Philippa Kaur

Jürgen Klopp is a football manager. That means there is a limit to how much he can teach corporate bosses about how to do their jobs. Managers in firms tend not to be parent substitutes to their charges, envelop people in bear hugs after a successful meeting or use the gegenpressing technique against rivals. But Mr Klopp has drawn back the veil on a crucial ingredient of success in almost every walk of life: energy.To general surprise Mr Klopp announced on January 26th that he would be leaving his job as manager of Liverpool Football Club later this year. His team is leading the English Premier League, the most-watched competition in the world’s most popular sport. His job is secure—his contract does not run out until 2026—and he claims still to love it. But after eight years in the role, and more in management, he is running out of energy. His resources are finite, he said. “I can’t do it on three wheels, I don’t want to be a passenger.”Mr Klopp is not the first high-profile person to make this kind of decision. Jacinda Ardern resigned as prime minister of New Zealand in January 2023, saying that she no longer had enough in the tank to do the job. Jeff Kindler cited the extreme demands of his role when he stopped being the boss of Pfizer, a drugmaker, in 2010, saying he was looking forward to recharging his batteries. But admissions like this are nonetheless rare from someone leading an organisation.For energy is one of those factors that reliably differentiates bosses from those below them. Ability, ambition and luck all play a big part in climbing the greasy pole. But energy plays an outsize role. High-achievers have done their email and a full workout before the sun rises. They don’t cancel breakfasts because they are feeling a bit tired; they certainly don’t admit to doing so. They are less likely to nod off in the middle of the afternoon. They get off the red-eye and work a normal day.And that is just on the way up. Talk to people who have made the leap into CEO roles and they will frequently comment on how intense the job is, how tough it is to switch off. Most organisations are pyramids. As decisions get tougher and more important, they land on an ever smaller number of individuals. And as these figures become more senior, the number of people who want to see them goes up.The boss has to show their face to employees regularly, and it cannot be the face of someone who looks like they haven’t slept for two weeks. They have to glad-hand the board, meet investors, attend endless networking events and make time for actual work. It is exhausting to contemplate, let alone do.The sheer physical demands of big jobs mean that certain types of people have an advantage over others. Not having too many other calls on your time helps, which tends to be bad news for women, who shoulder more chores and caregiving duties at home than men.Extroversion offers an edge in terms of oomph. A survey of CEO time use from 2017, conducted by Oriana Bandiera of the London School of Economics and her co-authors, found that bosses spend 70% of their time interacting with colleagues, clients and the like. If you are the kind of person who derives energy from spending time with other people, this is like being a phone on charge all the time. If you are introverted and find other people draining, your battery will be close to 1% and it is only a matter of time before you shut down completely.Some lucky people naturally have more zip. These are the mitochondrial CEOs who can get by on three hours’ sleep and do not know what it is like to grope for the snooze button. But if you haven’t won the biological lottery, you can still work out what reinvigorates and what enervates. That might mean exercise at dawn, power naps in the afternoon or just protecting your calendar; when he was running Amazon, Jeff Bezos would aim for eight hours’ shuteye a night and try not to schedule meetings before 10am. It means prioritising rest rather than getting by on less of it. In their book “The Mind of a Leader”, Rasmus Hougaard and Jacqueline Carter found that senior executives were likely to sleep more than non-executives.In admitting that his energy stores are now becoming depleted, Mr Klopp has offered an unusual reminder of how punishing leadership roles can be. His decision to hang up his Liverpool tracksuit brings to mind the aphorism of another great football manager, Sir Alex Ferguson. Hard work is a talent, Sir Alex liked to say. But it is also just hard. More

