Philippa Kaur

HAVING more or less invented the smartphone in 2007, Apple has lately lagged behind other gadget-makers. On October 13th it caught up, unveiling its first 5G-enabled iPhones. Expect sales to pick up as users who have put off purchases finally upgrade. Whether they can find a zippy 5G network is another matter. Opensignal, a research firm, finds that most 5G handsets are connected to one less than a quarter of the time.■
This article appeared in the Business section of the print edition under the headline “The iPhone gets up to snuff” More

WERE ANY more evidence needed to reflect how surprising 2020 has been, consider tractor sales. In April Hemant Sikka, president of Mahindra & Mahindra’s farm-equipment business—which makes around 300,000 of the things a year, more than any other company anywhere—sat in his Mumbai flat near his shuttered main factory wondering if he still had a business. India’s nationwide lockdown that began a couple of weeks earlier led analysts to foretell doom for all manner of vehicle sales. Instead, Mr Sikka’s main challenge has turned out to be meeting unprecedented demand, both at home and abroad.
The Indian conglomerate’s tractor sales have broken records since May; production is operating at 100% of capacity. At its American factories the company has added a second shift. Regional managers around the globe are clamouring for tractors to replenish sparse dealer lots.

After collapsing in March, the share price of Mahindra & Mahindra has doubled, pulled along by the booming tractor division. So have the share prices of Deere and AGCO, two American manufacturers of farm equipment, suggesting that investors are eyeing bountiful profits from the industry as a whole.
Mahindra’s particular niche—durable, low-horsepower machines—has been especially sought-after. In America that is the fastest growing segment, with sales up by 18% in the first nine months of the year, compared with 2019, according to the Association of Equipment Manufacturers. By contrast, sales of the largest tractors have declined by 2%. The smaller tractors are used on properties of less than 100 acres (40 hectares). That makes them ideal for organic farms, which, because they eschew pesticides, cannot be large. They are also handy for tasks such as mowing lawns or hauling things around the rural properties where many city-slickers have fled from covid-infested urban areas.
In India other factors are at play. Stories about Indian farmers have long focused on suicides and misery. This year there is good news. The summer harvest was 6% bigger than last year. Prices for farm produce were up by an average of 12%. This has boosted farm incomes (even though it has concerning implications for inflation). The winter crop looks equally promising, thanks to favourable monsoon rains, which have been 9% heavier than usual and, critically, well-distributed over India’s northern agricultural belt. Reservoirs are at their highest level in a decade, which bodes well for harvests to come.
The extra cash, combined with lower interest rates and cheaper credit, has enabled farmers to modernise. Some are upgrading to slightly larger machines, capable not just of pulling a plough but also of hauling heftier kit like harvesters. The draconian national lockdown, which for weeks prevented migrant workers from returning to their villages from cities, added another incentive to accelerate mechanisation. Farmers in India often regard buying a Mahindra tractor as akin to having a child: both become part of their lives and livelihoods for decades to come. With brighter prospects than in years past, many may wish to add more little Mahindras to the fold. ■
This article appeared in the Business section of the print edition under the headline “Fertile ground” More

EARLIER THIS year the covid-19 pandemic brought SoftBank Group to its knees. As bondholders fled heavily indebted firms, the junk-rated Japanese tech conglomerate looked shaky. In March its flamboyant boss, Son Masayoshi, announced a $41bn sale of assets to return to stability.
Mr Son has since regained his footing—or at least his chutzpah—enumerating the upsides of coronavirus lockdowns for his firm. The “new normal”, in which meetings, food delivery, education, medical care, shopping and entertainment are mediated online, he said in September, is a boon to SoftBank. He has long invested around a grand vision of a digital transformation and ubiquitous artificial intelligence (AI). Covid-19 means it is coming to pass much more rapidly than expected. Having mostly dumped its telecoms activities outside Japan, SoftBank is wholly devoted to Mr Son’s technophilic passions.

