Philippa Kaur

“WE FEEL BETRAYED,” laments Petra Braun, a southern German who with her partner, Peter Wengerodt, runs Hansel & Pretzel, a German deli and bakery in Richmond, a suburb of London. Since leaving the European Union just over a month ago, Britain’s once-welcoming government has made it hair-raisingly complicated and costly to import sausages, marzipan, quark cheese, apple sauce and other authentic staples. This year she has yet to receive any of the weekly deliveries of goods from her homeland.
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The flipside of headaches for the likes of Ms Braun, whose small business employs 15 people, is a migraine for big German exporters, some of which furnish the ingredients for her fare. Deutschland AG was never a huge fan of Brexit. But the trade deal rushed through before the transition period ended at midnight on December 31st put German bosses’ minds at ease. A month into the new regime, “supply-chain problems are hitting German companies very hard”, says Joachim Lang of the BDI, the main association of German industry.

And it will get worse. Trade has slowed because of covid-19. As soon as it picks up again, commercial ties are in for a “massive stress test”, warns Mr Lang. In April British customs will introduce new rules (such as pre-notification and health paperwork for products of animal origin), followed in July by physical checks.
On February 9th the Association of German Chambers of Industry and Commerce said that 60% of the 1,200 German companies trading with Britain it surveyed consider their current business situation in Britain to be bad. Nearly as many expect further deterioration this year. One in six have either already shifted investments away from Britain or are planning to do so. They see the bureaucracy related to customs as their biggest business risk, followed by logistics and legal uncertainty.
Were it not for the pandemic these problems would make headlines in Germany, says Ulrich Hoppe, head of the German-British Chamber of Industry and Commerce in London. In January DB Schenker, a German logistics giant, stopped shipping consignments to Britain for a week. About 90% of them had incomplete or inaccurate customs forms, explains Maximilian Floegel of DB Schenker. The main stumbling block has been the proof of origin from the EU required under the trade agreement between the bloc and Britain. This is finicky to get for, say, a shoe made in Italy with a sole imported from China. DB Schenker set up a Brexit task-force to help clients with the customs bureaucracy. But, says Mr Floegel, “the problem remains acute.”
In December BMW, which pre-emptively moved engine production from Britain to Germany in 2019, warned that a no-deal Brexit would cost hundreds of millions of euros, which the carmaker would pass on to clients in Britain and on the continent. At least BMW had the resources to prepare for January’s customs checks and to stockpile car parts in Britain. The pocket multinationals of Germany’s Mittelstand face an even bigger cross-channel struggle.

Take Schott, a 250-year-old maker of sheet music for which Britain is the second-biggest market. The family company started to get anxious at the end of last year about tariffs levied on each classical piece. Delays at the border could leave British orchestras that rent its sheet music unable to get the scores in time for rehearsals, once these resume. This won’t be the last of Brexit’s unintended consequences. ■
This article appeared in the Business section of the print edition under the headline “From bad to wurst” More

“I AM BECOME meme, Destroyer of shorts.” This recent tweet by Elon Musk struck a messianic tone that his disciples lap up. The past month has boosted the cult status of the uber-entrepreneur. The GameStop saga gave him ammunition in his long-running battle with short-sellers, while also positioning him as a champion of the little guy taking on Wall Street. This week fans were spellbound by the announcement that Mr Musk’s electric-car maker, Tesla, had invested $1.5bn in bitcoin and would start accepting the cryptocurrency as a form of payment. Earlier, a barrage of cheeky tweets from Mr Musk about dogecoin (“the people’s crypto”) had sent serious investors scrambling to learn more about a digital currency that started as a joke.
Impish humour is a Musk hallmark, but the impact of his missives is no joke. They can set herds stampeding. His bitcoin announcement propelled it to new heights. Tesla’s market value briefly climbed back towards $830bn, near its peak. The history of business is littered with Pied Pipers but, as Peter Atwater, a social psychologist, points out, none has matched Mr Musk for the number of things he has helped turn red-hot, from cars and crypto to space travel and Clubhouse, a live-podcasting app he appeared on. That invites two questions. What makes the Musk scent so intoxicating to so many? And what are the pros and cons of being a cult CEO?