Handing over a family business to the next generation can be a dramatic process. If the company is big and progeny bountiful, the intrigue is followed with zeal by both the financial press and the tabloids. When 29-year-old Frédéric Arnault, the second-youngest of five scions of the LVMH luxury empire, took over its watch unit at the start of the year, speculation swirled about the succession plan being put in place by his billionaire father, Bernard Arnault. Yet many more heads of family firms face the opposite predicament: they have no heir at all.Legions of entrepreneurs born in rich countries during the two-decade baby boom starting in the 1940s are close to retirement age or past it. Some, like Giorgio Armani, the 89-year-old founder of the Italian fashion house, are childless. Others have offspring who want to chart their own career paths. Dalian Wanda, a sprawling Hong Kong conglomerate, faced a public headache when it turned out that the only son of the founder, Wang Jianlin, would not take over the company. Most heirless firms are not quite so large or well-known. But they are numerous. Owners aged 65 or over account for 23% of American firms with at least one employee, up from 20% in 2017. The share of German business-owners who are over 60 has climbed to 31%, three times the number two decades ago. Only one in ten is younger than 40. By 2025 almost 2.5m small and medium-sized businesses in Japan will have owners in their 70s or older, reckons the country’s economy ministry. Half of that group have made no plans for a handover.No owner likes to see a life’s work fall into desuetude. When otherwise successful companies fold without a new owner or are sold off piece by piece by inheritors, they also lose valuable know-how and intangible assets. Collectively, their disappearance into oblivion may be a drag on the broader economy’s productive potential. Fortunately for owners and governments, help is at hand thanks to a fast-growing industry of pseudo-heirs.The most established group of helpers, called search funds, is an offshoot of America’s private-equity industry. The first such fund was created in 1984 by a professor at Stanford University’s Graduate School of Business (GSB). Many are run by one or two MBAs in their early 30s—GSB graduates were historically particularly common. They raise capital from outside investors, identify one small or medium-sized company, typically worth less than $10m, buy it from their owners and take over as full-time chief executives.Search funds are now popping up across the Atlantic, where Europe’s ageing economies offer rich pickings. Arturo Alvarez, a Spanish search-fund founder, says he has looked at 3,000 companies in Spain and Portugal over the past two years or so, and has sat down for a conversation with about 400, of which he will pick just one. Jürgen Miller, an investor in search funds from Munich, notes that many of the more than 500,000 small and medium-sized firms in Germany’s formidable Mittelstand with annual sales of between €2m ($2.2m) and €50m are run by old-timers who might prefer to be soaking up the sun on Majorca.The next target may be Japan. In the past some Japanese founders with no male heir relied on the peculiar practice of adult adoption—a son-in-law or loyal employee can become the legal descendant of a business owner, avoiding gift taxes. Nowadays adopted daughters are acceptable, too. But relentless demographic trends are making such adoption ever harder. Japanese 70-somethings, of whom there are 16.4m, outnumber 20-somethings by four to three.Strangely, the world’s most demographically challenged big economy has so far not attracted many search funds. Some enterprising types are, however, profiting from its demographic cliff in other ways. M&A Research Institute, created in 2018 and listed in Tokyo in June 2022, is a succession broker. It uses clever machine-learning algorithms to match buyers, mostly private-equity firms or larger Japanese companies, and sellers. Two-thirds of its target businesses are worth less than $3.5m. The firm’s 32-year-old founder, Sagami Shunsaku, says that about four in five of the owners he encounters want to sell because they have no alternative plan for succession. Some are in their 90s.The pseudo-heir industry is still tiny. Between 1986 and 2021 search funds made deals worth just $2.3bn in total. But they are rising in popularity: a third of that figure was invested in 2020 and 2021 alone, with more almost certainly deployed since.And they are doing a roaring trade. According to one GSB study, the typical search fund boasts an annual internal rate of return (IRR)—the private-equity industry’s preferred performance measure, which calculates returns on deployed capital but ignores any uninvested money—of 35%. By comparison, conventional private-equity funds generate an IRR of around 15% over the past two decades. Jan Simon of IESE Business School in Spain (and an investor in search funds) says the outsize returns are due to a combination of little competition from bigger private-equity firms, which prefer much larger deals, and plenty of involvement by the young managing partners.The M&A Research Institute is similarly lucrative. Its operating profit more than doubled in the last financial year, to $32m. Its share price has risen by more than 450% since its listing; earlier this year Mr Sagami’s stake made him Japan’s youngest billionaire. He is already eyeing other rapidly greying places in Asia, such as Singapore. ■ More

