Philippa Kaur

Scholars of happiness have found that close relationships are one of the critical ingredients of a contented life. What is true in general is also true of the workplace, according to research by Gallup. The pollster finds that having a “best friend at work” is closely associated with all manner of good things, from greater employee engagement to higher retention and better safety records.At some level, that is unremarkable. Spending time with people you like makes most things more appealing, including work. If a job is sufficiently humdrum, camaraderie among colleagues can be the main draw. The support of friends can also encourage people to try new things. A study from 2015 by Erica Field of Duke University, and her co-authors, looked at the impact of business training given to Indian women. Women who attended the course with a friend were more likely to end up taking out loans than those who came alone.The reverse also applies. Antagonistic relationships with co-workers are always likely to make working life miserable. A study conducted by Valerie Good of Grand Valley State University found that loneliness has an adverse effect on the performance of salespeople. Among other things, they start spending more on wining and dining their customers. The only thing worse than a salesperson who sees you as a way to make money is one who wants your company.So friends matter. The problems come when managers see the words “higher employee engagement” and leap to the conclusion that they should try to engineer work friendships. In a report published last year Gallup gave the example of an unnamed organisation which has a weekly companywide meeting that spotlights one employee’s best friend at work. It’s not known if, in the Q&A, others pop up to sob: “But I thought we were best friends at work.”Startups also offer services to encourage work friendships. One monitors the depth of connections between people in different teams. It identifies shared interests (gluten-free baking, say, or workplace surveillance) between employees who don’t know each other and arranges meetings between them. You thought life was bad? At least you are not making crumpets with a stranger in finance.It is a mistake for managers to wade into the business of friend-making, and not just because it royally misses the point. The defining characteristic of friendship is that it is voluntary. Employees are adults; they don’t need their managers to arrange play-dates. And the workplace throws people together, often under testing conditions: friendships will naturally follow.The bigger problem is that workplace friendships are more double-edged than their advocates allow. They can quickly become messy when power dynamics change. The transition from friend to boss, or from friend to underling, is an inherently awkward one (“This is your final warning. Fancy a pint?”).And friendships have the potential to look a lot like cronyism. A clever study by Zoe Cullen of Harvard Business School and Ricardo Perez-Truglia of University of California, Berkeley, found that employees’ social interactions with their managers could give their career prospects a boost relative to others.The researchers looked at promotions of smokers and non-smokers who worked for a large bank in South-East Asia, hypothesising that sharing smoking breaks with managers who also indulged might give workers a leg up. And so it did. Smokers who moved from a non-smoking boss to a puffer were promoted more quickly than those who moved to another non-smoker. The authors found that social interactions did not just help smokers; socialising between male managers and male employees played a large role in perpetuating gender pay gaps. If firms are going to make friendship their business, they should worry about its downsides, too.Companies should facilitate interactions between employees, particularly in a world of hybrid and remote working. Social gatherings and buddy systems are reasonable ways to encourage colleagues to meet each other and to foster a culture. But a high-quality work relationship does not require friendship. It requires respect for each other’s competence, a level of trust and a desire to reach the same goal; it doesn’t need birthday cards and a shared interest in quiltmaking. Firms should do what they can to encourage these kinds of relationships. If individuals want to take it further, it’s entirely up to them. ■Read more from Bartleby, our columnist on management and work:Who is the most important person in your company? (Sep 14th)Networking for introverts: a how-to guide (Sep 7th)The best bosses know how to subtract work (Aug 31st)Also: How the Bartleby column got its name More

AROUND THE world, dealmaking is in a rut. A combination of higher interest rates, geopolitical tensions and economic uncertainty has put a hold on joint ventures, mergers and acquisitions. One exception is targets with AI in their name. Another, less obvious one, involves a less catchy initialism: ADCs.Makers of these antibody-drug conjugates, to give them their full name, are all the rage among the world’s biggest drugmakers. Pfizer is paying $43bn for Seagen, which in turn has just teamed up with Nurix Therapeutics, a smaller biotechnology firm, to work on this class of drugs. Amgen, AstraZeneca and Merck have also placed billion-dollar bets on ADCs. In the past five years licensing deals worth $60bn have been signed for such therapies. The number of such deals tripled in that period, to 26. So far this year 18 have been signed, outpacing similar deals involving other emerging cancer drugs.ADCs aren’t new. The first was approved in 2000 for types of leukaemia. They act like guided biological missiles: a payload of toxic chemotherapy