Philippa Kaur

WHEN BOB IGER returned to the top job at Disney in November 2022, some anticipated a fairytale ending to the entertainment giant’s troubles. In February last year Nelson Peltz, a feared activist investor, called off a campaign by his hedge fund, Trian Partners, for a shake-up after Mr Iger announced measures to slash costs and otherwise improve Disney’s fortunes.With the company’s share price languishing, however, Mr Peltz returned to the warpath in October. Blackwells, another activist investor, launched a campaign of its own. Both sought seats on Disney’s board, arguing it had grown too chummy with Mr Iger and failed to find a viable strategy amid the decline of “linear” TV.Chart: The EconomistOn April 3rd both activists’ candidates were rejected by shareholders at Disney’s annual general meeting (AGM), by what the company said was “a substantial margin”. This has handed Mr Iger what he surely hopes is a decisive victory. Investors regained faith in Disney’s boss after an earnings call in February, when he reported that losses in its streaming business, including Disney+, had narrowed sharply in the final quarter of 2023, and trumpeted splashy new initiatives including a partnership with Epic Games, a video-game developer, to incorporate Disney characters into its popular “Fortnite” franchise. The announcement that Disney would increase its dividend by 50% and repurchase $3bn of shares also went down a treat. Its share price jumped by 11% the following day, and has kept climbing since (see chart).At the AGM Mr Iger declared that Disney has “turned a corner and entered a new, positive era”. Yet such triumphalism is premature, for Mr Iger still has much work to do, in three areas especially. The first is to generate the “double-digit” operating margins in Disney’s streaming business that he has promised investors. That will require a lot more subscribers, to provide economies of scale, which may put Mr Iger in a bind. To stem losses in the business he has jacked up prices, undermining growth. Between the third and fourth quarters of last year the number of subscribers to Disney+ (outside India) shrank by 1.3m.What is more, over half of the $7.5bn in costs Mr Iger has pledged to slash are to come from Disney’s content budget. That will hardly help the company to grow, and could undermine a second of Mr Iger’s promises—to restore Disney’s creative magic. In his letter to shareholders from 1966, the last before he died, Walt Disney declared a disdain for sequels. Mr Iger, by contrast, is an avid fan. Of the 15 forthcoming films he mentioned in his presentation in February, all bar one were sequels, prequels, spin-offs or remakes. Mr Iger applauded a greater reliance on franchises as a “smart thing”. Results at the box office, however, have been disappointing. Last year Disney lost the top spot for global cinema-ticket sales, to rival Universal, for the first time since 2015. On March 31st it was reported that last year’s Indiana Jones film, a Disney reboot featuring an 80-year-old Harrison Ford, took in $134m less at the box office than it cost to produce.The third promise Mr Iger must still fulfil is to find a more durable successor than his last pick, whom he then supplanted. Worryingly, three of the four directors on Disney’s succession-planning committee were involved in that bungled process. Already Mr Iger’s two-year contract has been extended until the end of 2026.If Mr Iger trips up, the interlopers may return. In his remarks at the AGM, Mr Peltz noted that, regardless of the outcome of the vote, he would be “watching the company’s performance”. The veteran activist, too, may be a fan of sequels. ■ More

FOR YEARS foreign companies were desperate to get into China, and faced formidable bureaucratic obstacles in their way. Now many are getting out. Over the past year several foreign law firms have closed some or all of their Chinese offices. Orrick, Herrington & Sutcliffe, an American one, said on March 22nd it would shut the Shanghai office it opened 20 years ago. Another, Akin Gump Strauss Hauer & Feld, plans to exit China altogether this year. Some global investment banks are pruning their Chinese staff. So are a few large accountancies and due-diligence groups. In 2023 foreign direct investment in China fell to its lowest level in 30 years.One reason for foreigners’ change of heart is the sorry state of the Chinese economy. Of the 18 largest multinational companies that report their earnings from China, 13 saw annual revenues there fall in 2023. Qualcomm and Samsung, two technology giants, recorded sales drops of more than 20%. Apple sold nearly a quarter fewer iPhones in the first six weeks of 2024 than it did in the same period the year before. In February Tesla shifted 19% fewer electric cars. Weak Chinese sales are the main reason why Kering, the French owner of Gucci, expected to flog a fifth less of its bling in Asia in the first quarter.President Xi Jinping and the Communist Party are keenly aware of these problems. And they care. At least that was the message broadcast loudly at the China Development Forum (CDF) in