The digital surge is helping the group’s underperforming Vision Fund, a $99bn tech-investing vehicle. The fund started deploying capital in 2017 in a cloud of hype and optimism but lost its way as a result of a few spectacular failures, most notably the implosion of WeWork, an office-subleasing firm masquerading as a tech platform.
Even though SoftBank contributed only $28bn of the Vision Fund’s capital (equal to around 12% of the Japanese firm’s assets at the time), the mishaps hurt its share price and Mr Son’s reputation as a brilliant investor. That reputation was acquired after his purchase, starting in 2000, of a 34% stake in a Chinese e-commerce startup called Alibaba, now China’s most valuable listed company. The pandemic has hurt valuations of some Vision Fund firms in industries such as hospitality and transport. Mr Son has struggled to raise outside money for a sequel, Vision Fund 2, which was aiming for $108bn in capital but now makes do with small sums from SoftBank.
Unsurprisingly, then, these days the Japanese firm steers attention away from the Vision Fund. This leaves a mystery over where Mr Son will direct his energy and cash next. His selling spree did not end with the asset sales announced in March. This year SoftBank has completed an unprecedented number of disposals.
The firm has offloaded most of its mobile-telecoms assets, including another slice of its Japanese mobile business, SoftBank Corp, and the whole of Sprint, America’s fourth-largest mobile operator, and of Brightstar, a distributor of wireless gear. In September Mr Son announced the sale of Arm, a Britain-based chip-designer, for $40bn to Nvidia, a big American chipmaker. Arm was the lynchpin of Mr Son’s envisioned ecosystem of huge web- and AI-powered startups. Even some of his top executives were confounded to see it go.

Excluding the sale of Arm, which will take months to complete, SoftBank has amassed $52bn from the divestments. Investors do not expect the hyperactive Mr Son to sit on it for long. Three different paths appear open to him. One scenario is to activate long-discussed plans to take SoftBank private. Second, he may be preparing to take a large stake in one or more publicly listed technology giants. In September SoftBank pulled off another surprise when it emerged as the mystery “Nasdaq whale” that had snapped up billions of dollars’ worth of options in publicly listed stocks such as Amazon, Microsoft and other technology stars. A new asset-management arm had already bought nearly $4bn of shares in various tech giants. Third, he could double down on the Vision Fund model by putting more cash into the second vehicle and subsequent funds.
The rationale for a management buyout, which would be one of the largest in history, is the steep discount between SoftBank’s market value and the value of its underlying listed assets (see chart 1). That has narrowed thanks to a big run-up in SoftBank’s share price this year (owing in part to a large share buyback).

A buy-out would be feasible, says a big SoftBank investor, if it were structured as a bridge loan financed by selling more of the firm’s stake in Alibaba and other assets. But it would shrink SoftBank, enriching its billionaire boss but reducing his ability to invest in new growth areas, notes Oliver Matthew of CLSA, a broker. As such, says Mr Matthew, it looks fairly unlikely.
Investing in publicly listed tech giants could be more attractive. These firms are raking in big profits from the digital surge. Unlisted tech darlings, by contrast, are often still honing their business models or fighting for market share. Mr Son’s view, according to a person close to him, is that “size begets size, and the big companies are the ones to succeed in this environment”. New opportunities in private markets are less plentiful—partly because the Vision Fund has already bankrolled most of them.
The third way is less crazy than the first fund’s blow-ups suggest. Its results are looking better than a few months ago. So far it has deployed $82.6bn of capital in 92 firms. By the end of June it had risen in value by $3.5bn. By the end of September, say people close to it, it had gained another $4.5bn. This adds up to a 10% return, hardly stratospheric: the NASDAQ tech index has returned ten times as much in the past three years. But it continues a turnaround from early 2020, when the fund pulled its parent into a record $8.8bn annual loss. The fund has nine more years to run. In the spring it slashed valuations to conservative levels and now expects markups.
A hot market for technology initial public offerings (IPOs) will help. Since the fund’s inception nine of its firms have gone public. Prominent bets like Uber have disappointed. But all told, returns from the listings have been decent (see chart 2). And more IPOs are in the offing. DoorDash, a food-delivery firm, expects to list in November at a valuation of around $25bn. That would quintuple the value of Vision Fund’s $600m investment.

