Philippa Kaur

KISHIDA FUMIO, Japan’s new prime minister, has voiced no opposition to the corporate-governance reforms of Abe Shinzo. His predecessor’s efforts to make Japanese companies more focused on shareholder returns and less beholden to insider management were central to his economic reforms. But nor has Mr Kishida said much in their favour. Proposals for tax breaks for companies that increase wages have made it into the manifesto of his ruling Liberal Democratic Party, as have references to the importance of stakeholders over shareholders. That will worry those who think Japanese shareholder capitalism has not yet gone far enough.A new test will provide more evidence of Mr Kishida’s attitude to changing the behaviour of Japan Inc. In September SBI Holdings, a financial conglomerate, made an unsolicited takeover offer which would raise its holding in Shinsei Bank, a regional lender, from around 20% to 48%. SBI has ambitions to create a Japanese megabank through alliances and acquisitions. The consolidation of the country’s multitudinous small banks is precisely the sort of change the corporate-governance reforms were implemented to facilitate. Shinsei Bank opposes the offer as it stands, making it a hostile bid, still an extremely rare event in Japan. It is willing to defend itself using a “poison pill” which would dilute SBI’s holding, subject to shareholder approval in a meeting on November 25th.That puts the government in a tricky position. It holds around 22% of voting shares in Shinsei Bank through the Deposit Insurance Corporation of Japan and the Resolution and Collection Corporation. These institutions are involved as the result of a bail-out long ago of Shinsei’s former incarnation. The government cannot sell the stake because rules prevent making a loss on Japanese taxpayers’ investment, but it can vote on the poison pill.Approval, rejection or an abstention would offer some fresh insight into the government’s appetite to press ahead with reforms that have broughta number of welcome changes. The prevalence of cross-shareholdings has declined. Among non-financial companies listed on the Topix 100 Index, the total number of shares held in this way dropped by around 20% between March 2013 and March 2020. The proportion of all listed firms adopting anti-takeover measures has also fallen from 19% in 2012 to 8% last year. Over the same period, the portion of companies without a single outside director went from 45% to 1%.It seems to have worked. Profits (measured by a common Japanese accounting standard) as a proportion of sales reached 6% shortly before the pandemic, the highest level since records began in 1950s.There is still room for improvement says Nicholas Benes of the Board DirectorTraining Institute of Japan. He regards disclosure as a crucial area where a change of policy could yield significant results. In June the country’s corporate-governance code was revised to require listing the skills and experience of directors as well as broadening disclosure requirements for large listed firms in fields such as environmental policy. “This is a jungle of largely unreadable, sometimes encrypted [documents], written with a variety of different formats,” says Mr Benes. Standardising such publications and making them machine-readable would be a simple way of improving investors’ access to information.Greater scrutiny can yield results. In June Toshiba’s chairman, Nagayama Osamu, was ousted by shareholders following a report that alleged that the firm’s management and the Ministry of Economy, Trade and Industry had colluded to put pressure on big investors to back management at an annual general meeting. (He expressed his regret at the “unacceptable events”.) But efforts at reform often get bogged down by Japan’s bureaucracy. The Ministry of Finance, the Financial Services Agency, the Tokyo Stock Exchange and Ministry of Justice all play a part in introducing and enforcing new regulations.Clear leadership by Mr Kishida might help to set a path through the swamp. The outcome of the takeover attempt at Shinsei will show whether there is still enough momentum to improve corporate governance or whether old impulses run deep. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Poison-pill popping” More

IF YOU LOOK only at the scale of the profits cranked out by American businesses, they seem to be indestructible (see chart). Despite a pandemic and a savage slump in 2020, large listed American firms’ net income for the third quarter of this year is expected to reach over $400bn, at least a third higher than in the same quarter in 2019. Yet as earnings season gets into full swing this week, bosses and investors are watching for signs that three related worries are biting: supply-chain tangles, inflation, and hints that a long era of profitable oligopolies is giving way to something more dynamic and risky. Already big firms such as Snap, Honeywell and Intel have given the jitters to investors. Could there be more to come?Only a quarter or so of firms in the S&P index have reported results so far. Those that have done so have pleased investors with better than expected figures. Superficially the picture is of “back to business as usual”. Bad-debt provisions taken by banks in the depths of the panic over the economy, which proved unnecessary, have been unwound. JPMorgan Chase got a $2bn benefit to its bottom line from this reversal in the third quarter. Goldman Sachs has shelled out $14bn in pay and bonuses so far this year, up by 34% year on year. American