is carried by antibodies able to seek out cancer cells directly. Because they bypass normal tissue and go straight for their targets, they let patients receive higher doses that would otherwise cause too much collateral damage.Two developments explain the frenzied stockpiling of these anti-cancer weapons of late. One is increased clinical confidence. Enhertu, an ADC developed by AstraZeneca and Daiichi Sankyo, a Japanese biotechnology company, was first approved in America in 2019. But after another set of trials in 2022 showed that it allowed breast-cancer patients to live almost twice as long without relapse as those treated with standard chemotherapy, its approval was extended to different types of breast and lung cancer. Regulators have cleared a dozen other ADCs, which are now routinely used to treat some of the deadliest cancers, including leukaemia, lymphoma and breast cancer.image: The EconomistMore than 140 new ADCs are currently in clinical trials. Bristol Myers Squibb and Sanofi all have therapies in late-stage tests. AstraZeneca and Merck have each formed a joint-venture with biotech firms in China, to take advantage of Chinese regulators’ more relaxed rules for early-stage trials, which helps accelerate the drugs’ development. Susan Galbraith, who oversees oncology research and development at AstraZeneca, says that the timeline for drug testing in China has been significantly reduced in the past decade.Clinical success has, in turn, boosted commercial confidence. Sales of Enhertu exceeded $1.2bn in 2022. Revenue from Trodelvy, a similar drug approved for advanced breast cancer and sold by Gilead Sciences, rose by 79% last year, to $680m. Kadcyla brought in $1.1bn for its Swiss developer, Roche, in the first half of this year. Evaluate, a provider of health-care data, forecasts that ADC sales could reach nearly $30bn by 2028, up from around $7.5bn last year (see chart). Some of these wagers could misfire. It is unclear just how well the drugs will work in combination with others, such as immunotherapies. They are also complex to make. Any deals involving Chinese partners could unravel if Sino-Western tensions increase. For now, though, ADCs are a global arms race worth cheering. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

Tech bosses have long sought to disrupt the initial public offering (IPO). They bristle at the thought of the high fees collected by spreadsheet-savvy investment bankers for flogging their vision, at the alchemical process of divvying up shares to new investors and at the money left on the table when the price of a company’s shares soars as soon as they begin trading on an exchange. Many plans have been hatched to improve the process, with varying degrees of success. When going public in 2004 Google botched a “Dutch” auction for its shares, which started with the highest bid and worked downwards, rather than upwards, to a price that matches the supply of shares to investors’ demand. As a final insult to the formalities of the normal IPO process, an interview with the search giant’s founders was published, of all places, in Playboy magazine, and of all times, during the supposedly “quiet period” in the run-up to their company’s stockmarket debut.Little of this bravado was on display on September 19th, when Instacart was welcomed on New York’s Nasdaq exchange. The grocery-delivery firm is one of the latest to ring the bell after an almost two-year drought in IPO activity. Instacart sold its shares for $30 a pop, the top of a price range that had been revised higher in the days before its listing. Their price closed a further 12% above that after the first day of trading, giving the firm a market value of $11bn. That was the second strong debut in as many weeks. On September 14th Arm’s share price climbed by 25% after its Japanese owner, SoftBank, floated around 10% of the chip designer’s stock on the Nasdaq.On the surface, Arm and Instacart look rather different. Instacart’s market capitalisation is less than a quarter that of Arm. Its business of connecting shoppers with people who buy and ferry their groceries looks less exciting than chipmaking, an industry at the heart of the artificial-intelligence (AI) revolution. Yet both firms are, in various ways, indicative of what to expect from the gathering wave of public listings. This is likely to be less audacious than the last bonanza in 2021. And that may be for the better.Although Instacart’s first-day pop was mostly undone the next day, the fact that the share price did not sink below the offer price may inspire confidence in other startups. Plenty are looking for inspiration. According to data from PitchBook, around half of the 83 unlisted American firms that were first valued at more than $1bn in 2019 have either gone public, gone bankrupt or gone on sale. For the significantly larger class of 2021, composed of nearly 360 such “unicorns”, the share drops to 6%. Having missed out on the listing boom of 2020-21, many may now be ready to trade in the relative quietude of private-company life for the drudgery of quarterly earnings calls, not least to provide liquidity for their shareholders, including stock-option-holding employees.Many investors are ready to back them but, in contrast to the go-go years, not unconditionally. For a start, hand-on-heart promises of future growth count for less in an era of high interest rates than profits in the here and now. According to Goldman Sachs, a bank, nearly half of the class of 2020-21 failed to post even one profitable quarter within two years of listing. Emphasis on profitability in turn favours more mature companies. Data collected by Jay Ritter of the University of Florida show that the share of firms that were lossmaking