Philippa Kaur

After a day’s work, you are not quite ready to go home. Perhaps you fancy catching a film. You could head to the cinema. Instead, you retreat into your car. A few taps on the touchscreen dashboard and the vehicle turns into a multimedia cocoon. Light trickles down the interior surfaces like a waterfall. Speakers ooze surround sound. Augmented-reality glasses make a screen appear in front of your eyes.This immersive experience is at the core of what Nio, a Chinese electric-vehicle (EV) company, laid out as the future of the car at its European coming-out party last month in Berlin. The firm wants its high-end evs to be a “second living room”. Forget horsepower, acceleration and design—Nio talks up the two dozen high-resolution cameras and transistors (of which there are 68bn, about four times as many as in the latest iPhone) in their vehicles. “We have a supercomputer in our cars,” boasts Nio’s boss, William Li. Nio is at the forefront of a revolution in the car industry: what was once the archetypal hardware business is becoming ever more about software. Immutable objects that do not change after they leave the factory are turning into dynamic platforms for applications and features which can be updated “over the air”. Rather than deteriorate with age, such “software-defined vehicles” can improve over the years. Brands will become defined less by handling or mechanical excellence, and more by the services they offer, from safety features and infotainment to artificially intelligent driving aids. Nio’s cars come equipped with an ai assistant called Nomi, whose circular interface sits on top of the dashboard and smiles when you ask it questions.Like all revolutions, this one promises to usher in a new world. It will certainly benefit motorists and digitally native carmakers such as Nio or Tesla, America’s EV champion. It will also claim victims, mostly among incumbent carmakers steeped in the culture of mechanical engineering. The boss of Volkswagen, Herbert Diess, recently lost his job after botching the German giant’s software plans. For many of vw’s rivals, too, going “soft” is proving thornier than managing the other big transition, from the internal-combustion engine to electric power. It may also prove more consequential. Luca de Meo, boss of Renault, a French carmaker, likens the situation to the upheaval wrought on telecommunications by the smartphone. The shift will define the fate of a global industry with revenues of nearly $3trn. Cars have been accumulating software for decades. For the most part, however, code was deeply embedded in a car’s parts, powering the “electronic control units” of such things as the ignition, brakes and steering. Most of these programs were developed by the carmakers’ suppliers and came in completed units that were then assembled into a vehicle. Car firms “were mostly integrators”, explains Klaus Schmitz of Arthur D. Little, a consultancy.In recent years this setup has started to collapse under its own complexity. As more software was added, it became harder to make all the pieces work together, explains Andreas Boes of isf Munich, a think-tank. In June 2020 vw postponed for months the launch of the ID.3, a new ev, because of software troubles. Software engineers’ go-to approach to untangle such messes is to create a “platform”—to equip cars with a central computer powered by an operating system (os) that comes with standardised digital plugs for additional components (application programming interfaces, or APIs, in the jargon) and a connection to the computing clouds. This technical transformation, in turn, has triggered a knotty cultural one. In the old hardware world, car companies were hierarchical, process-oriented organisations often run by big egos. Launching a new model took around four years and the focus fell on meeting the deadline for the all important start of production. A new model was much the same as the old one, with precious little innovation, says Henrik Fisker, who once designed Aston Martin and BMW sports cars and now runs an EV startup bearing his name. In the new software world, by contrast, decentralised teams of developers focus more on problem-solving than on execution. Cars are updated in rhythms counted not in years but in days and sometimes hours. Products are never really finished. This is second nature to newcomers such as Tesla—which was conceived as a software company that happened to make cars and is now the world’s most valuable carmaker—as well as Nio More

Readers looking for thrills rarely turn to official reports written by groups of worthies. At first glance, one from a body soporifically named the UN High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities might be expected to cure insomnia. The team of experts, led by Catherine McKenna, a former Canadian minister, has spent the past seven months poring over the proliferating climate commitments of banks and big businesses, as well as cities and regions. Listen to this story. Enjoy more audio and podcasts on More

