Philippa Kaur

The spiritual home of Mars Inc is Slough, an unprepossessing town somewhere under the flight path to London’s Heathrow Airport. It is not a place that sweet dreams are made of. It serves as the British backdrop for Ricky Gervais’s “The Office”. It is also the place where Forrest Mars, in the Depression of the 1930s, came up with two business ideas and a management philosophy that are still quietly shaping the world today.The creation story of the Mars Bar is well known. In 1920s Chicago, Forrest Sr, as he is now remembered, met his estranged father, a struggling chocolatier, over a malted milk, and came up with the brainwave of pouring malted milk chocolate as filling into a candy bar. Thus was the Milky Way born. But Forrest Sr, as irascible as he was enterprising, fell out with his father, left America and ended up in Slough. There, he rechristened the Milky Way as the Mars Bar. At a time when people needed calories at low cost, it took off. With brands like m&ms, Mars, based since 1974 in McLean, Virginia, is now the world’s biggest confectioner. Less familiar is the origin of the dark horse of the Mars empire, pet food. In Slough, Forrest Sr noticed the Brits’ obsession with dogs. He did not like the way they ate scraps off the table. So in 1935 he bought a company that made Chappie, a tinned dog food. Today Mars reckons it caters to half the world’s pets. Royal Canin, maker of a fancy dog chow, is its biggest brand. It is one of the largest providers of veterinary care. On June 22nd the company announced that Poul Weihrauch, head of pet care, would take over from Grant Reid, its retiring ceo. Mr Weihrauch’s elevation partly reflects the growing importance of the pet business, which now generates 58% of sales, overtaking snacks (38%). Food accounts for the rest. The family-owned company, though fiercely private about its finances, also updated its sales figures. They showed that since Mr Reid took office in 2014, revenues have increased by more than 50%, to $45bn. That makes them bigger than Coca-Cola’s. The firm gives credit for its success to the austere business practices Forrest Sr honed in Slough, now known internally as the Five Principles: quality, responsibility, mutuality, efficiency and freedom. They may sound like managerial guff. But they strike the right balance between making money and doing good. Many more showy corporations aim for that under the trendy slogan of “stakeholder capitalism”. Few carry it off as convincingly as Mars.To understand why, first consider the relationship between the company and its only shareholders, the family—a dynasty worth about $96bn, according to Forbes magazine. The fourth generation, known as g4, runs the board. Like shareholders everywhere, they have varying priorities, ranging from sustainability to the welfare of “associates” (Martian for employees). Yet their mandate for steering the firm puts top-tier financial performance and long-term growth on a par with positive social impact and trust. The shareholders reap less than a tenth of profits as dividends. That frees Mars to plough the rest back into its business, letting it keep a strong balance-sheet and a staunchly independent streak. They lead low-key lives. That fits with Mars’s egalitarian ethos and preference for privacy. They also retain some of Forrest Sr’s eccentricities. A former board member recalls factory visits with family members where everyone tried mouthfuls of canned dog food in order to check its quality. “It’s like pâté. You get used to it,” he says. The practice continues—though “we don’t come into work every day and chomp away,” a current executive insists. Next there is the firm itself. It has been professionally run since 2001. People who know Mars say the clan does not meddle much, provided managers do not threaten to blow up the firm’s—and hence the family’s—reputation. Delegation of responsibility runs deep. Mars has a relatively flat management structure, in which bosses have no cushy perks such as personal parking spaces. Associates are given responsibility, even at a young age, to make big decisions. If they take a calculated business risk that goes wrong, so be it. If they behave unethically there is zero tolerance.In business, the firm is competitive but not cut-throat, rivals say. It used to be notable mostly for a strong factory culture, operational efficiencies and returns measured in relation to its physical assets. But this is changing as the veterinary-services business has grown. Now it plays up the more intangible parts of the business. “If you meet a Mars guy, they will talk about brands and people all the time,” a rival executive says admiringly, noting its high pay and good employee-retention rates. As for stakeholderism, or what Mars calls mutuality, it says it puts the interests of customers, workers, suppliers, communities and the environment alongside those of the family shareholders. That comes with some big investments, such as $1bn to support sustainable initiatives such as renewable energy, and a policy of paying its taxes in full. But when it talks about these publicly, it is mostly because they are germane to its business. It does not wade into political debates, nor does it pontificate on every social issue.What about the future? With low debt, lots of cash and products resilient to economic turbulence, Mars is in a strong position to expand further. Some of its competitors, such as Kellogg, a food company, are flogging parts of their business. Mars bought Wrigley, a maker of chewing gum, during the financial crisis in 2008—not its finest acquisition, to be sure, but one it has stuck with. It may snap up more during today’s inflationary turmoil. Willy Wonka moment It won’t discuss strategy, however. Though the family is more open about its commitments to society, it keeps business matters tightly under wraps. That legacy, which also dates back to Forrest Sr, may start to change. In 2020 Mars opened the Slough factory to tv cameras for the first time. Its chocolate-makers were, anticlimactically, locals in hairnets, not Oompa Loompas. But at least some of the secrets of Snickers’ nougat filling were revealed. ■Read more from Schumpeter, our columnist on global business:In EY’s split, fortune may favour the dull (Jul 25th)Amazon has a rest-of-the-world problem (Jun 16th)What’s gone wrong with the Committee to Save the Planet? 