before listing fell from 81% in 2000 to less than half in the subsequent three years, after the dotcom bubble burst. In that period the median age of a listing firm rose from six years to more than ten. Few fresh listers are quite as mature as Birkenstock, a nearly 250-year-old German sandal-maker about to list in New York. But many are at least adolescent. Klaviyo, which helps clients automate marketing and listed on September 20th, was founded in 2012. So was Instacart. Arm turns 33 in November. Startups that barely manage to edge into the black, as Instacart did for the first time in 2022, should prepare to go public at a steep discount to their peak private-market valuations. Jefferies, an investment bank, estimates that in the first half of this year stakes in venture-capital funds changed hands at an average of 69% of their reported asset values. This is already translating into compressed valuations on public stock exchanges. Instacart’s market capitalisation is around a quarter of the $39bn implied by its last private funding round in February 2021, when Silicon Valley venture investors including Andreessen Horowitz and Sequoia pumped $265m into the firm.The way companies are listing their shares is also looking less exuberant. Bosses considering a listing in 2021 had two novel paths to the market, in addition to the old-school IPO. One was to merge with one of the more than 800 special-purpose acquisition companies (SPACs), which raised $220bn in 2020 and 2021, and allowed startups to escape some of the scrutiny of conventional IPOs. The other, a direct listing, involved floating shares without the usual IPO roadshow to drum up investors’ interest and line up buyers, for which investment bankers charge companies through the roof. But SPACs often attracted firms which had less sensible business models, or less scrupulous ones. After a series of scandals and disappointments, SPACs look dead in the water.Whatever floats your basketToday’s nervy investors may balk even at the less controversial direct listings, which can be more volatile since they do away with some of the pre-flotation price discovery. Indeed, what little IPO innovation there is aims to smooth the listing process in a jittery environment. Notably, both Arm and Instacart lined up big-name investors to buy slugs of shares in their offerings. These included, among others, Alphabet, Apple and Nvidia for Arm, and, for Instacart, Norway’s sovereign-wealth fund and PepsiCo. The practice has historically been more prevalent in cautiously capitalist Asia. America’s turbocharged capitalism may need to get used to it, too, at least temporarily. ■Read more from Schumpeter, our columnist on global business:The Mittelstand will redeem German innovation (Sept 14th)America’s bosses just won’t quit. That could spell trouble (Sep 4th)Cherish your Uber drivers. Soon they will be robots (Aug 31st)Also: If you want to write directly to Schumpeter, email him at [email protected]. And here is an explanation of how the Schumpeter column got its name. More

The car industry faces unprecedented upheaval as the importance of the internal-combustion engine, which has defined it for more than a century, declines and that of battery power, which will define its future, rises. The latest reverberation of this historic shock is now rippling through the four-yearly contract negotiations between Detroit’s “big three” carmakers and its biggest trade union. On September 15th, for the first time ever, members of the United Auto Workers (uaw) began simultaneous industrial action against Chrysler, General Motors (GM) and Ford. (Chrysler is part of Stellantis, whose biggest shareholder part-owns The Economist’s parent company.) The union’s tactical change foreshadows a protracted stand-off, the stakes of which are high for the union and the carmakers alike.In the past the UAW renegotiated its contract with one of the big three, with the other two usually falling into line with any agreements. In 2019 the renegotiation happened at gm, which reached a deal with the union only after a six-week strike by 48,000 workers had cut production by 300,000 vehicles, costing the company $3.6bn in net profit. Even though this time the industrial action is affecting all three companies, it is more targeted. The three factories affected so far together employ only 13,000 of the uaw’s 146,000 members who work at the Detroit trio. As a result, reckons Evercore isi, a bank, only up to 20,000 vehicles might be lost in the first week of the strike.That could change if the talks do not move fast enough. The uaw has threatened to tighten the screw considerably if no progress is made by September 22nd. In particular, extending the strikes to factories making engines could result in 150,000 unmade vehicles a week, because other plants that depend on powertrains are also forced to stop production. Hitting the manufacture of lucrative pickups would inflict even more duress on the companies. The union thinks it can afford to dig in, thanks to a $825m strike fund that could pay $500 a week to all the uaw‘s big-three members for 11 weeks. It also has the public on its side; two in three Americans tell pollsters they support unions, almost an all-time high.The UAW argues that American carmakers’ recent good fortune should be shared out more evenly, pointing to record profits and ballooning bosses’ pay. The self-styled “audacious and ambitious” set of demands from Shawn Fain, the uaw’s newish leader, includes a cumulative pay rise of 36% over the next four years. Also on the wish list are a return of more generous pension provisions and a rapid end to a scheme introduced in 2007 after bail-outs induced by the financial crisis, whereby new workers are paid