Philippa Kaur

THE SCRAMBLE to electrify motoring resembles a car race. Tesla and like-minded startups, unencumbered by the legacy of the internal combustion engine (ICE), are surging up the straight. Behind them, jostling for position at the first corner, are the established carmakers, urged on by ever-tightening government deadlines for clean power to supersede fossil fuels. Many are calling time on the ICE. On February 17th Ford’s European division said that it would go all-electric by 2030. Days earlier Jaguar Land Rover (JLR), an Indian-owned firm based in Britain, announced that the posh Jaguar brand would become fully electric by 2025. In January General Motors (GM) promised it would make only zero-emissions cars after 2035.
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No one is dedicating more resources to electrification than Volkswagen Group, says Herbert Diess, the German giant’s boss. The company plans to spend around €73bn ($88bn) over the next five years on battery power and digitisation, he says. “The competition is now taking the same decisions,” Mr Diess notes, alluding to rival firms’ pledges.

Among the old guard, vw is indeed firmly in the driving seat. A fifth of the millions of cars it sells will be electric by 2025. Some analysts think that by then VW will churn out more electric cars than Tesla, today’s market leader. Mr Diess is more circumspect. A year ago he was confident his firm would lead the world in electric vehicles in ten years’ time. Now he is less sure, admitting that Tesla’s surging shares give it the resources to grow fast. Although Apple’s talks with carmakers such as Hyundai and Nissan did not go anywhere, the tech giant’s evident interest in an iCar could yet make it a force to be reckoned with, Mr Diess admits. But he still thinks that the electric race is Volkswagen’s to lose, not least because the cashflow from its traditional business gives him the money to invest in the future.
Indeed, despite all the noise about electrification the old ICE technology has plenty of mileage left in it. Unlike his counterparts at Ford Europe, JLR or GM, Mr Diess is unwilling to set a date for the demise of the fossil-fuel engine. His electric plans for 2025 still leave four-fifths of his firm’s cars powered by petrol or diesel. Volkswagen is a global company and, he says, many markets will not be ready for electric cars by 2035. Coal-fired power stations will still provide part of the electricity that might charge batteries, making electric cars a moot proposition. In places such as Latin America ICE-friendly biofuels will be the prevailing green alternative to petrol.
Scratch the surface and the ICE seems to be lurking even at firms which claim to be forsaking it. GM says its target is an aspiration. Citigroup, a bank, notes that the majority of investment by established carmakers is still directed towards conventional power trains. BloombergNEF, an energy-analysis firm, reckons that more than one in three cars sold in 2040 will be powered by petrol and diesel. Some will sport the Volkswagen logo. ■
For the full interview with Herbert Diess go to economist.com/VWpod

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This article appeared in the Business section of the print edition under the headline “ICEy conditions ahead” More

IF BUSINESS HAD a Moses, “Thou shalt link pay to performance” would be on his tablet. Compensation committees have, however, tended to stick to a narrow reading of the commandment. Whereas they reward good behaviour, deterring the bad is an afterthought. Worried that this may lead bosses to adopt a mentality of “heads we win, tails shareholders lose”, boards are rethinking their priorities—partly in response to pressure from regulators and investors, but also to shifting social winds. Perfectly balanced incentives remain as elusive as the promised land. Still, measures designed to ensure that misconduct does not pay are becoming central to the debate about how to craft bosses’ salary plans.
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The most striking change of recent years has been the rise of the “clawback”. This is a provision in pay plans that gives the board the right (or, less commonly, an obligation) to yank bonuses or stock awards given but later found to be unjustly earned. A prototype, contained in America’s Sarbanes-Oxley reforms of 2002, required retrieving pay from chief executives and chief financial officers whose sins caused accounting restatements. The idea gained traction after the global financial crisis. The European Union mandated recouping money from wayward bankers. In America Congress told regulators to craft a new clawback rule. While they mulled this, big firms got the message and began to draw up such policies voluntarily. Some 93% of those in the S&P 500 index now say they have one covering cash bonuses, equity awards or both, according to ISS, a proxy-advisory firm, up from a small minority before Sarbanes-Oxley.