Following a series of anti-Semitic outbursts in October, Kanye West, a rapper and fashion entrepreneur (who insists on being called Ye), bragged that Adidas would never get rid of him. Within days, the German sportswear giant proved him wrong, ending a lucrative seven-year relship. Mr West’s line of Yeezy sneakers added €1.5bn ($1.5bn) to Adidas’s revenues in 2021, or 12% of its entire shoe business. After the announcement, the company’s share price fell to lows unseen since 2016. On November 9th Adidas cut its profit forecast for the fourth time this year. The previous day it had named a new chief executive, Bjorn Gulden, to clean up the mess.Listen to this story. Enjoy more audio and podcasts on More

On November 9th Meta said it would fire 11,000 people, or 13% of its workforce. It is not the only tech firm to give its workers the boot, as the sector goes through a harsh downturn. A week earlier Stripe, a fintech firm, announced it would cut 14% of its staff; Twitter’s new owner, Elon Musk, fired half its personnel. According to Crunchbase, a data provider, more than 60,000 American techies have been shown the door this year.To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

“Lorries are vital for the transport of almost everything in Europe,” says Raluca Marian of the International Road Transport Union (IRU) in Brussels. Three-quarters of all goods in the EU travel by lorry. If half the bloc’s 6.2m heavy-duty vehicles (HDVs) cannot function, supermarket shelves will be empty within days and essential services reliant on ambulances and fire engines will break down. That could happen if stocks of AdBlue, a mix of urea and deionised water that neutralises nitric-oxide emissions from diesel engines, are depleted. As many as 4m European lorries are programmed to stop after a few kilometres without AdBlue. Listen to this story. Enjoy more audio and podcasts on More

“ONE CARGO of LNG heats 1m people in Europe for a month,” beams an employee of Cheniere, America’s biggest exporter of liquefied natural gas, pointing to a specialised vessel docked at its huge export terminal in Corpus Christi, Texas. The firm has poured $17bn into the facility and in October held a groundbreaking ceremony to mark an additional $8bn expansion. More lng sets sail from Cheniere’s even bigger plant in Louisiana.Listen to this story. Enjoy more audio and podcasts on More

In 1922 Vladimir Lenin, criticised by Communist militants for tolerating a minuscule role for the private sector in Bolshevik Russia, insisted that it was a reasonable trade-off because the state would still control “the commanding heights” of the economy. For much of the rest of the 20th century that phrase came to stand for state meddling—not a complete clampdown on private markets, but preference for a dominant economic role played by the mandarins of the public sector. In the 1980s that changed. For most of the period since then it was market forces, rather than the state, that have been in the ascendancy across the West, even when centre-left governments have been in power. But Daniel Yergin, who co-authored a book called “Commanding Heights” in 2002, argues that the concept is back. President Joe Biden’s spending bills on infrastructure, semiconductors and the climate seek to use industrial policy to strengthen investment in America and counter geopolitical competition from China. His government has a left-wing regulatory zeal not seen in generations. “The hand of the regulatory state has become stronger,” asserts Mr Yergin, who is also vice-chairman of S&P Global, a research firm.For such reasons, the prospect of gridlock after Republicans appear on track to narrowly regain the House of Representatives in midterm elections on November 8th will probably be salutary for business, even if the Grand Old Party fails to make the sweeping gains in the Senate that some had predicted. If nothing else, it will prevent yet more big-spending “Bidenomics”, potentially reducing upward pressure on inflation and interest rates.Yet the election results are not an unalloyed win for America Inc. Although political paralysis in Washington may constrain the more progressive wing of the Democratic Party and the globophobe populists among the Republicans, there is little that centrists can do in the short run to stem the regulatory tide. Moreover, results in state races portray a country split into conflicting ideological camps. Whether in red states like Florida and Texas or blue ones like California, governments are increasingly keen to boss businesses about. Corporations struggle to straddle the chasm. Even before the final vote counts roll in, the post-electoral picture for corporate America is already clearest on taxes. Republican control of the house would