less than existing employees.The car giants have countered by offering a pay increase of around 20% and some other concessions. They contend that meeting all the union’s demands would frustrate their costly efforts to turn themselves from manufacturers of gas-guzzlers into software-powered makers of electric vehicles (EVs). Ford says that this would more than double its labour costs. These, the firm adds, are already much higher than at Tesla, a non-unionised EV pioneer, or at foreign-owned factories with similarly unorganised workforces. And far from paying the “poverty wages” as Mr Fain claims, Ford says that its offer would boost average annual pay and benefits from $112,000 to $133,000.The carmakers are right to worry about rising costs. The uaw, for its part, may well see the current moment as its last chance to stay relevant before more of the industry switches to EVs, which are less mechanically complicated and so less labour-intensive to make. This is signalled by another of its demands—the right to strike over factory closures. Its insistence on that suggests that in four years’ time the negotiations will not be so much about money. Instead, they could be more like a rerun of 2019, when one of the main points of contention was gm’s decision to close four plants—but on a much larger scale. ■ More

The creation of a new market is like the start of a long race. Competitors jockey for position as spectators excitedly clamour. Then, like races, markets enter a calmer second phase. The field orders itself into leaders and laggards. The crowds thin.In the contest to dominate the future of artificial intelligence, OpenAI, a startup backed by Microsoft, established an early lead by launching ChatGPT last November. The app reached 100m users faster than any before it. Rivals scrambled. Google and its corporate parent, Alphabet, rushed the release of a rival chatbot, Bard. So did startups like Anthropic. Venture capitalists poured over $40bn into AI firms in the first half of 2023, nearly a quarter of all venture dollars this year. Then the frenzy died down. Public interest in AI peaked a couple of months ago, according to data from Google searches. Unique monthly visits to ChatGPT’s website have declined from 210m in May to 180m now (see chart).image: The EconomistThe emerging order still sees OpenAI ahead technologically. Its latest AI model, GPT-4, is beating others on a variety of benchmarks (such as an ability to answer reading and maths questions). In head-to-head comparisons, it ranks roughly as far ahead of the current runner-up, Anthropic’s Claude 2, as the world’s top chess player does against his closest rival—a decent lead, even if not insurmountable. More important, OpenAI is beginning to make real money. According to The Information, an online technology publication, it is earning revenues at an annualised rate of $1bn, compared with a trifling $28m in the year before ChatGPT’s launch.Can OpenAI translate its early edge into an enduring advantage, and join the ranks of big tech? To do so it must avoid the fate of erstwhile tech pioneers, from Netscape to Myspace, which were overtaken by rivals that learnt from their early successes and stumbles. And as it is a first mover, the decisions it takes will also say much about the broader direction of a nascent industry.OpenAI is a curious firm. It was founded in 2015 by a clutch of entrepreneurs including Sam Altman, its current boss, and Elon Musk, Tesla’s technophilic chief executive, as a non-profit venture. Its aim was to build artificial general intelligence (AGI), which would equal or surpass human capacity in all types of intellectual tasks. The pursuit of something so outlandish meant that it had its pick of the world’s most ambitious AI technologists. While working on an AI that could master a video game called “Dota”, they alighted on a simple approach that involved harnessing oodles of computing power, says an early employee who has since left. When in 2017 researchers at Google published a paper describing a revolutionary machine-learning technique they christened the “transformer”, OpenAI’s boffins realised that they could scale it up by combining untold quantities of data scraped from the internet with processing oomph. The result was the general-purpose transformer, or GPT for short.Obtaining the necessary resources required OpenAI to employ some engineering of the financial variety. In 2019 it created a “capped-profit company” within its non-profit structure. Initially, investors in this business could make 100 times their initial investment—but no more. Rather than distribute equity, the firm distributes claims on a share of future profits that come without ownership rights (“profit-participation units”). What is more, OpenAI says it may reinvest all profits until the board decides that OpenAI’s goal of achieving AGI has been reached. OpenAI stresses that it is a “high-risk investment” and should be viewed as more akin to a “donation”. “We’re not for everybody,” says Brad Lightcap, OpenAI’s chief operating officer and its financial guru.Maybe not, but with the exception of Mr Musk, who pulled out in 2018 and is now building his own AI model, just about everybody seems to want a piece of OpenAI regardless. Investors appear confident that they can achieve venture-scale returns if the firm keeps growing. In order to remain attractive to investors, the company itself has loosened the profit cap and switched to one based on the annual rate of return (though it will not confirm what the maximum rate is). Academic debates about the meaning of AGI aside, the profit units themselves can be sold on the market just like standard equities. The firm has already offered several opportunities for