Larger-than-life business figures enjoy various degrees of celebrity. One category includes bosses of big firms who, while charismatic, fail to inspire feverish devotion. Jeff Bezos, Amazon’s outgoing boss, commands admiration on Wall Street and envy in other corner offices, but is too restrained to attract drooling groupies. Similarly, in his 20 years running GE, Jack Welch earned a reputation (since disputed) for red-toothed success, but was too cold-blooded to mesmerise the masses.
The second group comprises tycoons who achieve cultlike status but whose businesses scarcely warrant the adulation. Their trademark is often shameless self-promotion. Richard Branson has spent decades cultivating an image as a corporate hippy-cum-pirate who takes on complacent incumbents in industries from aviation to finance. Donald Trump touted himself as the arch-dealmaker. Both have hordes of wide-eyed fans. Neither has built a business that comes close to $10bn in value or is built for stability.
The third category is more exclusive: those who build both cults of personality and huge businesses. Joining Mr Musk in this club is Jack Ma, the founder of Alibaba, China’s tech titan. Millions of Chinese college students and other wannabe entrepreneurs bought into the image he cultivated, of a humble teacher turned philanthropic tech titan with a splash of cultural cool (he once appeared as a tai chi master in a martial-arts film). Admiration of Mr Ma has often verged on religious fervour. In 2015 a group of online merchants created a shrine to him, to bring them good luck on “singles day”, an e-shopping festival.
Messrs Musk and Ma walk a trail blazed by an Indian business legend: Dhirubhai Ambani, who founded Reliance Industries, a petrochemicals-to-telecoms conglomerate. The son of a village schoolteacher who cut his teeth trading polyester yarn, Ambani pioneered the equity cult. His trick, in a country where companies had long relied mostly on banks for funding, was to see the untapped potential lower down the pyramid. He toured India, convincing middle-class savers that they, too, could join the capitalist class. When Reliance went public in 1977 it attracted 58,000 punters. The shareholders he drew in have done well: the share price has gained 275,000% since the flotation. When 30,000 of them turned up to pay homage at one general meeting, it had to be moved to a park. These days only Warren Buffett attracts zealots in such numbers (or did before covid-19).

Cult status confers perks. Equity is cheaper when those buying it are devout retail investors, not hard-headed institutions. Small investors are also more patient, heeding calls to “keep the faith” during profitless investment splurges. Marketing costs are low; Mr Musk can use social media to burnish his (and Tesla’s) brand for nothing. Fans are willing to overlook flaws that more dispassionate consumers won’t. Tesla’s build quality is hardly world-class and regulators, most recently China’s, frequently flag up concerns. Yet it is hard to see that reflected in the firm’s sales or share price. Lastly, mass appeal means political clout. Ambani’s popularity helped him bend India’s trade policy to his advantage. Mr Musk’s helps explain soft treatment by governments and regulators, over rogue tweets or reopening factories in the pandemic.
But combining star power and scale is not risk-free. Mr Musk forged his reputation as a David, fomenting rebellions against Detroit and Wall Street elites. But now he is a Goliath: the world’s richest man who runs its most valuable carmaker. Playing both roles is a dangerous game. This is made more so by being a cultural icon, which leaves him more vulnerable to changing social taste—and taste can change in a trice online.
Ye shall fund you no idols
Sentiment could turn if his devotees start to doubt he has their interests at heart. Ambani was able to bat away repeated allegations of financial manipulation; he beat back short-sellers with help from a group of brokers known as “Friends of Reliance”. Mr Musk may not be so lucky. Acolytes who piled into GameStop stock after his “Gamestonk!!” rallying cry on January 26th were buying near the top. His recent crypto-talk looks self-serving in light of Tesla’s bitcoin move.
Finally, political advantage can turn into a bane. Just ask Mr Ma, who, overestimating his power, publicly chided Chinese regulators last year. Irked, Beijing scuppered the planned listing of Ant, Alibaba’s financial affiliate, and is forcing it to restructure. Joining the ranks of cult CEOs may lower your cost of funding. But it raises the cost of miscalculation. More

BEFORE THE pandemic investors favoured companies with strong sales growth, low debt and high return on assets. In the past three months, they have been ploughing money into smaller, underperforming firms that have barely survived the covid-19 recession. A robust economic recovery, Wall Street seems to think, will pull the most covid-impaired away from the abyss and towards financial outperformance. Right now, says Jonathan Golub of Credit Suisse, an investment bank, “the market is rewarding failure.”

