Philippa Kaur

If you want to see how technology and deglobalisation are changing the global economy, there are few better places to look than the car industry. Not only is it going through an epochal shift: away from the internal-combustion engine (ice) and towards electric vehicles (evs). Automobiles are also becoming, in effect, computers on wheels, running as much on processing power as the horse variety. And the pandemic has wreaked havoc on car companies’ complex global supply chains, most prominently of semiconductors. As carmakers electrify, computerise and refashion their supply chains for the new reality, the giant sector is undergoing the greatest transformation in decades.Having outsourced much of the manufacturing process over the past few decades to focus on design, supplier management and parts assembly, car companies are trying to exert greater control over their value chain—from the metals that go into their batteries to the software their evs run on and the shops in which they are sold. They want to turn their ev arms into tech startups. In both respects, control and startupiness, Big Auto wants to be more like Tesla, the world’s undisputed ev champion. As with earlier examples of companies tailgating a rival that tries something that works, from Ford’s moving assembly line or Toyota’s just-in-time manufacturing, Teslafication of the car business will prove disruptive.Doing everything under one roof is an idea both old and new. Tesla’s industrial system is at one glance an embrace of Silicon Valley’s “full stack”—internalising all aspects of production, and thus all the profits. Elon Musk, Tesla’s opinionated boss, once claimed that his company is “absurdly vertically integrated” by any standard, not just the car industry’s. In fact, Mr Musk borrows heavily from carmaking’s past. Henry Ford often sourced raw materials, like rubber for tyres and steel for chassis, from plantations and blast furnaces owned by his firm. His River Rouge factory in Detroit was powered by coal from Ford mines. In an echo of Fordism, Tesla has struck recent deals with lithium miners and graphite suppliers and last month confirmed a deal with Vale, a Brazilian mining giant, to acquire nickel. The plan is to acquire most of its lithium, over half its cobalt and around one-third of its nickel directly from nine mining companies. It will use those minerals in its “gigafactories”, the first of which started making batteries in 2017 in Nevada in partnership with Panasonic of Japan. It plans to make more cells on its own at its three other gigafactories around the world. Tesla has also pulled other bits of the powertrain in-house. It makes its own motors and a lot of its own electronics, giving it more control over costs as well as over the technology, says Dan Levy of Credit Suisse, a bank. Although rumours swirling last year that Mr Musk might buy his own chip factory have faded, Tesla designs its own semiconductors and has closer links than other carmakers with companies that manufacture them. That has helped it weather the global chips shortage better than rivals. Tesla’s software engineers have created a centralised computing architecture to run on those chips, ensuring smooth integration with the four-wheeled hardware. Mr Musk has even dispensed with the dealership-based sales model, instead opening his own swanky Tesla stores. Jealously eyeing Tesla’s market capitalisation of $850bn, which is roughly as much as the next nine biggest carmakers combined (see chart 1), other car bosses are desperate to emulate Mr Musk’s digger-to-dealership control. According to ubs, another bank, “integration represents a strong competitive edge in an environment of structurally tight supply chains.” As Jim Farley, Ford’s current boss, recently declared, “The most important thing is we vertically integrate. Henry Ford…was right.”This reverses decades of outsourcing to big suppliers such as Bosch, Continental and Denso in order to concentrate on managing supply chains, integrating separate parts, design, and marketing. Suppliers sold similar sorts of the same components to many customers using scale to keep prices low. This freed up capital for carmakers but put technological innovation at one step removed. Carlos Tavares, ceo of Stellantis, an Italian-American giant (whose big shareholder, Exor, also owns a stake in The Economist’s parent company), has said that his cars are 85% “bolt-on parts”. Mercedes-Benz puts the value-added split at 70/30 in favour of suppliers. Established car firms now want their ratios to more closely resemble Tesla’s, which Philippe Houchois of Jefferies, an investment bank, puts at around 50-50 and rising in favour of in-house. This starts with raw materials. As demand for battery minerals and processing capacity continues to outstrip supply, car firms are striking deals which would have Henry Ford nodding with approval. Getting their hands dirty by short-circuiting supply chains is, in the words of one former mining titan, “extraordinary”. bmw said in 2021 that it has put $334m into an Argentine lithium project. Last year Stellantis and Renault also each signed deals with Vulcan Energy Resources, and gm revealed a “multimillion-dollar investment” in Controlled Thermal Resources, in each case for lithium. In April Ford inked one with Lake Resources for the same mineral. The same month Stellantis and Mercedes