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The island of Sakhalin, pinned between Japan and Russia just north of Hokkaido and to the west of the Kamchatka Peninsula, has historically been the site of conflict between the two north Asian neighbours. Today, as the home of two massive fossil-fuel projects, it symbolises an uneasy Russo-Japanese peace—and, ever since Russia invaded Ukraine in February, a sore point in relations between Japan and its Western allies. The two projects, Sakhalin-I and Sakhalin-II, lured energy firms from America, Britain and India, as well as Japan and Russia. Shortly after Vladimir Putin’s tanks rolled into Ukraine, however, ExxonMobil, an American giant, pledged to divest its 30% stake in Sakhalin-I and Shell, a British rival, said it would offload its 27.5% stake in Sakhalin-II.Not the Japanese. Sakhalin Oil and Gas Development Company, a public-private partnership, will hold on to 30% of the oil-producing Sakhalin-I; two big trading houses, Mitsui and Mitsubishi, will keep their 12.5% and 10%, respectively, of Sakhalin-II, which pumps out liquefied natural gas (lng). The government in Tokyo has no problem with that. In May the economy minister, Hagiuda Koichi, declared that the Japanese shareholders wouldn’t leave even if asked to by the Russian government. Japan’s approach seems out of character. In other instances the country’s position with respect to Russia has mirrored those of America and Europe. In June the Japan Bank for International Co-operation, a state-owned lender, extended its freeze, introduced in March, on project financing of Russian natural-gas projects in the Arctic. Private-sector financial firms have cut links with their Russian counterparties. Exports to Russia of high-performance machine tools, quantum computers, 3d printers and other items have been blocked by Japanese sanctions.Why, then, stay in Sakhalin? For one thing, this avoids the pickle that the projects’ Western partners now find themselves in. Selling their stakes is easier said than done. ExxonMobil took a $3.4bn write-down related to the project in the first quarter and Shell took a $1.6bn charge. The war limits the number of potential buyers, mostly to state-run firms from countries which are neutral or friendly towards Russia, such as Sinopec, China’s state energy giant, or ongc Videsh, the international arm of India’s Oil and Natural Gas Corporation (which already owns 20% of Sakhalin-I). As forced sellers, ExxonMobil and Shell have a weak negotiating hand, which the Chinese and the Indians would be only too happy to exploit.Japan’s government dislikes the prospect of disposing of the Japanese assets in such a fire sale. It is particularly loth to hand one of the world’s largest and most advanced gas projects over to a Chinese competitor for a song. And unlike ExxonMobil’s and Shell’s investments, which followed a purely commercial logic that Western sanctions and the reputational risk of remaining in Russia have severely undercut, it worries about energy security. Archipelagic Japan has no pipelines or electricity grids linking it to other countries. It is the world’s second-biggest importer of lng. Around 9% of its supply comes from Russia, and the bulk of that is produced in Sakhalin. This year between 50% and 69% of Sakhalin-II’s monthly gas output has headed for Japan, according to Kpler, a data firm. “When the cold light of day sets in you have to think about what impact you are having on Russia versus what impact you are having on yourself,” sums up Yuriy Humber of Japan nrg, an energy-research firm in Tokyo.Similar considerations are being aired in Germany, which gets more than half its gas from Russia. But the German government does want to reduce its reliance on Russian oil and gas, the sale of which is bankrolling the campaign against Ukraine. Japan’s prime minister, Kishida Fumio, has talked faintly about joining a Western embargo on Russian oil and has been silent on Russian gas. To Western ears, that silence sounds increasingly deafening. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

An economic downturn is a bad time to get sick, especially in poor countries. As conventional medicines become scarce and pricey, desperate patients turn to cheaper herbal remedies to treat even serious illnesses like diabetes, cancer and, these days, covid-19. Many doctors, of the scrub-wearing variety, doubt those treatments’ effectiveness. But the business of peddling them is in rude health.In 2021 sales of Yiling Pharmaceutical, a big maker of traditional Chinese medicines including lianhua qingwen, used against covid, among various other ailments, exceeded 10bn yuan ($1.6bn), nearly double the figure in pre-pandemic 2019. Amid recent Chinese covid outbreaks in March and April Yiling’s market capitalisation surpassed $11bn. It has since come down but remains three times what it was before the pandemic. Beijing Tongrentang, another large manufacturer, has doubled in value since the start of 2020, also to $11bn. Both companies have outperformed Pfizer and AstraZeneca, two Western producers of indisputably effective covid-19 vaccines (see chart).They have a powerful champion in President Xi Jinping. His government has praised traditional Chinese medicine’s “positive impact on the progress of human civilisation”. Between 2012 and 2019 alternative treatments’ share of medicine sales in China