The bet on weaklings is the latest sign, if any more were needed, that 2020 marked a weird year in modern corporate history. Far from imploding, as many feared after the virus drained the life out of the world’s stockmarkets in March, America Inc has emerged from the plague year looking astonishingly healthy. It did not take long for analysts to start revising their profit forecasts back up (see chart 1). Even then, four in five of those big firms which have reported their latest quarterly results beat projections. Their aggregate earnings in the three months to December surpassed estimates by over 17%.
The losers—particularly in industries such as hospitality, travel and energy, which rely on people mixing or moving about—lost a lot. Of the 305 S&P 500 firms that have so far presented full-year results, 42 ended 2020 in the red, up from 18 the year before. Their losses added up to $177bn, five times as much as the comparable figure in 2019. But the winners won big: $860bn, all told, just 12% below last year’s profit pool. The technology titans without whose products socially distant shopping, work, socialising and entertainment would be impossible made more money than ever. Wall Street appears to be wagering that both winners and losers have room for improvement (see chart 2).

Big firms are the most bullish. A survey last month by Corporate Board Member, a trade publication, found that overall confidence has risen at public companies. Nearly two in three board members rated their firm’s outlook “very good” or “excellent”. Three-quarters of chief executives expect revenues and profits to increase, compared with less than two-thirds in December. Half predict increased investment.
Lacking the access to capital enjoyed by bigger firms, most of the smaller firms of the Russell 2000 index were bleeding red ink mid-pandemic. Now things are looking up even for them. In the last quarter the Russell 2000 posted a gain of 31% , far outpacing the 12% notched up by the S&P 500. The latest survey by Vistage, an executive-coaching outfit, found that 64% of bosses at small and medium-sized business plan to expand their workforce this year, up by a fifth from the previous quarter. Two-thirds think sales will increase in 2021. Over half expect profitability to rise.
There are two main reasons for this perkiness. First, investors are pricing in the successful rollout of vaccines in America by the summer, which would help reopen the economy. Citigroup, a bank, calculates that Americans have squirrelled away nearly $1.4trn in unspent income over the past year, which translates into oodles of pent-up demand. All told, $5trn or so is sitting idle in money-market funds which could be spent—on everything from a fresh pair of shoes to new shares—once the pandemic recedes. Second, it is widely assumed that unified Democratic control of the White House and Congress will mean continued fiscal and monetary stimulus that could fuel that demand further still.
These considerations have led financial forecasters to project that S&P 500 revenues in 2021 will match or surpass the levels seen in pre-pandemic 2019 for most sectors, according to Goldman Sachs, an investment bank. By 2022 everyone except America’s oilmen should be in rude health. Gregg Lemos-Stein of S&P Global, a credit-rating agency, foresees a speedier-than-expected revival in health care, building materials, business services and non-essential retail (see chart 3). On this interpretation, share prices have room to soar.

Two dangers lurk. If President Joe Biden fails to get something resembling his proposed $1.9trn stimulus through Congress, investors and bosses may start feeling jittery, regardless of the views of macroeconomists, many of whom worry that the stimulus plan is excessive. Given the uncertainty over post-pandemic demand for large industries such as corporate air travel, now that CEOs have concluded that Zoom is often a decent alternative, understimulation is a bigger risk than overstimulation, says the boss of a big private-equity firm.
The other danger is the vaccine rollout. The pace at which American states are administering the inoculations is indeed decent compared with most other big countries; only Britain has done a better job so far. But nine in ten Americans have yet to receive a single dose, let alone the full two. And a distressingly large share may refuse to be vaccinated. At the same time, the emergence of virulent new strains of the virus could mean that the transition from pandemic to no pandemic will not be a binary switch but a sliding scale. American business may need to cope with a much messier scenario of partial lockdowns and ongoing endemic disease for years.