entered an arrangement with Umicore, a Belgian chemicals giant, to supply cathode materials for acc, the two carmakers’ battery joint venture. In March byd, a more Tesla-like Chinese firm that started out making phone batteries before buying a small car company in 2003 and turning into one of the world’s biggest ev-makers, announced a nearly $500m investment in a Chinese lithium miner. It is said to have bought six mines in Africa. The terms of such deals are generally opaque but the sums involved are large and growing. Car bosses agree that they will become commonplace. Efforts to emulate Tesla’s battery gigafactories are also getting into gear. Carmakers are hoping to break the stranglehold of China and South Korea on battery-making, bringing production closer to home to keep costs in check and supplies reliable. Volkswagen (vw) is creating some in-house battery-making capacity. It has earmarked €2bn ($2.1bn) for its German factory, and says it will build six battery factories in Europe by 2030.Plans for such fully fledged in-house battery units remain rare (see chart 2). Most companies prefer to team up with specialist producers. Ford and sk Innovations of South Korea will stump up $7bn and $4.4bn, respectively, for three joint gigafactories in America. Last year gm unveiled an investment of $2.3bn for a battery plant in Tennessee built with lg, another South Korean firm. Sometimes, as with acc, rival car companies band together to share the cost of battery production. Stellantis and Mercedes (along with TotalEnergies, a French oil giant) will invest $7bn in acc factories in France and Germany. vw has a 20% stake, worth 1.4bn, in Northvolt, a Swedish firm that also counts Volvo as an investor. Buying off-the-shelf electric motors from suppliers is also falling out of favour. Hyundai, and the long-standing alliance between Renault and two Japanese carmakers, Nissan and Mitsubishi, are mostly going it alone. bmw, Ford, gm, Mercedes-Benz and vw are among those planning to make more motors in their own factories. Although no car boss is about to outdo Mr Musk and make the leap into semiconductor manufacturing, the 7.7m cars in lost production last year as a result of the global chip shortage has made the industry forge closer links with chip designers such as Qualcomm and Nvidia, which would once have sold chips to firms far down the carmakers’ supply chain. The car firms are also employing chip specialists to help them semi-tailor specifications to make them, as one car boss puts it, “smarter buyers”. vw is hatching plans to design its own custom silicon, as Tesla does. Something similar is happening in software development. Last month vw’s boss, Herbert Diess, told a meeting of his employees that “development of our own software expertise is the biggest switch the automotive industry has to make.” Mr Diess’s fellow industry leaders share his analysis. In the next few years software is expected to become the main source of revenue for the industry. ubs reckons car-software sales will bring in around $1.9trn annually by 2030 (see chart 3). Small wonder that car companies want to appear more techie. In September Ford poached Doug Field, who had been in charge of special projects at Apple, a tech giant with its own long-rumoured automotive ambitions. Jim Rowan, who took charge of Volvo in February, is a former boss of Dyson, an electronics firm. Even Ferrari, an Italian sports-car brand defined by the roar of its petrol engines (which is also part-owned by Exor), has been run since September by Benedetto Vigna, recruited from stMicroelectronics, a Swiss chip company. In 2020 vw created a separate software arm, cariad, to sidestep its slow decision-making bureaucracy. Despite teething troubles with the software on its id.3 hatchback that surfaced at the end of 2019, the firm has recently said that it aims to develop most of its own software in 15 years’ time, up from about 10% now. That includes plans for a proprietary operating system, something that Mercedes and Toyota are also contemplating. (Ford and gm are instead adopting Google’s Android operating system.) To that end, vw plans to invest around €30bn over the next five years. Stellantis wants to hire 4,500 software engineers by 2024. Several carmakers are setting up research-and-development centres in tech hubs, from Silicon Valley and Shanghai to Berlin and Bangalore, in order to tap those places’ existing talent pools.As for sales, established car firms have no intention of ditching the dealership system. It serves useful functions in servicing, for example—as Tesla’s long-running struggles in this area illustrate. Still, more car companies are shifting to an “agency model”, selling cars directly to customers, like Tesla, rather than through a third party. Charging fixed prices could boost margins. Direct sales also forge a closer bond with buyers that might go on to purchase additional services and upgrades. If they really want to catch up with Tesla, let alone overtake it, car companies have to “move at Silicon Valley speed”, as Barclays, a bank, puts it. That means simplifying not just their supplier networks but their corporate structures, which have become complex and siloed. As long ago as 2019 Volvo and Geely, its Chinese parent company, merged their ice operation as a stand-alone business. That has allowed the Swedish marque to go full speed