Philippa Kaur

ONCE UPON a time, long before the hoodie was invented, pioneers of business preferred to call themselves self-made men rather than entrepreneurs. They built hard assets like ports, railways and oil terminals. They cajoled—and canoodled with—governments. They built vast conglomerates. In America, such men made history in the Gilded Age. In India, one of their modern-day avatars is Gautam Adani, a trader who started his career haggling for diamonds, and now controls more ports, power stations, solar farms and airports than almost any other private tycoon. A thickset 59-year-old of few words, a strong political antenna and a stomach for debt, he could not be further removed from the elfin founder-CEOs of the digital age. And yet as recently as June, the value of his companies had more than quintupled in 12 months, to $133bn. That is tech-like growth from what is normally one of the stodgiest parts of the old economy—infrastructure.In India’s “Billionaire Raj”, Mr Adani is usually overshadowed by the other “A”, Mukesh Ambani, India’s richest man, who controls Reliance Industries, a petrochemicals-to-phones conglomerate. Yet Mr Adani, whose personal net worth almost caught up with Mr Ambani’s in June, is just as intriguing—not least for some of the contradictions he embodies. In a country whose banks have lost fortunes lending to infrastructure projects, his debt-fuelled acquisition spree has gone from strength to strength. He is a champion of Prime Minister Narendra Modi’s drive for self-reliance, yet relatively few of his firms’ shares are owned by Indian institutional investors. And he courts environmental, social and governance (ESG) funds from around the world, yet parts of his empire are knee-deep in coal. Anyone who can sustain such a precarious juggling act probably deserves to make history, too.The Adani Group’s interests have dovetailed with the economic ambitions of Mr Modi’s government. For instance, since listing in 2018, the share price of Adani Green Energy (AGEL), its renewables company, has soared by over 2,700%. As well as building what it reckons is the world’s biggest solar-power company, it is helping Mr Modi achieve his clean-energy ambitions. And Mr Adani is not afraid of bold bets to win government contracts. Take Adani Enterprises (AEL), another listed entity, for instance. In 2018-19 it scooped up six privatised Indian airports, despite no previous experience in the industry. Since then (and despite the blight on air travel caused by the covid-19 pandemic) its stockmarket value has eclipsed that of Adani Ports, historically the group’s crown jewel.This expansion is not as reckless as it seems. Adani Group touts an “adjacency model” in which it moves into complementary areas: from ports to power to logistics to data storage, for example. Its debts are backed by rising cashflows. It has stepped up reliance on bond markets, rather than India’s ropy banks. And it has brought foreign groups, such as TotalEnergies, the French supermajor, and Qatar’s sovereign-wealth fund, into joint ventures. The government, not overly keen on foreign competition in India, welcomes these sorts of capital inflows as much as Mr Adani does.Its financing creates a paradox, though. While the group attracts foreign funding for businesses that are focused squarely on India, ordinary Indian investors barely get a look-in. Besides the flagship ports business, domestic mutual funds hold minuscule amounts of its other listed entities, including those whose share prices have shot up of late, such as AGEL and AEL. The group says such shareholdings should widen “in the near future”, explaining that the small free floats are a result of relatively recent listings.But in the meantime, questions about the group’s arcane shareholding structure have helped wipe tens of billions of dollars off the combined value of its six listed entities since mid-June. Besides Mr Adani, who has huge stakes in all his listed companies, most of the remaining large investors are offshore funds, including some based in Mauritius. Some have almost all of their investments in Adani Group companies, and questions about their ownership have been raised in parliament. In response, a government minister said last month that the Securities and Exchange Board of India, the capital-markets regulator, was investigating some of the group’s companies. Adani Group said it had always been transparent with its regulators, and had received no information requests recently.The group’s hunger for capital creates a further conundrum. Increasingly it is peddling its clean-energy businesses to ESG fund managers. Yet AEL owns Carmichael, an Australian thermal-coal mine that has been the target of a grassroots “Stop Adani” campaign, and has been shunned by banks and insurers worried about the climate implications of funding coal projects. Tim Buckley of the Institute for Energy Economics and Financial Analysis, a pro-renewables think-tank, reckons that the coal exposure could cause an ESG backlash hurting other parts of the Adani empire. He argues that to bolster its ESG reputation, the conglomerate should commit to phasing out coal power.Nice present, bleak futureMr Adani appears to have no plans for that yet. He believes a developing country like India cannot give up coal overnight. The group still intends to produce 30% of the gross operating profit of its utility businesses from thermal power generation in 2025 (it was 52% last year). When Carmichael produced its first lump of coal in time for Mr Adani’s birthday on June 24th, he tweeted: “There couldn’t be a better birthday gift.”Perhaps he recognises that foreigners, sustainable pretensions notwithstanding, find India irresistible, especially with investment in China in the doldrums. Perhaps he hopes that they will flock to giants like Adani, not least because of its knack for coping with India’s bureaucracy. Yet if they do, the group faces a problem. The stronger it becomes, the more unsavoury it will seem that few ordinary Indian shareholders are sharing in the upside. More