In 2020 a strong stockmarket sat awkwardly atop a sickly economy. In 2021 the opposite may be true, thinks Michael Wilson, of Morgan Stanley, a bank. Yes, the recovery will be “extraordinarily robust”, he believes, with both GDP and earnings growing briskly. But, he warns, the stockmarket has “already priced in too much good news”. The pandemic year’s corporate champions may find that their solid sales included a lot that were pulled forward, so disappointment is all too conceivable. The stragglers’ valuations already look rich.
If the virus does turn endemic, and the recovery slows, the disconnect between Wall Street and Main Street may become untenable. Tobias Levkovich of Citigroup is confident that companies will learn how to find opportunities even under conditions of continued topsy-turviness. As for investors, the best ones “don’t try to predict the market,” says the private-equity boss. “They adapt quickly.” The year 2021 will offer them plenty of opportunities to shine in that department. More

TWO AMERICAN giants, spooked by a crisis that has roiled oil markets, fall into each other’s arms. The tie-up strings back together bits of Standard Oil—broken up in 1911 in the world’s most famous trustbusting exercise. The year was 1999, and Exxon had just completed an $81bn merger with Mobil. Might history repeat itself in 2021? The world of corporate dealmaking is abuzz following reports that last year the bosses of ExxonMobil and Chevron discussed combining the two firms, clobbered by covid-19 along with the rest of their industry. The talks are off, apparently. But they could be rekindled. The resulting crude-pumping colossus could produce enough to meet over 7% of global oil demand.
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This time, though, the deal would not be a show of strength, especially for ExxonMobil. The company was under strain before the pandemic. Despite a $261bn capital-spending splurge between 2010 and 2019, its oil production was flat. Its net debt has ballooned from small change to $63bn, in part to maintain its sacrosanct dividend, which costs it $15bn annually. The company, which had a market capitalisation of $410bn ten years ago—and in 2013 was the world’s most valuable listed firm—is worth less than half that now. In a symbolic blow, last August it was ejected from the Dow Jones Industrial Average, after 92 years in the index.

Adding injury to insult, on February 2nd ExxonMobil reported that a decade of gushing profits—which averaged $26bn a year between 2010 and 2019—had come to an end. The firm booked its first-ever annual net loss, of a staggering $22bn. Much of that was a one-off write-down of natural-gas assets. ExxonMobil is not the only oil firm suffering; Britain’s BP also announced an annual loss this week. Darren Woods, ExxonMobil’s chief executive, gamely argued that the firm was “in the best possible position” to bounce back. As rivals have talked about a new future of renewable-energy investment, Mr Woods has been frank about doubling down on hydrocarbons. His firm’s strategic mantra is that demand for fossil fuels will remain high for decades as consumers in emerging markets buy more cars, air-conditioning units and aeroplane tickets.
Shareholders are no longer so sure. Those concerned about greenery are angered by ExxonMobil’s continued carbon-cuddling. Those who care more about greenbacks are irked by its capital indiscipline. Right now, both are pushing in the same direction.
D.E. Shaw, a big hedge fund, is urging ExxonMobil to spend more wisely. The company’s return on capital employed in exploration and production fell from an average of over 30% in 2001-10 to 6% in 2015-19. The fund has urged Mr Woods to be more like Michael Wirth, his opposite number at Chevron, who has focused more on value and less on volume. More eye-catchingly, Engine No.1, a newish fund with a stake of just 0.02%, is trying to green-shame Mr Woods with a mantra as straightforward as ExxonMobil’s: if the company continues on its current course, and demand shifts quickly to cleaner energy, it risks terminal decline. The fund has launched a proxy battle by proposing four new directors; the current board, it complains, is long on blue-chip corporate credentials but short on energy expertise. Engine No.1’s agitation for a shake-up has won backing from, among others, CalSTRS, which manages $283bn on behalf of California’s public-sector workers.
Most important, the tone from ExxonMobil’s three biggest institutional shareholders—BlackRock, Vanguard and State Street—has also shifted. Between them these titans of asset management own around 20%. That understates their power. Many retail shareholders who own the company’s stock directly do not bother to vote, leaving the big guns that do with outsized sway. Where once asset managers occasionally wagged a finger at climate-unfriendly firms, they are starting to threaten to walk away.