As such provisions have grown in popularity, two things have happened. First, the list of misdeeds covered has lengthened. What initially applied solely to criminal financial conduct now extends to almost anything that might damage a firm’s reputation. That includes creating a toxic corporate culture, sexual harassment and “inappropriate” personal relationships; cupping backsides is taken as seriously as cooking books.
The second development is that more firms—albeit still a minority—are plucking up the courage to invoke the provisions. Wells Fargo clawed back $28m from John Stumpf on top of the $41m he forfeited when he resigned as CEO of the lender in 2016, after a probe concluded he had engendered a culture that encouraged employees to open fake accounts to lift sales. Goldman Sachs tapped a dozen current and former executives for $175m last year to help ease the pain of whopping fines over the investment bank’s role in the 1MDB embezzlement scandal. McDonald’s is trying to recoup $57m of severance pay from its ex-boss, Steve Easterbrook, who was fired over sexual relationships with underlings.
The Goldman Sachs case encapsulates the pros and cons of clawbacks. The firm won plaudits for its stance; here was a Wall Street giant willing to make top brass pick up some of the tab for wrongdoing. But what initially seemed a bold move became an embarrassment when Gary Cohn, its former second-in-command, who had cashed in his pay awards on joining the Trump administration in 2016, demurred. The stand-off ended when Mr Cohn agreed to pay a sum, reportedly $10m, to charity. Much as the bank tried to spin this as fair, it was made to look impotent.
The episode underlines that, when it comes to compensation, he who has already paid the piper finds it harder to call the tune. Goldman Sachs’s board could have shown more spine and seen Mr Cohn in court, if only to signal it was serious about holding grandees to account. That, though, would have been costly and risky. Lawyers’ fees might have exceeded what Mr Cohn owed as they wrangled over what is “excessive” pay, “inappropriate” behaviour or “inadequate” oversight in a scandal that involved decisions at many levels. The court might have sided with Mr Cohn, who was never personally accused of wrongdoing. Boards must also consider potential bad publicity. McDonald’s was put on the back foot when Mr Easterbrook claimed it already had information about his liaisons, including sexually explicit emails, when it approved his severance package.

Unsurprisingly, then, some firms try to just put the mess behind them. GE decided last month not to claw back pay from an ex-boss, Jeff Immelt, after a huge write-off and a probe into disclosure policies led to a $200m fine for the industrial conglomerate. (He denies wrongdoing.) Drugmakers accused of stoking the opioid epidemic have also eschewed clawbacks. Such clauses may deter some executives from reporting misconduct. And broadening what is considered wrongdoing creates ambiguity. Some firms include behaviour “embarrassing” to them. Might a CEO expressing exotic political views count?
Fire, brimstone and bonuses
Still, deterrence efforts are proliferating. One popular policy is to lengthen deferral periods for pay, by a year or more for cash bonuses, and a similar period beyond the vesting date for equity grants—in some cases until after the executive leaves the firm. Though less dramatic than clawbacks, this has the advantage of reducing the chance that the money has left the company before alleged misbehaviour emerges. Last month CVS Health, other pharmacy chains and even a few drugmakers (like Bristol Myers Squibb), agreed on a set of extended-deferral principles with a group of investors who had threatened to agitate over the firms’ role in the opioid crisis.
Clawbacks, too, will spread. For one thing, the pandemic recession has stoked anger over excessive executive pay—particularly perceived pay-for-failure such as Boeing’s $62m payoff to Dennis Muilenburg, who presided over the bungled response to two crashes of its 737 MAX passenger jets. And big investors like such provisions. In just a few years BlackRock, the world’s biggest asset manager, has gone from tepid to wholehearted support for them. What better way to focus executives’ minds than to make it clear that what the board giveth, the board can take away? ■
This article appeared in the Business section of the print edition under the headline “Red in tooth and clawback” More