take two immediate concerns off the table. The first is the White House’s ambition to push through corporate-tax increases, windfall taxes on oil firms, or both. The second allayed concern is that of a new fiscal splurge. Granted, many consumer-facing firms benefited from the fillip to households that came from Mr Biden’s $1.9trn American Rescue Plan in March 2021. Others, such as construction-equipment firms, logistics operators, chipmakers and clean-energy companies, are likely to benefit from the $1.7trn trio of spending bills pushed through by the Biden administration in the past year. With annual inflation running at 8%, however, further spending, if debt-financed, would be dangerous. It would push up wages and other costs.Matters are blurrier when it comes to the regulatory state. Even if the right wins control of both chambers, Mr Biden would veto any attempts to arrest his sharp shift to the left on matters like competition policy; the Federal Trade Commission is gearing up for some high-profile cases, including an antitrust trial against Meta, Facebook’s corporate parent, expected to begin in December 2023. With control of at least one chamber, the Republicans can make mischief, summoning regulators to Capitol Hill, or turning down agencies’ requests for more money. They are cross about some issues that many big businesses also seethe about, such as the attempts by the Securities and Exchange Commission, the market regulator, to demand finicky emissions disclosures.In other important ways, though, the party that used to treat corporate America as a bedfellow has started to disown it. Like Democrats, though for different reasons, Republicans want to cut big tech down to size. Just as Donald Trump courted blue-collar voters, some of his most notable acolytes have espoused causes that are anathema to big business, such as higher wages and workers’ councils, while turning against laissez-faire favourites like globalisation and immigration. In the end it may be the courts, not the Republicans, that prove to be the last bulwark against overweening regulators.Business may have the most difficulty keeping interventionism at bay in the states. With Washington gridlocked, states are turning into strongholds of ideological unity and taking matters into their own hands. In the run-up to the elections, only 12 of the 50 states had divided governments, notes Neil Bradley of the US Chamber of Commerce, America Inc’s main lobby group. That emboldens them to interfere in what used to be considered internal corporate affairs, from the “wokery” of CEOs to investments, lending policies and the size of share buy-backs. That leaves companies in the tricky position of trying to appease both deep-red and deep-blue states at the same time. As Mr Bradley puts it, companies are seeing “Texas telling them they have to do one thing and California telling them they have to do the opposite”. Taking the Mickey One way for businesses to cope with this is to keep their heads down and their noses out of politics. The consequences of misreading local political moods can be severe. Just ask Disney, whose run-in with Ron DeSantis, Florida’s governor, may be all the costlier after his thumping re-election win puts him in pole position to challenge Mr Trump for the Republican nomination in the 2024 presidential race. Alternatively, companies could also lobby the federal government for a single set of rules in areas such as greenery or data privacy, even if these are not all to businesses’ liking. That would help clear the state-by-state minefield. It is also fanciful in an era of gridlock. From the commanding heights of Bolshevik heaven, Lenin must be laughing. ■ More

The bad news just keeps coming. Ten months after America’s stockmarket peaked, its big technology companies have suffered another rout. Hopes that the Federal Reserve might change course have been dashed; interest rates are set to rise by more than previously thought. The bond market is screaming recession. Could things get any worse? The answer is yes. Stockmarket booms of the sort that crested in January tend to engender fraud. Bad times like those that lie ahead reveal it. “There is an inverse relationship between interest rates and dishonesty,” says Carson Block, a short-seller. Quite so. A decade of ultra-low borrowing costs has encouraged companies to load up on cheap debt. And debt can hide a lot of misdeeds. They are uncovered when credit dries up. The global financial crisis of 2007-09 exposed fraud and negligence in mortgage lending. The stockmarket bust of the early 2000s unmasked the deceptions of the dotcom bonanza and the book-cooking at Enron, WorldCom and Global Crossing. Those with longer memories in Britain will recall the Polly Peck and Maxwell scandals at the end of the go-go 1980s. The next downturn seems likely to uncover a similar wave of corporate fraud. Where, exactly, is