Philippa Kaur

AT A SUMMIT with China’s richest entrepreneurs in late 2018 Xi Jinping sought to allay concerns that the state had declared war on the country’s private sector. Although officials in Beijing had spent the previous year bringing to heel unruly tycoons, China’s president insisted that rumours of a forceful push for party influence in the private sector were untrue. He exhorted the business leaders to “take a pill of reassurance”.
The medicine has been hard to swallow. Since then the Communist Party has sought a more active hand in recruitment and business decisions. And after subduing a band of headstrong bosses at overextended financial conglomerates, the state is now taking aim at China’s tech billionaires, making it clear that outspoken critics will not be tolerated.

Mr Xi’s preoccupation has always been maintaining China’s social and financial stability. Keeping big business in check is part of that plan. It should come as no surprise that the state is now homing in on tech, which has expanded rapidly (see chart). Six of China’s 20 most valuable listed companies are tech firms and with billions of users they touch the lives and wallets of almost all citizens.

A reckoning for the sector began with what looked like a shot across the bows of China’s largest financial-technology group. The suspension by regulators on November 5th of Ant Financial’s $37bn initial public offering with less than 48 hours’ notice was at first interpreted merely as a warning to its founder, Jack Ma, who had previously criticised China’s state-owned banks. But on November 10th the publication of an extensive draft of new rules for technology groups laid bare the state’s ambitions to bring to heel not just Ant, but the whole of China’s tech industry.
Mr Xi’s relationship with China’s tycoons has always been troubled. When he became president in 2013, he inherited a corporate system replete with fraud, patchy regulation and surging debt. After the success of an anti-corruption campaign that mostly targeted officials, Mr Xi took aim at a group of businessmen who were ploughing huge sums into risky overseas investments. Purchases included SeaWorld, an American amusement-park group, and the Waldorf Astoria, a swish hotel in New York. Officials argued that many of these acquisitions were thinly disguised means to divert capital out of China.
Many of the businessmen who once fancied themselves as a Chinese Warren Buffett are in prison or worse. Wu Xiaohui, the chairman of Anbang, which bought the Waldorf among other assets, was handed an 18-year prison sentence in 2018 for financial crimes. Ye Jianming, who attempted to buy a $9bn stake in Rosneft, a Russian oil producer, was detained in early 2018. His whereabouts is still unknown. Xiao Jianhua, a broker for China’s political elite who once controlled Baoshang Bank, was kidnapped by Chinese agents from his flat at the Four Seasons Hotel in Hong Kong in 2017 and is thought to be co-operating with authorities in the unwinding of his financial conglomerate.
The crackdown has put an abrupt end to a boom in global spending by Chinese firms: in 2016 there were $200bn-worth of overseas mergers and acquisitions, the figure in 2019 was less than a fifth of that. And under government pressure private groups have divested assets worth billions of dollars. HNA, an airlines and logistics group that bought a large stake in Deutsche Bank and Hilton Worldwide, a hotel group, has sold assets worth over $20bn in recent years. Anbang Insurance was nationalised, putting the Waldorf under the ownership of China’s Ministry of Finance. Baoshang was taken over by the state and allowed to file for bankruptcy in August. Acquisitions of European football clubs by Chinese groups have all but ended.

Analysts have praised the way in which systemic risks posed by companies such as Anbang and HNA appear to have been reduced on Mr Xi’s watch. Within China few dare to criticise him for his failings. Those who have done so have been dealt with severely. Ren Zhiqiang, a senior member of the Communist Party who once ran a state-owned property firm, penned a missive to friends earlier this year in which he referred to Mr Xi as a “naked clown”. He was sentenced to 18 years in prison in September for bribery and embezzlement.
The party has also been increasing its influence over private firms in more subtle ways. Under a strategy referred to as “party building”, firms have been asked to launch party committees, which can opine on whether a corporate decision is in line with government policy. The number of committees in publicly traded but privately controlled companies is still low. According to a survey of 1,378 Chinese listed firms by Plenum, a consultancy, of the 61% that were privately controlled only 11.5% had party-building clauses in their charters compared with 90% of state-owned firms.