In a recent letter to clients, Larry Fink, boss of BlackRock, talked of greener stocks enjoying a “sustainability premium” and dirty ones jeopardising portfolios’ long-term returns. He hinted that his firm—the world’s largest asset manager—might divest from firms that failed to appreciate the “tectonic shift” taking place. Vanguard, too, has called out ExxonMobil for flawed governance.
Such badgering used to fall on deaf ears. Now, ExxonMobil seems ready to make some changes. It has just added the ex-boss of Petronas, a Malaysian energy group, as a director, as part of a “board refreshment”. It also unveiled a $3bn effort to intensify its work on carbon capture. The firm is paring back spending on new rigs, and narrowing its focus to higher-return fields in places like Guyana and to America’s Permian shale basin.
Texas let ’em go
This is a start. But it looks unlikely to appease increasingly restive shareholders. Some of the green-minded rebels think ExxonMobil is too focused on carbon-capture technology, which is costly and has yet to be deployed at scale by anyone who has tried, and not focused enough on reducing emissions. Unlike many peers, the firm has set targets for bringing down only the intensity of emissions from its operations, not their overall level—leaving room for more belching if production rises. It lags behind rivals in targeting “scope 3” emissions: those of customers burning its petrol and jet fuel. ExxonMobil may also have to offer further concessions to those shareholders who fret more about capital than carbon. A big cut in capital spending in 2020 has gone down well, but its planned annual outlay of $20bn-25bn in coming years still looks splashy compared with that of parsimonious rivals.
The firm’s response “has only emboldened us”, says a member of Engine No.1’s proxy-fight team. “They are still looking at the world today, or in five years, not the long-term trajectory—which is exactly what got them into this mess.” Last year Mr Woods survived a shareholder resolution, backed among others by BlackRock, to strip him of his dual role as ExxonMobil’s chairman. This time around, as Davids and Goliaths gang up on him, the oilman may be less lucky.■
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This article appeared in the Business section of the print edition under the headline “The long squeeze” More

HOW BEST should managers be incentivised? In the biblical parable of the talents, a master divides his property among three servants before going away. Two put his money to work and double its value; the third buries it in the ground. The first two servants are rewarded and the third is punished.
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The biblical story is an early example of the principal-agent problem. When delegating authority, how can a principal be sure that their agents will act responsibly? The problem is usually discussed in terms of the potential for the agents to be greedy, and take money for themselves. The unfortunate servant in the parable acts out of fear, declaring: “Master, I knew you to be a hard man.” Sure enough, the servant is cast into the “outer darkness” where there will be “weeping and gnashing of teeth”.

In the corporate world, some say, fear plays as big a part as greed in distorting manager incentives. Critics claim that managers are unwilling to invest in long-term projects because they fret this will damage the company’s profit growth in the short term. If that happens, the managers may worry that they will be fired by the board, or that the company will be subject to a takeover bid.
Companies have several layers of agents. The board is worried about pressure from fund managers who are themselves acting on behalf of the underlying investors, and fear losing clients if they do not deliver above-average returns.
Lucian Bebchuk of Harvard Law School argues that there has been too much focus on the role of institutional, and particularly activist, investors in driving short-termism. Writing in the Harvard Business Review*, he notes that managers at both Amazon and Netflix have been able to pursue long-term growth at the expense of short-term profits without experiencing any significant pressure from shareholders. Indeed, growth stocks in general (defined as those where the value depends on the expectation of future increases in profits) have been very much in fashion in recent years.
Mr Bebchuk says this short-termism “bogeyman” has been enlisted to argue in favour of insulating managers from shareholder control using restricted voting rights, special shares and the rest. Some think executives may be constrained by the concentration of ownership in a few institutional hands, as the fund-management industry consolidates. Mr Bebchuk believes it is foolish to think back to a “golden era” when share ownership was dispersed. Managers may have felt no pressure to produce short-term results. “But”, he says, “they felt no pressure to produce long-term results either.”