Express reported a leap in revenues as small firms and consumers spent on their cards more freely. United Airlines confirmed it was on track to hit its performance targets for 2022.Yet look again and the three worries loom. Start with supply chains. The number of ships waiting off California’s big ports remains unusually high at about 80, according to Bloomberg. On 22nd October, Jerome Powell, the chair of the Federal Reserve, said that supply-chain problems may last “well into next year”. The knock-on effects are feeding through industry. Union Pacific, a railway firm, lowered its forecast for traffic volumes because semiconductor shortages (often in Asia) have hit car production, in turn reducing the number of vehicles and components transported by rail. Honeywell, an industrial firm, cut its full year sales target by 1-2% complaining of a shortage of parts. VF Corp, which makes shoes (including white ones that fans of Squid Game, a hit TV show, hanker after) complained of supply-chain problems in Asia. So far the problem is not disastrous but it is inflating costs and forcing firms to adapt.This supply chain headache is one element of a second, broader worry, about inflation and its impact on profits. Commodity prices are a source of pressure, with crude oil reaching $86 a barrel this week. Wages are too: although there are still 5m fewer people employed across the economy than before the pandemic hit, average hourly pay rose by 4.6% year on year in September. The immediate effect tends to be felt by low-margin firms that employ a lot of people: Domino’s Pizza has complained of a “very challenging staffing environment” and falling sales.Elsewhere a mild inflationary mindset is slowly infiltrating boardrooms. Procter & Gamble predicted that commodity and freight inflation would raise its operating costs this financial year by about 4% and that sales would rise by up to 4%, owing to a mixture of price rises, and volume and mix effects. Honeywell warned there would be a “continued inflationary environment” in 2022. All firms are weighing how much they can raise prices to compensate for higher costs. So are fund managers who are busy running screens for companies that they judge to exhibit the all-important quality of “pricing power”. The shifting psychology of bosses and investors towards expecting more inflation should concern Mr Powell at the Fed. The final big issue is whether an economy with shortages that is running hot ultimately forces an end to the managerial consensus of the past decade, which has favoured keeping margins high and being stingy with investment in order to maximise short-run cashflow. Already there are signs that attitudes are shifting in response to shortages and pent-up demand: economy-wide investment, excluding residential investment, rose by 13% in the second quarter of 2021 compared with the preceding year. United Airlines has said it will increase its capacity on international routes by 10%. FreePort McMoRan, a huge miner of copper (used in electric vehicles among a wide array of industrial applications), has said that it is “prepared to make value enhancing investments in our business” in response to red-hot prices. Hertz has announced an order of 100,000 cars from Tesla. And on Wall Street a fund-raising bonanza for speculative start-ups continues, including last week the merger of a special-purpose acquisition company with the social-media ambitions of a certain Donald Trump.Rising investment is exactly what economists want because it increases capacity today and boosts the economy’s long-run potential. Yet whether investors are prepared to take the plunge remains to be seen. Habituated by years of high margins, they tend to run shy of rising investment and competition. Snap’s share price dropped by over 20% on October 21st as signs that the war over privacy settings on the iPhone between Apple and social-media firms, and the intensifying competition in advertising between a wide array of tech firms, is hurting its results. And Intel, which earlier this year boldly announced plans for a huge rise in investment in order to return to the frontier of the semiconductor industry, alongside TSMC and Samsung, presented Wall Street with the bill in the form of much lower than expected short-term earnings: its shares dropped by 12%. If you run a company or invest in one this is the new calculation: demand is recovering and costs are rising. Can you raise prices? And should you expand capacity? By the end of this earnings season the answer may be clearer. More

“WE ARE BUILDING the energy company of the future…like Tesla did,” declares Seifi Ghasemi, chairman of Air Products. Comparing yourself to the electric-car darling may seem Napoleonic for a purveyor of industrial gases. But Mr Ghasemi, who has thought about one gas in particular, hydrogen, for 30 years, insists the comparison is apt.He is not alone. Hydrogen is expected to play a big role in greening hard-to-decarbonise sectors such as cement and steel, as well as in long-term energy storage. Today’s smallish and, because almost all the stuff is made from fossil fuels in a carbon-intensive way, dirtyish hydrogen business is forecast to grow into a much cleaner trillion-dollar industry in a few decades. Governments are spending tens of billions of dollars a year to kickstart a clean-hydrogen revolution. A posse of hydrogen-curious firms are keen for a piece of the action.Maheep Mandloi of Credit Suisse, a bank, sees the natural-gas industry as a template for the development