“SUCCESS BREEDS complacency. Complacency breeds failure. Only the paranoid survive.” So said Andy Grove, the Hungarian emigré who helped turn Intel from a scrappy startup in the 1960s into the firm that did more than any other to put the “silicon” in Silicon Valley. They will be ringing in the ears of Pat Gelsinger, Intel’s new boss, who took over on February 15th. He takes the helm of a company that looks, from some angles, to be in rude health. With $78bn in revenue in 2020, it is the world’s biggest chipmaker by sales. It has a 93% share of the market for powerful—and lucrative—chips that go into data-centre computers, an 81% share in desktop PCs, and operating margins of around 30%.
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Yet Intel’s share price has underperformed those of rivals. Nvidia, a firm with one-seventh of Intel’s revenues, has a market capitalisation, at $370bn, that is half as high again (see chart). The manufacturing technology on which much of Intel’s success was built has fallen behind. It has missed the smartphone revolution. Some of its big customers, such as Apple and Amazon, are turning into competitors. Mr Gelsinger inherits quite the in-tray, then.

Start with production. Chipmaking is propelled by the quest for smallness. Shrinking the components in integrated circuits, these days to tens of nanometres (billionths of a metre), improves the performance of both the components and the microchip as a whole. For decades Intel led the way, its “tick-tock” strategy promising a manufacturing revolution every other year. Now “it has lost its mojo,” says Alan Priestley of Gartner, a research firm, who worked at Intel for many years. Its “ten nanometre” chips were originally pencilled in for 2015 or 2016 but did not start trickling out until 2019—an unprecedented delay. The technology is still not mature. In July Intel said the next generation of “seven nanometre” chips would not arrive until 2022, a delay of at least six months.
Manufacturing stumbles have cost it business. AMD, its most direct rival, outsources production to Taiwan Semiconductor Manufacturing Company (TSMC), whose technology is now ahead of Intel’s. That means AMD’s chips are generally faster, and consume less power; its market share has more than doubled since 2019.
A second challenge is the industry’s growing specialisation—a problem for Intel’s traditional forte of general-purpose chips, especially if desktop PCs continue to stagnate. Technology giants, flush with cash and keen to extract every drop of performance for their specific purposes, increasingly design their own semiconductors. In 2020 Apple said it would drop Intel from its laptops and desktops in favour of custom-designed chips. Amazon is rolling out its “Graviton” cloud-computing processors, also designed in-house and made by TSMC. Microsoft, whose cloud business is second only to Amazon’s, is rumoured to be working on something similar.
Intel has also failed to make any headway in smartphones, the most popular computers ever made. An effort in the late 1990s to build graphics chips, which have also proved handy for artificial intelligence (AI), and to which Nvidia owes its enviable valuation, petered out. Attempts to diversify into clever new sorts of programmable or memory chips—in 2015 it paid $16.7bn for Altera, which makes them—have so far not paid off in a big way.

Mr Gelsinger has yet to say how he plans to deal with the challenges. He does not look like a revolutionary. He began working at Intel aged 18, before leaving in 2009 to preside over EMC, a data-storage firm, and for the past nine years heading VMware, a software firm. In an email to Intel’s staff after his appointment was announced he invoked its glory days, recalling being “mentored at the feet of Grove, [Robert] Noyce and [Gordon] Moore”, the last two being the firm’s founders. Like them but unlike his predecessor, Bob Swan, Mr Gelsinger is an engineer, who in 1989 led the design of a flagship chip.
His first job will be to try to turn the firm’s ailing manufacturing division around. Intel already outsources the manufacturing of some lower-end chips to TSMC. Its production woes will force it, at least temporarily, to send more business to Taiwan, perhaps including some of its pricier desktop and graphics chips. Daniel Loeb, an activist investor with a sizeable stake in Intel, sent a letter to the firm’s management in December urging it to abandon factories entirely and restrict itself to designing chips that other firms, such as TSMC, would make. On paper, that looks attractive: Intel capital expenditure in 2020 amounted to $14.2bn, almost all of it on its chip factories. AMD, meanwhile, spun out its manufacturing business in 2009, and is thriving today. Nvidia has been “fabless” since its founding in 1993.
Finding a buyer could be tricky, says Linley Gwennap, a veteran chip-industry watcher, precisely because Intel’s factories are now behind the cutting edge. Most of the world’s chipmakers, which might be tempted by the fabs, are in Asia. Since chips are a front in America’s tech war with China, politicians may veto a sale to a non-American bidder.
In any case, Mr Gelsinger has said he will ignore Mr Loeb’s suggestion. In January the new boss said that, although the firm may use more outsourcing for some products, he intends to pursue the hard, costly task of restoring Intel to its customary position at chipmaking’s leading edge. He also seems minded to pursue his predecessor’s strategy of diversifying into new products, including graphics-to-AI chips. “Our opportunity as a world-leading semiconductor manufacturer is greater than it’s ever been,” he wrote. The direction of travel, then, is not about to change. Intel’s shareholders will have to hope that Mr Gelsinger can at least get it back on the pace.■
This article appeared in the Business section of the print edition under the headline “Hard reboot” More