THE SUDDEN unavailability a decade ago of cars in “tuxedo black”, “rugged brown” or “royal red” highlighted the vulnerability of the industry’s global supply chain. The abrupt closure of the only factory making a vital pigment because of its proximity to the tsunami-hit Fukushima nuclear plant in Japan affected most of the world’s big carmakers. A side-effect of a global pandemic has denied carmakers a more vital component. A shortage of semiconductors has left car firms unable to install the complex electronics that control entertainment systems, safety features and advanced driving aids. Many have cut assembly-line shifts. Some have temporarily closed factories. Ferdinand Dudenhöffer of the Centre Automotive Research, a German think-tank, estimates that the bottlenecks will dent worldwide production in 2021 by 5.2m cars, to 74.8m. Ford’s net profit fell by half in the second quarter, year on year, mainly owing to the chip crunch. Jaguar Land Rover expects sales in the three months to September to be 50% lower than planned. On August 3rd Stellantis, created by the merger of Fiat Chrysler and PSA, which owns Peugeot and Citroën, said it would make 1.4m fewer cars in 2021 than expected. (A big Stellantis shareholder is a part-owner of The Economist’s parent company.) Though car bosses agree the worst is over, shortages are likely to dent output in 2022.The dearth of chips is a consequence of the pandemic, which boosted demand from makers of electronic devices for those stuck at home during lockdowns. Car firms also underestimated the rapid pace of recovery this year. Expecting weak sales, in 2020 they pared back orders. Although carmakers spent $40bn or so on chips in 2019, that accounted for only a tenth of global demand, which puts them low in the semiconductor pecking order. This makes orders hard to reinstate. Established car firms also long ago outsourced development of most technology, including electronic subunits, to big suppliers. These “tier 1” suppliers, such as Germany’s Bosch or Denso of Japan, buy circuit boards and microcontrollers to make components from suppliers in the next tier down, which in turn buy semiconductors from chipmakers. This has kept chip firms and car firms at arm’s length. Deloitte, a consultancy, talks of a “lack of visibility up and down the value chain”. Carmakers’ initial response has been to make more vehicles that require fewer chips, or to use the scarce resources to build their most profitable models. In the long run, the changing nature of the car will force them to think more creatively. Fully electric cars are packed with twice as many chips by value than fossil-fuelled ones, says KPMG, another consultancy. As Pedro Pacheco of Gartner, yet another firm of consultants, points out, software will become a significant source of profits as cars move from a disparate collection of chips to a centralised “brain” connected to the internet that can be updated remotely. In 2019 Tesla made an average of nearly $1,200 per vehicle from selling software updates, Mr Pacheco notes. To ensure that the hardware woes don’t stymie this ambition, carmakers may need to take another leaf from Tesla’s book. The Californian firm has been designing its own chips since 2016, which lets it launch new software-enabled features quickly. Volkswagen’s boss, Herbert Diess, has said that the German giant will develop its own chips and software for autonomous driving: “Software and hardware have to come out of one hand.” For now Volkswagen would like closer relations with chipmakers. So would its rivals. Few have the resources—or inclination—to design chips. Some will still need help developing their own software. Big suppliers, fearful of losing out as carmakers cosy up to chip firms, are being forced to up their game. Bosch, the world’s biggest car-parts maker, has invested €1bn ($1.2bn) in a factory that will start to produce advanced chips for cars later this year. A hiccup over paintwork is one thing. As the industry braces for a more electric and electronic future, it can ill afford to leave its fate in someone else’s hands. More

“WE’RE ALWAYS 30 days away from going out of business,” is a mantra of Jen-Hsun Huang, co-founder of Nvidia, a semiconductor company. That may be a little hyperbolic coming from the boss of a company whose market value has increased from $31bn to $486bn in five years and which has eclipsed Intel, once the world’s mightiest chipmaker, by selling high-performance chips for gaming and artificial intelligence (AI). But only a little. As Mr Huang observes, Nvidia is surrounded by “giant companies pursuing the same giant opportunity”. To borrow a phrase from Intel’s co-founder, Andy Grove, in this fast-moving market “only the paranoid survive”.Constant vigilance has served Nvidia well. Between 2016 and 2021 its revenues grew by 233%. In the three months to May sales expanded by a dizzying 84%, year on year, and gross margin reached 64%. Although Intel’s revenues are four times as large and the older firm fabricates chips as well as designing them, investors value Nvidia’s design-only business more highly (twice as much in terms of market capitalisation). Its hardware and accompanying software are used in all data centres that make up the computing clouds operated by Amazon, Google, Microsoft and China’s Alibaba. Nvidia’s systems have been adopted by every big information-technology (IT) firm, as well as by countless scientific research teams in fields from drug discovery to climate modelling. It has created a broad, deep “moat” that protects its competitive advantage.Now Mr Huang wants to make it broader and deeper still. In September Nvidia confirmed rumours that it was buying Arm, a Britain-based firm that designs zippy and energy-efficient chips for most of the world’s smartphones, for $40bn. The idea is to use Arm’s design prowess to engineer central processing units (CPUs) for data centres and AI uses that would complement Nvidia’s existing strength in specialised chips known as graphics-processing units (GPUs). Given the global reach of Arm and Nvidia, regulators in America, Britain, China and the European Union must all approve the deal. If they do—a considerable “if”, given both firms’ market power in their respective domains—Nvidia’s position in one of computing’s hottest fields would look near-unassailable.Game timeMr Huang, whose family immigrated to America from Taiwan when he was a child, founded Nvidia in 1993. For its first 20 years or so the company made GPUs that made video games look lifelike. In the past decade, however, it turned out that GPUs also excel in another futuristic, but less frivolous, area of computing: they dramatically speed up how fast machine-learning algorithms can be