to becoming electric-only by 2030. In March Ford said that it would create an ev unit, Ford Model e, and separate it from the ice operations. Renault is considering doing something similar, also with a view to accelerating innovation. All this amounts to a huge upheaval for a globe-spanning industry involving thousands of companies, millions of workers and billions in sunk ice-age costs. Refashioning value chains means spending lots of time and money, and comes with the risk of failure. For suppliers, it potentially means less business, as vertical integration makes them less central to carmaking—a prospect reflected in the sliding share prices of some, including Continental, in the past few years. For car bosses, that means more headaches, as they consider how best to deploy their firms’ resources and skills, without provoking a backlash from governments and unions fearful of the loss of well-paying manufacturing jobs. As a result, the sector’s Teslafication drive will be uneven and fitful. But the direction of travel is unmistakably Muskian. ■ More

Didi global ought to be dead. Over the past year the Chinese government has stopped the domestic ride-hailing giant from signing up new users and launched a cyber-security investigation into its operations, days after its $4.4bn initial public offering in New York last June. In a seemingly fatal blow, Didi is being forced to delist from America but blocked from relisting in Hong Kong. That the company has not collapsed is a testament to the strength of its business. Its future survival—and that of other Chinese tech darlings—remains in the gift of the Communist Party.The probe into Didi is expected to wrap up shortly and on June 6th the Wall Street Journal reported that the firm will soon be able to take on new customers. The news propelled Didi’s share price up by 60%. It still faces an investigation in America, where it is alleged to have underplayed regulatory risks in its domestic market, and investors are suing it on similar grounds. But these problems seem piffling next to what it has soldiered through at home.The first sign that the Communist Party’s two-year campaign against big tech would ease came in March from Liu He, a top economics adviser to President Xi Jinping. In May Mr Liu met a handful of tech executives and spoke of supporting the digital economy and balancing the relationship between state and market. The potential resumption of Didi’s business in China is one sign that things are indeed normalising. Some large tech platforms’ first-quarter results were also better than expected. Meituan, a delivery super-app, said on June 6th that revenue grew by 25% year on year in the first three months of 2022. Yet China’s tech companies are returning to a very new normal. Its two mightiest tech titans, Alibaba and Tencent, are growing much more slowly than in the past. Room to expand into new areas beyond their core businesses (e-commerce, and social media and video-gaming, respectively) has all but vanished. Outspoken entrepreneurs such as Jack Ma, Alibaba’s co-founder, are a thing of the past. Tech executives instead parrot official lines about ending their industry’s “reckless expansion” (which has also meant laying off tens of thousands of employees). And the state is taking direct stakes in their firms.Not long ago global investors shuddered at the prospect of state ownership. Now some are coming around to the idea. When Bloomberg reported on May 27th that faw, a state-run carmaker, was planning to buy a large stake in Didi, the ride-hailer’s share price surged by 10%. A big state investor such as faw could help Didi navigate compliance and governance issues, explains Cherry Leung of Bernstein, a broker. State investors have been eyeing the consumer-lending and credit-scoring businesses of Ant Group, Alibaba’s financial affiliate at the heart of the techlash. Once viewed as a drag on profitability, backing from a powerful government group is increasingly seen as a precondition for big tech firms to remain going concerns. It may be the only way for companies that have fallen foul of Mr Xi, and his grand plan for achieving “common prosperity” in China, to stay alive. Investors appear happy to forget about Didi’s death throes now that the firm has been resuscitated. They would be wise to remember that China’s leader has changed his mind before—and could do so again. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

The pandemic denied both the pleasures and tribulations of travel. The urge to make up for lost holidays and reunions with friends and families has brought the sort of airport holiday chaos that travellers avoided while covid-19 scuppered their plans. A rush to take advantage of school breaks caused recent misery in Europe. Passengers queued for hours at airports from Mallorca to Manchester, and flights were delayed or cancelled. Americans were furious after nearly 3,000 flights were scrapped in the four days around the Memorial Day weekend in late May. At least the hordes of unsatisfied customers are a sign that air travel is returning to normal. “Pent-up demand for travel is becoming un-pent,” says Andrew Charlton of Aviation Advocacy, a consultancy. The number of seats available on European airlines in the week commencing June 6th was only 9% below the same week in 2019. In North America it was just 5.6% down, according to oag, another