Its 37% stake in Coupang, South Korea’s Amazon, could prove similarly juicy if it went public at the level at which some have been trying to invest. According to investors in Asia, Coupang has received offers at a valuation as high as $30bn. And SoftBank’s portfolio contains holdings in some of China’s choicest private tech stars, including ByteDance, the biggest (which owns TikTok, a short-video app beloved of teenagers the world over), and Beike, a residential-property platform which has recently quadrupled in value.
Another reason for optimism is that the lessons from the Vision Fund’s error-filled first three years appear to have sunk in. The second fund is not trying to stuff too much money into young companies. Whereas Mr Son’s monster first fund refused to get out of bed for any investing opportunity under $100m, eight of its successor’s 13 investments are less than that. One is a piddling $20m. It looks far less risky.
What has not changed is Mr Son’s clout and unpredictability. Under pressure from Elliott, an activist hedge fund, he has made governance tweaks, adding a woman to the board. But Glass Lewis, a proxy firm, opposed another appointment. Allies with the stature to challenge him, such as Jack Ma, Alibaba’s co-founder, have stepped down. Whatever Mr Son’s next act, he will serve chiefly his own impulses.■

This article appeared in the Business section of the print edition under the headline “What Masa does next” More

A 16-YEAR FIGHT at the World Trade Organisation (WTO) between Boeing, an American planemaker, and Airbus, a European one, over illegal subsidies resembles a heavyweight boxing bout in which both sides raise their gloves to claim the round. And so it was on October 13th, when the WTO ruled that the EU can impose tariffs on $4bn-worth of American goods annually. The award is lower than last year’s decision that America is allowed to slap duties on $7.5bn in European goods. But it was much higher than the Americans once braced for. More important, both aerospace titans look knocked about.
The counterpunching at the WTO began in 2004. After Airbus first overtook it in aircraft deliveries, Boeing complained that its rival was boosted by government support eventually amounting to $22bn in repayable “launch aid”. Airbus soon parried with its own claim that Boeing had benefited from $24bn in favourable tax breaks, as well as research-and-development support from NASA and the Pentagon.

The WTO eventually determined that both firms had received illegal subsidies. America used last year’s win to slap tariffs on everything from French cheese to Scotch. Airbus now faces levies of 15%. The EU will be permitted to impose its new duties after October 27th.
The latest ruling will not put paid to the bickering. Boeing says that the contentious tax break from Washington state has been repealed, so the looming EU tariffs are unjustified. Airbus says it is now in full compliance with the rules, and grumbles that the WTO appellate body that decides such matters is in limbo. America’s long-standing claims of unfair treatment at the hands of the body have led it to veto new appointments, leaving the arbiter inquorate.
With no knockout blow on either side, the spat may end in a negotiated settlement. America has been more reluctant to talk. But it may reconsider, given the size of the EU’s permitted retaliation—and Boeing’s precarious position. The aerospace giant has more to fear from the devastating effect of the pandemic on the world’s air travel. The continued grounding of the 737 MAX, its cash cow, after two fatal crashes means that battered carriers are cancelling orders without penalty.
Airbus has not escaped unscathed. Last month it said it would cut more jobs on top of the 15,000, out of a global workforce of 130,000, announced in June. It has shaved output to 40% of capacity. Like Boeing, it has lost around half its market value since the start of the year.