trained to perform tasks by feeding them oodles of data. Four years ago Mr Huang, who goes by Jensen, startled Wall Street with a blunt assessment of his company’s prospects in what has become known as accelerated computing. It could “work out great”, he said, “or terribly”. Regardless, the company was “all in”.Around half of Nvidia’s annual revenues of $17bn still comes from gaming chips. They have also proved excellent at solving the mathematical puzzles that underpin ethereum, a popular cryptocurrency. This has at times injected crypto-like volatility to GPU sales, which contributed to a near-50% fall in Nvidia’s share price in late 2018. Another slug of sales comes from selling chips that accelerate features other than graphics or AI to computer-makers and car companies.But the AI business is growing fast. It includes specialised chips as well as advanced software that lets programmers fine-tune them—itself enabled by an earlier bet by Mr Huang, which some investors criticised at the time as an expensive distraction. In 2004 Mr Huang started investing in “Cuda”, a base software layer that enables just such fine-tuning, and implanting it in all of Nvidia’s chips.A lot of these systems end up in servers, the powerful computers that undergird data centres’ processing oomph. Sales to data centres have increased from 25% of total revenues in early 2019 to 36%, contributing nearly as much as to the total as gaming GPUs. As companies across various industries adopt AI, the share of Nvidia’s data-centre sales going to big cloud providers such as Amazon and Google has declined from 100% to half that.Today its AI hardware-software combo is designed to work seamlessly with the machine-learning algorithms collected in libraries such as TensorFlow (which is maintained by Google) and PyTorch (run by Facebook), boosting the algorithms’ number-crunching power. Nvidia has created programs to hook its hardware and software up to the IT systems of big business customers with AI projects of their own. All this makes AI developers’ job immeasurably easier, says a former Nvidia executive. Nvidia is also expanding into AI “inference”: running AI models, hitherto the preserve of CPUs, rather than merely training them. Real-time, huge AI models like those used for speech recognition or content-recommendation systems increasingly need the specialised GPUs to perform well, says Ian Buck, head of Nvidia’s accelerated-computing business.This is also where Arm comes in. Owning it would give Nvidia the CPU chops to complement its historic strength in GPUs and more recently acquired abilities in network-interface cards needed to run server farms (in 2019 Nvidia acquired Mellanox, a specialist in such interconnecting technology). In April the company unveiled plans for its first data-centre CPU, Grace, a high-performance chip based on an Arm design. Arm’s energy-efficient chips would help Nvidia supply AI products for “edge computing”—in self-driving cars, factory robots and other places away from data centres, where power-hungry GPUs may not be ideal.Transistors in microprocessors are already the size of a few atoms, so have little room to shrink and tricks such as outsourcing computing to the cloud, or using software to split a physical computer into several virtual machines, may run their course. So businesses are expected to turn to accelerated computing as a way to gain processing power without spending through the roof on ever more CPUs. Over the next five to ten years, as AI becomes more common, up to half of the $80bn-90bn that is spent annually on servers could shift to Nvidia’s accelerated-computing model, estimates Stacy Rasgon of Bernstein, a broker. Of that, half could go on accelerated chips, a market which Nvidia’s GPUs dominate, he says. Nvidia thinks the global market for accelerated computing, including data centres and the edge, will be more than $100bn a year.Nvidia is not the only one to have spotted the opportunity. Competitors are proliferating, from startups to other chipmakers and the tech giants. Venture capitalists have backed companies such as Tenstorrent, Untether AI, Cerebras and Groq, all of which are trying to make semiconductors even better suited to AI than Nvidia’s GPUs, which for all their virtues can be power-hungry and fiddly to program. Graphcore, a British firm, is touting its “intelligence-processing unit”.In 2019 Intel bought an Israeli AI-chip startup called Habana Labs and ceased work on the neural-network processors it had acquired as part of an earlier purchase of Nervana Systems, another startup. Amazon Web Services (AWS), the e-commerce giant’s cloud division, will soon start offering Habana’s Gaudi accelerators to its cloud customers, claiming that the Gaudi chips, which are slower than Nvidia’s GPUs, are nevertheless 40% cheaper relative to performance. Advanced Micro Devices (AMD), a veteran chipmaker that is Nvidia’s main rival in the gaming market and Intel’s in the CPU business, is in the process of finalising a $35bn deal to acquire Xilinx, which makes another kind of accelerator chip called field programmable gate arrays (FPGAs).A bigger threat comes from Nvidia’s biggest customers. The cloud giants are all designing their own custom silicon. Google was the first to come up with its “tensor-processing unit”. Microsoft’s Azure cloud division opted for FPGAs. Baidu, China’s search giant, has its “Kunlun” chips for AI and Alibaba, its e-commerce titan, has Hanguang 800. AWS already has a chip designed for inference, called Inferentia, and has one coming for training. “The risk is that in ten years’ time AWS will offer a cheap AI box with all AWS-made components,” says the former Nvidia executive. Mark Lipacis at Jefferies, an investment bank, notes that since mid-2020 AWS has put Inferentia into an ever-greater share of its offering to customers, potentially at the expense of Nvidia.As for the Arm acquisition, it is far from a done deal. Arm’s customers include all of the world’s chipmakers as well as AWS and Apple, which uses Arm chips in its iPhones. Some have complained that Nvidia could restrict access to the chip designer’s blueprints. The Graviton2, AWS’s tailor-made server chip, is based on an Arm design. Nvidia says it has no plans to change Arm’s business model. Western regulators are due to decide on whether to approve the deal with Britain’s competition authority, which had until