Party invitation
Yet the prevalence of such committees looks likely to grow. In September Mr Xi asked for the private sector to “unite around the party”. A day later Ye Qing, vice-chairman of the All-China Federation of Industry and Commerce, a powerful organisation controlled by the Communist Party, issued a more detailed list of demands. He called for private groups to establish human-resources departments led by the party and monitoring units that would allow the party to audit company managers.
This might not affect all firms equally. “For big companies, there’s no negotiation. The party approaches you and you say yes,” says Joe Zhang, a business consultant who has sat on the boards of Chinese private and state corporations. However, he also argues that for most smaller firms, less visible and not as economically important, party cells are little more than a rubber stamp as profits will trump state influence on decision-making. Their influence may not necessarily be unwelcome either. One executive, whose company has a party committee, argues that by growing closer to the thinking of the party leadership, “we can steer the company accordingly”. This heads off potential clashes with the state.
So far there is little evidence to suggest that party committees have hurt profitability, says Huang Tianlei of the Peterson Institute for International Economics, a think-tank. But increased party influence could inhibit some operations. “Innovation may be suppressed. More red tape can emerge. A firm can turn from profit-driven to goal-driven, sacrificing profitability,” says Mr Huang.
It is possible that party committees may soon play a larger role in tech firms. A raft of new regulations presents a more immediate threat. Ant is connected to hundreds of millions of people through its payments and lending platforms. Like other Chinese tech giants it holds precious data on customers as well as controlling a pipeline through which hundreds of billions of dollars are lent and spent. That such power lies in private hands is a source of tension between the party and entrepreneurs.
“These resources need to be tightly controlled and the political loyalty of the firms and entrepreneurs, not only to the regime but also to individual political leaders, needs to be strictly maintained,” says Sun Xin, an academic at King’s College London. “The case of Ant is just one manifestation of this underlying logic.”
The halting of Ant’s IPO was triggered by new draft regulations aimed at online micro lending. For Ant, the rules can only be interpreted as an attack on the firm’s lending platform, its biggest source of revenue. Mr Ma may regret comparing China’s banks to pawnshops in a speech in October. The comments infuriated senior officials and played a part in the hasty suspension of Ant’s IPO. But Mr Ma is not to blame for the latest onslaught of antitrust rules, although he may have sped up their arrival.
vie-ing for influence
The new rules, under consideration for some while, will for the first time explicitly apply monopoly controls on internet and e-commerce firms. For many years China’s antitrust laws have not exempted the groups but they have also not been targeted in monopoly cases. This has allowed a few companies to control large swathes of the digital economy. They also take aim at the structures that have allowed Chinese tech firms to raise capital overseas. Barred from allowing foreign investors to take direct stakes, for two decades virtually all capital-hungry tech groups have skirted the rules by using a “variable-interest entity” (VIE) to link foreign cash to the Chinese market. The structure creates an offshore holding company into which foreigners invest. That company has a contractual agreement with an onshore firm to receive the economic benefits of the underlying assets.
The VIE structure has long been tolerated by Chinese authorities, but without full legal recognition. Foreigners have virtually no recourse in China to claim rights to the assets they have invested in. Foreign funds have long been wary of the framework but most Chinese tech companies still use it to structure their overseas listings. The new antitrust rules could require companies to seek approval for such arrangements, calling into question whether VIEs will be permitted in the future and so the way that foreign capital will reach Chinese tech firms. The threat of withdrawing tacit approval for a VIE is another way the state can intimidate firms and their owners.
Perhaps the new rules will humble the outspoken Mr Ma. He has not spoken publicly on the matter, but Ant has bent the knee and agreed to embrace the new regulations. Mr Xi has made clear that no company is too big, and no IPO too valuable, to be allowed to challenge the state.■
This article appeared in the Business section of the print edition under the headline “The intimidation game” More

DESPITE THE autumn chill, a group has gathered in front of the Iron Horse Royal Enfield dealership, a small stone building set in the Connecticut hills. A woman sits on a motorcycle, its single-cylinder engine thumping with a distinctive sound. In the window a striking chrome-and-black model looks much like what would have rolled out of Enfield’s original factory in Redditch in the British Midlands in the company’s heyday in the 1950s.
Enfield, dating back to 1901, boasts of the longest lifespan of any motorcycle manufacturer. But Iron Horse only began selling its bikes in 2018 and the name remains relatively unknown in America and other markets outside India. The company’s original British operations closed in 1970; the surviving Indian remnant was heading the same way before a stunning revival that saw annual sales grow from 31,000 units in 2006 to more than 800,000 in 2019, transforming the value of Enfield’s parent company, Eicher Motors, a tractor-maker, from just a few hundred million dollars to $8.5bn. Now the company is accelerating into the wider world.

Enfields are a throwback, devoid of modern frills and with the looks of a classic bike. Engines ranging from 350cc to 650cc are large for India but small compared with machines from firms such as of Triumph and BMW. Enfield declined to enter the largest part of the Indian market, which is for small and cheap bikes, and will not attempt to make the expensive, tech-laden machines that bikers generally hanker after in rich countries. Improvements have tackled mechanical shortcomings without undermining the existing sound, feel and look. They must, says Siddhartha Lal, Eicher’s boss, provide “everything you need and nothing you don’t”.
A consequence of this approach is that production is confined to a limited number of straightforward motorcycles produced at high volume which enhances economies of scale and enables profitability at low prices. The most expensive Enfield in America is $6,400, making the bikes accessible to a wider potential market. Machines from Harley-Davidson, which has suffered falling sales in recent years, often cost more than three times as much.
Enfield is aiming to sell 20% of its production abroad. Over the past five years, it has added 700 dealers worldwide to its 1,600 in India. Exports doubled to 39,000 units in the year to the end of March and in June, admittedly an odd month because of the covid-19 lockdown, an Enfield 650cc motorcycle topped the British sales chart.
A sign that it might succeed as an exporter is that the bikes are becoming part of popular culture outside India. A YouTube diary by a young Dutch woman, for example, begins with her purchase of an Enfield in Delhi and follows her journey back to theNetherlands. More than 100,000 people subscribe to her posts. The urge to cross borders is shared not only by Enfield but, apparently, its customers as well.
This article appeared in the Business section of the print edition under the headline “Kickstart” More