consultancy. Japan, which was in effect shut to tourists for two years, said on May 26th that it would start to relax restrictions on visitors. With the exception of China, where severe recent lockdowns set back a strong recovery in domestic flying, the planes are back in the air at close to pre-pandemic levels. Bookings also look encouraging for the summer. Airlines are having to cope with a new uncertainty—a tendency of travellers to buy tickets later, induced by the riskiness of planning too far ahead during the pandemic. Even so, up to September sales for international routes are at 72% of their level in 2019 and those on domestic ones are at 66%, according to iata, an industry body. Capacity is ascending towards pre-covid levels, according to oag (see chart). Willie Walsh, iata’s boss, said in May that the speed of the rebound meant that passenger numbers worldwide would match figures from 2019 by 2023, a year earlier than previously forecast.The pace of the recovery has caught out an industry that has been rebuilding at a steady clip. In particular, traffic has become much more concentrated in peak periods, according to aci Europe, a group representing the region’s airports. Passenger numbers are already exceeding pre-pandemic levels in short spells in some places. Airports, in particular, are struggling to cope with these peaks. Replacing workers laid off during the pandemic is tough amid tight labour markets, especially so because of the extra security checks required to hire airport staff. Swissport, the world’s largest airport-service firm, said in May that it needed to take on 30,000 new workers worldwide by the summer on top of the 45,000 it now employs. Staff shortages have already prevented some airlines from adding even more capacity to meet the surging demand. Continuing disruptions may deter passengers, especially if the novelty of taking a holiday in a faraway place wears off. Even if airlines and airports are able to recruit staff to make the summer months less painful, other problems remain.Foremost is a sky-high oil price. Mr Walsh said recently that surging fuel costs had added 10% to fares already. Michael O’Leary, the irrepressibly bouncy boss of Ryanair, Europe’s biggest carrier, admits only to “cautious grounds for optimism”. A white-hot summer could be followed by a difficult winter. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

“For the last two months it has been busy like the weekend every day,” sighs a sales assistant at a large Zara store on Tauentzienstrasse, a shopping street in the centre of Berlin. On the Tuesday after the long Pentecost weekend about a dozen ladies were queuing for the fitting room, each carrying several items, many of them in hot pink or canary yellow, colours en vogue this season. They don’t seem to be deterred by Zara’s higher garment prices. At least not yet.Shoppers are still “revenge buying” to make up for all the time when shops were closed and socialising banned amid waves of covid-19. After grafting pajama bottoms onto their legs over the past two years, buyers are snapping up office and party wear. On June 8th Inditex, which own Zara, Bershka and Massimo Dutti, among other brands, reported glittery results for its latest quarter. Revenues rose by 36% year on year, to €6.7bn ($7.2bn), surpassing levels before the pandemic. Net profit jumped by 80% year on year. Online sales dipped compared with the same period in 2021, when the internet was the only place to shop for clothes owing to lockdowns in America and Europe. But the decline of 6% was much slower than expected, which suggests that people have got used to buying garb on the internet. In another boost, China is reopening after the latest bout of lockdowns. Only four of Inditex’s Chinese outlets remain closed, down from 67 in the three months to April. h&m, Inditex’s Swedish fast-fashion rival, is expected to report similarly perky results on June 15th.The big question for Óscar García Maceiras, who took over as chief executive of Inditex in November, and his opposite numbers at other fast-fashion firms, is whether the party can last. The short answer is that it probably won’t. But if anyone can keep it going for a bit longer, it is Inditex. As Georgina Johanan of JPMorgan Chase, a bank, notes, the Spanish giant looks best-placed to withstand the combined pressures of war, competition, inflation and, possibly, recession. Start with the problems. Fast-fashion firms had to put a complete halt to their operations in Russia and Ukraine after Vladimir Putin invaded his southern neighbour in February. Inditex, which has more than 500 shops in Russia, derived 8.5% of its operating profit from the country in 2021. This year it has had to make a €216m provision for the estimated cost of the war to its Ukrainian and Russian businesses. Beyond eastern Europe, fashion retailers are being squeezed by competition from Shein, an online-only challenger from China that has sashayed into Western wardrobes in the past few years. And then there is the twin “stagflationary” challenge of higher costs and flagging demand. This is acute for clothes pedlars, since many of their customers have already replenished their closets—and a new pair of trousers is a less urgent need than energy, food and rent, all of which have been getting pricier.No fast-fashion house is immune to these forces. But with the