increased from 31% to 40%. The figure is probably higher today, given their widespread use against covid. As Hong Kong grappled with outbreaks this year, 1m packets of lianhua qingwen were sent to the territory from the mainland. Since 2020 China has also promoted the supposed benefits of lianhua qingwen in places struggling to procure covid jabs and treatments. Nearly 30 countries have approved the formulation for import, and some, including Kuwait and Laos, to treat covid. Belarus has signed an agreement with China to build a factory to churn out traditional Chinese medicine in Minsk.Regulators in America and Singapore have warned against using lianhua qingwen to treat covid. That has not put off investors. As earnings go, makers of traditional medicines have a big advantage: their reliance on ancient wisdom saves them billions in research-and-development costs. Pfizer and AstraZeneca funnel a fifth of their revenues, give or take, into r&d, More

On a busy street in downtown San Francisco sits the former headquarters of Fast, a maker of checkout software for online merchants. The offices look quiet; a for-let sign hangs above one of the windows. That is a departure from its management’s flashy habits. Last year at an event announcing Tampa as its East Coast hub, the firm splurged on backflipping jetski riders and pickup trucks straight from the nascar race track. Fast had set investors’ pulses racing, too. It raised $125m between 2019 and 2021, including from some of Silicon Valley’s most astute venture capitalists at firms like Kleiner Perkins and Index Ventures. Then, in April, having burned through its cash and being starved of fresh capital, Fast went bust. Fast’s demise is a sign that the startup boom of the past few years is going through a sharp correction in Silicon Valley and beyond. Rising interest rates, soaring consumer prices, pandemic-induced supply-chain chaos in China and the war in Ukraine are causing a wave of uncertainty to wash over the global economy. It is buffeting young tech firms particularly hard because much of their value is derived from the prospect of profits far in the future, whose present value is being eroded by rising interest rates. “It’s like a stun grenade has hit the market,” says one Silicon Valley veteran. And the shock is rippling through the vc industry, which bets on innovative upstarts and tries to nurture them into the next Google. The startup slump is only just beginning to run its course. Investors are warning their portfolio companies not to expect fresh funding rounds for a while—and to keep enough money in the bank to last until 2025. Many firms will fail to do this and go the way of Fast. Others will hang on. Some may even prosper, as founders learn to go easy on the fripperies and double down on their core business. When the dust settles, the global startup scene will look different, and possibly healthier. The looming lean period comes after several fat years in vc-dom. Non-traditional investors piled into speculative startups: venture arms of large companies from Salesforce to ExxonMobil, New York hedge funds such as Coatue and Tiger Global, Wall Street buy-out barons and other “tourists”, as they are derisively known in vc’s Silicon Valley heartland. New tech hubs mushroomed around the world, from Beijing to Bangalore. No year was fatter than 2021. According to cb Insights, a research firm, global tech startups raised $621bn in 2021. That is twice as much as the year before and ten times more than in 2012. Then the techno music stopped. First to feel it were publicly traded tech firms. The nasdaq Composite, a tech-heavy index, has fallen by 30% since its peak last November. According to PitchBook, a data provider, more than 140 vc-backed firms that went public in America since 2020 have market capitalisations lower than the total amount of venture funding they raised over their lifetimes. Faraday Future, American maker of electric vehicles, is now valued at just $710m after raising more than $3bn. Grab, a Singapore-based delivery app, raised $14bn before its going public at a valuation of around $40bn. Now it is worth $10bn. The beatlessness is now spreading to the private markets. Fundraising has slowed sharply compared with the second half of 2021 (see chart 1). Between March and May the number of funding rounds was down by 7% in America, compared with the same period last year, according to PitchBook. In Asia it declined by 11% and in Europe by 19%. Things are almost certainly worse than those numbers suggest. A delay in reporting means they lag behind the reality on the ground by a few months. vc investors say that hardly any deals are being inked these days. Fewer startups are also “exiting”, vc lingo for being listed or sold on to other investors. Investors’ reticence is having an effect on valuations in private markets. Such drops usually only come to light during private funding rounds or public listings, when a firm raises capital in exchange for equity, or when a company changes hands. Less fundraising and fewer exits makes this harder to assess. ApeVue, a data provider, offers a hint of what is happening by tracking share prices in the secondary markets, where employees and venture capitalists can buy and sell shares of private firms. An equally-weighted index of the 50 most-traded startups has declined by 17% since its peak in January. Using ApeVue’s data, The Economist estimates that a basket of 12 big startups worth $1trn at the start of this year is now worth about $750bn (see chart 2). That list includes Stripe, a fintech star, which has seen its secondary-market share price collapse by 45% since January, and ByteDance, TikTok’s Chinese parent company, the shares of which trade a quarter below their value six months ago. Secondary-market valuations of private firms have not yet dropped as far as public ones. ApeVue’s index is down by about ten