July 30th to scrutinise the transaction and is expected to be among the first to do so. China, for its part, is unlikely to welcome an American takeover of an important supplier to its own tech firms, which is currently owned by SoftBank, a Japanese technology conglomerate.Even if one of the antitrust watchdogs puts paid to the acquisition, however, Nvidia’s prospects look bright. Venture capitalists have become markedly less enthusiastic over time about backing startups taking on Nvidia and the tech giants investing in accelerated computing, says Paul Teich of Equinix, an American data-centre operator. Intel has overpromised many things, including accelerated computing, for years, and mostly undelivered. AWS and the rest of big tech have plenty of other things on their plates and lack Nvidia’s clear focus on accelerated computing. Nvidia says that, measured by actual utilisation by businesses, it has not ceded market share to AWS’s Inferentia.Mr Huang says that it is the expense of training and running AI applications that matters, not the cost of hardware components. On that measure, he says, “we are unrivalled on price-for-performance.” None of Nvidia’s rivals possess its software ecosystem. And it has a proven ability to switch gears and capitalise on good luck. “They’re always looking around at what’s out there,” enthuses another former executive. And with an entrenched position, Mr Lipacis says, it also benefits from inertia.Investors have not forgotten the near-halving of Nvidia’s share price in 2018. It may still be partly tied to the fortunes of the crypto market. Holding Nvidia stock requires a strong stomach, says Mr Rasgon of Bernstein. Nvidia may present itself as a pillar of the computing industry, but it remains an aggressive, founder-led firm that behaves like a startup. Sprinkle in some paranoia, and it will be hard to disrupt. More

NO CHILD ASPIRES to a life talking the kind of nonsense that many executives speak. But it seems that, as soon as managers start to climb the corporate ladder, they begin to lose the ability to talk or write clearly. They instead become entangled in a forest of gobbledygook.The first explanation for this phenomenon is that “jargon abhors a vacuum”. All too often, executives know they have nothing significant to say in a speech or a memo. They could confine their remarks to something like “profits are up (or down)”, which would be relevant information. But executives would rather make some grand statement about team spirit or the corporate ethos. They aim to make the business sound more inspirational than “selling more stuff at less cost”. So they use long words, obscure jargon, and buzzwords like “holistic” to fill the space.Another reason why managers indulge in waffle relates to the nature of the modern economy. In the past, work was largely about producing, or selling, physical things such as bricks or electrical gadgets. A service-based economy involves tasks that are difficult to define. When it is hard to describe what you do, it is natural to resort to imprecise terms.Such terms can have a purpose but still be irritating. Take “onboarding”. A single word to describe the process of a company assimilating a new employee could be useful. But “to board” would do the trick (at least in American English, which is more comfortable than British English with “a plane boarding passengers” and not just “passengers boarding a plane”). The only purpose of adding “on” seems to be to allow the creation of an equally ugly word, “offboarding”, the process of leaving a firm.Overblown language is also used when the actual business is prosaic. Private Eye, a British satirical magazine that often mocks corporate flimflam, used to have a regular column pointing out the absurd tendency of companies to tag the word “solutions” onto a product; carpets became “floor-covering solutions”. (Bartleby has long wanted to start a business devoted to dissolving items in water so it could be called “Solution Solutions”.) Nowadays, the target for mockery is the use of the term DNA, as in “perfect customer service is in our DNA”.In her book about life in the tech industry, “Uncanny Valley”, Anna Wiener used the term “garbage language” to describe “a sort of nonlanguage which was neither beautiful nor especially efficient”. Tech executives spouted a very grand vision of how they would reshape society but their rhetoric often clashed with the hard reality of what they were doing, which was to sell advertising or monopolise users’ time. It is a variation on the old Ralph Waldo Emerson dictum: “The louder he mentioned his honour, the faster we counted our spoons.”The third reason why managers use jargon is to establish their credentials. What makes one person fit to manage another? It is hard to identify any obvious attributes; managers are not like doctors, who prove their expertise through passing exams and practical training. If you can speak the language of management, you appear qualified to rule. If others don’t understand terms like “synergy” and “paradigm”, that only demonstrates their ignorance. In a sense, managers are acting rather like medieval priests, who conducted services in Latin rather than in the local language, adding to the mystical nature of the process.Once corporate jargon is established, it is hard for managers to avoid using it. The terms are ever-present in PowerPoint slides, speeches and annual reports. Not to use them would suggest a manager is not sufficiently committed to the job. Junior staff, for their part, dare not question the language for fear of damaging their promotion prospects.Of course, new words will inevitably be coined in the world of business, as in other areas of life. Technology has ushered in a range of terms, such as hardware and software, which were once unfamiliar but are now widely understood. But a lot of the more irritating jargon has been brought in from other areas of life, like the self-help movement.All this matters because the continued use of obscure language is a sign that the speaker is not thinking clearly. And if those in charge aren’t thinking clearly, that’s bad for the business. People who are in real command of the detail are able to explain things in a way that is easily understood. And if a manager’s colleagues understand the message, they are more likely to get the right things done. Jargon gets in the way.This article appeared in the Business section of the print edition under the headline “Jargon abhors a vacuum” More