exception of the Russia-Ukraine war, Inditex does look less vulnerable than the others. Shein, whose items sell for an average of $20 or so, poses less of a direct threat to the Spanish company’s mid-market frocks, which go for just under $40 at Zara, according to estimates by Anne Critchlow of Société Générale, a bank. In recent years Inditex has also done a better job than its rivals of unifying its online operations with its more than 6,000 shops around the world, thanks to clever radio-frequency trackers, an in-house digital platform and a group-wide inventory database. Crucially, Inditex enjoys one more advantage over rivals when it comes to inventory, the management of which is particularly important in times of stagflation. The company produces around two-thirds of its items in Europe or in nearby north Africa and Turkey. That allows it to adjust output more quickly in response to demand than firms like h&m, which sources 80% of its clothes from Asia. In a slowdown it pays to be faster in fast fashion. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

The original Rorschach test involves showing a series of ten inkblots to someone, and asking them what images they see. Although the test’s psychological validity is debatable, no one can dispute its wild success as a metaphor: a single object can mean very different things to different people. In business a prime example of Rorschachiness is the corporate jet. Depending on your perspective, it can signal untrammelled greed, rational decision-making, post-pandemic work habits or the fight against climate change. Those who see excess regard the company jet as the worst in a pile of gold-plated perks for overpaid executives. While minions reacquaint themselves with airport queues and the curse of six hours next to the chatty stranger in 24a, bosses skip the lines and travel in luxury. It is difficult to remain grounded in these circumstances. ey, a global accounting firm, reportedly calls its plane “ey One”; on touchdown, auditors doubtless fantasise about radioing that “the eygle has landed”. If jets were used only for work trips, that would be bad enough. But more than half of the ceos of a 500-strong group of companies monitored by Equilar, an analytics outfit, made use of their firm’s jet for personal purposes in 2020. This view equates the company plane with entitlement and waste. The bosses of America’s big carmakers were excoriated for using their jets to travel to Washington, dc, to ask for a bail-out during the financial crisis in 2008. Disquiet about his use of Credit Suisse’s private jet was one reason why António Horta-Osório resigned as chairman of the Swiss bank earlier in the year. When Jeff Immelt, a former chief executive of ge, travelled on the firm’s private plane, a second one would sometimes follow him around the world as backup. Mr Immelt’s successor, John Flannery, made a point of putting ge’s jets up for sale when he took over in 2017. A research study from 2012 found that cost-conscious private-equity firms reduced corporate-jet fleets at firms they had acquired. If the corporate-jet inkblot spells excess to some, to others it represents hard-headed pragmatism. The personal safety of top executives is one consideration: private aircraft are a big part of Meta’s outsized spending ($27m in 2021) on the security of Mark Zuckerberg, its chief executive. So is privacy: it is really hard to finalise a secret takeover when there is a stranger spilling pretzels on you. (Both of these arguments are slightly weakened by the scraping of air-traffic data that lets people track specific aircraft; a paper published last year described a machine-learning algorithm designed to predict where a corporate jet is going to land while it is still in the air.) Above all, chief executives are busy people. If boards would rather they spent more time working and less time watching someone repack their suitcase at the security gates, that’s their call. And because private jets can land on more airfields than commercial airliners can, they are often the only way for executives to travel directly from headquarters to factories and subsidiaries in less accessible locations. A paper published in 2018 by academics at Boston College and Drexel University found that business-related flights of this kind improved firms’ operational performance. Some look at corporate jets and primarily see an enemy in the fight against climate change. Because of the small number of passengers on board, private planes emit much more carbon per passenger mile than commercial flights do. Elon Musk, a clean-tech tycoon who is fast becoming a Rorschach test in his own right, was pilloried recently when his jet took a nine-minute flight from San Jose to San Francisco. Mr Musk is also an outspoken critic of remote work, which is another thing that private jets bring to mind. The argument for using them rests heavily on the importance of in-person communication, something that has become a lot more contentious in the post-pandemic workplace. The point of the Rorschach test is that it has no single right answer. Corporate jets look unjustifiable to some and sensible to others. They can improve productivity or be a sign of an out-of-control ceo; the paper from 2018 found that planes made more flights to resorts when a firm’s boss had been in place for longer and when it had dual-class shares. They raise questions of fairness among critics and spell efficiency to defenders. They have become a useful shortcut for testing someone’s gut instincts on management, as well as for beating the queues. Read more from Bartleby, our columnist on management and work:Do not bring your whole self to work (Jun 2nd)The power of small gestures (May 28th)Making brainstorming better (May 21st) More

