Philippa Kaur

It has been a jittery few months for the economies of the West. First came the nerve-rattling crisis in the banking sector. Then came the as-yet-unresolved prospect of a default by America’s government on its supposedly risk-free debt. Many now fret over what other hidden dangers lie in wait.An understandable area of concern is the hefty debts racked up by non-financial companies in recent decades courtesy of low interest rates. Since 2000 non-financial corporate debt across America and Europe has grown from $12.7trn to $38.1trn, rising from 68% to 90% of their combined GDP. The good news is that hardy profits and fixed-rate debts mean the prospect of a corporate-debt-fuelled cataclysm in the West remains, for now, reassuringly slim. The bad news is that businesses will soon find themselves waking up to a painful debt hangover that will constrain their choices in the years ahead.The West’s corporate-debt pile has so far proven less wobbly than many feared. On both sides of the Atlantic roughly one-third of debt covered by credit-rating agencies is deemed to be speculative grade, less charitably known as junk, with iffy prospects for repayment. The default rate for those debts remains at a comfortable 3% in both America and Europe (see chart 1). A pandemic-era spike in downgrades from the more reassuring investment grade down to speculative has also since been largely reversed.The explanation for the resilience is two-fold. First is better-than-expected corporate profits. According to The Economist’s calculations, earnings before interest, tax, depreciation and amortisation of listed non-financial firms in America and Europe were 32% higher in the final quarter of 2022 than in the same period in 2019. Some of that is thanks to bumper profits in the energy industry, but not all. Companies from McDonald’s, a fast-food chain, to Ford, a carmaker, handily outperformed analyst expectations on earnings in the first quarter of this year. Procter & Gamble, a consumer-goods giant, and others have successfully protected profits in the face of cost inflation by jacking up prices and cutting costs. That has left plenty of money to continue paying interest bills.The second factor is the structure of corporate debt. In the years after the financial crisis of 2007-09, many firms began opting for long-term fixed-rate debts, notes Savita Subramanian of Bank of America. Today three-quarters of non-financial corporate debt in America and Europe is on fixed rates, according to S&p Global, a rating agency. Rock-bottom interest rates at the height of the pandemic created an opportunity to lock in cheap debt for many years. Only a quarter of the combined debt pile of American and European firms will mature in the next three years (see chart 2). The average coupon rate that issuers actually pay on American investment-grade corporate bonds is currently 3.9%, well below the yield of 5.3% that the market is pricing in at the moment (see chart 3). For high-yield speculative bonds the average coupon rate is 5.9%, compared with a market yield of 8.4%.The morning afterComforting stuff. Yet businesses and their investors would be wise not to take too much solace. GDP growth in America and Europe continues to slow. Analyst estimates suggest that aggregate quarterly earnings declined in the first quarter of this year for listed non-financial firms in both America and Europe. The Federal Reserve and its European counterparts are still raising interest rates. On April 3rd Multi-Color Corporation, an American label-maker, issued $300m of bonds at a hefty 9.5% coupon rate. Firms like Carnival, a cruise-operator, are drawing on cash buffers built up during the pandemic to delay refinancing at higher rates. Such nest-eggs are steadily dwindling.The strain will begin at the flakiest end of the debt spectrum. Less than half of speculative-grade debt in America and Europe is on fixed rates, according to S&P Global, compared with five-sixths for investment-grade debt. Goldman Sachs, a bank, reckons the average coupon rate on speculative-grade floating-rate loans in America has already soared to 8.4%, up from 4.8% a year ago. Floating-rate debt tends to prevail among the most indebted firms, and is particularly common in businesses backed by debt-hungry private equity (PE). Although some PE funds hedge against higher interest rates, the squeeze is already beginning. Bankruptcies of PE-owned businesses in America are so far on track to double from last year, according to S&p Global. On May 14th Envision Healthcare, a provider of doctors to hospitals, declared bankruptcy. KKR, a private-equity giant, paid $10bn for the business in 2018, including debt. It is expected to lose its $3.5bn equity investment.That will make for an uncomfortable ride for the pension funds, insurers and charitable endowments that have entrusted money to the PE barons—not to mention the financiers themselves. Fortunately, for the economy more broadly the effect is likely to be contained. PE-backed businesses employed around 12m workers last year in America, according to EY, a professional-services firm. Listed firms employed 41m.Indeed, it is the effect of rising interest rates on large listed firms, whose debts are mostly investment-grade, that may be the most consequential both for investors and the economy. The S&P 500 index of large American companies accounts for 70% of employment, 76% of capital investment and 83% of market capitalisation of all listed firms in the country. The equivalent STOXX 