early employees to sell their units.SoftBank, a risk-addled tech-investment house from Japan, is the latest to be seeking to place a big bet on OpenAI. The startup has so far raised a total of around $14bn. Most of it, perhaps $13bn, has come from Microsoft, whose Azure cloud division is also furnishing OpenAI with the computing power it needs. In exchange, the software titan will receive the lion’s share of OpenAI’s profits—if these are ever handed over. More important in the short term, it gets to license OpenAI’s technology and offer this to its own corporate customers, which include most of the world’s largest companies.It is just as well that OpenAI is attracting deep-pocketed backers. For the firm needs an awful lot of capital to procure the data and computing power necessary to keep creating ever more intelligent models. Mr Altman has said that OpenAI could well end up being “the most capital-intensive startup in Silicon Valley history”. OpenAI’s most recent model, GPT-4, is estimated to have cost around $100m to train, several times more than GPT-3.For the time being, investors appear happy to pour more money into the business. But they eventually expect a return. And for its part Openai has realised that, if it is to achieve its mission, it must become like any other fledgling business and think hard about its costs and its revenues.GPT-4 already exhibits a degree of cost-consciousness. For example, notes Dylan Patel of SemiAnalysis, a research firm, it was not a single giant model but a mixture of 16 smaller models. That makes it more difficult—and so costlier—to build than a monolithic model. But it is then cheaper to actually use the model once it has been trained. because not all the smaller models need be used to answer questions. Cost is also a big reason why OpenAI is not training its next big model, GPT-5. Instead, say sources familiar with the firm, it is building GPT-4.5, which would have “similar quality” to GPT-4 but cost “a lot less to run”.But it is on the revenue-generating side of business that OpenAI is most transformed, and where it has been most energetic of late. AI can create a lot of value long before AGI brains are as versatile as human ones, says Mr Lightcap. OpenAI’s models are generalist, trained on a vast amount of data and capable of doing a variety of tasks. The ChatGPT craze has made OpenAI the default option for consumers, developers and businesses keen to embrace the technology. Despite the recent dip, ChatGPT still receives 60% of traffic to the top 50 generative-AI websites, according to a study by Andreessen Horowitz, a venture-capital (VC) firm which has invested in OpenAI (see chart).image: The EconomistYet OpenAI is no longer only—or even primarily—about ChatGPT. It is increasingly becoming a business-to-business platform. It is creating bespoke products of its own for big corporate customers, which include Morgan Stanley, an investment bank. It also offers tools for developers to build products using its models; on November 6th it is expected to unveil new ones at its first developer conference. And it has a $175m pot to invest in smaller AI startups building applications on top of its platform, which at once promotes its models and allows it to capture value if the application-builders strike gold. To further spread its technology, it is handing out perks to AI firms at Y Combinator, a Silicon Valley startup nursery that Mr Altman used to lead. John Luttig of Founders Fund (a VC firm which also has a stake in OpenAI), thinks that this vast and diverse distribution may be even more important than any technical advantage.Being the first mover certainly plays in OpenAI’s favour. GPT-like models’ high fixed costs erect high barriers to entry for competitors. That in turn may make it easier for OpenAI to lock in corporate customers. If they are to share internal company data in order to fine-tune the model to their needs, many clients may prefer not to do so more than once—for cyber-security reasons, or simply because it is costly to move data from one AI provider to another, as it already is between computing clouds. Teaching big models to think also requires lots of tacit engineering know-how, from recognising high-quality data to knowing the tricks to quickly debug the source code. Mr Altman has speculated that fewer than 50 people in the world are at the true model-training frontier. A lot of them work for OpenAI.These are all real advantages. But they do not guarantee OpenAI’s continued dominance. For one thing, the sort of network effects where scale begets more scale, which have helped turn Alphabet, Amazon and Meta into quasi-monopolists in search, e-commerce and social networking, respectively, have yet to materialise. Despite its vast number of users, GPT-4 is hardly better today than it was six months ago. Although further tuning with user data has made it less likely to go off the rails, its overall performance has changed in unpredictable ways, in some cases for the worse.Being a first mover in model-building may also bring some disadvantages. The biggest cost for modellers is not training but experimentation. Plenty of ideas went nowhere before the one that worked got to the training stage. That is why OpenAI is estimated to have lost $500m last year, even though GPT-4 cost one-fifth as much to train. News of ideas that do not pay off tends to spread quickly throughout AI world. This helps OpenAI’s competitors avoid going down costly blind alleys.As for customers, many are trying to reduce their dependence on OpenAI, fearful of being locked into its products and thus at its mercy. Anthropic, which was founded by defectors from OpenAI, has already become a popular second choice for many AI startups. Soon