The original Rorschach test involves showing a series of ten inkblots to someone, and asking them what images they see. Although the test’s psychological validity is debatable, no one can dispute its wild success as a metaphor: a single object can mean very different things to different people. In business a prime example of Rorschachiness is the corporate jet. Depending on your perspective, it can signal untrammelled greed, rational decision-making, post-pandemic work habits or the fight against climate change. Listen to this story. Enjoy more audio and podcasts on More

For the leaders of America Inc, high inflation is unwelcome. It is also unfamiliar. Warren Buffett, 91, the oldest boss in the s&p 500 index of big firms, last warned about the dangers of rising prices in his annual shareholder letter for 2011. The average chief executive of a company in the index, aged a mere 58, had not started university in 1979 when Paul Volcker, inflation’s enemy-in-chief, became chairman of the Federal Reserve. By the time the average boss started working the rise of globalised capitalism was ushering in an era of low inflation and high profits (see chart 1). Their stock rose between the global financial crisis of 2007-09 and the covid-19 pandemic, a decade of rock-bottom inflation.Inflation will stay high for some time yet. On June 7th the World Bank warned that “several years of above-average inflation and below-average growth now seem likely.” A new study by Marijn Bolhuis, Judd Cramer and Lawrence Summers finds that if you measure inflation consistently, today’s rate is almost as high as it was at the peak in 1980. As the past creeps up on the future, “stagflation” is preoccupying corner offices. Today’s executives may think of themselves as battle-hardened—they have experienced a financial crisis and a pandemic. However, the stagflationary challenge requires a different toolkit that borrows from the past and also involves new tricks. The primary task for any management team is to defend margins and cashflow, which investors favour over revenue growth when things get dicey. That will require fighting harder down in the trenches of the income statement. Although a rise in margins as inflation first picked up last year led politicians to denounce corporate “greedflation”, after-tax profits in fact tend to come down as a share of gdp when price rises persist, based on the experience of all American firms since 1950 (see chart 2). To create shareholder value in this environment companies must increase their cashflows in real terms. That means a combination of cutting expenses and passing on cost inflation on to customers without dampening sales volumes.Cost-cutting will not be easy. The prices of commodities, transport and labour remain elevated and most companies are price-takers in those markets. Supply-chain constraints have begun to ease a bit and may keep easing in the coming months. But disruptions will almost certainly continue. In April Apple lamented that the industry-wide computer-chip shortage is expected to create a $4bn-8bn “constraint” for the iPhone-maker in the current quarter.The input bosses can control most easily is labour. After months of frenzied hiring, companies are looking to protect margins by getting more from their workers—or getting the same amount from fewer of them. The labour market remains drum-tight: in America wages are up by more than 5% year on year and in April layoffs hit a record low. But, in some corners, the pandemic hiring binge to meet pent-up demand is being unwound. American bosses are again demonstrating that they are less squeamish about lay-offs than their European counterparts. In a memo sent to employees this month Elon Musk revealed plans to trim salaried headcount at Tesla, his electric-car company, by 10%. Digital darlings, many of which had boomed during the pandemic, collectively sacked nearly 17,000 workers in May alone. After tempting workers with increased pay and perks, in the latest quarterly earnings calls more American ceos have been talking up automation and labour efficiencies. In the current climate, though, hard-headed (and hard-hearted) cost control won’t be enough to maintain profitability. The remaining cost inflation must be passed on to customers. Many companies are about to learn the difficulty of raising prices without dampening demand. The companies that wield this superpower often share a few attributes: weak competition, customers’ inability to delay or avoid purchase or inflation-linked revenue streams. A strong brand also helps. Starbucks boasted on an earnings call in May that, despite caffeinated price rises for its beverages, it has struggled to keep up with “relentless demand”. But recent data hint at softer consumer sentiment. This makes it riskier for firms to roll out frequent price increases. Amber lights are blinking, from McDonald’s, which has speculated about “increased value sensitivity” among burger-munchers, to Verizon, which detected