Perhaps the problem lies not with investors, but with the incentives used to motivate executives. Andrew Smithers, an economist, has calculated that the proportion of operating cashflow paid out to shareholders by non-financial American companies was just 19.6% between 1947 and 1999. By the end of that era, share options became a popular means of motivating managers. Subsequently, the proportion of cashflow paid to shareholders averaged 40.7% between 2000 to 2017, while cash used for investment fell.
To examine the effect of incentives, Xavier Baeten, a professor at the Vlerick Business School in Belgium, studied the Stoxx Europe 600 index of big European companies between 2014 and 2019. When he compared individual firms’ returns on assets with the chief executives’ remuneration, he found a positive impact of high pay on performance over the short term, defined as the next 12 months. Yet no such relationship showed up over a three-year period, implying that the initial gains soon dissipated. (The study controls for variables including a firm’s size.)
Mr Baeten then examined the composition of the executives’ packages. He found that short-term performance was better when incentives were more than 200% of base pay than when incentives were less than 100%. He also found that after the first 12 months, the impact switched. Executives with incentives of more than 300% of base pay performed significantly worse in the next two years than those who received less than 100%.
This is not proof that executive incentives have led to an excessive short-term focus. But it suggests the need for carefully designed incentive schemes. The principal-agent problem requires eternal vigilance by shareholders. Get the formula wrong and weeping and gnashing of teeth will follow.
*https://hbr.org/2021/01/dont-let-the-short-termism-bogeyman-scare-you
This article appeared in the Business section of the print edition under the headline “Talent management” More

IF A FOOTBALL match is played but no fans watch it, either in the stands or on television, did it really happen? The quandary might once have amused Albert Camus, a fine goalkeeper who dabbled in philosophising. It is also existential, in another way, for French football clubs. First, covid-19 has deprived them of live supporters. Then the top league’s broadcasting partner skipped town without paying. Teams that once feared relegation now worry about bankruptcy.
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This year France’s Ligue 1 had hoped to kick off its journey to the European elite. Though the national team won the most recent World Cup, the domestic championship in which many of its stars compete is, financially speaking, outplayed by richer leagues in England, Germany, Italy and Spain. A whopper broadcasting deal starting this season, worth over €1bn ($1.2bn) a year, up by 60% on the previous arrangement, would help it level the playing field.

The deal proved too big a whopper even for Mediapro, the Spanish broadcasting group with Chinese backers that snapped up most of the matches. The channel it had set up to show Ligue 1 clashes attracted few punters. Stretched for cash, it made just one quarterly instalment in August, then stopped paying entirely. By December the contract was voided.
On February 1st an auction was held to replace Mediapro. No credible buyer emerged. Canal+, a pay-TV group controlled by Vincent Bolloré, a ports-to-media tycoon, unexpectedly stayed away. Having lost the main football rights in 2018 after several decades, Canal+ says it can live without Ligue 1 (it still shows a handful of matches). Many think it may rejoin the fray, but offer much less than Mediapro did. Amazon has also shown interest in streaming rights, but has offered stingier terms than traditional broadcasters. TV channels may bid for one match at a time.
For now, French football has no broadcasting deal for most matches—a catastrophe for clubs that rely on such rights for a third of their income (often more for smaller teams). They are already facing an entire season with no gate receipts. Pandemic-hit sponsors have less money to throw around. Player transfers, a traditional source of cash, are tricky in a depressed market. The league has already indebted itself to tide teams over; struggling clubs have been able to tap banks for state-backed loans. But a public bail-out of an industry that rewards its stars with multimillion-euro contracts would look unseemly.
Other European leagues are also ailing. Some, like the English Premier League, offered rebates to broadcasters during the covid-19 crisis. An auction for Italy’s Serie A rights in January fell short of expectations. A group of European clubs estimates 360 teams will need financial help to survive. The main concern in France is which channel will be airing the showdown on February 7th between Olympique de Marseille and Paris Saint-Germain—if any. French football wanted to be viewed as the most competitive in Europe. Now it would be happy just to be viewed.■
This article appeared in the Business section of the print edition under the headline “Goalless defeat” More