hard to know in advance, fraud-busters concede. Everyone has a favourite hunch. The rush to comply with the demands of environmental, social and governance (ESG) investing seems ripe for more imbroglios; in May German police raided the offices of dws, an asset manager, over claims of greenwashing. The various government schemes to shore up businesses in the pandemic are another candidate. They were designed to be tapped quickly, so checks were by necessity lax. Evidence of fraud is already emerging. The archetypal sin revealed by recession is accounting fraud. The big scandals play out like tragic dramas: when the plot twist arrives, it seems both surprising and inevitable. No simple formula exists to sort the number-fiddlers from the rest. But the field can be narrowed by searching within the “fraud triangle” of financial pressure, opportunity and rationalisation.Start with pressure. Sometimes this is self-imposed. If you make the cover of “Business Genius Monthly”, in Mr Block’s words, “the guy on the cover becomes your identity, the ceo of a high-flying firm.” Fessing up that the firm is not flying high becomes unthinkable. Often it is the result of external expectations, says Andi McNeal of the Association of Certified Fraud Examiners, a 90,000-strong professional body based in Texas. The expectations to be met—or gamed—can be regulatory: think of how bankers pulled the wool over the eyes of their watchdogs before the financial crisis; or how Volkswagen deceived environmental agencies about the pollution from its cars in the “diesel-gate” scandal that blew up in 2015. For bosses of listed firms, the external eyes to please are often those of portfolio managers, analysts and traders—and the thing doing the pleasing are accounting earnings. The stockmarket uses profits as a rough-and-ready guide to how well a company is doing and at what price its shares should change hands. Earnings “misses” can be punished brutally. The shares of Meta, owner of Facebook, lost 25% of their value after disappointing quarterly earnings last month. A lot of ceo pay is tied to share prices, which creates the incentive to meet earnings forecasts. That bosses feel pressure to deliver predictable earnings is well documented. Almost all of the 400 managers surveyed in the mid-2000s by John Graham, Campbell Harvey and Shiva Rajgopal, a trio of academics, said they had a strong preference for smooth earnings. Most admitted they would delay big spending line items to meet a quarterly earnings target. More than a third said they would book revenues this quarter rather than the next, or incentivise customers to buy more earlier. If anything, the rewards for smoothing earnings have grown. Investors attach rich valuations to the shares of dependable earners, or so-called “quality stocks”. Those that suddenly look unreliable have a long way to fall (see chart). Some bosses will resort to fraud to avoid that fate. Motive is not enough to lead people to commit fraud. The circumstances have to be right (or rather, wrong). Opportunity will vary by jurisdiction. In places where the rule of law is weak, scope to falsify accounts with impunity is wider. You should expect to find more book-cooking in emerging markets than in rich ones. Some short-sellers, such as Mr Block, have trained their attentions on Chinese firms listed abroad, whose accounts are hard for foreigners to verify. They landed a big target in 2020, when Luckin Coffee agreed to pay $180m to settle accounting-fraud charges in America. India is another font of scandal. Its tycoons are often afforded a reverence that is at odds with their probity. In rich countries, opportunity is afforded by the latitude of accounting practices. Earnings are a slippery concept. In a simple business, like a lemonade stand, profit is the difference between the cash coming in from lemonade sales and cash going out to buy lemons. More complex businesses have to account for non-cash items, or “accruals”, such as sales that have been booked but not yet paid for. Accruals also include costs that will eventually be a drain on cash, but aren’t yet: wear and tear (depreciation) of assets, pension payments, bad debts and so on. Accruals always rely on a forecast or best guess of how things will turn out. “Accountancy is full of such estimates,” notes Steve Cooper, a former board member of the International Accounting Standards Board, who now writes the Footnotes Analyst, a blog. Accruals estimates can change for defensible reasons. Amazon Web Services, the e-emporium’s cloud-computing division, said in February that it would extend the working life of its servers by a year, thus lowering its depreciation costs. This is perfectly legitimate. No one knows for sure the useful life of fixed assets, such as servers (or aircraft or office buildings). Some less scrupulous firms, however, can time accruals changes to give earnings a bump, by