WHEN WILL most people be back at the office? As with Tantalus and the fruit tree, the prize seems to be close, only to recede out of reach. A survey conducted by Morgan Stanley, an investment bank, found that employees have adjusted their expectations for when they are likely to repopulate their desks, moving the date back from April to June. Given the slow pace of vaccinations in some countries, even that may be optimistic.
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Companies have also had to adjust their expectations. Brian Kropp of Gartner, a research and advisory firm, says that businesses have gone through three phases. In the first, during the spring of 2020, they thought that the pandemic would be short-lived and that corporate life would soon return to normal. In the second, economic restrictions seemed set to last indefinitely and companies figured there was little point in planning for a post-pandemic world. In the third, current, stage the vaccines have brought hope of a reversion to normality, and businesses are trying to work out what the new world will look like.

Interestingly, Mr Kropp observes that views have switched since the start of the pandemic. A year ago, many executives were dubious that productivity could be maintained if employees worked from home. Staff, meanwhile, enjoyed the greater flexibility. Now managers are much more comfortable with the idea. But employees are hankering after the office, at least for part of the time.
This employee restlessness seems to relate to the sheer length of the lockdown. The novelty has worn off and working from home seems much less appealing in winter. And the time spent on screen has led to a feeling of fatigue.
It has also led to increased stress. A study of 1,500 workers in 46 countries by the Harvard Business Review found that 85% said their well-being had declined and 55% felt they had not been able to balance their work and home lives.
The problems are physical as well as mental. A survey of Italian workers found that 50% reported greater neck pain, and 38% increased lower-back pain, while working remotely. This is probably because home furniture is not designed to accommodate extensive computer use.

This does not mean that workers want to go back to the old days entirely. The Morgan Stanley survey found that employees said that, in future, they would like to work from home for two days a week, on average, compared with just one day a week before covid-19.
When people do come back, mask-wearing and social distancing will have to continue for a while. Even if they legally can, few employers will force their employees to get vaccinated, not least because of the furore this might arouse. Gartner surveyed 116 human-resources professionals and only 9% were planning to mandate vaccination. This may mean that 30-35% of American worker will not be vaccinated, Gartner says. They will be vulnerable to catching the virus at work.
Another problem for companies is that employees have become less loyal as the pandemic has progressed. Mr Kropp says that workers are spending more time looking for jobs online and updating their LinkedIn profiles. Since few businesses are hiring at the moment, not many employees have left. But when the economy opens up again, there might be a rush for the exit.
The urge to depart may not be universal. As Bartleby has argued before, the pandemic has divided workers into slackers and Stakhanovites. The first group are getting away with the minimum effort. The second are working even longer hours than before. It is the Stakhanovites who are more likely to leave, Mr Kropp argues, if they feel their efforts are not adequately rewarded.
All this presents challenges for managers who are planning a return to normal. They may have to redesign their offices to create more distance between desks, and come up with a system for allocating space to employees who may turn up for just three days a week. They need to recreate camaraderie within their teams and make sure their best employees do not head out the door.
Issues of equity may be trickiest of all to deal with. Women appear to be keener on working from home than men are. But Mr Kropp warns that managers have a tendency to reward those employees whom they can see, at the expense of those with whom they have reduced contact. That could widen the existing gender pay gap. In short, when the all-clear finally sounds, that may be just the start of managers’ problems.
This article appeared in the Business section of the print edition under the headline “Back for good, or bad” More