percentage points less than the nasdaq composite so far this year (see chart 3). Comparing private firms with listed rivals reveals the same pattern. The share price of Impossible Foods, a private purveyor of meatless meat, has fallen by 17% since January, while that of Beyond Meat, a listed competitor, has slid by 61%. This could mean that startup valuations are more robust than market capitalisations of listed firms. Alternatively, they could have further to fall. The ultimate test will be the number of “down rounds”, where firms raise new capital at a lower valuation than before. Founders dislike these more than secondary-market slip-ups. Down rounds are a more definitive indication of falling value. They also hurt morale of employees, who are often compensated for their grinding hours with stock options. And they irk vc firms forced to mark down the value of their investments, which is not something that their limited partners want to hear. Only a few down rounds have been publicly reported. Last month, for example, the Wall Street Journal reported that Klarna, a Swedish fintech firm, was seeking fresh funds at a valuation two-thirds lower than its previous round a year ago. In March Instacart, a grocery-delivery firm, took the even more unusual step of valuing itself down from $39bn in March last year to $24bn, without raising fresh capital.Most investors do not expect a spate of down rounds in the near term. That is partly because last year’s flood of capital has left lots of firms with healthy bank balances. Consider the 70-odd biggest startups selling business software and services. According to Brex, a provider of corporate-banking services popular among startups, mature firms in this sector are burning through cash at the average rate of around $500,000 per month. At that pace, all but three of the 70 raised enough money in their last financing round to cover them into 2025. Even at a high burn rate of $4m a month, more than half of the cohort would have enough to tide them over for the next three years, even before factoring in cash left over from previous financing rounds and any profits they may have made.To avoid having to raise capital in a rush at a depressed valuation, founders are nevertheless busy trimming the fat. “Last year one dollar of growth was all the same, whether it cost 90 cents or or $1.5 to acquire it,” says Hilary Gosher of Insight Partners, a vc firm. Today the watchwords are capital-efficient growth. The average cash burn rate has fallen in the past year for all types of startup, from the youngest to the more mature, according to Brex’s data (see chart 4). One way startups are containing costs is by cutting staff. According to Layoffs.fyi, a website, around 800 startups have reduced their payrolls since mid-March. Getir, a Turkish delivery app, sacked over 4,000 people (or 14% of its workforce). Better.com, an online mortgage lender, laid off 3,000 (33%). Another common strategy is to spend less on marketing. SensorTower, a firm of analysts, tallies how much firms spend on digital marketing. The median of the world’s 50 biggest startups has reduced such expenditures in America by 43% since January. Some categories, such as instant-delivery firms, including Getir and GoPuff, an American rival, have made even more swingeing cuts.For some firms the cuts will not go far enough. Those most exposed to a Fast-like fate are early-stage companies. On average, their burn rate implies they have capital for about 20 months, less than the 30 months that most venture capitalists are warning founders to prepare for. Among more mature firms, three groups stand out as higher risk. One is firms in highly competitive businesses, such as cybersecurity, instant delivery and fintech. These areas suffer from an “oversupply of venture capital”, says Asheem Chandna of Greylock Partners, one more vc firm. “Anytime something starts working, vcs will go and fund ten of these,” he adds. The winners in those categories could do well. Middling firms may struggle to survive.A second higher-risk group are unlucky firms that did not raise money in 2021, when investors were generous and valuations sky-high. Around 60 of the world’s 500 biggest startups are in this camp. Most are smaller firms, such as Yuanfudao, a Chinese education-technology provider, and OrCam, an Israeli maker of devices for the visually impaired. A third category are firms that are most sensitive to consumer demand. Besides delivery apps this includes entertainment startups such as Epic Games, a video-game developer, and Bytedance. An index of such firms tracked by ApeVue has underperformed the average of highly traded firms of all sorts. Crypto firms, which benefited from Americans using their pandemic stimulus cheques to bet on bitcoin and its more exotic cousins, are also in trouble as the crypto-sphere is rocked by uncertainty. The price of shares in Blockchain.com, a big crypto platform, on the secondary markets is down by 56% since March. This group also includes many Indian and Latin American startups, which tend to be more consumer-focused. Mr Chandna detects greater “anxiety” among international startups than in America about the coming economic downturn. The money has not dried up altogether. Indeed, the total value of funding rounds has declined by less than their volume. In America fundraising has actually edged up slightly year-on-year in the past six months, according to PitchBook, despite 7% fewer deals. In Europe, with its deal count down by a fifth, their total value has risen by 13%. In other words, the average deal has got bigger—and bigger deals naturally involve larger, more mature firms. These well-capitalised companies smell opportunities. As the red-hot market for tech talent cools off, they will find it easier and cheaper to hire. And smaller rivals may be cheaper to buy. In the past few months the vc arms of established tech firms such as ibm, Intel and Salesforce have bought startups. So have industrial giants including Shell and Schneider Electric. On June 27th Bloomberg reported that ftx, a deep-pocketed crypto exchange, was in talks to buy Robinhood, a day-trading app. One investor recalls a recent deal he concluded at about a third of the price he had discussed with a founder at the end of last year. “The world has changed,” he notes. For many startups the change will be wrenching, and possibly fatal. For the startup scene as a whole, it will be salutary. ■ More