The European firm nevertheless looks in a bouncier mood. It is said to be planning to ramp up production of its A320 single-aisle aircraft as early as next year, perhaps hoping to win 737 MAX customers. Airbus also has a broader range of planes and a factory in Alabama, which lets it escape tariffs on jets sold to American customers (though not on imported parts), whereas Boeing assembles all its planes at home. Airbus has just unveiled plans to bring a hydrogen-powered net-zero-emissions aircraft to the skies by 2035. Boeing, already weighed down by the MAX debacle, may do best to put yesterday’s fight behind it and prepare for the next bout.■
This article appeared in the Business section of the print edition under the headline “Not boxing clever” More

IN FRIGID WATERS 350km east of Newfoundland, the West White Rose project is designed to produce up to 75,000 barrels of oil a day. Whether it actually pumps a drop is a separate question. In September Husky Energy, its main backer, said it would review the investment and urged Canada’s government to take a direct stake. The province has since set new incentives for exploration and the federal government has announced C$320m ($240m) to support its energy sector. Yet Husky says West White Rose’s future remains in doubt.
This year’s implosion of oil prices has led companies to reconsider investments from Newfoundland to Nigeria. As capital has become scarce, some governments have taken action—for better or worse. Norway set new climate targets but also passed tax relief to encourage new drilling. In Canada, where an index of energy companies has shed more than half its value this year, the downturn has amplified long-standing questions about how the government can help—or whether it should.

Canada pumps more oil than anyone bar America, Saudi Arabia and Russia. But covid-19 caps a bumpy decade. American shale has offered fast, easy (if not always profitable) growth compared with Canada’s offshore projects or its mucky oil sands, where building mines and processing thick bitumen is both costly and carbon-intensive. Inadequate pipelines from Alberta, the industry hub, added further strain. Equinor of Norway, ConocoPhillips, an American major, and Royal Dutch Shell, an Anglo-Dutch one, sold their oil sands in 2016 and 2017. In February Teck Resources, based in Vancouver, scrapped plans for a large new project. The company cited capital constraints, opposition from indigenous groups and uncertain regulation.
Justin Trudeau, Canada’s prime minister since 2015, has coupled green ambition with a desire to avert the industry’s collapse. In his first term he passed a carbon tax. But he also backed the government’s purchase of the Trans Mountain pipeline from Kinder Morgan, an American firm, to bring oil from Alberta to the Pacific.
As the pandemic has battered Canadian oil firms, Mr Trudeau has tried to prop companies up without quite bailing them out. Measures include C$1.7bn to clean up abandoned wells and a national scheme to help all industries pay wages, more than C$1bn of which went to oil, gas, mining and quarrying firms. The C$320m earmarked for Newfoundland and Labrador aims to help oil producers reduce their emissions and invest in research and facilities.
Paul Barnes of the Canadian Association of Petroleum Producers, a trade group, welcomes the assistance for Newfoundland and Labrador. Whether it helps projects advance is another matter, he says.

Equinor is among those to delay plans for Canadian offshore drilling. In September Jason Kenney, Alberta’s premier from the opposition Conservative Party, blasted Mr Trudeau, a Liberal, for failing to offer more help. Mr Kenney maintains that Canada’s oil sector can thrive if only Mr Trudeau would let it (and, in a feat of rhetorical finesse, has argued the world will continue to depend on oil, not “unicorn farts”). In March Alberta took a C$1.5bn stake in TC Energy’s Keystone XL pipeline, to funnel crude from Alberta to refineries along America’s Gulf Coast, and backstopped the project with a $6bn loan guarantee.
Even generous aid would not spur rapid growth. Suncor, a giant Canadian producer, announced 2,000 lay-offs this month. Investors have little appetite for big projects. The sector won’t vanish; existing oil-sands endeavours can have operating costs as low as C$7 a barrel, says Mark Oberstoetter of Wood Mackenzie, a research firm. Beside fast-depleting American shale, oil sands’ steady output may look attractive, says Benny Wong of Morgan Stanley, a bank. Waterous Energy Fund, a private-equity firm that has bought more than half of the Canadian reserves sold in the past three years, has a simple strategy, says its boss, Adam Waterous: “Hold production flat and maximise sustainable free cashflow.” With or without government handouts. ■
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This article appeared in the Business section of the print edition under the headline “Crude crutch” More