WANDER AROUND Seoul’s residential neighbourhoods at dawn and you will invariably encounter a Coupang delivery van. In the past few years South Korea’s mini-Amazon has parked itself in a choice spot amid a crowded e-commerce market by steadily expanding the range of products it offers to deliver in time for breakfast, so long as customers order before midnight. Some items arrive the same day. The strategy looked sensible before the covid-19 pandemic. After 2020 it looks inspired. Coupang’s revenue nearly doubled from $6.3bn in 2019 to $12bn last year. It employs 50,000 people, twice as many as a year ago, and controls a quarter of South Korean e-commerce, up from 18% in 2019, according to Digieco, a research firm.
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The 11-year-old firm has yet to make money—its cumulative $4.1bn loss so far has been bankrolled by venture capital, notably SoftBank’s $100bn Vision Fund, which owns a 37% stake, according to estimates by Bloomberg. Cashflow has improved, says Kim Myoung-joo of Mirae Asset Daewoo, an investment firm in Seoul. But it needs more capital to grow.

Happily for Coupang, investors’ appetite for startups seems insatiable, as the boom in blank-cheque companies created to merge with them shows (see article). So on February 12th it filed the paperwork for an initial public offering (IPO) on the New York Stock Exchange. It may go public as soon as next month, at a market capitalisation that could surpass $50bn.

Coupang is the latest in a generation of young e-commerce stars nibbling at the heels of Amazon and Alibaba, a Chinese titan. The incumbents are being challenged at home (by Shopify in Amazon’s American backyard, and Meituan and Pinduoduo in Alibaba’s), as well as in places like Latin America (by Argentina’s MercadoLibre) or South-East Asia (by Sea, a Singaporean group). The upstarts’ sales have soared of late (see chart ). In the past 12 months they have more than quadrupled their combined stockmarket value, to $1trn.
With no known plans to expand abroad, Coupang’s prospects depend on fending off local rivals. These range from the e-commerce arms of big conglomerates such as Lotte and Shinsegae to internet platforms like Naver and upstarts like Baemin, a food-delivery service backed by Germany’s Delivery Hero. To extend its dominance Coupang must thus continue to nurture the customer goodwill it has garnered thanks to those pre-dawn deliveries. The firm prides itself on employing delivery workers directly, and has a newsroom section dedicated to correcting allegations, for instance over working conditions, that it deems false or distorted. But it has not escaped scrutiny of the e-commerce industry. Earlier this month it had to apologise after a government commission classified the death of a young contract worker at one of its logistics centres as an industrial accident.
Even if it manages to keep consumers on its side, as seems likely, long-term growth could require looking beyond fulfilment and logistics, thinks Ms Kim. MercadoLibre and Sea owe significant chunks of their rich valuations to adjacent businesses, from e-payments to gaming. To thrive in South Korea’s isolated online ecosystem, Coupang may need to occupy more than one niche. ■

This article appeared in the Business section of the print edition under the headline “South Korea’s baby Amazon” More

FROM “GOLD DIGGER” to “Money, Money, Money”, Vivendi’s shareholders have lots of tunes to whistle as they stroll to the bank. On February 13th the French conglomerate announced plans to spin off Universal Music Group, its most valuable asset and the world’s largest record label. Vivendi and Tencent, Universal’s Chinese co-owner, will each retain a 20% stake, with the rest distributed among Vivendi’s shareholders.
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Universal, which owns the rights to those Kanye and ABBA classics, among other discographies, will be the second big label to go public. Warner Music Group did so last June. Its value has since risen by 28%, to $20bn. Vivendi expects Universal’s to exceed €30bn ($36bn).