businesses may have more cutting-edge alternatives. Google is building Gemini, a model believed to be more powerful than GPT-4. Even Microsoft is, despite its partnership with OpenAI, something of a competitor. It has access to GPT-4’s black box, as well as a vast sales force with long-standing ties to the world’s biggest corporate IT departments. This array of choices diminishes OpenAI’s pricing power. It is also forcing Mr Altman’s firm to keep training better models if it wants to stay ahead.The fact that OpenAI’s models are a black box also reduces its appeal to some potential users, including large businesses concerned about data privacy. They may prefer more transparent “open-source” models like Meta’s LLaMA 2. Sophisticated software firms, meanwhile, may want to build their own model from scratch, in order to exercise full control over its behavour.Others are moving away from generality—the ability to do many things rather than just one thing—by building cheaper models that are trained on narrower sets of data, or to do a specific task. A startup called Replit has trained one narrowly to write computer programs. It sits atop Databricks, an AI cloud platform which counts Nvidia, a $1trn maker of specialist AI semiconductors, among its investors. Another called Character AI has designed a model that lets people create virtual personalities based on real or imagined characters that can then converse with other users. It is the second-most popular AI app behind ChatGPT.The core question, notes Kevin Kwok, a venture capitalist (who is not a backer of OpenAI), is how much value is derived from a model’s generality. If not much, then the industry may be dominated by many specialist firms, like Replit or Character AI. If a lot, then big models such as those of OpenAI or Google may come out on top.Mike Speiser of Sutter Hill Ventures (another non-OpenAI backer) suspects that the market will end up containing a handful of large generalist models, with a long tail of task-specific models. If AI turns out to be all it is cracked up to be, being an oligopolist could still earn OpenAI a pretty penny. And if its backers really do see any of that penny only after the company has created a human-like thinking machine, then all bets are off. ■ More

Pop! Few events in financial markets this year were as hotly anticipated as the listing on September 14th of Arm, a British chipmaker whose designs are found in nearly every smartphone. The debut, on New York’s Nasdaq stock exchange, was a resounding success. The share price climbed by 25% on the first day of trading, giving the firm a market value of $65bn. That is $34bn more than SoftBank, a Japanese investment group, paid for the firm in 2016, $25bn more than Nvidia, an American chipmaker, offered to pay in 2020, $1bn more than the valuation at which SoftBank shuffled a 25% stake from its investment fund to its main operation in August, and 125 times Arm’s profit last year.Arm’s initial public offering (IPO) is America’s biggest since Rivian, a startup that makes electric trucks, raised $14bn in November 2021. New listings dried up shortly thereafter. Many have been counting on Arm to break the spell. Its successful opening day will lift the spirits of Birkenstock, a German sandal-maker which on September 12th announced plans to list its shares in America, and Instacart, a grocery-delivery firm looking to raise $600m this month.Some investors had feared that Arm might flop, which is understandable, given how devilishly difficult the firm is to value. Arm’s bosses and bankers have convinced investors that it can juice the royalties its customers pay to use its designs, offsetting the effect of the worldwide slump in smartphone sales currently under way. Arm’s new shareholders appear to have also shrugged off two wider worries confronting markets: the risk of doing business in China, and the excesses of investor enthusiasm for all things artificial intelligence (AI).To believe Arm is fairly valued is to believe that the pages of China-related risks in its IPO prospectus are conservative legalese, rather than an ominous premonition. Last year a quarter of the firm’s revenue came from China. Trade restrictions and RISC-V, an open-source alternative to Arm’s technology popular in China, could nibble away at these sales. The governance of the company’s operations in China adds to the worry. The majority of Arm China, which licenses Arm’s products in the country, has been sold to Chinese investors, meaning neither Arm nor SoftBank retains control. Issues are already emerging, including a history of late payments disclosed in the company’s prospectus (in March 40% of Arm’s accounts receivable were owed by Arm China). If relations between America and China deteriorate further, the arrangement may become problematic.Arm, like many other firms, has been busily trying to present itself to investors as a bet on AI. That is unsurprising, given how this year’s buzz around the technology has fuelled extraordinary stockmarket gains for its early adopters. Yet it may be some time before AI starts to fatten Arm’s bottom line. “It’s a bit early to call where AI computing workloads are going to sit. If they end up in our phones, that could drive more demand for Arm’s products,” says Sara Russo of Bernstein, a broker.Some of the biggest names in tech, including Apple, Google and Nvidia, whose AI chips pushed it into the trillion-dollar tech club this year, were part of an exalted list of ten “cornerstone” investors that lined up to purchase $735m of Arm’s shares as part of the listing. Announcing buyers ahead of an IPO can inspire confidence and reduce price volatility. Usually, however, these are financial investors. Rarely, as in this