IN THE 1990S, when a youthful Son Masayoshi, a Japanese entrepreneur, was pursuing acquisitions in his home country, he sought advice from a banker eight years his junior called Mikitani Hiroshi. They shared a lot in common: both had studied in America (Mr Son at the University of California, Berkeley, Mr Mikitani at Harvard Business School); they had a common interest in the internet; and they were both baseball mad.
In the decades since, both men have blazed past a stifling corporate hierarchy to become two of Japan’s leading tech billionaires. Mr Mikitani, who says in an interview that he did not even know the word “entrepreneur” when he enrolled at Harvard, pioneered e-commerce in Japan via Rakuten, which is now a sprawling tech conglomerate worth $14bn. Mr Son’s SoftBank, after spectacular investments in early internet stocks, muscled into Japan’s telecoms industry. They have both invested heavily in Silicon Valley. They also each own baseball teams named after birds of prey; the SoftBank Hawks and the Rakuten Golden Eagles.

Now it is rivalry, not a shared past, that better defines their relationship. In Japan SoftBank and Rakuten are elbowing their way onto each other’s turf. Their respective investments overseas in Uber and Lyft, two ride-hailing firms, put them at odds. Even the Hawks and the Eagles are bitter enemies. Until recently Masa, as Mr Son is known, appeared to have the advantage. He has bigger money bags than Mr Mikitani, and a higher profile thanks to the audacity of his $100bn Vision Fund, which backed blitzscaling tech startups globally. Yet Mickey, as Mr Mikitani is known, has made a quieter bet on mobile communications that is almost as bold—though in a different way. If it pays off, it could start a revolution not just in Japan, but across the world, too.
Discussing it by Zoom from his home in Tokyo, a hoodie-wearing Mr Mikitani is keen to emphasise both the audacity of the bet and the difficulty of bringing it to fruition. Since 2018 he has committed $8bn to build a fourth- and fifth-generation (5G) mobile network from scratch in Japan, a country where a triumvirate of industry heavyweights, including SoftBank, dominate. Instead of replicating the huge investments they have made in hardware, he used low-cost base stations, cloud-based architecture and software to create what Rakuten calls the world’s first fully commercial virtualised network, adaptable for a new modular technology called OpenRAN. In essence, what Mr Mikitani has sought to show is that an internet firm like his, with a geeky software-engineering culture, can provide a high-quality, low-cost alternative to the hardware-obsessed telecoms giants, using OpenRAN at the core of its 5G architecture. It’s a work in progress but it has been blessed with geopolitical tailwinds. Concerns about the influence of the Chinese government over Huawei, the world’s biggest 5G equipment supplier, have caused telephone companies, as well as governments, to embark on a frantic hunt for alternatives. OpenRAN is attracting a lot of attention. All eyes are on Rakuten to see whether its network functions.
Mr Mikitani and his lieutenants are upbeat. Though he has faced naysayers all the way—“Good luck, Mickey, you’re going to fail,” he says his CEO friends all told him—the company has brought forward to 2021 the year when it expects to have coverage over almost all of Japan. It had been 2026. Low costs have lured more than 1m customers, even though coverage remains patchy. Globally, Tareq Amin, Rakuten’s mobile-technology guru, has become one of the most prominent OpenRAN evangelists. In September he struck a deal with Madrid-based Telefónica, a big telecoms group, to develop the technology further. Mr Mikitani says one of the blessings of the OpenRAN model is that, rather than replacing antiquated kit with each new generation of mobile technology, it can be updated with software. He likens it to Tesla’s ability to use software to upgrade its electric cars.
For all that, Mr Son is hovering menacingly in the background. Well before Mr Mikitani started to encroach on his telecoms territory, he used SoftBank’s big stake in Yahoo Japan to challenge Rakuten in e-commerce. Last year SoftBank upped the stakes by orchestrating a merger between Yahoo Japan (now known as Z Holdings) and Line, a messaging app, to create Japan’s largest online services company. Kirk Boodry of Redex Research, an Asian equity-research firm, says Rakuten’s e-commerce operating margins have fallen by half recently as it spends money to defend itself against both Yahoo and Amazon in e-commerce. That may eventually constrain Rakuten’s telecoms ambitions. As he puts it: “They don’t have enough money to be as disruptive as they’d like to be.”