FIRST IT WAS fintech. Last November China’s Communist rulers abruptly suspended the $37bn initial public offering (IPO) of Ant Group, a financial-technology titan, and forced it to modify its asset-light business into something more like a bank. Since then they have pursued other internet giants. The two biggest, Alibaba and Tencent, have been targeted by trustbusters. This month regulators banned Didi Global’s ride-hailing app over data transgressions, days after the firm’s $4bn IPO in New York. And on July 24th, in the clearest sign yet that the government wants to revise its state-capitalist model into something with less global capitalism and more Chinese state, online-education companies were told they can no longer make a profit or use offshore vehicles that enable their shares to be traded abroad. Global capitalists are spooked. The share prices of three big online tutors listed in New York, TAL Education, New Orient and Gaotu, are down by two-thirds, wiping out $18bn in shareholder value. The panic has engulfed other Chinese firms with American listings, which were collectively worth over $2trn not long ago (and often also use the offending offshore structures). The Nasdaq Golden Dragon China Index, which tracks nearly 100 of the biggest such stocks, fell by a record 19% in three trading days. Fear spread to Hong Kong, where it has pulled the territory’s benchmark tech-stocks index down by 16%, and even to mainland China. Foreigners have dumped enough mainland-traded shares to cause a surge in currency outflows that pushed down the value of the yuan on July 27th, according to Natixis, an investment bank. Policy uncertainty may have reach a point at which outsiders just stop buying Chinese stocks, says Zhang Zhiwei of Pinpoint Asset Management, a hedge fund. The squeeze reflects the government’s “overriding concern” that it has less control over its internet than it would wish, says Mark Hawtin of GAM, an asset manager. Online education is a case in point. It has been one of China’s most innovative and fastest-growing industries in recent years. Firms have used clever software to offer individualised courses to millions of pupils, many of whom are poor. In 2019 and 2020, the industry saw 27 IPOs. Three-quarters of the proceeds funded firms offering services to schoolchildren rather than university students. This ferment proved too much for the government, which prizes stability above all else. The authorities began to view the industry’s fees as an extra burden on parents, potentially discouraging them from having more children—an increasingly pressing problem as China’s population begins to decline. State media, channelling their inner Marx, talk of an end to “the era of barbaric growth”. The simplest way to curb this barbarism is to do away with the profit motive. Many companies serving school-age children will now have to become non-profit organisations. Their lucrative businesses suddenly seem about to “be worth almost nothing”, says Travis Lundy of Smartkarma, a research outfit.As Peter Milliken of Deutsche Bank puts it, in China “the profit pool [investors] chase exists within parameters set by the state.” Where will these shift next? One place may be video-gaming. Games firms collect lots of data on users, many of whom are minors, and gaming addiction is a Beijing bugbear, notes Chelsey Tam of Morningstar, a research firm. The industry titan, Tencent, has already been censured. In July alone it was fined twice, by the cyber-regulator for sexually explicit content and by antitrust authorities for unfair practices, and ordered to end exclusive music-licensing deals. On July 27th it suspended registrations for new users of WeChat, a ubiquitous messaging app, to align itself with new regulations. Its market value has sunk from $950bn in January to $550bn. Other targets include internet-connected cars and online health care, which both suck in reams of sensitive data. A private-equity investor in the health business says his firm is adjusting its portfolio to reflect new risks. In a meeting with banks on July 28th the government tried to restore calm. But its message is clear: the Marxist pursuit of power trumps market logic. More

FACEBOOK HAS always had two faces. One is the grimace of a company that many people, in particular politicians, love to hate. President Joe Biden recently accused the social-media giant of “killing people” by spreading misinformation about vaccines against covid-19. (He later rowed back a bit after Facebook pointed out it does quite a lot to stop the spread of such content and to promote legitimate vaccine tips.)The other face is a happy one of a firm that users, advertisers and investors cannot live without. Analysts predict it will be grinning again on July 28th, when it presents second-quarter results. Revenues are expected to rise by nearly 60%, year on year, to around $28bn—despite Apple’s update in April to its iPhone operating system that allows users easily to opt out of being tracked around the web by apps like Facebook. That would put it on track to exceed $100bn in sales this financial year. Quarterly net profit could come in just shy of $10bn, double that of a year ago. No wonder Facebook looks poised to become a long-term member of the exclusive club of companies with a market value above $1trn, which it joined earlier this year (see chart).How can a firm with such political baggage be so successful? The answer is two sides of the same coin. With more than 2.7bn daily global users, Facebook’s main offerings—its flagship social network (known internally as Blue), photo-sharing on Instagram and messaging on WhatsApp and Messenger—are a digital magnifying glass of human nature. This glass amplifies the good (neighbourly help amid the pandemic) as well as the bad (conspiracy theories and quack cures). It also serves as a remarkable lens for advertisers to focus in on the world’s consumers. And the two-facedness is likely to become more pronounced should Facebook succeed with its biggest project yet: creating a “metaverse” that would combine a 3D digital world with the 3D physical one.At its core Facebook is a giant advertising machine. Adverts generate 98% of its revenue. Blue remains a dominant ad platform internationally, raking in perhaps $55bn last year, according to estimates