case, are they customers. For Arm, having some of tech’s biggest names on board is a vote of confidence. For the giants, it affords them a chance to get a foot in the door of a company vital to the tech industry.Investing in a SoftBank-backed IPO is a triumph of hope over experience—some of its biggest investments have gone on to flop in the public markets. What’s more, the investment group still holds around 90% of Arm’s shares, which means it will continue to call the shots. The incentives of SoftBank and Arm’s new investors are not certain to align, especially when it comes to future share sales. These could dampen Arm’s price by increasing supply, though SoftBank isn’t thought to be in a hurry to fully exit its investment. Arm’s new shareholders have, in other words, hitched themselves to a controlling owner whose behaviour is harder to predict even than what Arm is really worth. ■ More

TALK TO GERMAN bosses these days and sooner or later one will bring up “Buddenbrooks”. Thomas Mann’s epic tale of the eponymous clan of grain merchants and their demise is required reading in Germany’s business circles, as well as its schools. Today it serves as a convenient metaphor for the country’s perceived economic decline. GDP may contract this year. Inflation remains stubbornly high. The anti-immigrant Alternative for Germany party is second in some opinion polls, imperilling Germany’s reputation for openness to skilled foreigners. Iconic companies are fleeing abroad. bASF, the world’s largest chemicals firm, is building its $10bn state-of-the-art factory in China. Linde, an industrial-gas group, delisted from the stock exchange in Frankfurt to escape its cumbersome rules but kept its listing in New York. BioNTech, which helped develop one of the world’s first covid-19 vaccines, is setting up its cancer-research operations in Britain.Viewed through a tragic Buddenbrookian lens, German decline can seem inevitable. Not to Nicola Leibinger-Kammüller, chief executive of Trumpf, a 100-year-old family company based in Ditzingen, near Stuttgart, which makes industrial tools such as laser cutters and punching machines. In Mrs Leibinger-Kammüller’s reading, the Buddenbrooks’ downfall was not caused by others. They brought it on themselves, by turning their backs on the virtues of thrift and hard work. That leaves a path to redemption. And this, she believes, runs through the Mittelstand, the German economy’s enterprising backbone.The Mittelstand is home to some 3.5m small and medium-sized businesses. They are as diverse as their wares, which range from chainsaws to industrial software. Some are large and old: Trumpf has 17,000 employees worldwide and annual revenues of €5.4bn ($5.8bn). Others are small and young, like TeamViewer, an 18-year-old computer-maintenance firm with 1,400 employees, or Marvel Fusion, a nuclear-fusion startup founded in 2019. Despite this diversity, they share two important things in common. They are relentlessly innovative. And, not unrelatedly, their leaders are, like Mrs Leibinger-Kammüller, less gloomy about Germany’s prospects than many of their blue-chip counterparts.More than 80% of Mittelstand firms say their situation is stable or good, according to a survey in July by the zGV, an alliance of such businesses. The mood is not rosy, exactly: half reported that sales were down in the second quarter. But it is hopeful. The Mittelstand continues to hire and invest at home. In July Trumpf announced a €380m investment into its headquarters. “People said we have gone mad,” recounts Mrs Leibinger-Kammüller.In fact, Trumpf is coldly rational. “The current wave of pessimism is vastly overdone,” says Holger Schmieding, chief economist of Berenberg, a private bank. Germany enjoys record employment and low public debt. Most of all, he says, it has in the Mittelstand “one of the best search engines for innovation ever invented”. These “hidden champions”, world leaders in their market niche, have coped with painful transitions before, such as the aftermath of German reunification in the 1990s. Now they are adapting again, be it to higher energy prices or to chillier relations with China, which has become a large market for the Mittelstand’s products but is itself looking economically enfeebled and geopolitically adversarial.Trumpf spends 11% of revenue on research and development, almost twice the average for German industry as a whole. It is constantly comparing notes with clients to tailor its products to their changing needs. It has worked with one client to develop a way of using lasers to cut metal more directly from the coil, which uses less of the newly costly energy than the conventional method of cutting it from sheets. Karl Haeusgen, chairman of Hawe, a maker of hydraulic pumps, says that conversations with domestic customers are his firm’s principal source of innovation. “Our Chinese clients will buy what we have, but our German customers challenge our creativity,” he says.Oliver Steil, chief executive of TeamViewer, agrees that the Mittelstand contains some of Germany’s most agile and innovative firms. They benefit from closeness to German industrial titans, to which they often act as suppliers, and from the country’s deep pool of technological and engineering know-how. Most important in times of change, they are risk-takers, says Mr Steil. Undaunted by the old saw that fusion power is 20 years away and always will be, Marvel Fusion is intent on developing commercially viable power generation by smashing atoms together using lasers.If there is a Buddenbrook in the latest chapter of the Mittelstand story, it is the German government. Policymakers and bureaucrats have become too set in their ways, sighs Mr Steil. They seem wedded to red tape and