Beijing on March 24th-25th, and echoed a few days later at the Boao Forum, China’s answer to Davos. The mood at both jamborees was decidedly better than last year, when it was spoiled by a suspected Chinese spy balloon which floated above America before being shot down on the order of President Joe Biden. Many Western corporate bigwigs who stayed away were back; more than 80 foreign chief executives turned up in Beijing, including far more Americans. In Boao a senior official promised that China would make it easier to move capital in and out of the country. Two days earlier, at a separate event, Mr Xi assured a handful of American CEOs that China would continue to reform and open up.Participants report that Mr Xi and party officials are doing more now than in the past four years to stress that China is still open for business—a nice change after the pandemic years, when China’s leaders self-quarantined themselves from the outside world. “At the very least the meetings showed there is a strong desire to communicate,” says a boss who attended the CDF both this year and last. Earlier in March the State Council, China’s cabinet, launched a 24-point “action plan” for attracting foreign investment. It included familiar ideas such as protecting intellectual property and promoting trade agreements, and welcome additions such as fostering cross-border data flows. A few weeks later the main internet regulator eased some onerous data rules that in the past two years have made foreign businesspeople nervous about routine things such as sending emails to colleagues abroad.The trouble is that Mr Xi’s desire to lure back foreign business runs up against his other objectives. Observers describe his leadership model as “wanting this, that and the other”. Foreign companies are to do business in China but keep their hands off Chinese data. Multinationals are to double down on China and homegrown brands are meant to give them a run for their money. China’s technology industry is to decouple from the West while attracting Western investment. And global businesses are to like all this, never mind that it works against their commercial interests.Marxist theories of the sort Mr Xi likes to elevate may be able to resolve these contradictions. But capitalists see trade-offs and choices. And business logic increasingly argues in favour of greater circumspection about China.Consider data flows. Regulators may have loosened some restrictions but weeks earlier they tightened others, by updating a state-secrets law for the first time since 2010. The law now covers “work secrets”, or information that is “not state secrets but will cause certain adverse effects if leaked”. The vague wording gives security agencies broad powers to consider any communication between foreigners and Chinese employees as a potential violation. On March 28th, as foreign bosses mingled with party ones at the Boao summit, the Ministry of State Security released a six-minute instructional video. In it a Chinese engineering company is convinced by foreign investors to allow a foreign due-diligence firm to investigate it. An executive at the company travels in time to visit an incarcerated version of his future self, who warns him not to hand over company secrets to the investigators. When, back in reality, they ask him to share sensitive information, the enlightened executive reports them to the authorities instead.SpookedThe lessons of the film are as unsubtle as the acting. For Chinese viewers, it is that foreign investors and consultants could be working for hostile foreign governments and must not be trusted. For foreigners, it is not to look too hard into obvious material concerns such as a company’s supply-chain vulnerabilities or its links to the state, which could make a business susceptible to Western sanctions.Any such investigation of China’s chip industry, a big target of American restrictions, has long incurred the party’s wrath. Now less sensitive sectors, such as electric vehicles (EVs), batteries, renewables and biotechnology, are increasingly out of bounds, too. Chinese executives at the Beijing branch of a climate consultancy were recently questioned by security agents about the information it collects on local firms and to what foreign entities it has divulged it. The interrogation came as a surprise, because the outfit had enjoyed seemingly strong support from China’s environmental regulators. The incident led it to slim down its Chinese operations and try to eliminate reporting lines between staff based in China and in other countries.A further reason foreigners are having second thoughts about China is stiffening local competition, a lot of it given a leg-up by the state, one way or another. Government support for makers of EVs, batteries, solar panels and wind turbines has created oversupply and pushed down prices. This has been a blessing for foreign importers of Chinese-made components. For multinationals trying to compete in China it has been a curse. Margins on sales of electrolysers, bulky machines used to produce hydrogen, are said to have dropped to almost nothing