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Tim Cook, boss of Apple, is having a rough start to 2024. In the past month his company has faced an unusual barrage of unpleasantness. A patent dispute forced it to remove features from two of its smartwatches. It found out that America’s Department of Justice (DoJ) would be suing it shortly over antitrust transgressions. It reported that it was losing market share in smartphones in China, its second-biggest market. Adding insult to injury, a few Wall Street analysts said something that would have been unthinkable until recently—that Apple’s shares were overvalued. On January 11th Microsoft, a rival tech titan, duly dethroned the iPhone-maker, temporarily, as the world’s most valuable company.The run of bad news may continue on February 1st, when Apple reports its latest quarterly earnings. Equity researchers estimate that its revenues barely grew in the last quarter of 2023, if at all. Then, on February 2nd, Apple will be tested once again. It will start shipping the Vision Pro, an augmented-reality (AR) headset that it has been working on—and talking up—for a few years. The high-end gadget, which will sell for $3,499, represents a big bet on a new technology “platform” that, Apple may be hoping, could one day replace the smartphone as the core of consumers’ digital experience—and the iPhone as the source of its maker’s riches. Early indications hint that Apple should worry about the device’s prospects. Netflix, Spotify and YouTube have announced that they will not make their popular streaming apps work on the headset. None said why. But it could be because they all compete with Apple’s own streaming services, and developing an AR app is likely to be costly.Mr Cook can brush off some of these worries. Despite everything, Apple’s share price has not moved meaningfully in January. A few days after being overtaken by Microsoft, it reclaimed its heavyweight stockmarket title—and its $3trn valuation. And if the Vision Pro’s launch is a flop, the short-term effect on Apple’s revenues will be nugatory, given the headset’s limited initial production.Nevertheless, Apple’s boss would be unwise to dismiss the new year’s niggles. For they point to larger challenges for the company. These fall into three broad categories: antitrust and legal issues; slowing iPhone sales; and growing geopolitical tensions. None of these is existential right now. But each carries with it a risk of causing a big upset. Could they cost Apple its position as the world’s most valuable company for longer than a week or so?image: The EconomistThough Apple’s market value has been among the world’s top ten since 2010, until a few years ago it traded at a low valuation relative to profits. It was thought of as a maker of hardware, a business that is more difficult to scale than software. For much of the 2010s its price-to-earnings (p/e) ratio, which captures investor’s expectations of future profits, was below 20, comparable to that of HPE or Lenovo, boring computer-makers with low growth and tight margins. It was also below the average for big American companies in the S&P 500 index (see chart 1).image: The EconomistThis started to change around 2019, notes Toni Sacconaghi of Bernstein, a broker. Revenue from Apple’s “services” business, which provides software to its devices’ 1bn or so users, began to grow. The two biggest parts of this category are an advertising business, which Bernstein puts at $24bn a year (including around $20bn a year from Google for making the search engine the default option on Apple’s devices), and the App Store (another $24bn). Services also includes Apple Music and Apple TV, its streaming offerings, as well as a fast-growing payments business. All told, revenues from services amount to $85bn a year, or a fifth of total sales. In 2016 they contributed just $24bn, or a tenth of overall revenues (see chart 2).This helped convince investors that Apple was no longer a stodgy hardware provider. It was a software platform, where new paying users could be added at little extra cost. That meant higher profits—the gross-profit margin for Apple’s services arm is 71%, compared with 37% for devices—and more recurring revenue. As services became a bigger part of the business, Apple’s overall profitability swelled, too, from 