600 index in Europe carries similar weight in its region.In the years before the pandemic the non-financial firms in these indices consistently splashed more cash on capital investments and shareholder payouts than they generated from their operations, with the gap plugged by debt (see chart 4). But if they wish to avoid a sustained drag on profitability from higher interest rates, they will soon need to start paying down those debts. At current debt levels, every percentage point increase in interest rates will wipe out roughly 4% of the combined earnings of these firms, according to our estimates. Many firms will have no choice but to cut back on dividends and share buy-backs, squeezing investor returns. That will prove especially painful in the spiritual heartland of shareholder capitalism. High payout rates in America—63% of operating cashflow, compared with 41% in Europe—have helped push share prices relative to earnings above those in other markets. Suddenly, borrowing money in order to fork it over to shareholders makes less sense in a world of higher interest rates, argues Lotfi Karoui of Goldman Sachs.Plenty of companies will also find themselves forced to scale back their investment ambitions. Semiconductor companies swimming in overcapacity have already cut back on spending plans. Disney, a media titan with hefty debts, is cutting investments in its streaming services and theme parks. From decarbonisation to automation and artificial intelligence, businesses face an expensive to-do list in the decade ahead. They may find their grand ambitions in such areas derailed by the indulgences of yesteryear. That would be bad news for more than just their investors. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

FLYING IS A dirty business. Airliners account for more than 2% of the annual global emissions from the burning of fossil fuels, many times commercial aviation’s contribution to world GDP. Two forces look poised to push this figure up in the years to come. First, people love to fly. IATA, the airline industry’s trade body, predicts that 4bn passengers will take to the skies next year, as many as did in 2019, before covid-19 temporarily grounded the sector. Airlines could be hauling around 10bn passengers by mid-century (see chart 1). Boeing, an American planemaker, estimates that this will require the global fleet to roughly double from around 26,000 in 2019 to 47,000 by 2040. After a pandemic blip, investors are more bullish again about the sector’s prospects (see chart 2). Showing its confidence, on May 9th Ryanair, a giant of low-cost air travel, placed an order worth $40bn for 300 new Boeings.Second, as other carbon-belching industries, from electricity generation and road transport to steel- and cement-making, go green, air travel is proving harder to decarbonise. If the aviation business is to reach the industry’s goal of net-zero emissions by 2050, tomorrow’s fleet would need to be much cleaner than today’s. Mission Possible, an industry consortium, reckons this could only be done by doubling historical fuel-efficiency gains, putting aircraft powered by novel technologies in the air by the mid-2030s and rapidly rolling out sustainable fuels (plus carbon-capture technology to offset residual emissions, see chart 3).A recent report by SEO Amsterdam Economics and the Royal Netherlands Aerospace Centre, two think-tanks, puts the necessary investment between now and 2050 in Europe alone at some €820bn ($900bn) at current prices, on top of the €1.1trn required for business as usual. Alas, the aviation industry’s current state-of-the-art technology and its economics make Mission Possible sound anything but.When it comes to cutting emissions, aviation has a “wonderful history” compared with other sectors, says Steven Gillard, a director of sustainability at Boeing. He is not wrong. Carbon emissions per kilometre travelled by the average passenger fell by more than 80% over the past 50 years. Each new generation of aircraft generally consumes 15-20% less fuel than the previous one, largely thanks to improved engines. Boeing’s chief executive, Dave Calhoun, told investors last year he wants his next model to be “at least 20%, 25%, maybe 30% better” than aeroplanes it replaces. The trouble is that the technology that might help Mr Calhoun meet this goal is barely perceptible on the horizon. As the jet age nears its centenary, even the historic pace of improvement is becoming tougher to sustain. “Every leap in tech makes the next one harder,” says Andrew Charlton of Aviation Advocacy, a consultancy. And not just for Boeing and its European arch-rival, Airbus.Take engines. CFM, a joint venture between GE and Safran, two engine-makers, has nearly 1,000 engineers working on Rise, an open rotor-engine that does away with the cowling the covers the fan blades. Rolls-Royce and Pratt & Whitney, two other big engine-makers, are also beavering away on their own ideas. But neither engine is likely to provide the efficiency gains that Boeing is after. Tweaking the airframes, such as the potential upgrade to Airbus’s A320 short-haul jets with composite wings that can carry larger, more efficient engines, may help—but only a bit. Work on more radical airframe redesigns, like using a narrower, lighter wing held in place with a strut extending for the bottom of the fuselage as in small propeller planes, under development by Boeing and NASA, America’s space agency, is preliminary at best. If Mission Possible’s efficiency targets look distant, the