of hydrogen, which is already used in refining. The rise of liquefied natural gas took the sort of capital and expertise that only the integrated global energy giants had. Small wonder big oil is taking an interest. In September Chevron, an American oil titan, unveiled a $10bn strategy for “new energy” that bets big on low-carbon hydrogen.The other supermajors—BP, ExxonMobil, Royal Dutch Shell and TotalEnergies—have also announced investments in hydrogen clusters and technologies. Ahmad al-Khowaiter, chief technology officer of Saudi Aramco, says that the state-controlled oil colossus intends to be the world leader in fossil-derived low-carbon hydrogen in the 2030s. The kingdom’s hope is also to maintain its energy superpowerdom as oil’s prospects fade by exporting hydrogen made using its world-class solar and wind resources.Aaron Denman of Bain, a consultancy, calls such bets a quest for “growth engine number two” in case the firms’ core fossil-fuel business falters. The same rationale may underlie the hydrogen efforts of other sectors with a spotty environmental record. On October 11th Andrew Forrest, a mining tycoon and Australia’s richest man, who controls Fortescue Metals Group, unveiled plans to build the world’s biggest factory for electrolyser machines, needed to produce green hydrogen from water.Not all H2 prospectors come from grubby industries trying to burnish their image in an ever more climate-conscious world. Given the much wider range of potential applications for hydrogen, various other sectors could strike gaseous gold. Mr Ghasemi, for one, is confident that his company will beat the commodities giants, which he sees as complacent. “They think hydrocarbons are here for ever and don’t think anybody can disrupt them.”Air Products is trying to prove them wrong. It is developing several hydrogen megaprojects around the world, including a $5bn initiative to produce renewable hydrogen in Saudi Arabia for export. James West of Evercore, an investment bank, reckons industrial-gas firms could become the first supermajors of the hydrogen era. Big oil won’t take that lying down. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “The hydrogen rush” More

LIU ZHONGTIAN has been called Asia’s “aluminium king”. His firm, Zhongwang Group, is one of the world’s largest makers of aluminium products. At one point he was the richest man in China’s north-eastern rust belt, where the company is based. In America, Mr Liu has a different reputation. Firms controlled by the 57-year-old were convicted in late August of orchestrating one of the most brazen tariff-avoidance schemes in history. Now his empire appears to be coming undone, not at the hands of American prosecutors but owing to domestic economic woes.Zhongwang’s long, hollow metal rods are a key component in everything from cars to homes and bridges. They have undergirded China’s building and manufacturing boom. Literally at times: Zhongwang grabbed big contracts with the construction groups behind the 2008 Beijing Olympics and the World Expo in Shanghai in 2010. An initial public offering in Hong Kong in 2009 made Mr Liu one of China’s richest industrialists.Mr Liu’s fortunes turned in 2019. He was indicted by America’s Department of Justice (DoJ) for running a scheme whereby shell companies shipped in products subject to import duties disguised as crudely welded aluminium pallets. Prosecutors say that Mr Liu arranged for these pallets, 2.2m of which his firm had stockpiled in its American warehouses, to be turned into other things at melting facilities in America. The conviction in August found American firms he controls guilty of trying to evade $1.8bn in tariffs. The sentence, expected in December, may allow the DoJ to go after Zhongwang’s American assets. Days after the ruling Zhongwang froze the trading of its shares in Hong Kong, ostensibly pending the delayed release of results for the first half of 2021.All debilitating, to be sure. But probably not fatal. The firm remains the world’s second-biggest aluminium-extruder with a vast home market. Disclosure delays are common in Hong Kong and may be unrelated to the DoJ case. And China’s government, itself in a tussle with America over trade and geopolitics, might even help shield Zhongwang from the DoJ’s lawmen.Then, on October 15th, the firm divulged that two important subsidiaries in China were facing severe difficulties “due to major losses”. Analysts reckon that without a bailout Mr Liu’s group could collapse. The company has offered little explanation. But like many Chinese firms it has been paralysed by power cuts, which could cause the country’s industry to run at 5-10% below its usual capacity until the end of the year. In order to prevent blackouts, local governments are permitting some energy-intensive manufacturers to operate only ten days a month, says Johnson Wan of Jefferies, an investment bank.Aluminium extrusion requires lots of energy, so power cuts and surging electricity costs have hit Zhongwang hard. Having sold its smelter business in 2020 the firm faces rocketing prices for aluminium, as other smelters raise prices to help offset their own rising bills amid shortages of the metal. As Zhongwang’s home province of Liaoning braces for a bitter-cold winter, manufacturers are in for more disruptions as coal is burned to heat homes rather than produce industrial electricity. For Mr Liu, escaping the clutches of American law must feel like cold comfort. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Awaiting electrocution” More