Mr Mikitani is gracious about his former client. He credits Mr Son with having a great eye for investments and tactfully does not mention the Vision Fund’s debacle with WeWork, an office-rental firm that faced near-collapse last year. He insists SoftBank and Yahoo “are my rivals, not my enemies”. He goes on to express the irony that whereas once he was Mr Son’s investment banker, now, of the two, he is more of the operator.
Home RAN?
That raises the question of both men’s legacy. Mr Son may have broken the mould for investing in snazzy startups in a way that put him on the cover of global magazines (including this one). Although he has a strong claim to be one of Japan’s great entrepreneurs he has never pioneered a new technology. Mr Mikitani has never achieved such global stature. He is arguably more famous outside Japan for making English the lingua franca in his company than for Rakuten itself. Yet if his 5G dreams come true, Mr Mikitani will have helped engineer a solution not only to a global technological problem but a pressing geopolitical one, too. As far as the tech world is concerned, that would be a more far-reaching achievement. And if Masa resents that, he can always get his talons out on the baseball field. ■
This article appeared in the Business section of the print edition under the headline “Mickey v Masa” More

ON THE HUSTINGS, both Donald Trump and Joe Biden promised to revive America’s economy from its pandemic-induced funk. Doing so will require a turnaround for corporate America, which has suffered a savage downturn. When the occupant of the White House starts his four year term in January, in what state will American business be?
Some recent vital signs may look promising. America’s economy expanded at a record pace of 33%, on an annualised basis, in the third quarter. Total profits for the big firms of the S&P 500 index have surpassed analysts’ expectations by roughly a fifth, with 85% beating forecasts for the quarter. Michael Wilson of Morgan Stanley, a bank, calculates that revenues for the median S&P 500 firm rose by 1% year on year. Small wonder that the Conference Board, a research organisation, published a survey on October 20th finding that its measure of confidence of bosses at big companies has jumped to 64 from 45 in the previous quarter—a figure above 50 indicates more positive than negative responses.

Yet anyone tuning into big firms’ quarterly update calls with Wall Street investors could not help but pick up the tentative tone and frequent dour notes of executives. Visa, a payments company, for example, called the recovery “uneven”. Caterpillar, a maker of industrial machinery, admitted it is “holding more inventory than we normally would” because of the uncertainties resulting from the pandemic. And a close analysis of the figures suggests that the corporate recovery is very patchy, with some industries and smaller firms still in big trouble. Meanwhile, corporate balance-sheets are under strain, which could hold back investment and lead to an eventual rise in defaults.
America’s economic boom in the latest quarter would be impressive had it not come on the heels of a comparable decline in GDP in the previous three-month period. The economy remains 3.5% smaller than it was at the end of 2019, reckons the Conference Board, and it is not likely to return to its pre-pandemic level until the tail end of 2021 or possibly later (see chart). As for the large proportion of companies where profits exceeded expectations this quarter, Tobias Levkovich of Citi, a bank, is unimpressed: “Beating lowered earnings expectations is not that great a feat.” It is now clear that analysts were too pessimistic when they pencilled in their forecasts earlier in the year. He adds that many firms managed to improve profits not by boosting sales but by slashing their expenses. The business outlook remains “squishy”, he reckons, as “you can’t cost-cut your way to prosperity.”

The more you peer into the numbers, the more inconsistent the recovery looks. One source of differentiation is where a company’s customers are based. Jonathan Golub of Credit Suisse, another bank, estimates that the companies in the S&P 500 reported an aggregate revenue decline of 2.8% and a fall of 10.2% in profits in the third quarter compared with a year earlier. But he estimates that at American firms focused on exports profits plunged by over 14%, whereas those companies more reliant on the domestic market suffered a drop of less than 9%.