“WE AIM be the most customer-obsessed company in the world,” declares the opening line in the 700-page prospectus from Kuaishou, a Chinese video app. The firm, launched a decade ago by a former software engineer at Google and another at Hewlett-Packard, boasts more than 300m daily active users, up from an average of just 67m in 2017. On February 5th Kuaishou listed in Hong Kong to great fanfare: share prices surged by 161% after the first day, valuing the company at a cool $159bn. That instantly lifted it above better-known social-media titans like Twitter (worth $45bn) and Snap ($87bn). Kuaishou’s shares were more than 1,200 times oversubscribed by retail investors—a record for the city’s bourse.
Kuaishou’s revenues have soared in recent years, reaching 25bn yuan ($3.6bn) in the first six months of 2020, up by nearly half on the previous year. Just over two-thirds of this came from what the firm calls “live-stream gifting”. It hosted nearly 1bn live-streaming sessions in that period, taking a cut on “tips” that viewers shower on their favourite live-streamers. A tip can be as small as 10 fen (1.5 cents) or as generous as 2,000 yuan. Performers film themselves singing, dancing, otherwise prancing or just sunbathing. (Pornography is strictly prohibited.) New stars can expect to fork half of their tips over to the platform.

Amid this exuberance two threats loom. The first comes from China’s increasingly hands-on regulators (see article). In November they mandated that video apps like Kuaishou impose daily and monthly limits on the amount that users can tip live-streamers. Moreover, to prevent impressionable minors from being coaxed into sponsoring cunning broadcasters, platforms have been instructed to perform tougher background checks on users with such tools as facial-recognition technology. Bureaucrats in Beijing have yet to work out precisely what Kuaishou’s daily and monthly ceilings ought to be. But growth will probably slow down once the details are hashed out.
Douyin, TikTok’s Chinese sister app and Kuaishou’s arch-rival, is better insulated from the regulatory crackdown. Like Kuaishou, it operates a live-streaming business. But unlike its competitor, it earns most of its revenues from online ads, which the new rules do not affect. For comparison, adverts accounted for just 28% of Kuaishou’s revenue mix in the first half of 2020. The company may now try to raise that share. To do so Kuaishou will have to overcome the somewhat outdated perception that its users are disproportionately folk living in small cities and rural areas with less money to buy advertised wares.
The second threat is the potential for a price war between Kuaishou and Douyin. For both platforms, user growth is largely a function of the appeal of their video content, which in turn depends on the calibre of the producers behind it. A race to the bottom, whereby each firm lowers its “take rate” on tips and ad sales to lure popular broadcasters from the other app, would depress margins.
At the moment neither company has a particular incentive to shatter the cosy duopoly, points out Jeffrey Young of Smart Grandly Asset Management, an investment firm. But the possible arrival of a big competitor—not inconceivable in China’s effervescent e-economy—could disrupt this equilibrium, Mr Young suggests.

Despite its domestic challenges (or maybe because of them), Kuaishou is proceeding apace with its global ambitions. The international version of its app, Kwai, claims “tens of millions” of users in markets from Brazil and Colombia to Malaysia and Vietnam. It still lacks the name-recognition of TikTok, though that may prove to be a blessing in disguise. Kwai has thus far avoided the sort of political scrutiny that its better-known rival has attracted in many foreign markets. ■
Editor’s note (February 5th 2020): This story has been updated after Kuaishou’s IPO. More