“WE ARE A community company committed to maximum global impact. Our mission is to elevate the world’s consciousness.” The opening lines of WeWork’s prospectus for its planned initial public offering in 2019 seem to confirm the worst about mission statements. People sit in a room earnestly discussing the differences between their purpose, their vision and their mission. There are whiteboards and bottles of kombucha. Nonsense ensues.But even guff has meaning. For investors in young companies in particular, the mission statement sends useful signals. It articulates what a firm does and gives clues to where its priorities lie. Such information matters all the more when founders exercise outsized voting power. The WeWork prospectus helped elevate the consciousness of investors that the property company had lost its marbles. WeWork ended up scrapping both its listing and its boss.To see why mission statements deserve more than an eye-roll, look first at entities that lack them. Of the 58 prospectuses filed with America’s Securities and Exchange Commission in the first two weeks of this month, more than a third were for special purpose acquisition companies. SPACs are a type of shell company whose goal is to raise money for an unspecified future deal. They are purposelessness incarnate.“We have not identified any potential business combination target, and we have not, nor has anyone on our behalf, initiated any substantive discussions, directly or indirectly, with any potential business combination target,” runs a typical SPAC filing blurb. Investors have been warned: their money could end up pretty much anywhere.Mission statements contain multitudes in comparison. They can tell you which stakeholders matter most to a firm. A tiny handful of the non-SPACs to have filed this month say their objective is shareholder returns (call it a Milton statement). Most couch their goals in terms of meeting customer needs.Lulu’s Fashion Lounge says that its vision is to be the most beloved women’s brand for affordable luxury fashion. AirSculpt Technologies, a “body-contouring” firm, aims to produce the best results for its patients. This may be the age of purpose, but giving people what they want, whether they are looking for clothes or a “Brazilian butt-lift procedure”, is mission enough for many entrepreneurs.The mission statement can also tell investors something about how technologically sophisticated a company is. Among this month’s filers there is a marked lack of flannel from GlobalFoundaries, a big semiconductor firm. But for simpler products and services, it is not enough to describe what an enterprise does. “We aim to help the customers in our communities live a good life by inspiring moments that create lasting memories,” burbles Solo Brands, whose biggest seller is a stainless-steel fire pit.Similarly, you may have been under the impression that Krispy Kreme, which returned to public markets earlier in the summer, sells doughnuts. Wrong. “As an affordable indulgence enjoyed across cultures, races, and income levels, we believe that Krispy Kreme has the potential to deliver joyful experiences across the world.” That’s not icing on your face, it’s euphoria.A mission statement also illuminates crispness of thinking. Of the firms to have filed this month, NerdWallet, a firm that provides reviews and comparisons of financial products, deserves most plaudits. “Our mission is to provide clarity for all of life’s financial decisions,” runs the prospectus. That is ambitious without being absurd, informative without being constraining.Others are woollier. The prospectus for Rivian, an electric-vehicle manufacturer, says that it wants “to keep the world adventurous forever”. Prospective investors are told that “the part of us that seeks to explore the world is also the secret to making sure it remains a world worth exploring.” Yet the company’s near-term revenues depend on a big order from Amazon for its electric delivery van. The part of us that plans never to leave the house again may be the secret to Rivian thriving.As for WeWork, it is back and chastened. Its public debut, via a merger with a SPAC called BowX, was due on October 21st. In a proxy statement issued by BowX in September, WeWork says it was founded in 2010 with a vision “to create environments where people and companies come together and do their best work”. No mission creep this time.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Why mission statements matter” More

HUAWEI, A CHINESE firm emblematic of the breakdown in Sino-American relations, makes for a perfect business-school case study. Less than two years ago the company, based in the southern boom town of Shenzhen, had not only surpassed Nokia and Ericsson, its Nordic rivals, to become the world’s leading supplier of telecoms infrastructure. It had also overtaken Samsung to become the biggest seller of mobile phones. Like all good case studies, it has vivid characters, from its founder, Ren Zhengfei, a former army officer and engineer, to his daughter, Meng Wanzhou, just freed from a starring role in the first prisoner-exchange drama of the tech cold war. It is a groundbreaking firm. Like Japan’s Sony in the 1980s, it helped change the perception of its home country from one of cheap knock-offs to eye-catching innovation. And its very future may be in peril. With the long arm of American law enforcement around its neck, it is being throttled by a lack access to cutting-edge technology, such as 5G smartphone chips.The question is what