Size is another lens which reveals the uneven recovery. Binky Chadha of Deutsche Bank argues that it is “a tale of two stockmarkets”. The market capitalisation of the five biggest tech giants (Facebook, Amazon, Apple, Microsoft and Alphabet) has fallen in recent weeks from its peak of roughly a quarter of the entire value of the S&P 500 index. Even so, they have generated returns of 39% for shareholders this year and without them the 495 others have produced a return of -1%.
Small and medium-sized firms (SMEs) have been crushed. The proportion of them that are making losses—based on the Russell 2000, an index of SMEs—has declined a bit from its peak of above 40%, but it remains well above 30%. SMEs are nearly four times as likely to be losing money as big firms, a far worse situation than during the recession of 2001 or the global financial crisis a decade ago.
The mood in the board rooms of small companies is foul. The latest survey of executives at SMEs, published by the Wall Street Journal and Vistage, an executive-coaching organisation, found sentiment “stalled in October 2020 due to increased concerns about an economic slowdown amid a resurgence in covid-19 infections.” The gloomy outlook, the most pessimistic in six years, may be explained by the fact that 42% of small firms believe they will run out of cash in under six months.
If the inconsistency of the recovery is one worry, the other is the state of firms’ balance-sheets. Corporate debt was rising before the pandemic, and many firms have piled on more borrowings in order to cover the shortfall in revenue they have experienced this year. Edward Altman of NYU Stern School of Business is worried about what he calls “the enormous build-up of non-financial corporate debt.” By his estimation, firms have issued more than $360bn in high-yield debt (ie, junk bonds) so far this year, surpassing the previous record of $345bn in all of 2012. With debt-earnings ratios reaching critical levels, and a resurgence in corporate defaults, Mr Altman reckons that 6.5% to 7% of junk bonds, by dollar value, will default in 2020.
His fears are echoed by S&P Global, a credit-rating agency. It calculates that the “distress ratio” (distressed credits are junk bonds with spreads of more than ten percentage points relative to US Treasuries) for American companies had come down to 9.5% in September from its peak of 36% in March but that it remains above pre-pandemic levels. Corporate America already leads the world in the tally of corporate defaults this year, with 127 by the end of October. Nicole Serino of S&P Global notes that corporate credit quality is deteriorating, with the number of firms rated a lowly CCC+ or below now 50% higher than at the end of 2019. For such firms, she worries that “excess liquidity and low interest rates are only postponing the inevitable.”
With a large share of firms still making losses and given the weakening of balance-sheets it is far from clear that American business is in the clear. What happens next depends on three unknowns. One is the fallout from this week’s presidential vote. A prolonged period of post-election uncertainty would weigh on the mood, notes Mr Levkovich. He points to the 11% fall in the S&P 500 index after the election in 2000 while legal wrangling decided the outcome of the contest for the presidency between George W. Bush and Al Gore.
Another unknown is the timing and size of the next package of fiscal stimulus from Congress, which at the moment is frozen by partisan gridlock in Washington, DC, and which could be limited if the Republicans keep firm control of the Senate. This matters to companies because, as Mr Golub puts it, “the government has effectively said, ‘We do not want market forces to drive firms out of business right now and so we are going to backstop a large part of the economy.’” Mr Wilson believes that the number of companies going bankrupt so far this year has been much lower than otherwise feared because of generous stimulus measures.
The biggest unknown, though, is the pandemic. Moody’s, a credit-rating agency, predicts that corporate-debt defaults will continue to rise until March 2021. The reason it gives is “economic recovery remains fragile amid risks of another pandemic resurgence leading to another round of countrywide lockdowns”. That should serve as a sober reminder to the next president and corporate bosses alike that, despite a rebound, there may yet be difficult days ahead for USA Inc.■
This article appeared in the Business section of the print edition under the headline “Still ailing” More

IN THE 1990S, when a youthful Son Masayoshi, a Japanese entrepreneur, was pursuing acquisitions in his home country, he sought advice from a banker eight years his junior called Mikitani Hiroshi. They shared a lot in common: both had studied in America (Mr Son at the University of California, Berkeley, Mr Mikitani at Harvard Business School); they had a common interest in the internet; and they were both baseball mad.
In the decades since, both men have blazed past a stifling corporate hierarchy to become two of Japan’s leading tech billionaires. Mr Mikitani, who says in an interview that he did not even know the word “entrepreneur” when he enrolled at Harvard, pioneered e-commerce in Japan via Rakuten, which is now a sprawling tech conglomerate worth $14bn. Mr Son’s SoftBank, after spectacular investments in early internet stocks, muscled into Japan’s telecoms industry. They have both invested heavily in Silicon Valley. They also each own baseball teams named after birds of prey; the SoftBank Hawks and the Rakuten Golden Eagles.

Now it is rivalry, not a shared past, that better defines their relationship. In Japan SoftBank and Rakuten are elbowing their way onto each other’s turf. Their respective investments overseas in Uber and Lyft, two ride-hailing firms, put them at odds. Even the Hawks and the Eagles are bitter enemies. Until recently Masa, as Mr Son is known, appeared to have the advantage. He has bigger money bags than Mr Mikitani, and a higher profile thanks to the audacity of his $100bn Vision Fund, which backed blitzscaling tech startups globally. Yet Mickey, as Mr Mikitani is known, has made a quieter bet on mobile communications that is almost as bold—though in a different way. If it pays off, it could start a revolution not just in Japan, but across the world, too.
Discussing it by Zoom from his home in Tokyo, a hoodie-wearing Mr Mikitani is keen to emphasise both the audacity of the bet and the difficulty of bringing it to fruition. Since 2018 he has committed $8bn to build a fourth- and fifth-generation (5G) mobile network from scratch in Japan, a country where a triumvirate of industry heavyweights, including SoftBank, dominate. Instead of replicating the huge investments they have made in hardware, he used low-cost base stations, cloud-based architecture and software to create what Rakuten calls the world’s first fully commercial virtualised network, adaptable for a new modular technology called OpenRAN. In essence, what Mr Mikitani has sought to show is that an internet firm like his, with a geeky software-engineering culture, can provide a high-quality, low-cost alternative to the hardware-obsessed telecoms giants, using OpenRAN at the core of its 5G architecture. It’s a work in progress but it has been blessed with geopolitical tailwinds. Concerns about the influence of the Chinese government over Huawei, the world’s biggest 5G equipment supplier, have caused telephone companies, as well as governments, to embark on a frantic hunt for alternatives. OpenRAN is attracting a lot of attention. All eyes are on Rakuten to see whether its network functions.
Mr Mikitani and his lieutenants are upbeat. Though he has faced naysayers all the way—“Good luck, Mickey, you’re going to fail,” he says his CEO friends all told him—the company has brought forward to 2021 the year when it expects to have coverage over almost all of Japan. It had been 2026. Low costs have lured more than 1m customers, even though coverage remains patchy. Globally, Tareq Amin, Rakuten’s mobile-technology guru, has become one of the most prominent OpenRAN evangelists. In September he struck a deal with Madrid-based Telefónica, a big telecoms group, to develop the technology further. Mr Mikitani says one of the blessings of the OpenRAN model is that, rather than replacing antiquated kit with each new generation of mobile technology, it can be updated with software. He likens it to Tesla’s ability to use software to upgrade its electric cars.
For all that, Mr Son is hovering menacingly in the background. Well before Mr Mikitani started to encroach on his telecoms territory, he used SoftBank’s big stake in Yahoo Japan to challenge Rakuten in e-commerce. Last year SoftBank upped the stakes by orchestrating a merger between Yahoo Japan (now known as Z Holdings) and Line, a messaging app, to create Japan’s largest online services company. Kirk Boodry of Redex Research, an Asian equity-research firm, says Rakuten’s e-commerce operating margins have fallen by half recently as it spends money to defend itself against both Yahoo and Amazon in e-commerce. That may eventually constrain Rakuten’s telecoms ambitions. As he puts it: “They don’t have enough money to be as disruptive as they’d like to be.”