38% in 2018 to 44% last year. That was also aided by the fact it was selling more high-end, high-margin iPhone models. All of this helped lift Apple’s p/e ratio to around 30, comfortably above the S&P 500 average and higher than that of Alphabet (Google’s parent company), though still below Microsoft’s (38) and Amazon’s (72).One set of risks that could undo Apple’s p/e progress has to do with its legal headaches. Some, such as the patent problem, look like minor threats. In October the International Trade Commission ruled that Apple infringed patents related to an oxygen-measuring sensor that were owned by Masimo, a medical-device maker. Apple stopped selling the models which contained the offending technology. But on January 18th it started to sell them again, minus the disputed sensor.Apple’s bigger legal problems have to do with its services business. In March new rules will come into force in the EU, a huge market, that force Apple to allow apps to be installed on its devices without going through its App Store. That makes it harder for it to charge the 30% fee it levies on most in-app purchases (Apple has filed a lawsuit against the rules).In America, the DoJ is reportedly looking into whether Apple’s smartwatch works better with the iPhone than with other smartphones and why its messaging service is not available on rival devices. If, in a separate case against Google, the courts agree with the DoJ that its default-search deals with device-makers are anticompetitive, Apple could be deprived of roughly $20bn a year in virtually free money. As a result of a lawsuit filed in 2021 by Epic Games, a video-game developer, Apple has already had to change the way the App Store charges developers to sell apps there.The orb is in your courtApple is not defenceless in the legal battles. It quickly found a workaround to the Epic-induced changes to its App Store policy that lets it keep collecting hefty fees. A final ruling in the DoJ’s case against Google is probably years away. The same is true of its expected case against Apple. As with many antitrust cases against big tech, investors seem nonplussed.The company is more vulnerable to the second area of concern—its slowing core business. According to a poll of analysts, Apple sold about 220m iPhones last year, barely more than the 217m it shifted in 2017. In 2024 the number might not be much higher. For a while, Apple could offset the slowing volumes with higher prices. But annual revenue growth has slipped to 1% in the past three years, down from an average of 9% between 2012 and 2019.Some rivals are trying to eat into Apple’s market share in high-end devices by exploiting consumers’ appetite for ChatGPT-like “generative” artificial intelligence (AI). Samsung, a South Korean tech titan, said that it would launch a new range of AI-powered phones by the end of January. Flashy features will include real-time voice translation and turbocharged photo- and video-editing. The devices may be on sale eight months before Apple’s next iPhones. Apple, by contrast, has said little about its plans for the hottest thing in tech since, well, the iPhone. “We’re investing quite a bit,” Mr Cook noted cryptically on the company’s most recent earnings call.Apple is also being given a run for its money in China, the source of 17% of its overall revenues. According to Jefferies, an investment bank, Apple’s share of smartphones in the country declined last year. Meanwhile that of Huawei, a domestic tech champion, grew by around six percentage points. In August Huawei stunned industry-watchers—and America’s government, which has for years barred sales of American technology to the firm on national-security grounds—by launching the first 5G device containing advanced chips that were Chinese-made rather than imported. Patriotic shoppers in China snapped up the phone and, for good measure, other Huawei devices.When it comes to AI, worries about Apple’s progress may be overstated. Erik Woodring of Morgan Stanley, an investment bank, points to signs that the company is indeed investing quite a bit. In October the firm’s boffins and researchers at Columbia University jointly released an open-source AI model called Ferret. Two months later Apple published a paper about how such models could run on smartphones, which are much less powerful than the data centres typically used for the purpose. In January a South Korean tech blogger reported that an update to Apple’s operating system possibly as early as June would include AI enhancements for Siri, Apple’s robot assistant. Rumours swirl that Apple is planning to use generative AI in its own search engine.China represents a bigger threat—and not just because of a revitalised Huawei. Apple’s plans for future growth depend in large part on