by KeyBanc Capital Markets (Facebook does not break out revenues by service). Instagram, which Facebook bought in 2012 for what seemed like a colossal $1bn, now chips in another $20bn or more, taking its share of overall ad revenues to nearly 30%, up from just over 10% in 2017. Debra Aho Williamson of eMarketer, a data provider, praises Facebook’s ability to target ads as “incredibly precise”. Advertisers value this highly: Facebook earns more than $9 a year for every one of its users, about twice as much as Twitter does. The firm observes what its users do not only on its own services, but almost everywhere else online. This lets it pick what products to flog to a given user, identify others with similar interests and find out whether they bought something after seeing the ad.Even before the pandemic hit, this was hard to resist, especially for smaller firms with fewer resources to run sophisticated marketing operations, which make up the bulk of Facebook’s 10m advertisers, but also for most big global brands. Even Chinese sellers are spending hundreds of millions of dollars on Facebook, says Brian Wieser of GroupM, which places ads on behalf of brands. Although Facebook’s apps are banned in China, Chinese merchants can plug their wares to Western consumers thanks to firms such as Wish, an American online marketplace that helps arrange ads, payment and shipping.No commercial brakesCovid-19 has turbocharged Facebook’s machine. Confined to home, the average American user spent nearly 35 minutes per day on Blue and Instagram in 2020, according to eMarketer, two minutes more than the year before. That adds up to thousands of additional years of collective attention. While some firms went belly-up or cut advertising spending amid last year’s recession, others were created: 6.6m in America alone since the start of the pandemic. Many want a slice of that extra attention. These days it is unimaginable to run an online consumer business without targeted ads, notes Mark Shmulik of Bernstein, a broker, just as it was once unthinkable to run a business without a bricks-and-mortar shop. A bigger share of such firms’ budgets will be spent on Facebook and its fellow ad-tech giant Google, says Mr Shmulik. Some admen are calling it “the new rent”.Facebook has added more than 2m renters since the start of the pandemic. It is almost certain to add more of them as economies reopen and digital ads, which already make up 60% of overall ad spending in America, keep chipping away at TV and other traditional media. The impact of Apple’s new tracking opt-out, which four in five iPhone users have already embraced, according to Flurry, a data firm, will not be clear until the next round of quarterly results in October, observes Mark Mahaney of Evercore ISI, an investment bank. But even if this makes Facebook’s targeting a bit less effective, it will still be at least as good as its competitors’, he predicts. And although on July 23rd American trustbusters got another three weeks to refile a lawsuit against Facebook, which had been thrown out last month for lack of evidence, they will struggle to prove that the company is a social-networking monopolist under current competition law. For all the anti-tech bluster in Washington, DC, this is unlikely to change as long as Congress remains polarised.The bigger threat to Facebook’s continued success, which has long preoccupied Mark Zuckerberg, its co-founder and chief executive, is that virtual masses finally tire of its apps and move elsewhere, pulling advertisers with them. Over the past two years a new generation of social media has emerged that could do just that. Although Facebook’s share of American digital advertising has continued to grow in recent years, its global social-media advertising has been edging down since 2016. The challengers range from specialists such as Clubhouse and Discord, two audio-chat services, to Snapchat and TikTok, which take on Blue and especially Instagram more directly. TikTok fans in America now spend more than 21 hours a month on the video app, compared with less than 18 hours that users spend on Blue, according to App Annie, a market-research firm.In the past, Facebook might have snapped up smaller rivals, as it did with Instagram. With trustbusters looking over its shoulder, it is instead placing a number of big bets. The first is on the “creator economy”, which lets people make money from digital works such as videos or newsletters. This is an extension of its ad business, but one where it has fallen behind new rivals. TikTok and YouTube, in particular, have been better at attracting creators who keep users glued to their smartphone screens. In April Facebook announced that it was developing new audio features, including Clubhouse-like chat rooms in which listeners can tip performers. In June it launched Bulletin, a newsletter-hosting service that is similar to Substack, which popularised the genre. The following month Mr Zuckerberg vowed to shower creators on Blue and Instagram with $1bn by the end of next year (without specifying what form these payments would take).Facebook’s second wager looks beyond advertising to e-commerce. It already hosts 1.2m online shops on Blue and Instagram. That puts it in the same league as Shopify, a fast-growing rival to Amazon, which has 1.7m. A month ago Facebook launched a new way to lets buyers try on clothes virtually. It also plans to link its “Shops” offering with Marketplace, its existing peer-to-peer trading service, and WhatsApp, which Facebook wants to turn into a vehicle for chat-based “conversational commerce”, the latest trend in online shopping. Later this year it would like to phase in a version of Diem, its controversial cryptocurrency (formerly known as Libra), that would beef up its payments infrastructure.For now Facebook has waived seller fees but they could add a few billion dollars to its turnover as soon as next year. Besides bringing in non-advertising revenues, an e-commerce business would also help the company with its tracking problem. If shoppers spend more time and leave more data on its platform the inability to follow them across the rest of the web becomes less important. Mr Shmulik expects the e-commerce landscape to fragment into such walled gardens, each combing shopping and advertising, and operated by a tech giant.Meta-morphosisMr Zuckerberg’s grandest gamble concerns the metaverse. When