Mr Mikitani is gracious about his former client. He credits Mr Son with having a great eye for investments and tactfully does not mention the Vision Fund’s debacle with WeWork, an office-rental firm that faced near-collapse last year. He insists SoftBank and Yahoo “are my rivals, not my enemies”. He goes on to express the irony that whereas once he was Mr Son’s investment banker, now, of the two, he is more of the operator.
Home RAN?
That raises the question of both men’s legacy. Mr Son may have broken the mould for investing in snazzy startups in a way that put him on the cover of global magazines (including this one). Although he has a strong claim to be one of Japan’s great entrepreneurs he has never pioneered a new technology. Mr Mikitani has never achieved such global stature. He is arguably more famous outside Japan for making English the lingua franca in his company than for Rakuten itself. Yet if his 5G dreams come true, Mr Mikitani will have helped engineer a solution not only to a global technological problem but a pressing geopolitical one, too. As far as the tech world is concerned, that would be a more far-reaching achievement. And if Masa resents that, he can always get his talons out on the baseball field. ■
This article appeared in the Business section of the print edition under the headline “Mickey v Masa” More

HERE IS A test. Assign a score of 1 to 5, where 1 is “strongly agree” and 5 is “strongly disagree”, to the following statement: “I really care about my work.” If you have answered that kind of question before, you have probably applied for a job at a large company. Psychometric tests, as they are called, have become increasingly popular.
Eager job-seekers may think the answers to these questions are glaringly obvious. For any statement, give a response that creates a portrait of a diligent, collaborative worker. Of course, applicants care about their work, love collaborating with other people and pay careful attention to detail. But the people who set the tests know that candidates will respond this way. So questions are rephrased in many different ways to check that applicants are consistent and make it difficult for them to remember what they have already said.

Aptitude tests are not a new idea. Intelligence tests have been around for a century and were popular with government departments. Charles Johnson, who has been involved in psychometric testing for 40 years and was responsible for constructing the tests used to recruit British civil servants, says the second world war had a big impact. The British were impressed with the efficiency of German army officers and learned they had been selected with the help of intelligence tests. This led the British to create the War Office Selection Board. Alongside verbal and non-verbal reasoning, it challenged candidates with word-association exercises and being made to lead group discussions.
For high-skilled jobs, these tests are useful. However, Mr Johnson says there is a risk with using such tests to recruit workers for low-skilled jobs. If you select people who pass sophisticated cognitive tests, they will learn the job quickly but will then get bored and leave.
Psychometric tests became more popular from the 1970s onwards and are now seen as a useful way of sorting through the many candidates who apply for the jobs offered by big companies. “It is a laborious task to sort through thousands of written applications,” says Julia Knight, another occupational psychologist. “As well as being time consuming, it is not very effective and subject to bias.”
Questions in such tests may ask a candidate to describe their behaviour in hypothetical situations: dealing with an angry customer, for example. The suggested answers may all be plausible (apologise profusely, fetch a manager and so on), so there is no obviously “right” answer. Nevertheless the aim is to build a profile of the candidate to see if they have the right character traits for the job.

People are generally judged on the basis of five characteristics with the acronym OCEAN for openness, conscientiousness, extroversion (or introversion), agreeableness and neuroticism. The ideal characteristics can be surprising: it turns out that introverts are the best train-drivers as they seem to pay more attention to details such as safety procedures and can cope with spending long periods of their time on their own.
Extroverts do not make the best call-centre employees because they can spend so much time chatting to customers that they don’t get much done. The most useful trait among such workers, according to Steve Fletcher, an occupational psychologist, is assertiveness; this enables them to deal with more calls.
These tests are used to assess senior managers, as well as new hires. Along with OCEAN characteristics, testers are also looking for what is known as the “dark triad”—psychopathy, narcissism and Machiavellianism. Factors that can make people successful as junior managers may limit their ascent. Candidates who are good with detail turn out to be obsessive micromanagers; people who flourish in sales may have an excessive need to be the centre of attention.
A large majority of big companies use these tests but they are hardly perfect. Paul Flowers, the former head of Co-op Bank, a British lender, passed his psychometric tests with flying colours, according to testimony at a parliamentary inquiry. But he was later ousted in a sex-and-drugs scandal that led him to be dubbed “the crystal Methodist”. Mr Johnson says the tests can be useful, but only in conjunction with aptitude tests and structured interviews.
That probably won’t save job candidates from having to take these tests in future, because they winnow down the list. But at least they beat the old-fashioned method: drop half the applications in the bin and pick from the other half.
This article appeared in the Business section of the print edition under the headline “Questionable behaviour” More