success in emerging markets, including the biggest one of all. Mr Cook kicked off Apple’s past three earnings calls by talking about the company’s sales outside the rich world. China was doubtless on his mind.Apple is also exposed to China risk through its supply chain. Despite much-publicised efforts to move some production to India, around 90% of iPhones are still manufactured in Chinese factories. So are most Mac computers and iPads. Mr Sacconaghi of Bernstein says that Apple will be hugely exposed to a serious geopolitical escalation, such as a conflict over Taiwan, for at least the next five years.Events short of a Chinese invasion of Taiwan could also hurt the company. The return of Donald Trump to the White House, a serious possibility now that he has all but wrapped up the Republican nomination, would almost certainly raise barriers to trade and heighten Sino-American tensions. Even if Joe Biden defeats Mr Trump in the presidential election in November, he is hardly a China dove. The Chinese government is beginning to hit back against American sanctions. It has already banned products made by Micron, a chipmaker from Idaho, from some infrastructure projects. In September reports surfaced of a ban on Apple products among government officials. Although the authorities later denied the claims, the episode put investors on edge.Any Chinese action that hurts Apple in China would hurt China, too. Apple says 3m people work in its supply chain. Many of those workers are Chinese. One analyst likens Apple’s position vis-à-vis China’s government to “mutually assured destruction”. The same could be said of the commercial balance between America and China. Try explaining that to Mr Trump. ■ More

The consecration of a Hindu temple in Ayodhya, the mythical birthplace of the god Ram, on January 22nd was a huge religious event in India. It carried political significance, too. It was presided over by the prime minister, Narendra Modi, and signalled the unofficial start to the campaign of his Bharatiya Janata Party (BJP) ahead of a general election in April and May. It also turned into a business jamboree. Attendees included a “Who’s Who” of India Inc, from the heads of the country’s mightiest conglomerates to founders of its sexiest startups. All came to pay tribute to Ram—but mostly to Mr Modi.Some corporate guests came because of genuine appreciation for his stewardship of the economy. Others showed up out of fear that if they didn’t, they and their businesses might find themselves fending off tax inspectors or struggling to secure business permits from a government that critics accuse of creeping authoritarianism. This odd mix of sentiment reflects the business world’s attitude towards India’s enigmatic strongman.image: The EconomistBusinesses certainly have a lot to be grateful for. During Mr Modi’s decade-long tenure GDP has grown faster than it has in most big countries. In the third quarter of 2023 it roared ahead by 7.6%, year on year. Foreign direct investment went from $24bn in the year before Mr Modi’s election in 2014 to more than double that on average in the past three financial years (see chart 1). On January 22nd India’s stockmarket overtook Hong Kong’s as the world’s fourth-biggest by market value.Not all of this is Mr Modi’s doing. India has, for example, benefited from Western firms’ efforts to diversify supply chains away from China. But bosses also credit his policies. The roll-out of a national digital-ID scheme has fuelled a boom in digital payments and e-commerce. A national goods-and-services tax (GST) has replaced a baffling patchwork of state levies. The financial sector went from crippled to sturdy in ten years and the government has turned talk of privatisation into (some) action, notably selling Air India, the long-suffering flag carrier.Economists debate the wisdom of protectionist bungs such as higher tariffs and “production-linked incentives” (PLIs) to promote manufacturing, on which the state is spending $26bn over five years—but businesses love them. Christopher Wood of Jefferies, an investment bank, forecasts that if the BJP lost the election, the stockmarket would drop by 30%.Industrialists aren’t shy about expressing their adulation. Two weeks before making the pilgrimage to Ayodhya, the heads of India’s three biggest conglomerates fawned on Mr Modi at a jamboree in his home state of Gujarat. Mukesh Ambani of Reliance Industries called Mr Modi “the most successful prime minister in India’s history”. Natarajan Chandrasekaran of Tata Sons spoke of Mr Modi’s “visionary leadership”. Gautam Adani of the Adani Group lauded him for setting “a benchmark for a more inclusive world order”. Lesser business figures zealously echo such sentiments, ideally within earshot of government officials.In