WHEN SUGA YOSHIHIDE emerged as the likeliest to succeed Abe Shinzo as Japan’s prime minister, telecoms bosses in Tokyo let out a collective groan. As Mr Abe’s chief cabinet secretary, Mr Suga urged operators to cut prices by as much as 40%. “They are using our public airwaves, an asset of the people,” he said in 2018. “They should not be generating excessive profit.” Since replacing Mr Abe last month, Mr Suga has made competition in mobile services a signature issue. The share prices of Japan’s three big carriers—NTT DoCoMo, SoftBank Corp and KDDI—fell by 10-15% between late August and late September.
Mr Suga’s calls were also the soundtrack to a pair of blockbuster announcements. On September 29th Nippon Telegraph and Telephone (NTT) said it was taking NTT DoCoMo, its listed mobile subsidiary, private. The tender offer, of $40bn for the 34% of shares it does not already own, is Japan’s biggest ever. The next day Rakuten, a Japanese e-commerce giant with ambitions to shake up mobile telephony, launched its much-awaited 5G network. An entry-level plan costs ¥2,980 ($28) a month, about half as much as comparable offers from rivals.

The government reckons that data-heavy users in Japan pay more than in other developed countries. For users of plans with 5GB of data, prices in Tokyo are three times higher than in Paris (see chart). Operators counter that users get what they pay for. Japanese networks consistently rate among the world’s best. The three big providers top the global rankings for 4G availability compiled by Opensignal, an analytics firm. Consumers have choice: SoftBank Corp and KDDI have their own budget brands, and myriad “mobile virtual network operators”, which piggyback on existing infrastructure, have cropped up in recent years, offering cheaper services.

Yet the promise of bringing prices down offers the new prime minister a quick political win. “Most people have phones and most people think they are expensive,” says Yokota Hideaki of MM Research Institute, a consultancy. Such efforts have been under way for years. Back in 2015 Mr Abe argued that phone bills were a drag on household budgets. Legislation enacted last year capped subsidies on handsets and cracked down on contracts that made it difficult to switch providers. DoCoMo announced a round of price cuts that brought it closer to SoftBank’s and KDDI’s levels.
The main tool for spurring competition was supposed to be Rakuten’s entry in the market, which Mr Suga encouraged under Mr Abe. The tech firm at last launched its cloud-based 4G network in April and its 5G service last month. That may put downward pressure on prices eventually. But Rakuten’s network coverage remains too patchy and its market share too small to spook the incumbents right away.

A bigger jolt may come from the spectre, raised by Mr Suga, of higher fees for mobile-spectrum use. (Japan awards its spectrum to operators based on merit, a nebulous concept, rather than auction.) NTT’s buy-out of DoCoMo, which was at least six months in the making, may make it easier to placate the prime minister. When he announced the deal, the company’s chief executive, Sawada Jun, said it would leave DoCoMo in “a more solid financial position so it will have capacity to carry out further price cuts”. SoftBank and KDDI have since said they, too, will consider cuts.
After being spun off from NTT in 1992, DoCoMo became a pioneer of mobile internet, launching i-mode, which allowed users to read email and browse the web, eight years before the iPhone was released. Yet the firm has slipped recently. Although DoCoMo has the largest market share of the three large carriers, with 37% to KDDI’s 28% and SoftBank’s 22%, its profits have fallen and a hacking scandal undermined an attempt to expand into fintech. NTT hopes that bringing it in-house will help speed up decision-making and unlock cost savings that will mollify minority shareholders angry about rate cuts.
The reductions, when they come, are unlikely to be anywhere near the 40% Mr Suga once sought. “There will be pressure on pricing, but there won’t be massive step change in the industry,” reckons Kirk Boodry of Redex Holdings, an advisory firm. Cuts could be targeted at heavy data-users or low-earners. The reduced sales will only accelerate the mobile operators’ shift from providing connectivity towards other revenue streams, such as offering fintech products for consumers or cloud services for businesses, says Mr Boodry. Operators will focus on attracting customers to pricier 5G plans. With a cap on handset subsidies, competition will shift to network quality, argues Tsuruo Mitsunobu of Citigroup, a bank. That, he says, “is exactly what the government wants to see”. ■
This article appeared in the Business section of the print edition under the headline “Dialling down” More