in recent months. In March BYD, a Chinese EV giant and longtime recipient of state largesse, dropped the price of its compact electric car to just $9,700, perpetuating a price war that has forced Tesla to sell its EVs for less. Foreign industrial firms face hundreds of local rivals that appear to operate in the red. In 2023, 22% of industrial companies in China lost money, an all-time high.Officials also invoke a mix of national security and national pride as a reason to choose Chinese products over Western ones. Apple must contend not just with downbeat consumers but also with a new line of smartphones from Huawei, a Chinese tech champion targeted by American sanctions—and with public servants and employees of state-run firms being told not to buy iPhones, lest they contain backdoors through which the American government can steal information. Teslas have been banned from some government facilities and airports on the grounds that they film their surroundings. State-owned enterprises and government agencies have been instructed to replace chips from Intel and AMD, two American semiconductor firms, with Chinese-made ones by 2026. They are also to phase out Microsoft’s Office software over the next few years.For many foreigners, overcoming these obstacles may be a price worth paying. In a survey of 354 multinationals conducted by Morgan Stanley, a bank, two-thirds of foreign firms were optimistic about China in the last quarter of 2023, the most in two years and up from a trough of 46% in the first quarter of 2022. For some companies China is a place to sharpen their competitive edge: if they can make it there, they can make it anywhere. Plenty want to preserve access to China’s vast market and manufacturing base. On March 21st, to much fanfare, Tim Cook opened a new flagship store in Shanghai and reiterated that “There’s no supply chain in the world that’s more critical to us than China.” To ram the point home, four days later he told an audience at the development forum in Beijing, “I love China and the people.”Yet to many Western ears, Mr Xi’s commitment to openness rings increasingly hollow. His regime can repeat such bromides only so many times before you grow cynical, says a weary boss of a multinational’s Chinese branch. In the long run a surfeit of foreign cynicism may end up being even more damaging to China’s economy than a glut of EVs and electrolysers. ■ More

“THE DIFFICULTIES inherent in such a reorganisation were many and serious.” That is how in 1893 Charles Coffin, the first chief executive of General Electric (GE), described merging three businesses into what became the iconic American conglomerate. More than 130 years later Coffin’s latest successor, Larry Culp, must be feeling similarly about doing the reverse. On April 2nd GE split into two public companies: GE Aerospace, a maker of jet engines, and GE Vernova, a manufacturer of power-generation equipment. A third, GE Healthcare, a medical-devices firm, was spun off in January 2023.Chart: The EconomistInvestors are not mourning the end of GE as they, their fathers, grandfathers and great-grandfathers knew it. On the eve of the split the company’s market value hovered at nearly $200bn—and more than $230bn if you add GE Healthcare’s (see chart 1). In November 2018, shortly after Mr Culp took over as boss, the whole group was worth $65bn, the least since the early 1990s. That June it had been ignominiously kicked out of the Dow Jones Industrial Average (DJIA), an index of American blue chips. In the past year both GE and GE Healthcare have handily outperformed the DJIA. Their shares have also done better than those of most American spin-offs (see chart 2). Mr Culp says that the group could not continue as an “all-singing, all-dancing GE”. Instead, GE’s corporate progeny will become less general and, amid the energy transition, more electric.Chart: The EconomistFor much of its history GE was synonymous with size. Under Jack Welch, the acquisitive CEO who ran it from 1981 to 2001, it became the world’s most valuable company. Subsequent losses at GE Capital, its bloated finance arm, and troubles in its core industrial businesses laid the giant low. Jeff Immelt, Welch’s successor, sold off GE’s media, home-appliance and, belatedly, finance assets but spent $11bn on the ill-timed takeover of a power-and-grid business of Alstom, a French conglomerate, and $7bn on a stake in Baker Hughes, a purveyor of oil-industry gear. John Flannery, who replaced Mr Immelt in 2017, had the idea of spinning off the health-care division and focusing on GE’s core businesses, aviation and power generation. But he was dumped barely a year into the job, as GE’s share price cratered.As a result, Mr Culp, the first outsider to run GE, inherited a mess. GE ended 2018 with a $23bn write-down of its power business (largely due to the Alstom deal), a $15bn capital shortfall in a rump reinsurance business, a net annual loss of $22bn and more than $130bn in debt. On paper his rescue plan looked similar to Mr Flannery’s: hive off health, double down on aircraft engines and power. The way he went about it, though, was