A high-tech development zone in the city of Wuhan has been abuzz since March, when the local government announced the creation of a 10bn-yuan ($1.5bn) investment vehicle. The Optics Valley Hi-Tech Venture Capital Guidance Fund aims to combine the animal spirits of private capital with the industrial objectives of the state. Its general manager, Li Yang, told state media in late May that more than 80 private investors had submitted formal proposals. Ten of these are already in the process of being approved. State cash is pulsing through China’s private-capital markets. Between 2015 and 2021 around 2,000 so-called “government guidance funds” collectively raised almost $1trn. Although the pace of fundraising has slowed since peaking in 2016, not least to let the vehicles deploy their copious dry powder, the government’s role has been entrenched. Last year the state (including local governments) accounted for a third of all capital raised in Chinese limited partnerships, making it by far the country’s biggest source of venture capital (vc) and private equity in the country (see chart 1). According to Bain, a consultancy, most big Chinese funds that completed fundraising rounds in 2021 were government-led. The Enterprises Reform Fund raised nearly $11bn; the National Green Development Fund brought in $13bn. Provinces set up 20 such vehicles last year, marshalling about 136bn yuan all told, four and a half times as much as they raised in 2020, according to Zero2ipo, a research firm. Cities and other local governments chipped in more (see chart 2).The dual aim of guidance funds is to counter the “disorderly expansion of capital” (Communist Party speak for China’s consumer-internet industry getting too big for its boots) and to fulfil President Xi Jinping’s desire for home-grown innovations in strategic areas such as artificial intelligence (ai), biotechnology and advanced manufacturing, notably of chips. On paper, combining patient capital from the state with the animal spirits and market savvy of private investors allows the guidance funds to avoid the pitfalls of conventional industrial policy. By the government’s own reckoning, failure to mobilise private capital would make the funds into just another state subsidy. In practice, the role of the private sector is fuzzy and constricted. As a result, many of the vehicles resemble old-school handouts, complete with oodles of waste and cronyism. And they bring fresh problems. Guidance funds are strange beasts. In a conventional vc or buy-out fund its originator acts as the general partner tasked with deploying the capital. A guidance fund, by contrast, often creates sub-funds in which it is a limited partner, and invites professional asset managers to be the general partner calling the shots. To limit the fund’s sway over the general partner’s investment decisions—and thus government meddling in where the money goes—many funds have rules dictating the maximum size of their investments. The Optics Valley fund’s stake in any one of its sub-funds must not exceed 25%, for example, and it can funnel no more than 100m yuan to any one of these sub-funds. In some cases these rules appear to work well enough. Shanghai Angel Guide Venture Capital, a 10bn-yuan vehicle originally launched in 2014, has created more than 65 sub-funds that invest small amounts in minority stakes at early-stage companies in partnership with non-state investors. A review by The Economist of a sample of 20 of these sub-funds shows that their general partners and most of their remaining limited partners are indeed private-sector funds. Judging by publicly available profiles, individual executives in charge of the sub-funds on behalf of the general partners have professional experience in investment.Beyond China’s largest cities, though, the situation is likely to look less like Shanghai and more like Shandong. In 2018 the eastern province set up the New Growth Drivers Fund. Since then the vehicle has launched more than 270 sub-funds and its cash has found its way into at least 1,000 provincial companies. Our analysis of 50 of these sub-funds reveals that about half are dominated by state capital with little private-sector co-investment. Instead, many of the other limited partners are other guidance funds, state-run firms or other government-linked entities. The people charged with managing these sub-funds also appear to have much less market experience than their counterparts in Shanghai.The Shandong example suggests that at least in some cases state cash is crowding out private capital rather than co-opting it. One reason is the sheer number of government investors seeking to deploy capital. By 2019 there were more than 1,300 city and district guidance funds. One city in central China has at least ten of them, according to the Centre for Security and Emerging Technology, an American think-tank. With all the government money sloshing around, private investors have fewer places to park their capital.The structure of the sub-funds, meanwhile, reduces their appeal to private investors. Many lock up capital for up to ten years, in line with Mr Xi’s exhortation to think long-term, but twice too long for the typical private limited partner. State guidelines for recognising investment losses are often stricter than venture capitalists or private-equity managers