Eight years ago, when Vivendi turned down €7bn for Universal from SoftBank, a Japanese group, the offer looked generous. The recorded-music industry was on its knees, revenues cut almost in half by online piracy. Now the internet is powering a revival, as streamers like Spotify bring in subscribers. Universal posted a 5% rise in revenues, year on year, in the first nine months of 2020. Industry sales should surpass their peak in 1999 within three years.
By going solo Universal will shed the “conglomerate discount” that weighs down Vivendi’s shares, as would-be investors in the music business are put off by its parent’s TV, advertising, telecoms and other interests. The music business is thirsty for capital. An executive at another label reports bidding wars in which artists offered $200,000 to sign in the morning command $500,000 by day’s end. Vivendi, for its part, is looking at new media acquisitions, many of which are going cheap.
Yet the listing also hints that recorded music’s comeback may be nearing a crescendo. Double-digit revenue growth in recent years will drop to about 3% a year by 2024, forecasts Bernstein, a broker. Three in five American homes now have a music-streaming subscription, up from one in five in 2016. The share won’t go much higher. Artists, as well as platforms like TikTok, are pressing labels for a better deal on royalties. “There’s a phrase in French: ‘The trees don’t grow right up to the sky’,” says Simon Gillham, who sits on Vivendi’s management board. “There’s a right time to cash in on the value you’ve created.”
This article appeared in the Business section of the print edition under the headline “Musical shares” More

SOME READERS will have come to this article through The Economist’s app; others will have heard about it in a newsletter or podcast. The largest number, however, are likely to have arrived here via a link on Facebook. Except, that is, in Australia, where on February 18th the world’s largest social network blocked the sharing of all news articles, Australian or otherwise, as well as banning the sharing worldwide of any articles that originated in Australia.
The news blackout was Facebook’s last resort in a long-running battle over who should pay for news online. Rather than pay media companies in return for linking to their stories, as a forthcoming Australian law would require, the company opted to block all such links on its platform. The decision came hours after Google, the other big tech firm targeted by the new law, made the opposite decision, signing a deal with Rupert Murdoch’s News Corp to carry on linking to stories from that publisher.

The dust-up, which is far from over, pits the new media barons of Silicon Valley against the old ones of television and the press. What so far looks like a one-all draw in Australia is likely to be played out around the world in the months ahead.
Australia’s “news media bargaining code” has been in development for three years, but the argument is older. A decade ago offline media controlled more than 80% of the advertising market in Australia. Yet there, as in the rest of the world, advertisers have found that digital media are better at reaching their audiences. In the past ten years offline media’s share of the market has fallen by half. The lion’s share has gone to Facebook, which dominates display ads, and Google, which has cornered the search market.
Media companies claim that, by showing ads alongside links to their articles—sometimes including short summaries and photos—the tech platforms are in effect monetising content that is not theirs. The platforms retort that, on the contrary, the media firms do better out of the exchange. Facebook says that in Australia last year it sent 5.1bn clicks to Australian publishers, which it claims were worth A$407m ($317m). If publishers feel they are getting a bad deal, it asks, why don’t they simply stop publishing on Facebook?
Under the Australian government’s proposed solution, currently before the Senate, tech platforms would be expected to negotiate payments to publishers. In the event that the two parties could not agree, an official arbiter would decide whose suggested payment was fairer (splitting the difference would not be an option). The new rules would also require tech firms to advise publishers in advance of any changes to their ranking algorithm that would affect them.