different.He halted his predecessor’s proposed spin-off of the health-care business, realising that GE would be too weak in the short run to survive without the health unit’s income. Instead he sold GE’s biotechnology business to his old employer, Danaher, another industrial group, for $21bn; accelerated the move towards cleaner energy by divesting the stake in Baker Hughes; and flogged GE’s aircraft-financing unit for more than $30bn. He also cut the quarterly dividend from 12 cents a share down to a cent. Taken together, these moves reduced GE’s debt by some $100bn.Critically, Mr Culp understood that reforming GE required not just changes to its structure but also to its operations. Six Sigma, a series of techniques championed by Welch that aimed to keep manufacturing defects below 3.4 per million parts, had become a barrier to innovation and was out. Instead Mr Culp introduced GE to “lean management”, which looks for small changes that add up to big improvements over time. This approach, pioneered by Toyota in Japan, involves managers solving problems by visiting the factory floor or their customer rather than from the comfort of their desks.Today GE executives pepper their disquisitions with Japanese terms such as kaizen (a process of continuous improvement), gemba (the place where the action happens) and hoshin kanri (aligning employees’ work with the company’s goals). More important, Mr Culp and his underlings routinely spend a week on the factory floor alongside workers. The company credits this system for improvements such as reducing the total distance a steel blade for its wind turbine travels during the manufacturing process from three miles (5km) to 165 feet (50 metres), and shaving the time to build a helicopter engine from 75 to 11 hours.This puts the two daughter firms in fighting shape to thrive as their sister, GE Healthcare, has done. In 2023 GE Aerospace and GE Vernova generated combined revenues of $65bn, up from $55bn the year before. Engines made by GE Aerospace, the group’s most profitable division, which Mr Culp has chosen to run after the break-up, power three-quarters of all commercial flights. GE Vernova’s turbines generate a third of the world’s electricity.Like many successful managers, Mr Culp also has luck on his side. Demand for passenger jets—and thus the engines that keep them aloft—is rebounding sharply from a pandemic slump. With a backlog of orders until the end of the decade, GE Aerospace expects adjusted operating profit to surge from $5.6bn in 2023 to $10bn by 2028. The turbulence at Boeing, which GE supplies with engines for the planemaker’s troubled 737 MAX planes, means that airlines facing delayed deliveries of these narrowbody workhorses will need to stretch their exisiting fleet. That, points out Sheila Kahyaoglu of Jefferies, an investment bank, increases demand for GE Aerospace to keep older engines going. Last year the services business accounted for almost 70% of the division’s revenues.The winds look equally favourable for GE Vernova. Operating margins in the business rose from low single digits in 2019 to almost 8% in 2023. The International Energy Agency, an official forecaster, estimates that demand for electricity generation will grow by more than half by 2040 as power-hungry data centres and electric cars guzzle more electricity. America is lavishing subsidies and tax breaks on renewable energy projects. Scott Strazik, a GE veteran who will run GE Vernova, believes that this will help the company attain the scale necessary to spread the high costs of wind-turbine manufacturing, which is still lossmaking.GE’s run of good fortune may not last. Projections for traffic in the notoriously cyclical airline business may turn out to be too rosy. If Boeing doesn’t pull out of its nosedive GE Aerospace’s order books could take a hit. The transition to clean energy in America, GE Vernova’s largest market, has been fitful even under Joe Biden, its climate-friendly president. Should the carbon-cuddling Donald Trump return to the White House next year, he has vowed to gut green subsidies. GE’s businesses, in other words, face many and serious difficulties ahead. But at least reorganisation is not one of them. ■ More

One of the most chilling moments in America’s post-war relationship with Japan occurred in Detroit in 1982. Two American autoworkers clubbed a Chinese-American man to death, mistaking him for a Japanese citizen they accused of stealing American jobs. A sympathetic judge gave them no more than a slap on the wrist. The verdict reflected a mood that in subsequent years extended to the highest level of government. Fearful of being overtaken by Japan as the world’s economic superpower, America wielded the crowbar. It imposed trade restrictions, sought to pry open Japan’s domestic markets and led international efforts to depreciate the value of the dollar against the yen. Only after Japan’s asset-price bubble burst in the 1990s did America leave it alone.You would think a new bout of protectionism in America, most recently the bipartisan attempt to block Nippon Steel’s $15bn acquisition