-zs have accumulated less wealth than Gen-x or Boomers at the same age. Easy access to means of spreading payments may also encourage splashing out. According to another McKinsey survey from October 2022, 45% of Europeans in their teens and early 20s intended to make some kind of splurge in the next three months whereas 83% of baby boomers, born before 1964, said “no” to such profligacy. Forrester, a market-research firm, found that most users of “buy now, pay later” apps are a few years either side of 20. Megan Scott, a 20-year-old student from London, speaks for many of her peers by admitting that, when it comes to shopping, she has no restraint—until, she chuckles, the bill arrives. In many ways youngsters’ shopping habits—like their lives—are defined by the “attention economy”, where buying stuff has been made far easier without a trip to the shops. A proliferation of social media means that there are many new ways of attracting consumers’ eyeballs. Most young shoppers never knew a world without smartphones. More than two-thirds of 18- to 34-year-old Americans spend four hours or more on their devices each day. A heightened expectation of convenience comes with being raised in the age of Airbnb, Amazon and Uber. Young people want their shopping to be totally hiccup-free. The light-speed online world also appears to have lowered tolerances for long delivery times. A study by Salesforce, a business-software giant, found that Gen-z Americans are the likeliest of all age groups to want their groceries delivered within an hour. They are more likely than the rest of the population to use their phones to pay for shopping, according to Forrester, and are put off if the range of payment methods is limited. These “always-on purchasers”, as McKinsey has christened them, often shun a weekly shop for quicker fixes of everything from fashion to furniture. They like subscriptions, frequently favouring shared access to products rather than outright ownership. This has buoyed online-rental sites (like Rent the Runway for fashion) and streaming services. Investors may have fallen out of love with Netflix but Gen-z has not; the company remains one of the most popular brands among that age group in America.The internet has also changed the way the young discover brands. Print, billboard or television advertising has given way to social media. Instagram, part of Meta’s empire, and TikTok, a Chinese-owned video-sharing app, are where the young look for inspiration, particularly for goods where looks matter such as fashion, beauty and sportswear. TikTok’s user-generated videos can propel even tiny brands to speedy viral fame. Such apps are increasingly adding features that allow users to shop without ever leaving the platform. According to McKinsey, by 2021 six in ten Americans under the age of 25 had completed a purchase on a social-media site. Some are following the Chinese model of “social commerce” by mixing live-streamed entertainment with the chance to shop. For the time being, though, young Western consumers prefer to make purchases outside social media, and often scour sites like Amazon for bargains from the brands they have discovered. According to a survey by Cowen, an investment bank, spending on subscriptions to Prime, Amazon’s home delivery and entertainment service, trails only phone bills, food and travel in young people’s shopping baskets. Physical shops are not entirely shunned, as long as the experience feels personal and, ideally, integrates virtual and physical worlds. Nike, for example, is successfully targeting young buyers by allowing them to design their own trainers on its website, to pick up in person after attending an in-store dance class, and then encouraging them to tag the brand in a review on TikTok or Instagram.The new world of shopping has also allowed the young to take a more informed view of the companies that they buy from. The attention economy’s information overload has not dulled youngsters’ senses. On the contrary, it appears to have made them hypersensitive, especially to any brand that pretends to be something it isn’t. Edelman, a public-relations firm, found that seven in ten Gen-zs across six countries fact-check claims made in adverts. Citing survey data that show some teens have stopped using certain brands because of their shady ethics, Forrester has taken to calling young consumers “truth barometers”. Brands that do not match up to the long list of requirements had better watch out. If they do not get what they want and how they want it, youngsters are happy to try something new. According to another McKinsey survey from October 2022, nine in ten Gen-z and millennial Europeans had changed how they shopped, where they shopped or the brands they bought in the previous three months. How the young shop is clearly in flux. What they buy, too, is changing. What older generations consider discretionary, such as wellness and luxury, have become essentials. Self-care is all the rage. On the hunt for clothing that will set them apart, the young are turning to posh brands at an ever more tender age. According to Bain, a consultancy, the average Gen-z shopper makes their first luxury purchase when they are 15; their 30-something counterparts were 19 when they entered the luxury market. Some buy posh items as a hedge, believing that such items can hold value even during tough times. Helpfully, these can now be traded easily on second-hand sales platforms such as Vinted and Vestiaire Collective. More broadly, young consumers profess to be more values-driven than previous generations. Research by Forrester shows that this attitude is even more common among teenagers and 20-somethings than among slightly older counterparts. Some of these values are centred around identity (race, gender and so on). Others stem from things the young care about, such as climate change. kpmg, an accounting firm, found that the Gen-z crowd across 16 countries worry more about climate change and natural disasters than any other generation. According to a survey by Credit Suisse, a bank, the young in emerging markets are more fretful still. Revealed preferences paint a more nuanced picture. On the one hand, Forrester has identified Patagonia, a premium outdoor-clothing brand with a record of green do-goodery, as a Gen-z favourite in the rich world. The young are the most likely of all age groups to try—and stick with—alternative proteins such as oat milk and plant-based meat alternatives. But not at any price. Credit Suisse found that on average, consumers globally will pay an average premium of 9% for more environmentally friendly grub. Young consumers in the rich world are less willing to pay premiums for these alternatives than their counterparts in emerging markets.Youngsters’ appetite for instant gratification is also fuelling some distinctly ungreen consumer habits. The young generation has virtually invented quick commerce, observes Isabelle Allen of kpmg. And that convenience is affordable because it fails to price in all its externalities. The environmental benefits of eating plants rather than meat can be quickly undone if meals are delivered in small batches by a courier on a petrol-powered motorbike. Shein, a Chinese clothes retailer that is the fastest in fast fashion, tops surveys as a Gen-z favourite in the West, despite being criticised for waste; its fashionable garments are cheap enough to throw on once and then throw away. Like everyone else the young are, then, contradictory—because, like everyone else, they are only human. ■ More