MANY COMMENTATORS paint a bleak picture of the future of work. Automation will spread from manufacturing to services, eliminating well-paid white-collar jobs. The workforce will be divided into a narrow technocratic elite and a mass of low-skilled, insecure jobs in the “precariat”.
But it does not need to be this way, according to Gary Hamel and Michele Zanini, two management consultants whose new book, “Humanocracy”, is as optimistic as its title is off-putting. They envisage a world in which low-skilled jobs can be enhanced—if only employees are given the chance to use their initiative and change the way they operate. “What makes a job low skilled is not the nature of the work it entails, or the credentials required, but whether or not the people performing the task have the opportunity to grow their capabilities and tackle novel problems,” they write.

This can only be achieved if managers relax their centralising tendencies and devolve power to individual business units. Few big companies—Toyota and Netflix being notable exceptions—have followed this path. The authors finger the dead hand of bureaucracy.
Since 1983 the number of managers and administrators in the American workforce has more than doubled, while employment in other occupations has gone up by only 44%. One study of executives published in the Harvard Business Review found that the average respondent worked in an organisation with six management layers; in large organisations, it tended to be eight or more. Employees in the survey spent an average 27% of their time on bureaucratic chores, such as writing reports or documenting compliance.
The result of all this paperwork, say the authors, is a corporate organisation that promotes conformity and dulls enterprise: “it wedges people into narrow roles, stymies personal growth and treats human beings as mere resources.” They envisage a different model.
All employees should be encouraged to think like businesspeople, be organised into small teams with their own profit-and-loss accounts (and appropriate incentives), and be allowed to experiment. Units within decentralised companies should be able to negotiate the price of services and products provided by the rest of the group.

The book is full of practical examples. Buurtzorg, a Dutch provider of home health services, is split into more than 1,200 self-organising teams. Each team is responsible for tasks such as finding clients and recruiting workers, rather than putting such duties in the hands of regional managers. That allows an organisation with 15,000 employees to have a central staff of just over 100 people.
Another highly decentralised group is Nucor, an American steel company. Essentially it is a confederation of 75 divisions which carry out their own research and development, sales and marketing. Bonuses are paid to teams, not individuals. The result is that teams take the initiative. One rejected outside bids for replacing a furnace shell and designed it themselves, saving 90% of the cost. Morning Star, America’s largest and most profitable tomato processor, has no managers and no job titles; 500 “colleagues” work in teams spanning 20 business units. Each staff member contracts with the rest of the team to provide the services they require.
The beauty of this approach, the authors argue, is that employees are more satisfied and motivated. This can lead to reduced staff turnover—and, potentially, to higher profits. In 2018, 20.5m Americans worked as managers or supervisors, with another 6.4m working in administrative support. Collectively, they took home more than $3.2trn in compensation, or nearly a third of the national wage bill. Cut this bill in half while also halving compliance costs, and American companies would save around $2.2trn a year, the authors estimate.
Such a cull would be bad news for some managers, of course. It could also be disruptive in the short term. But Messrs Hamel and Zanini may be onto something. Too many people feel dissatisfied with their jobs. A Gallup survey of American employees in 2019 found that less than a quarter said they were expected to be innovative in their job; only one in five felt their opinions mattered at work. Unleash their creativity, and productivity will improve, job satisfaction will increase and workers in supposedly “low-skilled” jobs will be free to demonstrate their abilities. If so, the future of work needn’t be gloomy after all.
This article appeared in the Business section of the print edition under the headline “Free the workers” More