he spent $2bn in 2014 to buy Oculus, a maker of virtual-reality (VR) gear, many thought he was buying himself a toy. But in recent years Facebook has made further VR-related acquisitions, most recently BigBox VR, the developer of “Population: One”, a shooter game similar to “Fortnite”. This gives Facebook control of a hardware platform for VR and its sibling, “augmented reality” (AR), which serves users digital information as they survey the real world through smart spectacles and the like.And as with e-commerce, part of Facebook’s rationale could be to create strategic sovereignty, by lessening its dependence on the whims of hardware-makers such as Apple. The potential prize is large. Sales of Oculus headsets contributed around $1bn to Facebook’s revenues last year. If the technology keeps improving, VR and AR are the obvious next phase of video-gaming, which has grown into an industry with global revenues of $180bn.Mr Zuckerberg’s ambitions do not stop there, however. He doesn’t see the metaverse, which now has its own division within the firm, merely as a place to enjoy games or other immersive entertainment. Instead, he envisages it as a virtual space where people live and work, in keeping with a dream that geeks have harboured since 1992, when the term metaverse was coined by Neal Stephenson, a science-fiction author. In five years’ time, Mr Zuckerberg has said, he would like Facebook no longer to be seen primarily as a social-media company but as a metaverse company.That would make Facebook cool again. It would no doubt also invite more scrutiny from critics worried about the firm’s power. Should users look on course to spend 35 hours a week immersed in its virtual world, rather than 35 minutes a day, this could invite regulation that actually bites. For now, the metaverse is encouraging something Mr Zuckerberg fears more: competition. Others sizing up the field include video-game firms like Roblox and Epic Games, as well as tech giants Apple, which is reportedly planning its own AR glasses, and Microsoft, which already sells AR goggles. If Facebook beats them to metaverse supremacy, it will have plenty to grin about. Otherwise, expect serious grimacing. More

TROUBLE IS BREWING in America. The reopening economy’s hunger for goods from China, and for the containers that carry them, has left importers of coffee, of which the average American guzzles two cups a day, struggling to ship the stuff from Brazil. They are using whatever they can get, says Janine Mansour of Port of New Orleans, where much of America’s raw coffee lands. That includes much bigger boxes, which reach maximum allowed weight before they are full. Importing part-empty containers adds extra costs, Ms Mansour says, and these will ultimately be swallowed by consumers.It isn’t just coffee prices in America that are rising. Transport logjams and paltry harvests in producing regions have conspired with surging demand to stoke food inflation across the smorgasbord. The UN Food and Agriculture Organisation (FAO) expects the value of global food imports to reach nearly $1.9trn this year, up from $1.6trn in 2019 (see chart). In May its index of main soft commodities hit its highest value since 2011, after rising for 12 straight months. Another benchmark index, by S&P Global, a research firm, has risen by 40% since July 2020. On July 22nd the boss of Unilever, the Anglo-Dutch maker of everything from Ben & Jerry’s ice cream to Hellmann’s mayonnaise, said that pricier raw materials have caused his firm’s costs to swell at their fastest pace in a decade.Central bankers warn that the price spikes could feed broader inflation, which is already on the rise in many countries. That would be bad for consumers. But their loss is a gain for the giant firms that source, store and ship foodstuffs on behalf of state buyers and multinational companies. These opaque traders, which possess the networks of silos, railways and vessels, as well as the data and relationships, necessary to redraw supply routes, thrive on volatility. The four biggest—ADM, Bunge, Cargill and Louis Dreyfus, collectively known as the ABCDs—have been adding to their total workforce of 240,000 and ploughing billions of dollars into new businesses that rely less on cycles of feast and famine. Their prospects offer a foretaste of global food markets in decades to come.The ABCDs have been matching buyers and sellers of foodstuffs for more than a century. The youngest of the four, ADM, was founded in 1902. The oldest, Bunge, dates back 84 years before that. In the decades to the early 2010s they thrived on the back of population growth, rising prosperity and accelerating globalisation.Down on the farmThen they began to wilt. A prolonged glut of crops kept prices low and stable, squeezing margins. Smartphones and other technology put real-time data on local conditions and global prices at farmers’ fingertips, reducing the middlemen’s market power. Producers bought storage to ride out price swings, which decreased arbitrage opportunities. Challengers emerged, including Viterra, the agricultural arm of Glencore, a large commodity-trader-turned-miner, and COFCO International (CIL), the overseas trading arm of China’s state-owned food giant. Between 2013 and 2016 the ABCDs’ combined sales plummeted from $351bn to $250bn.The revenues have stayed flat since. But last year was nevertheless a bumper one for the ABCDs, whose combined net profits doubled, to $4.5bn. Analysts expect ADM and Bunge, which are publicly traded and report second-quarter results this week, to do even better in 2021. All four benefit from abruptly changing patterns of demand for crops and of their supply.Start with demand. For one thing, the pandemic has altered diets. When covid-19 began to spread in early 2020, lockdowns and crimped incomes meant that people stopped eating out and started cooking at home. Meat, fish and dairy (for all those lattes) gave way to more vegetables and cheaper packaged foods. As restaurants, canteens and cafés reopen, and wages rise thanks to the economic rebound, the reverse is happening. “A year ago we were trying to get rid of milk,” says Alain Goubau, a farmer in Ontario. “Now we are adding as many cows as we can.” China has been rebuilding its vast hog herd, which an epidemic of swine flu in 2018 had halved in size.This has had a multiplier effect on demand for crops, since more grain is needed