high taxes, and uninterested in supporting innovation. This is leading some Mittelstand firms to sell up or try their luck elsewhere. In April Viessmann, a maker of heat pumps, sold most of its operations to Carrier, an American rival. Even Marvel Fusion recently teamed up with Colorado State University to set up a $150m research site in America.In search of a novel approachHeike Freund, Marvel Fusion’s chief operating officer, still hopes eventually to build a power plant in Germany. In March the Federal Agency for Disruptive Innovation pledged €90m to support laser-based fusion in Germany, half of which will go to Marvel. At a recent pow-wow in Schloss Meseberg, a castle near Berlin, the government unveiled a “growth opportunities law”. This includes a €7bn tax-relief package that would benefit the Mittelstand. On September 6th Olaf Scholz, the chancellor, announced a series of measures to digitise public administration, simplify immigration rules for skilled workers and make it easier to start companies, three pet peeves of Mittelstand bosses. The faster the government can shake off its own Buddenbrookian complacency, the better. ■Read more from Schumpeter, our columnist on global business:America’s bosses just won’t quit. That could spell trouble (Sep 4th)Cherish your Uber drivers. Soon they will be robots (Aug 31st)Corporate America risks losing the Supreme Court (Aug 24th)Also: If you want to write directly to Schumpeter, email him at [email protected]. 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THE CACOPHONY of small-vehicle engines and horns is one of the most recognisable noises in traffic-choked cities across Asia. Soon that trademark roar may be a thing of the past, even if the horns remain. A wave of cross-border ventures for electric two- and three-wheelers, and the infrastructure required to power them, is rippling across the continent.The electrification of scooters, motorcycles and auto-rickshaws in poor and middle-income countries is proceeding much more zippily than for larger motors. In China, the biggest market in the world for electric vehicles, about half of two- and three-wheeled machines sold were battery-powered in 2021, compared with 16% of new passenger cars. In India, Indonesia, the Philippines and Vietnam, where two-wheelers outnumber cars by between three and 30 to one, electrifying them can help countries decarbonise and limit air pollution in cities.That makes the recent flurry of dealmaking a welcome development. On September 6th GoTo Group of Indonesia announced a deal with Selex Motors, a Vietnamese producer of electric bikes and networks of so-called “battery ATMs”. Gojek, GoTo’s ride-hailing arm, will use Selex’s bikes and charging infrastructure in Vietnam. When its electric vehicles run out of juice, drivers can exchange the removable units for fully charged ones at swap stations. In late August Kymco, a large motorcycle-maker from Taiwan, announced a deal with a Thai state-owned energy firm, PTT, to produce new electric two-wheelers and the battery-swapping services to go with them. Around the same time another Taiwanese company, Gogoro, finalised a joint venture with Ayala, a Philippine conglomerate. This would expand what Gogoro claims is already the largest single battery-swapping network in the world, with more than 12,000 racks, carrying between eight and ten batteries apiece, across more than 2,500 locations in Taiwan.The biggest prize is India, where the market for electric motorcycles is booming. Despite the phase-out in May of some subsidies for the purchase of e-motorbikes, sales of battery-powered two- and three-wheelers in the world’s most populous country reached 5.5m in the first eight months of 2023, a rise of 53% compared with the same period in 2022. This year Gogoro has already announced two deals with Indian food-delivery companies, Swiggy and Zomato, for battery-swapping and scooter technology. The company also signed an agreement with the government of the state of Maharashtra, home to 126m people and to India’s commercial capital, Mumbai, promising to invest $1.5bn over eight years in what the two sides are humbly calling the “Ultra Mega Project”.Although some carmakers, such as Nio of China, are experimenting with battery-swapping, the case for it is most clear-cut for smaller rides. Given that few Asian countries have the deep pockets to encourage adoption of electric vehicles with generous subsidies, sellers and buyers alike need the economics to work. Fortunately, the numbers add up. Research published earlier this year by Arthur D. Little, a consultancy, found that total cost of ownership, which measures how much motorists pay for every mile driven over a vehicle’s lifetime, is lower for two- and three-wheelers with a battery-swapping arrangement than for similar vehicles which are petrol-fuelled or home-charged.That is not to say that e-motorcycles with interchangeable batteries will become ubiquitous overnight. Building battery-swapping networks requires a lot of capital spending, which is hard to justify unless people buy the compatible vehicles. And people are unlikely to make such purchases unless they have access to an existing network of charging stations. Solving this chicken-and-egg problem is easier in Taiwan, a densely populated and relatively wealthy nation, than in India, a poor and vast one. Standardisation of battery types will be necessary, too, if needless duplication of infrastructure is to be avoided. EV firms grumble that India’s official battery-swapping policy, which would provide incentives and certainty, seems to be stuck. And as on India’s streets, no amount of honking is likely to speed things along. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More