customer “slowness” in the most recent quarter. The ability to push through price increases as customers tighten their belts requires careful management. Unlike in the last high-inflation era, managers can use real-time algorithmic price setting, constantly experimenting and adjusting as consumers respond. Nonetheless, all firms will still have to take a longer-term view on how long fast prices will last and the limits of what their customers will tolerate. That is finger-in-the-wind stuff. Even if they keep revenues and costs under control, ceos are discovering what their predecessors knew all too well: inflation plays havoc on the balance-sheet. That requires even tighter control of working capital (the value of inventories and what is owed by customers minus what is owed to suppliers). Many firms have misjudged demand for their products. Walmart lost almost a fifth of its market value, or around $80bn, in mid-May, after it reported a cashflow squeeze caused by an excess build-up of inventories, which rose by a third year on year. On June 7th its smaller retailing rival, Target, issued a warning that its operating margin will fall from 5.3% last quarter to 2% in the current one, as it discounts goods to clear its excess inventories. Payment cycles—when a firm pays suppliers and is paid by customers—become more important, too, as the purchasing power of cash delivered tomorrow withers in inflation’s heat.All this makes a business’s performance more difficult to assess. For example, calculations of return on capital look more impressive with an inflated numerator (present returns) and the denominator (capital invested in the past) in old dollars. Between 1979 and 1986, during the last bout of high inflation, American firms were required by law to present income statements that were adjusted for rising prices. This edict is unlikely to be revived. But even as bosses boast of higher nominal revenue growth, investment and compensation decisions should account for such artificial tailwinds. Just ask Mr Buffett. In his letter to shareholders for 1980 he reminded them that profits must rise in proportion to increases in the price level without an increase in capital employed, lest the firm starts “chewing up” investors’ capital. His missive to investors in 2023 may need to carry the same message. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter. More

In his penthouse suite in London’s Old Street, under the watchful gaze of a small stone statue of a mushroom god, Christian Angermayer recalls a life-changing experience with psychedelic drugs. It was many years ago, on a tiny island in the Caribbean. The trip was so meaningful for the investor that he decided to back biotech firms using psychedelics to treat depression, anxiety, addiction and other mental-health conditions. Such startups are increasingly catering to corporate clients. A growing number of firms want to offer psychedelics to staff, either for the sake of mental health or to organise a mind-bending corporate retreat. This surge in interest is being driven by the growing evidence of psychedelics’ safety and efficacy, when consumed in controlled settings. Ketamine is already legally available, both as an anaesthetic and to treat depression in clinics across America and Europe. Psilocybin (which gives magic to mushrooms) is available legally in Amsterdam and will become legal in Oregon next year. And America’s drugs regulator is soon expected to decide whether to approve mdma (ecstasy) for use in treating post-traumatic stress disorder.In February Dr Bronner, an American soapmaker that has long supported efforts to loosen laws around the use of psychedelics and cannabis, added therapy that combines ketamine and counselling to its employee mental-health-care plans. Daniel Poneman of Beyond Athlete Management, a sports agency, says he has seen psychedelic medicine be extremely effective in helping clients struggling with performance anxiety, pressure and isolation from constant travel. Robert Levy, boss of Field Trip, a provider of psychedelic experiences in Amsterdam, tells of nba basketball players who were about to quit and were put back on their career path. Psychedelics have corporate uses beyond improving workers’ mental health. Anne Philippi, boss of The New Health Club, a German psychedelic-retreat outfit, says some firms are also experimenting with such drugs to make executives more empathetic, enhance team bonding, boost creativity or change company culture. Field Trip offers a weekend retreat for “leaders” to allow them to experience “a heightened level of consciousness”.Care is needed to avoid misuse. Psychedelics are not suitable for some mental-health problems, such as schizophrenia. As with after-work drinks, not everyone wants to, or can, take part. An asset manager at a big family office reports battling with whether or not to accept an invitation from a firm in her portfolio to an (illegal) Ayahuasca retreat at a villa in California, with a shaman flown in for the occasion. And a mind-bending experience can lead workers to question everything—including capitalism and the nature of work. Keith Ferrazzi, an executive coach, knows of several business founders who quit after a trip. As trippy options expand faster than the mind of a ceo on acid, companies would be wise to make any decisions about their business use with a clear head. ■ More