Both tech giants are aghast. Paying publishers for news is not without precedent: last month Google agreed to compensate French ones for linking to their stories. Both companies have recently launched “curated” news products—Google News Showcase and Facebook News—in which payments are made to the creators of content (including, in the case of Facebook News, The Economist). But Australia’s winner-takes-all arbitration regime is a more alarming prospect than the system in France, where disputes are expected to be settled by the courts. The French deal, the details of which are private, probably involves payments for displaying snippets of news, not just links. And the requirement to publicise changes to their secret and ever-changing algorithms unsettles them further.
Whereas Facebook walked away, Google blinked. Its three-year deal with News Corp will see it hand over an unspecified amount of money to include content from the publisher’s titles, including in America the Wall Street Journal and the New York Post, and in Britain the Times and the Sun, in its News Showcase. Earlier in the week it had announced similar deals with smaller outfits, including Seven West Media and Nine Entertainment. Blocking links to news would have rendered its search engine much less useful, sending customers to rivals such as Bing, run by Microsoft (which has cheered on Australia’s plans). For Facebook, news matters less, representing less than 4% of what users see in their feed. And though Australia is one of Facebook’s biggest foreign markets, it represents only a sliver of its global revenues. So walking away was better than setting a precedent by coughing up, it calculated.
Public reaction in Australia is testing that assumption. Facebook botched the blackout, accidentally banning not just news sites but links to health departments, fire services, a women’s shelter and a project for children with cancer, among others. Although most of these mistakes were quickly corrected, it was a disconcerting demonstration of the power wielded by the company. Australian media—concentrated in the hands of News Corp—has no doubt who is to blame. “No likes as unsocial network blocks millions”, read a headline in the Murdoch-owned the Australian.
Scott Morrison, the prime minister, wrote in a post on Facebook that the company’s actions to “unfriend Australia” would “only confirm the concerns that an increasing number of countries are expressing about the behaviour of BigTech companies who think they are bigger than governments and that the rules should not apply to them”. He may be right. David Chavern, head of the US News Media Alliance, an industry body, tweeted that “we are expecting a big push in the US in the new Congress.” Julian Knight, the chairman of Britain’s House of Commons committee on media, accused Facebook of “bullying”. “These platforms make enormous sums of money from other people’s work, and they aren’t returning any equitable value to them,” he told the BBC.
The European Union, which is debating a bumper package of new tech regulations, is pondering something similar. Earlier this month Robert Thomson, News Corp’s chief executive, declared that “there is not a single serious digital regulator anywhere in the world who is not examining the opacity of algorithms, the integrity of personal data, the social value of professional journalism and the dysfunctional digital ad market.”
If those regulators copy the Australian model, more stand-offs between the new and old media barons are in store. And whoever wins those confrontations, it looks as if the main losers may be small news organisations. Too small to fall within the scope of Australia’s new code, they stand to see their bigger rivals become mightier still if tech firms agree to cough up. Meanwhile, if the tech firms decide to walk away, the tiddlers stand to lose by far their most important means of distribution. The Australian code has succeeded in shaking some money out of Silicon Valley. It is not clear that it will do a lot to help journalism. More

“WE INVEST A lot of money here in China,” proclaimed Travis Kalanick, founder and then boss of Uber, at a confab in Tianjin in June 2016. But, he added with foreboding, “we have a competitor who is investing even more.” Two months later the American ride-hailing giant threw in the towel, selling its Chinese operations to its Beijing-based rival, Didi. Uber lost some $2bn over two years in China. Its retreat paved the way for Didi to grow into China’s undisputed ride-hailing champion, which today processes over four-fifths of all domestic orders. The Chinese titan is widely expected to go public in the next few months, eight years after its launch. It could fetch a valuation of $60bn.
That Uber was willing to burn through so much cash, at least for a time, is a testament to the size of the prize. China boasts the world’s biggest ride-hailing market. According to its transport ministry, 21m trips were booked on ride-hailing platforms each day, on average, last October. That is double the figure in pre-pandemic America, when travel was safer. Until it sold its Chinese business, Uber received more orders in China than in any other country, including its home market. The gross transaction value of China’s ride-hailers reached 221bn yuan ($32bn) last year, up by more than half since 2017, reckons Frost and Sullivan, a consultancy.

America may have invented ride-hailing. But it is in China where the conditions are most fertile for it to flourish. The reasons go deeper than the size of the market. Didi has the most to gain. But its dominance will increasingly be contested.