would like, and less patient towards struggling firms that could be tided over. Perhaps most frustrating, one lawyer notes, if a guidance fund with a small minority stake in a sub-fund decides to pull out, its preferential terms will cause the dissolution of the entire vehicle, leaving both the portfolio firms and private investors out to dry. The flood of state cash is leading to other distortions, too. One is to inflate company valuations. An analysis by The Economist of company ownership records shows that of the 56 unicorns based in six central and eastern provinces, 32 have received state funding. Some of them belong to the herd of consumer-internet darlings whose prospects—and therefore worth—have been dented by Mr Xi’s heavy hand. The local officials in charge of these investments have little incentive to recognise those losses, whatever their funds’ guidelines say. Frothy valuations are also a problem for the sort of startup Mr Xi approves of. Buy-out barons report that hot industries such as chipmaking and ai have absorbed record levels of guidance capital in the past two years. The resulting bubbliness in the market has made it even tougher to pick out the real innovators from a sea of wannabes, notes Scott Kennedy of the Centre for Strategic and International Studies, a think-tank in Washington. This problem is exacerbated by another, perhaps even more consequential distortion. Venture capital has traditionally plugged young firms into a network of talent and potential business partners. Guidance funds give them direct links to state-owned companies and other government bodies that can fast-track applications and help with regulatory problems. Both startups and private co-investors are therefore highly motivated to connect with government funds, says Catherine Chen of Zhong Lun, a law firm in Beijing. As Mr Xi’s state capitalism becomes more statist and less capitalist, such connections can make or break fledgling firms. This in turn gives startups and their private backers an incentive to curry favour with the government first and commercialise actual breakthroughs a distant second. Having for years tailored their business to qualify for local subsidies, cheap credit and land, young Chinese companies are now doing the same to attract guidance funds. They and their private backers often enlist former government officials to help them navigate the new vc bureaucracy. One prominent venture capitalist admits that his vc firm now bets not so much on the next big thing as on the next sector in line for handouts. This makes perfect investment sense in today’s China. It is not exactly a recipe for technological progress. ■ More

If there is one thing guaranteed to get Americans to stand to attention it is cheap Viagra. On June 2nd a firm owned by Mark Cuban, a billionaire investor (as well as a judge on “Shark Tank”, a tv show for budding entrepreneurs, and the owner of an nba basketball team), caused a stir by reducing the price of the blue pill—whose patent expired two years ago—from several dollars a pop to 11 cents. It was one of 87 drugs that the Mark Cuban Cost Plus Drug Company added to its growing assortment of cheap off-patent medicines. A new study finds that Mr Cuban’s prices might have saved Medicare, a federal health scheme for the elderly, $3.6bn on $9.6bn-worth of drugs it had bought in 2020. Drugs in America are notoriously dear. In 2019 spending on prescription medicines came to $1,126 per citizen, twice the figure in other rich counties (see chart). Critics like Mr Cuban seek to shake things up. He intends to offer thousands of cheaper drugs by the end of the year. His company buys these directly from manufacturers and sells them to consumers at cost, plus a 15% mark-up and a $3 pharmacy fee. The idea is to make drugs affordable to the 31m Americans who lack health insurance and the many more whose policies make them pay hefty fees for prescriptions. Patients have thanked him on social media for slashing the cost of drugs to treat conditions ranging from heartburn to cancer. Mr Cuban is not the only one to have lost patience with America’s current set-up. CivicaScript, from Lehi, Utah, is also trying to bring down the price of generics. In March it said it would manufacture a generic insulin at no more than $30 a vial, down from $300 for today’s branded versions. At the innovative, patented end of the market, meanwhile, eqrx and Checkpoint Therapeutics are developing new cancer and immunology drugs with the explicit intention of undercutting expensive existing therapies from big pharma.Competing on price seems like an obvious thing to try in America’s overpriced drug market. A lack of such competition suggests that obstacles get in the way. Some of these are practical. Certain off-patent drugs take years to copy, manufacture, test and win regulatory approval. Insulin, a complicated biological molecule, is one of them. Having borne the expense of copying and certifying its insulin, CivicaScript may find that the incumbents, which have long since recouped their development costs, simply lower the price of their branded products to undercut it instead. Ned McCoy, CivicaScript’s boss, insists this would make him happy; the firm’s goal, he says, is to bring about change in the market. The firm is set up as a public-benefit corporation that is not seeking profits but rather a “positive impact on society”. But it cannot do that if it goes out of business. In the American market for patented medicines, the drug’s inventor has a great deal of pricing power, which has driven prices higher. Developing new therapies is a costly gauntlet of research, clinical trials and regulatory hurdles. All too often it ends in failure. Risks can be reduced by picking well-understood diseases. Nevertheless, to succeed in the long run, eqrx will need to make up with volume what it forgoes on margins, observes Daniel