to produce an animal calorie than if the plant were consumed directly, says Sebastian Popik of Aqua Capital, an agribusiness buyout firm in Brazil. Alfonso Romero of CIL expects China to buy a record 30m tonnes of corn (maize), one of the world’s most-traded crops, this year, in large part to feed all its new pigs. That is up from 11m tonnes in 2020, which was itself an all-time high.Another boost to demand comes from high oil prices, which make energy crops look like an attractive alternative. The more crops are turned into fuel, the less is left in the food system. The volume of American soyabean oil used to produce energy could rise by 39% between 2020 and 2022, according to the US Department of Agriculture (USDA). Brazil’s production of ethanol from corn shot up by more than half last year and is forecast to increase by another quarter in 2021.Even as demand for crops has surged, a confluence of factors has conspired to squeeze global supply. Droughts in North and South America have curtailed output. Brazil’s winter-wheat harvest is down by a fifth—and that fifth was meant for export. Besides the container shortage that affects specialty crops such as coffee, the grounding of commercial flights is stranding fresh fruit and vegetables. Rising bulk-shipping rates, up by 150% this year, are adding to the squeeze. Part of that is the result of rising oil prices, which also increase the cost of petroleum-derived fertiliser and other chemicals, and of running farm equipment (which is itself more expensive to buy as farmers take advantage of high crop prices and cheap credit to invest in new tractors and other kit).This cocktail of forces is buoying global wholesale prices. Soyabeans and corn are, respectively, 56% and 68% more expensive than a year ago. This has filtered through to consumer prices: the cost of a home-grilled cheeseburger is up by 11 cents from 2019, says the USDA. The uncertainty and shrinking stockpiles are creating volatility. IFPRI, a think-tank in Washington, DC, has had corn on high “excess price variability” alert for nearly four months. Wheat and coffee prices have been volatile, too.Big traders are enjoying the ride. Higher prices give the ABCDs more margin to play with. Bigger volumes, as farmers sell more to lock in the high rates, let them recoup fixed costs more quickly. And more volatility makes it possible to exploit price discrepancies across time and space. Despite a recent dip, the share prices of ADM and Bunge are still up by a third since 2019. Rumours of Bunge’s takeover by rivals, which swirled in 2018 as it embarked on a painful restructuring, have quietened. Dreyfus, the most troubled of the four, has been steadied by market conditions (and a cash injection by Abu Dhabi’s sovereign-wealth fund, which bought a 45% stake in the family-owned business). Cargill has not reported its annual profit for last year but was headed for record earnings after the first three quarters of 2020.In the short run conditions for the traders look clement. Demand is likely to stay strong. Analysis by Josef Schmidhuber and Bing Qiao of the FAO suggests global agricultural trade volumes will grow by double digits every quarter in 2021. Although prices have softened a bit in the past two months, thanks to better-than-expected planting forecasts in big regions and the near-completion of China’s hog splurge, they are much higher than before the pandemic.They will probably stay that way until at least next year, reckons Carlos Mera of Rabobank, a Dutch lender. Mr Popik says that the food businesses in Aqua Capital’s portfolio, which export to 45 countries, must now finance two months of stock instead of the usual one. This implies that it will take time to iron out supply-chain wrinkles. And meteorologists place a high probability on another La Niña—a weather event of the sort that caused droughts in late 2020 and early 2021—before the end the year.Crop rotationTo deal with their longer-term structural challenges, the ABCDs are diversifying. All of ADM’s recent capital spending has gone into less cyclical and more lucrative businesses such as flavouring, colouring and other ingredients for fast food, fizzy drinks or vitamin supplements, says Seth Goldstein of Morningstar, a research firm. In the first quarter of this year its nutrition-ingredients units generated $154m in operating profit on revenues of $1.6bn. That is about 8% of its total, and growing fast. ADM expects this business to expand twice as fast as its core business, which tends to track global GDP.Bunge has sold dozens of mills, elevators and other assets to invest in plant-protein and edible-oil factories. Cargill now derives most of its profits from animal feed and animal protein. Its food-production facilities include a fish farm in Norway, a poultry farm in the Philippines and cultured-protein factories in America and Israel. It has become one of America’s largest meat processors, as well as a big investor in venture-capital funds focused on food and life sciences. Dreyfus has invested in Leong Hup International, one of South-East Asia’s biggest integrated producers of poultry, eggs and livestock feed.As the traders become ever larger producers of foodstuffs and consumers of crops in their own right, they may come to prize stability a bit more. But probably not too much. They are not about to stop trading. As the populations of Asia and Africa grow bigger and richer, the middlemen will be called upon to supply them with crops from surplus countries, says Jos Boeren, a former Bunge executive now at Stafford Capital, an investment firm. The policies of big hoarders such as China, India and Russia look ever more unpredictable and their stocks less transparent. Climate change will ensure mismatches between supply and demand of foodstuffs. With six centuries of experience between them, the ABCDs will be evening out soft-commodity cycles well into the future. More

IN 2016 TOKYO’S then governor, Masuzoe Yoichi, predicted that the Olympics the Japanese capital was to host in 2020 would “leave a hydrogen society as its legacy”, just as the 1964 Tokyo games left the Shinkansen bullet trains. Later that year Mr Masuzoe resigned over an expenses scandal. But as Tokyo prepares for the pandemic-delayed opening ceremony on July 23rd his dream lives on.Listen to this storyYour browser does not support the element.Enjoy more audio and podcasts on More