THERE IS NOTHING quite like a captive audience. When Sony, a Japanese electronics giant, reported its latest set of quarterly results on October 28th, the star performer was the firm’s video-gaming division, which makes the PlayStation line of consoles. Had it been a normal year, revenues would probably have been down, because Sony’s current model—the PlayStation 4—is coming to the end of its life.
But in a year marked by lockdowns and working from home, gaming revenue instead grew by 11.5% year-on-year (and operating profits by 61%) as housebound consumers reached for their controllers. Sony is not alone. Microsoft, its gaming arch-rival, released its own results the day before. Its Xbox One console is similarly superannuated, yet revenues jumped by 30%. The good times have been repeated across the industry (see chart).

Most forecasters expected covid-19 to boost the video-gaming business. The pandemic has given a filip to other forms of indoor entertainment, from board games to video-streaming to books. But the scale of the surge has caught industry-watchers by surprise. Tony Habschmidt, head of consulting at Newzoo, a games-industry analytics firm, says that when the pandemic began, his company predicted a boost of around $2bn to industry revenues on top of its existing forecasts. The latest figures, he says, suggest the real figure has been nearer $17bn. Newzoo now reckons industry revenues will reach $175bn this year, a rise of 20%. Even for an industry that had been growing by 9% annually, 2020 has been a barnstorming year.

It is not over yet. Amid a blitz of adverts, trailers and PR, Sony and Microsoft are gearing up to replace their existing consoles with new, more powerful machines. On November 10th Microsoft will release the Xbox Series X. Sony will respond two days later with the PlayStation 5. With a locked-down Christmas looming in many parts of the world, demand for both will be high. If industry rumours about pre-orders are correct, some consumers may have to go without.
At the same time, both firms will be keeping their eyes on several big new competitors. Amazon, Facebook and Google all think the time is right to try their luck in the gaming business. Over the past decade streaming has revolutionised music, television and films. The tech giants think cloud computing, fast broadband and 5G mobile networks mean the time is right to try the same thing with video games.
Start with the consoles themselves. Sony won the previous round of the console wars, selling over 100m PlayStation 4s and more than 1bn games. Microsoft does not provide official figures, but most analysts reckon that sales of the Xbox One (confusingly, the Xbox’s third iteration) were only half as high. Most expect Sony to outsell its rival this time, too. Piers Harding-Rolls at Ampere Analysis, a media-analysis firm, thinks 5m new PlayStations will be sold in the run-up to Christmas, compared with 3.9m Xboxes.