Huawei ought to do next. Should it tough out American sanctions and hope, as Victor Zhang, its global vice-president, puts it, that its research and development (R&D) budget, a whopping $21.8bn last year, can “fertilise” a new array of business activities that will redefine its future? Or should it instead quietly break itself up, dispersing a 105,000-strong army of engineers to seed a flurry of new ventures? In short, should it remain a tall poppy or let a hundred smaller flowers bloom?It is a fairly safe bet that Huawei will take the first option. After all, it is an employee-owned company with a fierce self-belief. It has a never-say-die business culture; its salespeople are renowned for drinking anyone under the table in pursuit of a deal. It could become a national champion for President Xi Jinping’s mission to make the country more self-reliant in technology. And the government in Beijing would hate the idea of it wilting under pressure from Uncle Sam.The tough-it-out approach is strewn with difficulties, though. Since America’s government branded Huawei’s 5G gear a national-security threat in 2019, and a year later curtailed the firm’s access to chips made with American equipment, its smartphone business, which in 2020 generated more than half of revenues, has cratered. Sales have tumbled from more than 60m units in the last three months of 2019 to about 15m units in the third quarter of 2021, according to Dan Wang of Gavekal Dragenomics, a research firm. In China its latest phones lack 5G connectivity.Although Huawei remains the world’s number-one supplier of telecoms gear, its sales and market share are shrinking as America’s allies bar it from their 5G networks and other customers fret about its long-term viability. Huawei is putting on a brave face, nonetheless. It is in its “second startup phase”, in Mr Zhang’s words. Each year it pours at least a tenth of its revenues into R&D (in 2020 the share reached almost 16%). This, Mr Zhang adds, will help build up new core ventures. It is expanding in areas from making cars smarter and helping coal mines become semi-autonomous to infrastructure for cloud-computing and regulating power supply in energy markets. None of these opportunities depends on cutting-edge semiconductors.Promoting that startup culture in-house may work. But the new endeavours do not generate anything like the revenues of Huawei’s smartphone and networks businesses. One analyst describes the coal venture as “a dying company meets a dying industry”. A better, bolder way forward would be to embrace the Schumpetarian creed of “creative destruction”: let the old firm die so that new ones could emerge, dispersing capital, ideas and talent.Silicon Valley provides a striking precedent. In 1957 the so-called “traitorous eight” walked out of Shockley Semiconductor Laboratory to found Fairchild Semiconductor. The “Fairchildren” became the backbone of the area’s high-tech, risk-taking culture, establishing Intel, a chip giant, and scores of other firms, including venture-capital veterans like Kleiner Perkins. Huawei’s engineers at HiSilicon, its chip-design unit, could do something similar. That could advance China’s growing ambitions in the chip industry, illustrated by the unveiling on October 19th by Alibaba, a tech giant, of a new, custom-built, state-of-the-art server chip.Huawei has no plans for a HiSilicon spin-off, Mr Zhang says. The firm’s tactical retreat in the smartphone business illustrates what it may and may not be able to do. Last year it sold Honor, a niche smartphone brand, to give it the freedom to evade American export controls. Honor’s new phones now have access to American chips and the software and services of Google, an American tech giant, that Huawei still does not. Despite the backing of Shenzhen’s government, which invites questions about just how entrepreneurial Honor will be, the industry’s reaction to the divestiture has been “really positive” both inside and outside China, reports Ben Stanton of Canalys, a telecoms-research firm. Moreover, he reckons, Huawei’s best smartphone engineers have moved to Honor, keeping alive the older firm’s engineering and sales culture.Tall-poppy syndromeUnsurprisingly, Honor has also attracted the attention of America’s foreign-policy hawks, including Marco Rubio, a Republican senator who on October 14th called it an “arm of the Chinese Communist Party” and a foreign-policy threat, and urged President Joe Biden’s administration to blacklist it. This is a reminder of how hard it will be for any firm in Huawei’s shadow to shake off such accusations, whether true or not. Better for its engineers to roam free instead. They are likely to be more creative within small groups than inside a corporation—all the more so if what Mr Wang calls “China’s Sputnik moment” engenders a burst of domestic innovation. Huawei’s liberated brain-boxes may then also teach America a lesson in how counterproductive knee-jerk technonationalism can be. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Business section of the print edition under the headline “Let a hundred flowers bloom” More

WORTH NEARLY $1TRN, Facebook is the world’s sixth-most-valuable company. Its revenues have grown by 56% in the past year, and its share price by more than a quarter. Nearly 3bn people use its products every month. Why would such a glittering success change its name, as the Verge, a news site, reports it plans to within days?Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More

Source: Business – economist.com More