SICKNESS AND shipping have a long shared history. The word quarantine is derived from the 14th-century Venetian practice of isolating ships at anchor for 40 days if plague was suspected on board. The latest ailment is a global pandemic that has killed at least 1m people and put the world economy, and global commerce, full steam reverse. This might have been expected to becalm an industry which carries 90% of traded goods—11.9bn tonnes last year, or 1.6 tonnes for every human—and where profits have often been elusive. The last time trade volume declined, in the aftermath of the financial crisis of 2007-09, maritime shipping suffered. Clarksons, a shipbroker, expects volumes to fall by 4.4% in 2020.
Still, Neptune seems to have smiled on shipping companies. Oil tankers and dry-bulk vessels that transport iron ore, coal and grain will turn a profit in 2020. Operators of ships ferrying containers, packed with consumer goods or components, are set fair for a banner year. Shipping is a business where, in the words of Martin Stopford of Clarksons, firms “make a living and occasionally make a killing”. This year, it appears, belongs to the second category. What is going on?

One answer is that the carnage wrought by the coronavirus has not been as bad as anticipated. The World Trade Organisation initially expected trade volume to shrink by as much as 30% in 2020. Drewry, a consultancy, had reckoned worldwide port visits by ships in the second quarter might decline by 16%. In fact they fell by 8%.
The industry has been able to take advantage of the swifter-than-expected recovery thanks to big underlying changes in its structure over the past decade, towards greater concentration. Container shipping, like tankers and dry bulk, seems finally to have learned a lesson from the debilitating overcapacity created as companies battled for market share.
In the decade before the financial crisis demand grew by around 10% a year. The order book swelled to the equivalent of 60% of the entire fleet when Lehman Brothers collapsed in 2008. An armada of new ships, which take at least two years from order to launch, arrived just as growth slowed. In the 2010s the fleet expanded by 100% while demand grew by just 50%, points out Peter Sand of BIMCO, a shipowners’ association.
The excess capacity ruined returns for years afterwards. McKinsey, a consultancy, reckons that between 2012 and 2016 container-shipping destroyed $84bn of shareholder value. Over the past five years, notes David Kerstens of Jefferies, an investment bank, the industry in aggregate has done a bit better, just about breaking even.

Now, though, efforts to cut costs and win market power are finally paying off. After years of consolidation the top seven firms now claim three-quarters of the global fleet, up from 55% in 2016, according to Jefferies. On top of that, 2017 saw the birth of three global alliances that now control 85% of capacity across the Pacific and almost all capacity between Asia and Europe.
Increased co-ordination has allowed the companies to respond to slowing trade. “Blank sailings”, industry jargon for cancelled voyages, came thick and fast. In May a record-breaking 12% of the global container fleet was idled, according to one estimate. Even as capacity has been reinstated—the share of the fleet that is idle has fallen to around 3%—freight rates have rocketed to cope with an unexpectedly vigorous recovery. Now, says Lars Jensen of SeaIntelligence, a consultancy, the container industry is on course for record profits of $12bn-15bn this year. Maersk, the world’s biggest container-shipping firm with 17% of the market, expects profits of $6bn-7bn, up from a pre-pandemic estimate of $5.5bn.
Rates have shot up most dramatically on trans-Pacific routes (see map). Spot prices for sending a container from China to America’s West Coast have risen by 127% since last year, to record highs. The port of Long Beach in California reported its busiest August ever; Los Angeles saw business that month up by 12% year on year.

Can firms continue to manage capacity and resist the urge to order ships? Possibly, thinks Mr Kerstens. Maersk and Hapag-Lloyd, another big firm, have eschewed chasing volume and market share in favour of profitability. Maersk is investing heavily in integration with more lucrative links in the chain, such as lorries and warehouses.
The thin order book (see chart)—now equal to just 7% of the fleet—is not entirely down to newfound sobriety. Stricter environmental rules play a part, says Mark Jackson of the Baltic Exchange, a data provider. The International Maritime Organisation, the UN’s shipping agency, wants to halve the industry’s carbon emissions by 2050, relative to 2008. As long as the pathway to meet the target remains sketchy, and the requisite technology nascent, companies are reluctant to order vessels with a lifespan of 25 years or more.