One reason is brand loyalty. “There’s very much a cult following when it comes to consoles,” says Michael Pachter, an analyst at Wedbush Securities. “PlayStation owners will mostly buy another PlayStation, and Xbox owners will get a new Xbox.” Another is Sony’s strategy, which focuses on existing gamers. Analysts think the firm is selling the machines at a loss—a common tactic for console-makers. Sony’s marketing has emphasised exclusive, big-budget games that are aimed at committed gamers and are not available elsewhere.
Sony’s executives will be hoping the analysts’ projections are right, because the PlayStation 5 is vital to its future. The firm’s gaming division is now its largest. Its recent success has cushioned the impact of problems elsewhere, such as in its imaging division, which has suffered from the troubles of Huawei, a Chinese tech giant that is one of its big customers (see Schumpeter).
Microsoft, for its part, professes itself unworried about precisely how many new Xboxes it sells. It is just as focused on expanding the market as on trying to win over existing gamers. More than 3bn people own smartphones, and mobile games—smaller and more casual than console titles—are the most popular sort of app. Phil Spencer, who runs Microsoft’s Xbox division, estimates that only around 200m households worldwide are willing—or able—to splash out on an expensive piece of gaming hardware like a console.
Microsoft is therefore trying to lower the barriers to adoption. It will offer hire-purchase deals for its new Xbox. It is heavily promoting “Game Pass”, a subscription service that offers access to an online library of hundreds of games for up to $15 per month (a quarter of the upfront cost of a typical high-end console game).
Cloud strife
The centrepiece of this strategy is a service called xCloud, which aims to remove the need to own a dedicated console at all, by running games in distant data-centres and streaming the results to smartphones, internet-connected TVs, or any screen that can be hooked up to the internet and a game controller.
In rich countries, streaming could let gamers play anywhere, not just at home—doing for games what Spotify and Netflix have done for music and films. In poorer countries, where smartphones are common and data plans are cheap, it could bring console gaming within the reach of millions of new players. “There are 1.2bn people in Africa and the average age is 20,” says Mr Spencer. “Many of them follow our games—they know the characters, the stories, even the release dates. They just lack devices on which to play them”.
Game-streaming is not a new idea. Previous attempts have been plagued by technical problems (streaming a game, which must react instantly to a player’s actions, is far harder than streaming a film or song to a passive viewer). And Microsoft is not the only firm that thinks the time is now ripe. Sony offers its own version, called “PSNow” (though it is limited to older games), as does Nvidia, a gaming-focused chipmaker, and several other firms. Other tech giants with little experience of video-gaming are also piling in. Google launched “Stadia” in 2019. Amazon announced its “Luna” service in September. On October 26th Facebook threw its hat into the ring with its own “Facebook Gaming” service.
Game-streaming sounds attractive on paper, but few expect it to transform the industry overnight. “I would describe the market as embryonic,” says Mr Harding-Rolls. Still, there is huge interest: Ampere tracks 60 firms whose offerings are either in public testing or available for use. And if streaming does take off, it is likely to prove just as disruptive as it has been in other media. “If you can make streaming work, you could grow the gaming market tenfold,” reckons Mr Pachter. The video-streaming wars have seen deep-pocketed tech giants and media companies spend billions on content. Similar jockeying may be under way in games. On September 21st Microsoft bought ZeniMax Media, which makes the best-selling “Fallout” and “Elder Scrolls” series of games, for $7.5bn.
It is too early to pick out winners and losers, but most analysts think Microsoft is well positioned. Its Azure cloud business is the world’s second-biggest, giving it a reach that many competitors lack. Last year Sony, which lacks cloud infrastructure of its own, said it was exploring the option of using Azure to power its own gaming services. And unlike Google or Amazon, its only real cloud rivals, Microsoft has decades of experience in the games business.
But its competitors have strong points, too. Amazon has 150m subscribers to its Prime service, which already includes streamed video and music. Google could leverage YouTube, where gaming videos are popular. Facebook plans to pitch its service at people who already play simpler, browser-based games on its existing platform, which boasts over 2bn users a month. And Sony’s success with the PlayStation has proved that size is not everything. There is all to play for. ■
This article appeared in the Business section of the print edition under the headline “The games are only just beginning” More

IN BARNS OR pens, or already in freezers, 40m American turkeys await their fate. More than half of the whole turkeys sold in America each year are eaten over Thanksgiving, which this year falls on November 26th. Most of the rest are polished off the following month, at Christmas. Social-distancing rules and travel restrictions mean that celebrations will look rather different in 2020—and so will the market for meat.
Some 30% of Americans say they will spend Thanksgiving with their immediate family only, up from 18% last year, according to Butterball, a North Carolina firm which rules the roost of turkey producers, supplying one in three Thanksgiving birds. Flight bookings for November are a third lower than last year, reports Skyscanner, a search platform, suggesting fewer people are going home for the holidays. In Britain, where 9m turkeys are usually eaten over Christmas, 61% of people say they are less likely than usual to have guests on Christmas Day, according to Kantar, a data firm.

Birds bred to feed large gatherings are therefore out of favour. Walmart and Kroger, large American food retailers, both plan to offer more small turkeys. However, “a lot of supply for the holidays is locked in well before the fall,” says Beth Breeding of America’s National Turkey Federation, an industry group. It is too late for producers to switch to daintier varieties, since a hen takes 14-16 weeks to mature from hatchling to main course. Changing a bird’s diet or the temperature of its surroundings can reduce its size, and it can be slaughtered earlier. But many Thanksgiving turkeys have already been dispatched and frozen, to fatten up inventory for the “Super Bowl” of the turkey calendar, as a Butterball spokesman describes it.
Some consumers may therefore end up buying spare parts cut from big birds. Walmart plans to increase by 20-30% its stock of breast meat, for families who can’t manage a whole turkey. Such cuts command a premium but may mean that the leftover dark meat goes unsold. “Whole birds are easier to produce and with no waste, so producers like them,” says Richard Griffiths of the British Poultry Council. Some farmers are in a flap at the prospect that turkey could lose out to more petite meats. Kroger is buying in more ham, beef, pork-roast and seafood, as well as vegetarian “meatless roasts”.
Yet the signs are that most consumers want to stick to tradition. Although millions of people accustomed to their mother’s cooking will have to fend for themselves this year, convenience products will mostly stay on the shelf, believes Scott McKenzie of Nielsen, another data company. Lockdowns have encouraged homely hobbies: Americans are buying 81% more yeast than last year and 41% more seaweed for wrapping home-made sushi, Nielsen reckons. Mr McKenzie expects increased demand for “made-from-scratch” products over the holidays, and beyond: “Homebody habits are here to stay,” he believes. If that is true, the glut of large turkeys may have a happy outcome: more leftovers. ■
Editor’s note: Some of our covid-19 coverage is free for readers of The Economist Today, our daily newsletter. For more stories and our pandemic tracker, see our hub
This article appeared in the Business section of the print edition under the headline “Gobble, gobble?” More