Ride-hailing firms depend disproportionately on customers in big cities, where population density is highest. Around a quarter of Uber’s gross bookings by value in 2019 came from just five metropolises: Chicago, Los Angeles, New York, San Francisco and London. China has 14 metropolitan areas with a population of over 10m (see map), more than any other country.
Most of these cities, keen to reduce rage-inducing congestion, discourage private car ownership by restricting the supply of licence plates. In Beijing’s most recent bi-monthly licence-plate lottery 3.6m applicants competed for 6,370 number plates. Shanghai, China’s most populous city, puts a small number of licence plates up for auction each month. The average winning bid at the auction in January was 91,863 yuan, more than double what it was a decade ago and costlier than many mid-range cars (see chart). The southern boomtowns of Guangzhou and Shenzhen have hybrid models whereby some plates are allocated via lottery and the rest sold to bidders. All that leaves millions of disappointed wannabe motorists for ride-hailing firms to cater to.
Moreover, high urban density and the absence of American-style suburban sprawl turn parking space into a prized (and pricey) commodity. The number of public parking spaces per car in Beijing, China’s second-most populous city, is a fifth that in its American opposite number, Los Angeles. China’s extensive high-speed rail network, the world’s longest, blunts the benefits of car ownership for long-distance travel. And cheaper labour means rides can be offered at low prices, making them accessible to a wider group of customers. More than 340m Chinese booked a ride-hailing service at least once in the first half of 2020, notes the Ministry of Industry and Information Technology.

In 2019 Didi disclosed that it was losing an average of just 2% of the total fare on each ride. The company now says its “core ride-hailing business in China is already profitable”. It is coy about the details; Uber also insists it makes money from ride-hailing but continues to report vast operating losses, of $4.9bn last year. Yet most analysts in China take Didi at its word. The question for Didi, they say, is not whether it can break even but rather how well it can sustain profits, maintain its near-monopoly in China and expand abroad.
In recent years the firm has expanded into new business lines, from bike-sharing and food delivery to financial services. The aim is to build up a convenient “ecosystem” to make it costlier for customers to switch to a rival platform. Those rival platforms are not standing still, however. Jack Wei, boss of Shouqi Yueche, its closest Chinese competitor, is sanguine about the challengers’ prospects. He sees room for “multiple firms”, perhaps three or four, to thrive in China in the long term.
One way to carve out a bigger slice of the market is through differentiation, Mr Wei suggests. Shouqi prides itself on premium customer service (as Lyft, Uber’s domestic rival, tries to in America). Its ambition is to become the “leader” in upscale rides while “keeping up” with Didi in the mass market. China’s market is big enough that serving such a niche is a big business. Shouqi expects to turn a net profit this year on revenues of 8bn yuan.
Another way to capture market share is to build strategic alliances. Shouqi has a special arrangement with Meituan, a rising Chinese e-commerce star that offers, among other things, food-delivery and bike-sharing services. The agreement allows Meituan’s 477m annual active users to book Shouqi rides directly in its super-app. In return Shouqi pays Meituan a small commission on each booking. Crucially, Meituan excludes Didi, which it views as a threat, from its platform.

Despite its advantages, the Chinese market presents some obstacles. As in the West, the authorities are concerned about big tech. In December the markets regulator summoned six online giants, including Didi, and lectured them on how not to abuse their dominant positions. At the local level, more than a hundred municipalities have drafted stricter rules on who can drive for ride-hailing firms over the past four years. The aim appears to be to appease embattled local taxi industries. The rules typically set a high bar, such as requiring existing residency status in the city where a driver wants to work. Yet most drivers are migrant workers who lack the proper papers. In 2016 Didi complained that only 3% of its 410,000 drivers in Shanghai would have passed the test.

The arrival of self-driving cars, which Didi has been developing since 2016, may one day solve this problem, though probably not soon (last year Uber called it quits and spun off its autonomous-vehicle arm). In the meantime, Didi is hedging its bets by diversifying. It set up an international division in 2017. A chunk of the $4.5bn it raised a year later was earmarked for foreign expansion. Today it operates in 13 overseas markets, mainly in Latin America. Three years ago it acquired a controlling stake in 99 Taxi, which competes with Uber in Brazil, in a deal that valued the Brazilian startup at around $1bn.
But China remains the biggest opportunity, which explains why Shouqi has chosen to lock in on its home market for the time being. It helps that local authorities have, for the most part, turned a blind eye to rule-bending by the ride-hailing firms. Perhaps they calculate that unemployment resulting from tougher enforcement imperils social stability, not least as economic growth slows and good manufacturing jobs are harder to come by. One in eight drivers for Didi in China are military veterans, a group known for staging small-scale protests when their interests are harmed. Given Beijing’s harmony-obsessed leaders, it is a good bet that ride-hailing in China has plenty of road left to run.■ More