FEW LIFE stories are as soap-operatic as Lai Xiaomin’s. The fallen state financier dallied with more than 100 mistresses, according to Chinese media. He was subsequently caught with three tonnes of cash in one of his dozens of homes. The sheer scale of his thievery—1.8bn yuan ($279m) in kickbacks, the largest bribery case since the founding of the People’s Republic of China in 1949—justified the death penalty, a judge opined. In a tragic denouement, Mr Lai was executed on January 29th.
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The moneyman’s most serious offense—and the one that ultimately cost him everything—may have been something else. Under Mr Lai’s control, Huarong Asset Management, a state-run financial group, became the lender of last resort to China’s riskiest corporate borrowers. When state banks said “no” to loans, Huarong said “no problem”. Its lending helped private conglomerates get around capital controls and scoop up assets overseas. This enabled some of them to enlarge their balance-sheets—occasionally to breaking point. These strains put the broader financial system at risk. And that perturbed the communist regime’s paramount leader, Xi Jinping, who prizes stability—including the financial sort—above all else.

The latest example came within hours of Mr Lai’s execution. HNA Group, a sprawling conglomerate with interests in airlines, finance, logistics, property, tourism and much else besides, said that its creditors had applied to a local court to initiate bankruptcy and restructuring proceedings. Huarong was among the groups seeking to claw back lost loans from the bankrupt concern.
HNA became known for amassing more than $80bn in debts and large stakes in Hilton, a large American hotel operator, and Deutsche Bank. But in recent years it often found itself short of cash. In 2019 it was in effect taken over by a state-backed management team, installed to stop the rot infecting the rest of the financial system. To make matters worse, disclosures made public on January 30th by HNA’s listed units, such as Hainan Airlines Holding, revealed that an internal investigation had found that some existing shareholders and associates had misused around $10bn of company money.
HNA’s demise, like Mr Lai’s, marks the end of an era for China Inc’s overseas ambitions. The conglomerate’s rise to prominence began in 2015, when it paid $7.6bn for Avalon, an Irish aircraft-leasing business. Such transactions fuelled a boom in outbound Chinese mergers and acquisitions. In 2016 Chinese firms splurged $218bn on foreign deals, more than twice as much as the year before, according to Dealogic, a data-provider.
Some purchases looked strategically sound—for instance ChemChina’s $43bn acquisition of Syngenta, a Swiss chemicals firm. Less disciplined buyers picked up trophy assets, such as the Waldorf Astoria hotel in New York (bought by Anbang, which started out in insurance) and Club Med (purchased by Fosun, another unwieldy holding company).

The globetrotting bonanza was short-lived (see chart). By 2018 Chinese authorities had grown wary of the domestic financial repercussions of reckless overseas adventures. At the same time, officials in America and Europe began to fret about the national-security implications of some Chinese investments.
In April 2018 Mr Lai was detained by the Chinese authorities. Three months later HNA’s co-chairman, Wang Jian, fell to his death in the French countryside. The incident was deemed an accident by local police. After that his group began to sell assets. Earlier that year the chairman of CEFC Energy, a conglomerate with interests in oil and finance and another of Huarong’s clients, was also detained, after attempting to buy a $9bn stake in Rosneft, Russia’s state-controlled oil giant. Chinese regulators were forced to take over Anbang. After more than two years they are still trying to offload its blingy assets, many of which have lost their sheen.
Not all of the era’s acquisitions were duds. Volvo, an iconic Swedish marque, seems to have thrived under Geely, a Chinese carmaking giant which bought it in 2010. In 2016 Midea, a white-goods manufacturer, bought Kuka, a German robot-maker, for $5bn and absorbed its valuable know-how. ChemChina appears to be a decent custodian of Syngenta. On February 2nd Alibaba reported 37% year-on-year growth in revenues for its international retail business; this, China’s e-commerce titan said, was mainly thanks to the strong performance of Lazada, a Singapore-based online-shopping platform it snapped up five years ago, and of Trendyol, a Turkish retail group in which it purchased a large stake in 2018.
These quiet success stories are, however, overshadowed by spectacular failures like that of HNA. They may be the last winners for a while, at least in the West, where governments and the public view Mr Xi’s unconcealed authoritarianism with growing anxiety. In 2020 Chinese firms spent just $32bn on foreign acquisitions, the lowest figure since 2007. ■

This article appeared in the Business section of the print edition under the headline “Too close to the sun” More