of US Steel under the guise of safeguarding American jobs, would elicit a sense of déjà vu in Japan. But it is more complicated than that. In recent years one of the most important strategic partnerships in the world has done a switcheroo. Japan is embracing shareholder-friendly, pro-market reforms that have long been America’s thing. America is adopting the sort of industrial policies and protectionism that once defined Japan. This reveals a lot about the contradictions America faces as it attempts to build global alliances to counter China while pursuing business autarky at home. Japan’s approach makes more sense.Japan’s transition in just the ten years since Schumpeter lived there in the early 2010s is remarkable—and not only big-picture stuff such as rising interest rates and the surging stockmarket. As Japan struggles to offset the economic headwinds of depopulation, things are changing on the ground, too. Ask an optimist, and several aspects of Japan’s lost decades are fading from view.Sayonara deflation: not only are prices rising but Japan’s large firms recently agreed to the biggest wage increase in 33 years. Sayonara xenophobia: immigrant employment, though still small by Western standards, is rising. Sayonara cosy capitalism: firms, though still awash with cash, are targeting higher returns, conducting more takeovers and reaping the benefits of shareholder activism. “It’s endogenous. This is the elite of Japan saying if we don’t sweat our assets, we won’t be around,” says Jesper Koll, a veteran Japan-watcher. As usual Warren Buffett, who bought big stakes in Japan’s trading houses in 2020, invested shrewdly.There are several hisashiburis, or “long time no sees”, too. Japan is once again a trading power, with exports surging for the past three years (thanks in part to a cheap yen). Sales by its most valuable company, Toyota, have risen sharply in America this year; many car buyers favour the firm’s hybrid models over rivals’ electric vehicles (EVs). Japan is enjoying an industrial renaissance, especially in high-tech products such as semiconductors. In February TSMC, the world’s biggest chip manufacturer, opened its first factory in Japan less than two years after construction started. It has suffered big delays trying to do the same in America.So what does Japan make of America turning Japanese, in the bad old sense? The first blow to trust came in 2017 when Donald Trump withdrew America from the Trans-Pacific Partnership, a trade treaty that America, Japan and ten other countries had painstakingly crafted partly to counterbalance China. Mr Trump’s successor, Joe Biden, doubled down on an America-first industrial policy. His Inflation Reduction Act (IRA) discriminated against firms from Japan and other places that lacked a free-trade treaty with America (Japan later signed a critical-minerals deal that provides its EVs with some of the tax incentives they had been denied.) Mr Biden’s opposition to the trans-Pacific steel merger has been a slap in the face. Not only were his protectionist arguments spurious. They came just as lawmakers were proposing to add Japan to a whitelist of strategic allies permitted to bypass America’s strict foreign-investment rules.Japan’s economy ministry will not go on the warpath against America as the Commerce Department did against Japan in the 1980s. For all its pro-market progress it is no paragon of capitalist virtue, deploying industrial policy to promote clean energy and chipmaking. America’s giant economy is growing fast, so Japan cannot afford to be too huffy. Its firms have pledged to invest billions in America to take advantage of the IRA. As for Nippon Steel, expect it to keep its head down and hope the merger brouhaha blows over after the presidential election in November. If Mr Biden’s pro-jobs stance helps him defeat Mr Trump, a protectionist to the marrow of his bones, Japan will sigh with relief.Yet the relationship is no longer one-sided. In the past America was not just Japan’s most important export market but also a guarantor of its safety under the US-Japan Security Alliance, a defence treaty. That protection remains vital. But in recent years, as threats from China and North Korea have grown, Japan has taken more of its defence into its own hands. It has decided to spend vastly more on powerful new weapons, such as cruise missiles. Its tech industry is hoping to play a bigger role in the West’s military supply chains. On April 10th Mr Biden and Japan’s prime minister, Kishida Fumio, will reportedly unveil the biggest upgrade to the security pact in decades when they meet at the White House.The Tokyo consensus America, for its part, needs Japan not just as a military partner in Asia. As Peter Tasker, another long-time Japan-watcher puts it, Japan is increasingly seen as the “non-China” leader in the region, and America relies on it as an economic counterweight to China. As more Asian countries move into Japan’s orbit, with luck they will emulate its new-found pro-trade pragmatism. That, after all, is the true American way. ■ More

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