Chancellor of Informa Pharma Intelligence, a research firm. The same applies to others who choose this model, like Checkpoint. Britain’s government has indicated that it would make large-scale purchases from eqrx’s pipeline of cancer drugs if those gain regulatory approval. Though this will not help American patients in the near term, it is good news for the company if it helps scale up production. The final wrinkle is that any medicine-seller who undercuts incumbents becomes a target for acquisition by them. It is easy to imagine a pharma giant launching a takeover bid for the firm, and if successful simply jacking up prices to what the market will bear—which in America is a lot more than what eqrx wants to charge. After buying a biotech startup that had developed a hepatitis drug in 2011, one big drugmaker, Gilead, charged much more for the treatment than its target had planned. On June 13th Goldman Sachs, an investment bank, noted that the market was undervaluing the drugs being developed by eqrx. On the topic of being acquired, eqrx’s boss, Melanie Nallicheri, remarks cryptically that the firm has put thought into how “not to let that happen”, but declines to give details. Mr Cuban shares the sentiment: “I don’t have a reason to sell…I can afford to absorb the losses that come from starting the company.” CivicaScript, too, has made itself an unattractive investment by ceding control over a lot of what it can do to a second non-profit sister company, Civica. The poison pill, it seems, has a place in the pharma business. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

In china’s world of video-game warcraft the phrase chong ta describes the storming of a castle before you are equipped with the right weapons and armour. More recently the term has been used to refer to an equally foolhardy and even more treacherous act: posting risky comments or content on Chinese social media knowing full well that this will incur the wrath of censors, or even higher-level officials.NetEase, a Chinese games developer, is familiar enough with the first meaning. Chong ta is, after all, a staple of “Diablo Immortal”, a hugely popular role-playing game set in medieval times. The firm was due to release the Chinese version of the game, developed together with Activision Blizzard, an American gaming giant, on June 23rd. On June 19th it delayed the roll-out, supposedly to further optimise the new version, prompting a 10% slide in its share price. Rumours swirled that chong ta’s second interpretation played a role. In late May the firm’s official “Diablo Immortal” account on Weibo, China’s Twitter-like service, posted a controversial question: “How has the bear not stepped down yet?” The cryptic message was widely interpreted as a reference to Xi Jinping, China’s president, who has often been likened online to Winnie the Pooh (apparently because he resembles the podgy bear’s Disneyfied depiction). The Weibo account was banned in June, shortly before the game’s scheduled release. Many Chinese netizens immediately spied chong ta. It wouldn’t be the first time inopportune online content has cost a Chinese tech company dearly. Last year Wang Xing, founder of Meituan, a delivery super-app, posted on Weibo a 1,000-year-old Tang dynasty poem. After certain internet users construed the verse as an affront to Mr Xi, investors fearful of state reprisal dumped Meituan stock. The firm’s share price fell by 14% over two days, erasing about $26bn in market value. On June 3rd a live-streamed broadcast of Li Jiaqi, an online influencer known to his millions of fans as Lipstick King, was suddenly cut off after he was presented with a piece of cake shaped like a tank. He has not appeared on his show since—a blow to Taobao, the e-commerce platform on which he plies his trade (as well as to international make-up brands), ahead of a big Chinese shopping holiday. Mr Li’s disappearance is widely assumed to be linked to the anniversary of the Tiananmen Square protests, in whose bloody suppression tanks played a role. The vehicles’ likenesses are thus scrubbed from the internet around the anniversary, lest they remind anyone of what happened that day in 1989. In recent months Chinese authorities have been signalling that their two-year crackdown on the consumer internet—which at its worst lopped some $2trn off the market value of Chinese tech firms, compared with late 2019—was easing. This month, for example, regulators even approved a new batch of games. The Diablo debacle and the Lipstick King’s predicament imply that any respite may be short-lived and selective. So do new rules requiring internet platforms to review user comments before they are posted, a draft of which was unveiled on June 17th.It is unclear if either NetEase’s alleged Pooh, Mr Wang’s poem or Mr Li’s pudding was in fact a defiant act of chong ta. Mr Li’s turreted, cookie-wheeled ice-cream cake certainly does not smack of premeditated subversion; the Lipstick King had not previously shown a dissident streak and it is hard to imagine him wilfully sacrificing a lucrative gig. Mr Wang’s sin may well have been to fail to consider all the possible interpretations of his post. Whether or not the managers of NetEase’s Weibo accounts knew what they were getting into, their plight—and that of Messrs Li and Wang—suggests that divining censors’ thought processes is becoming an ever bigger part of doing business in China. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