private, the praise is more guarded. Corporate leaders value Mr Modi’s willingness to hear them out. He often turns up in person at business shindigs, which have mushroomed on his watch. Behind closed doors he meets not just big bosses but also lowlier executives. Regional and Indian heads of multinationals report that during such audiences he listens to them intently, asks clever questions and never comes across as distracted or bored. They feel free to give him their unadulterated opinions about policy, which he takes in even if he then feels free not to act on them.He is also perceived as personally incorruptible—a welcome exception to India’s venal politics. Some businesspeople grumble that the government makes life easier for national champions, such as Reliance and Adani Group. But they concede that these groups are putting money into areas such as telecoms, energy and infrastructure, all of which India needs, and that their relatively meagre financial returns do not scream cronyism. When prominent companies stumble because of mismanagement, Mr Modi does not intervene to save them from insolvency. That includes firms run by people seen to be close to him, such as Mr Ambani’s brother, Anil, who headed a rival conglomerate, and the Ruia family, owners of Essar Steel.Mr Modi has also, bosses acknowledge, opened doors for them abroad. He used his recent stint chairing the G20 club of big economies to promote himself—but also to promote his country. He has established stronger ties with America, Israel, Saudi Arabia and the United Arab Emirates. Indian financiers and executives say they can now get meetings with American, Arab and European bankers who a decade ago would have ignored their calls.image: The EconomistCriticisms come in more hushed tones. India’s GDP per person grew briskly under Mr Modi by emerging-world standards but had risen half as fast again under his predecessor, Manmohan Singh of the Congress party, who also ruled for ten years. Stockmarket returns, too, have been lower in the past decade than in the one before (see chart 2). India may be resurgent, but the official measure of business investment as share of GDP is not (see chart 3).image: The EconomistMany of Mr Modi’s most successful policies, such as the digital ID and the GST, were first put forward by Mr Singh’s government. Some taxes are lower but, with the exception of the GST, no less Byzantine. The 73-year-old prime minister has no obvious successor. Although he remains sprightly, his eventual departure could therefore lead to political instability of the sort that businesses prefer to avoid.Such concerns come up again and again in conversations with prominent business figures. None wants to be quoted. One reason for the public silence is as old as the Indian state: a rapport with the government can help businesses cut through impenetrable red tape; a lack of one can leave them at the mercy of bureaucrats. Another reason is new, specific to Mr Modi’s BJP, and uttered underbreath. Criticism, businesspeople whisper, can invite retribution. This may come in the form of a probe by the Department of Revenue, the Serious Fraud Investigation Office or the Central Bureau of Investigation. It may concern matters dating back years, which makes defending yourself harder and costlier. To many luminaries of India Inc, staying in the government’s good graces has gone from advisable to existential.Fear of no favourA tycoon last aired such concerns openly four years ago. Rahul Bajaj of the Bajaj Group, another conglomerate, told Amit Shah, Mr Modi’s home-affairs minister, “You are doing good work, but despite that we don’t have the confidence that you will appreciate it when we criticise you openly. Intolerance is in the air.” Under Mr Singh, by contrast, the government was fair game. Mr Shah responded that “there is no need for anybody to fear…we have done nothing to be concerned about [with respect to] any criticism”. “If anyone does criticise,” he added, “we will look at the merit…and make efforts to improve ourselves.”Bajaj died in 2022, aged 83. No other corporate grandee has publicly echoed him since. In the eyes of his fellow industrialists, Mr Modi and his government are still doing good work. But intolerance is still in the air, too. ■ More