Shifting trade patterns are another factor. Supply chains are being reconfigured by the pandemic and the Sino-American economic war. As manufacturing shifts from China to other parts of Asia—Cambodia has rapidly replaced it as the predominant source of America’s Christmas-tree lights, for example—smaller ships will be required. These can ferry goods directly from minor Asian ports to Europe or, because vast existing vessels plying the route between China and Europe have plenty of life left, to trans-ship smaller loads to Asian mega-hubs for onward dispatch. All that means building ever-mightier ships offer diminishing returns to scale. Today’s leviathans—such as the Hong Kong, owned by OOCL, a firm based in the Chinese territory—can carry well over twice as many containers as the largest ships in 2005.
Tankers and dry-bulk carriers face rougher conditions. Both segments are far more fragmented than container shipping, and so unable to cut capacity as easily. The biggest specialist tanker operator, Teekay of Canada, wholly owns around 60 vessels totalling nearly 7m deadweight tonnes out of a global fleet of 623m in 2019. The average number of ships per firm is around 5.5.
Even so, tanker-owners were “having a party in the first half of the year”, says Mr Sand of BIMCO, thanks to sinking oil prices. Average annual earnings over the past decade were above break-even only half the time for the largest crude-oil tankers. But the collapse of an agreement between the Organisation of the Petroleum Exporting Countries and Russia sent oil prices tumbling just as covid-19 sapped demand for crude. Traders with nowhere to stash unwanted oil turned to tankers. At one point this spring more than a tenth of the world’s fleet was chartered as storage. Rates for the largest craft soared from $6,500 a day to $240,000, ten times the break-even level. Rates have now slipped below break-even but that bonanza will tide tanker-owners over to an annual profit.
Bulking up
Dry-bulk vessels, by contrast, had a terrible start to the year. But they have since been helped by China’s swift recovery. The country accounts for 40% of the global dry-bulk trade, mostly because it imports 70% of the world’s iron ore (see Schumpeter). Stimulus measures have led to record production and iron-ore imports hit all-time highs in the first seven months of the year. That has offset lower activity in the rest of the world, says Bimco. All sizes of ships are now making money.

One risk for commercially minded companies is that big rivals with different motivations might undermine capacity cuts. Governments in China, South Korea and Taiwan regard their state-controlled shipping giants, four of which are in the world’s top ten, not so much as profit motors but as a way to preserve their place in the global trading system. HMM, the eighth-largest firm, is the only big shipper not to trim capacity. There are hints that China’s government does not approve of the high prices to shift Chinese-made goods. It has reportedly asked its carriers to reinstate capacity to America. COSCO and OOCL, which are state-controlled, will refrain from raising rates.
It is a similar story with ports. Maersk’s port division, APM, has clear financial imperatives. But HMM and Evergreen Marine, a Taiwanese company, probably regard their ports as a cost to bear for the sake of their shipping businesses. China Merchants and COSCO, which also runs big ports, are owned by a state keen to use trade to spread Chinese influence around the globe. Dubai’s DP World, which delisted in February, and PSA, a Singaporean operator, are both commercially driven but ultimately in state hands, too. Hong Kong’s Hutchison, one of the world’s biggest port operators, saw profits dip by 15% in the first half of the year. Often the interests of shareholders do not completely align with the role of enabling trade, says Eleanor Hadland of Drewry.
Another doubt is whether governments will allow their shipbuilders to fall into desuetude. China, Japan and South Korea now control 90% of global shipbuilding. They have incentives to keep shipyards in business, even if some could soon be out of work; reopening mothballed yards is a long and expensive process.
Keeping the world’s goods flowing is, then, a complex business—just ask the seamen trapped on board for months as lockdowns and travel restrictions have prevented regular changeovers. But their employers are moving into the nascent global economic recovery with wind in their sails. That is good news for world trade. ■
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Correction (October 13th 2020): An earlier version of this piece misstated the size-ranking of HMM, and incorrectly referred to the company by its previous name. This has been updated.
This article appeared in the Business section of the print edition under the headline “It’s an ill wind that blows no one any good” More