bringing forward revenue to the present or deferring costs to the future. Eventually, earnings must tally with cashflow. Firms that do not generate a lot of cash tend to pile on debt to disguise the fact. Corporate sleuths know this, which is one reason fraudsters go to great lengths to conceal their true debt burden. Another reason, powerful during recessions, is to avoid a downgrade from rating agencies, which would raise borrowing costs. The side that completes the fraud triangle is rationalisation. Though some fraudsters are, as Mr Block points out, sociopaths who don’t feel the need to justify themselves to anyone, fraud is likelier to occur if company bosses feel they can justify it to themselves. “Everybody does it” is something you might hear from the earnings-smoothers at the white-lie end of the accounts-fiddling spectrum. Some fraudsters fall back on altruistic reasoning, telling themselves they are doing it to save jobs or investors. “This is just temporary” is another common rationalisation, says Ms McNeal. Book-cooking can feel acceptable in a recession, in cases where the bosses sincerely believe that the business has good long-term prospects. This is what happened at one particular company. It was a classic story, says the executive who was brought in to clean up the mess. Business was good. The management believed they had found a recipe for success. They repeated this formula until long after it had stopped working. The pressure increased after recession struck. Costs were slashed in an effort to sustain profits. The cuts served only to hurt the business. Somehow reality had to be kept at bay. So the company began to fiddle its accounts.How many such cases are thrown up by the next recession depends in part on its severity. It is easier to keep a fraudulent show on the road in a short downturn. In a prolonged one, a few sorts of corporate sinners are likely to come to be unmasked. The least guilty category is firms that were run with a view to meeting accounting goals but to the long-term detriment of the business. This group includes firms so obsessed with managing earnings that they skimped on investment in capacity, new products or brands, and firms that were so intent on managing costs that they destroyed valuable relationships with suppliers or employees. A firm that pays too much attention to accounting measures of success is not committing fraud. But such a focus may act as a gateway to actual book-cooking. Some firms that were flying high only to suddenly lose altitude may decide to fiddle the numbers in the hope that the good times would quickly return. A loss of revenue is the likeliest trigger for fraud of this kind. The peculiar circumstances of the post-pandemic economy have now given rise to other possible triggers, such as excess inventories or problems with suppliers going bust. The share prices of Walmart and Target fell sharply in May, after the two retailers revealed they had misjudged demand for some goods and been left with large stocks of unsold items. It is easy to imagine less honest firms seeking to cover up mistakes of this kind rather than fess up to them.Then there are firms with no real business or not much of one. Wirecard, a much-feted Germany “fintech” firm that imploded in 2020, fits this category. So does Nikola, a startup with plans to make battery-powered lorries, whose founder, Trevor Milton, was found guilty last month by a federal court in New York of defrauding investors. By the cold light of recession, similar such examples will come to light. A lot of venture capital (vc), much of it undiscerning, poured into untested enterprises in recent years. The valuations they were assigned in the boom years already look like fantasy; many of their business models will prove similarly fanciful. Their venture-capitalist backers may try to conceal such souring bets. Their fees are based on the value of their portfolio companies, whose equity is not frequently traded. That gives the vc fund managers wide discretion on the value (or “marks”) they place on them. The same is true of private equity. Both vc firms and private-equity firms, which focus on mature businesses, are notoriously slow in writing down these values in bad times. When a fund matures, its sponsor must usually sell companies, at which point the market value ought to be clear. But these days a lot of private-asset “exits” are sales to other private funds, including some run by the same asset manager. Clubby arrangements of this kind invite abuse. The slow-growth, low-rate 2010s were a favourable climate for fraud to breed in all these areas. There were no doubt instances where financial pressure, opportunity and rationalisation became aligned. Everybody does it? Perhaps. But even the “smoothing” that seems acceptable in a boom will be judged harshly in a bust. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More