GINA RAIMONDO seemed frustrated when she took the stage at the Reagan National Defence Forum in California in December. The Department of Commerce, which she leads, had just tightened restrictions on the sale of American semiconductors to China. But Nvidia, the world’s most valuable chipmaker, had immediately started developing a new, slightly less powerful artificial-intelligence (AI) chip for the Chinese market, to which the restrictions would not apply. “If you redesign a chip…that enables [China] to do AI, I’m going to control it the very next day,” Ms Raimondo warned.That was bombastic, given that it had taken her department a full year to rework the restrictions to cut off Nvidia’s previous workaround. But America’s five-year campaign against Chinese technology is intensifying. Earlier this month it was reported that Jensen Huang, Nvidia’s chief executive, and two fellow chip bosses had been summoned to testify in Congress about their Chinese business. On January 19th ABB, a Swiss industrial group, revealed that American lawmakers were investigating its links with China. ABB said it was co-operating with the investigation; Nvidia has said that it is working closely with the government to ensure compliance with the export controls. Neither Democrats nor Republicans are likely to relent. In a presidential-election year Joe Biden, the unpopular Democratic president, cannot afford to look weak on China. His Republican predecessor and main rival, Donald Trump, has long been America’s China-basher-in-chief. China hawks in Washington want to stymie Chinese efforts both to get around the rules and to recreate the necessary technological capabilities at home. However, the mixed record of export controls so far shows why harsher measures will be difficult to design—and not necessarily more successful.China has found some ways to work around the existing controls. To Ms Raimondo’s chagrin, for instance, it is possible to train AI models using chips that are not necessarily at the cutting edge, so long as you have enough of them. If the sale of any chip which can “do AI” is to be banned, as she implies, America must restrict the flow of a much broader array of chips to China.image: The EconomistIt is hard to know just how much broader. Trade statistics do not break out the graphics processing units (GPUs) used to train and run AI models from the larger flow of integrated circuits. But a sense of the scale of such a ban can be gleaned by examining the financial statements of Nvidia, which sells a range of GPUs. It has earned between 21% and 26% of its revenues from China over the past few years. In the nine months to October the company took in $8.4bn from the Chinese market. Almost all of Nvidia’s products can be used to “do AI”. Mr Huang has said that his firm has no “contingency” for being cut off from China.Another difficulty for America stems from enforcement. The Department of Commerce is empowered to punish any transgressions it discovers. Last year it fined Seagate, a hard-drive manufacturer, $300m for allegedly breaching export controls by sending components to Huawei, a blacklisted Chinese tech champion. But it is the chip firms themselves that are largely responsible for enforcement. That includes ensuring that their customers are not, in fact, a buying front for Chinese entities with which trade is prohibited. This is hard. “You have coin-sized devices and technologies that are widely commercially available, and indistinguishable from the controlled technologies, distributed around the planet,” says Kevin Wolf, an American lawyer and former official.The result is a situation ripe for smuggling, which experts say is impossible to quantify but doubtless rife. It also encourages transshipment. Firms in countries that have not signed on to the American export-control regime, like Singapore, can buy chips and send them on to Chinese entities without the knowledge of the American firms or the Department of Commerce. Nvidia’s most recent quarterly earnings for 2023 show that its sales to Singapore grew by a factor of five over the same period in 2022, faster than anywhere else.Of all customers in China, the one best placed to use such workarounds to get the chips it needs is the People’s Liberation Army. If one of America’s main aims is to deny China access to advanced technology for developing military AI, it is probably failing. Instead the controls are raising the costs to Chinese buyers of acquiring American AI chips. That in turn is aligning China’s tech sector with its government’s policy of indigenous technological development. Chinese tech giants used to prefer buying higher-quality American technology to investing in research and development. Their incentives have changed.The clearest evidence that this is happening comes from Huawei. The company, whose core business is making telecoms gear, was first targeted by America in 2019 for allegedly breaching sanctions on Iran. A measure called the “foreign direct product rule” (FDPR) cut Huawei off from any chips that had been produced using American technology (which is to say virtually all sophisticated ones). In 2022 the FDPR was deployed against the entire Chinese AI industry, and broadened in October to encompass a wider range of AI