In a monty python sketch from 1969, the middle-aged Mr Anchovy, played by Michael Palin, wants to give up what he calls the desperately dull world of chartered accountancy in order to become a lion-tamer. His “vocational guidance counsellor”, aka John Cleese, suggests he consider an interim career path—banking, say—while he works towards lion-taming. “No, no, no, no, no,” Mr Anchovy interrupts. “I don’t want to wait. At nine o’clock tomorrow I want to be in there, taming.”Echoes of Mr Anchovy’s yearnings can be heard in the haste with which ey, one of the Big Four accounting firms, is considering spinning off its fast-growing consultancy practice from the unfashionable audit side of the business. Not only is it a bold move by the standards of book-keeping firms—to the point, says Michael Izza of the Institute of Chartered Accountants in England and Wales, that ey’s three rivals, Deloitte, pwc and kpmg, will be considering their next steps in light of its decision. There is also a hint of Pythonesque farce about it. Such is the excitement that details of a proposed initial public offering (ipo) in 2023 were leaked to the Wall Street Journal, which published them on June 20th. They included the size of the potential bonanza for some of the firm’s 13,000 partners—something ey’s bean-counters of old would much rather have kept under their bowler hats. The firm insists no final decision has been made. Yet a split would make sense. Regulators worry that consulting services generate conflicts of interest for firms also carrying out statutory audits. After a string of accounting scandals in recent years they are urging the auditors to stand on their own two feet. As for an ipo, that is bound to set consultants’ hearts racing. But like Mr Anchovy, they should think twice before they leap into the lion’s den. In the long run, audit may well be the more prudent bet. Make no mistake, the advisory practice is the red-blooded side of the business. It accounted for two-thirds of ey’s $40bn in revenues last year. Unshackling much of the tax, consulting, strategy and transactions work from audit would give the consulting arm more room for manoeuvre and free it from a partnership model that smothers quick decision-making. The new advisory firm could raise capital more easily to invest in technology, as well as developing trendy outsourcing businesses such as fully running multinationals’ tax affairs. It could bolster its fortunes by offloading niche businesses. (Not that it needs to wait for an ipo to do that: last year pwc sold one that handles global companies’ foreign postings to a private-equity firm for $2.2bn, its biggest divestment in nearly two decades.) There is an even more enticing precedent. Accenture, which was spun off from Arthur Andersen and then went public a year before the accounting firm collapsed in 2002, has soared in value to $190bn. ey’s consulting arm would not be worth close to that. However, the leaked documents, based on recent market conditions, suggest it could raise $10bn by selling a 15% stake. The partners who join it would receive 70% of the shares (the remaining 15% would be for lowlier staff).It is not all upside for the consultants, though. The split would involve a cash payout from the spun-off company to partners remaining in the rump ey, and would cover potential claims against the firm for problems such as those at Wirecard, a failed German payments company, and nmc Health, a collapsed British hospital chain, both of which ey audited. To make the payment, the new firm would reportedly borrow $17bn—a large sum considering that publicly traded rivals like Accenture and tcs have low debts.Those are not the only competitors, either. Barriers to entry in consulting are low. Big tech firms such as Microsoft and data-miners such as Palantir may try to muscle into the space. The ey brand may have raised the stature of the consultancy practice, but it will probably be floated with a new name. Like some other consultants, it could fall victim to delusions of grandeur.That is why, despite being the pedestrian side of the business, audit could be a dark horse. Its shortcomings are well known: lack of trust, conflicts of interest, low pay compared with other professional services, the risk that ai-powered “audit bots” will crawl over its business model. Yet it has some advantages. For one thing, it remains an entrenched oligopoly. The Big Four audit 99% of firms in the s&p 500 index. Moreover, structural changes are afoot that could benefit it. The first is regulatory. As the Big Four auditors are forced to become more independent, they are raising fees. As pressure mounts to improve audit quality, they will charge more for it. The second change is to their scope. The firms are expecting a lot of new work as regulators force companies to disclose more about their climate impact. Much of this will have to be checked and approved by auditors. One senior accountant talks excitedly about hiring “thousands of eco-warriors”.If history is any guide, the windfall from the split may favour the auditors, too. Though the partners remaining on the audit side would receive lower payouts than those departing with the consultancy, cash in hand is precious, especially in times of volatile markets. The last time ey split off its consultancy, selling it to Capgemini, a French firm, in 2000, the partners who received cash, not shares, did better. And after that the auditors simply rebuilt the consulting side of the business. Even now they plan to retain elements of advisory work, such as parts of the tax practice. These could again be reconstructed into something bigger.Ants in the pantsThose with long memories, such as the older partners, will know all this. Many of the more junior ones may find themselves lured by the eat-what-you-kill excitement of consultancy. But if they ignore history, they should not ignore comedy. Mr Anchovy never did become a lion-tamer. What he thought was a lion was instead an anteater. Shown a photo of a real lion, he passed out. ■Read more from Schumpeter, our columnist on global business:Amazon has a rest-of-the-world problem (Jun 16th)What’s gone wrong with the Committee to Save the Planet? (Jun 9th)Why Proxy advisers are losing their power (Jun 2nd)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More