chips and chipmaking tools, and to require licences to ship products to countries such as the United Arab Emirates (albeit not Singapore) that are thought to serve as middlemen for Chinese buyers.Before it was blacklisted, Huawei had its microprocessors manufactured by TSMC, a Taiwanese contract chipmaker. It spent $5.4bn on TSMC-made chips in 2020, before America’s export controls extended to the Taiwanese firm. Now it is doing more business with SMIC, China’s biggest chipmaker. SMIC’s capabilities were thought to be many years behind those of TSMC. But last year it came to light that the company was making a Huawei-designed AI chip, the Ascend (and a smartphone chip, the Kirin, which raised many Western eyebrows after Huawei unexpectedly launched a handset containing it in September).With their access to foreign chips curtailed, Chinese AI companies are now turning to Huawei and SMIC for chips. China’s government is encouraging them, and continuing to shower the industry with subsidies in the hope of creating an industry to rival Nvidia and other American companies. Export controls have, in effect, forced China to embrace import substitution.The designers of America’s controls foresaw some of this. That is why, from the start, they also targeted China’s ability to recreate advanced technology at home. The controls restrict trade not just in chips themselves but also in tools used to make them. That has involved bringing on board allies such as the Netherlands and Japan, home to many of the toolmakers. As with chips, the tool controls place limits on the sophistication of the equipment that can be sold to Chinese buyers. And as with chips, just how sophisticated a tool has to be to fall under the controls has been the subject of intense debate.The critical machines are those used to etch transistors onto silicon wafers. The most cutting-edge equipment of this sort is made and sold exclusively by ASML, a Dutch company, and has been blocked from China for years. But older generations of such lithography tools can still be sold there. ASML’s sales to China have grown dramatically over the past year, as have those of companies that produce other chipmaking tools. In the most recent quarter Chinese sales made up almost half of ASML’s total revenue. Other toolmakers also sell lots of their wares to China (see chart).But, as with chips, export controls are giving Chinese toolmakers a strong incentive to invest in catching up technologically with foreign rivals. Already domestic toolmakers’ sales are growing. On January 15th one of them, NAURA, which manufactures other etching tools, said it expected its revenue to have risen by almost 50% in 2023.America’s campaign against Chinese technology may, then, be both ineffective and counterproductive. Ineffective, because China is adept at exploiting loopholes. And counterproductive, because it is leading to the creation of a more sophisticated Chinese industry. It may also be predicated on a wrong assumption: that the future economic and military balance of power depends on AI, and that AI depends on computing power. “Both of these are guesses,” points out Chris Miller, a historian of technology at Tufts University in Boston. It is far from clear that AI will have strategic importance. And even if it does, computing power may not be the overriding factor in its development. As Mr Miller points out, oomph is expensive, so AI developers will try to use it as sparingly as possible.Despite all this, America seems likely to toughen up its export controls on ai chips, as Ms Raimondo all but promised in December. And Republican lawmakers are eyeing more expansive controls still. Some of them see a new threat coming from the other end of the sophistication spectrum, which is less about China’s techno-military might and more about its economic power. Chips are required in growing volumes as components in everything from electric vehicles and heat pumps to electricity grids. By 2027 China could be making almost 40% of such semiconductors, reckons TrendForce, a research firm. The current export controls do nothing to curb China’s dominance of this business, which uses a lot of older American technology.Three congressional Republicans, Mike Gallagher, Elise Stefanik and Michael McCaul, are thus working on a bill which will force the commerce department to cut China off from all American chip technology, not just the most advanced stuff. Gaining support from allies for such an extreme policy will be hard. Japanese and Dutch businesses—and their governments—rankle even at the porous controls that are in place today. But if Mr Trump, an alliance sceptic, returns to power, the lack of support is unlikely to matter one bit. ■ More

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