prospects for all-new types of planes or fuel seem remote. A few startups, such as Electra.Airflow and Heart Aerospace, are working on battery-powered prototypes. Heart already has orders from Air Canada and United Airlines for 30-seaters that could fly 200km on batteries alone, or double that with hybrid power using sustainable fuel. If all goes well, these could be in the air by 2028. Anders Forslund, Heart’s boss, reckons that by 2050 all routes up to 1,500km could be served by electric planes. But such trips account for only 20% of today’s airliner emissions. Another option is liquid hydrogen. In 2020 Airbus said it would start work on this technology, with the aim of having a short-haul commercial jet in the air by 2035. This seems unlikely. Hydrogen must be stored below -235°C and takes up more space than kerosene per unit of energy. Using it would thus require a thorough redesign of the aircraft, with heavy cooling systems and bigger fuel tanks that leave less room for passengers, and of airports, which are not equipped to deal with the gas. If hydrogen can be made to work, it would, like battery-powered flight, probably be limited to short-haul flying. Reducing the carbon footprint of long-haul flight requires something else. The most promising something on offer is sustainable fuel, which though not fully carbon-free does emit 80% less greenhouse gas than kerosene. Such fuels are currently produced from old cooking fat, and occasionally blended in small quantities with the conventional stuff. Boeing has promised that all of its planes will be capable of running on 100% sustainable fuels by 2030. Many airlines and energy firms have announced joint schemes to boost production and bring down the cost, which currently stands at roughly twice that of kerosene. Output reached 300m litres in 2022, according to IATA, a three-fold increase on the year before.That is still a drop in the bucket. For sustainable fuels to get the industry 65% of the way to net zero by 2050 would require 450bn litres a year by 2050, according to iata. And obstacles to achieving the required scale remain formidable. A big one is availability of feedstocks. Second-hand cooking oil is not mass produced in sufficient quantities. Nor are household waste and by-products of forestry, two other potential feedstocks. Converting food crops to fuel use would get you further but is politically controversial at a time when food prices are already rising fast. The EU recently barred fuel producers from using food-crop-based feedstocks to meet new mandates for sustainable fuels. Synthetic alternatives, made from carbon captured from industrial sources or directly from the air, are so far the preserve of a few pilot projects.Overcoming these technological hurdles is made more difficult by the competitive dynamics of the planemaking duopoly. The covid crisis and the grounding of the 737 MAX, Boeing’s short-haul workhorse, for 20 months after fatal crashes in 2018 and 2019 have left the American firm with long-term debts of $47bn. It is already busy launching a bigger version of the MAX and certifying the 777X, a variant of its popular long-haul jet. If it does not launch an all-new plane until late this decade, that will be a gap of 25 years from its last big debut, of the 787 in 2005. Its engineers’ skills may atrophy. A new plane programme that might cost up to $30bn and take ten years from launch to commercialisation would not sit well with Boeing’s aim: to resume returning money to shareholders by 2026. Airbus’s finances are healthier. But it, too, has little incentive to place a giant bet on an untested new technology with its American nemesis in no position to exert competitive pressure. As it is, the European company’s orders are already around 7,000 planes, roughly 50% bigger than Boeing’s. All this means that flying is unlikely to become radically climate-friendlier soon. Scott Deuschle of Credit Suisse, a bank, calls the industry’s net-zero target “low probability”. The only other option is for governments to get serious about the problem. There are signs of this happening. The EU is phasing in a mandate for sustainable fuels, whose share in European airlines’ tanks will need to rise from 2% in 2025 to 70% by 2050. In 2026 the bloc will start phasing out free emissions allowances for carriers under its emissions-trading scheme. Some countries are going further. As part of its bail-out of Air France during the pandemic, the French government forbade the carrier from competing with trains on routes of less than two and a half hours. In the Netherlands, meanwhile, the authorities mandated a reduction by late 2023 in the number of flights at the state-owned Schiphol airport, the country’s biggest, by 8%, to 460,000 a year, to cut both carbon-dioxide and noise pollution. The French ploy might work, though just how much good it will do does is debatable. The Dutch one was foiled in April by a court, with the backing of several airlines. The aviation industry wants climate virtue—but not yet. ■ More

FLYING IS A dirty business. Airliners account for more than 2% of the annual global emissions from the burning of fossil fuels, many times commercial aviation’s contribution to world GDP. Two forces will push this figure up in the years to come. First, people love to fly. IATA, the airline industry’s trade body, predicts that 4bn passengers will take to the skies next year, as many as did in 2019, before covid-19 temporarily grounded the sector. Airlines could be hauling around 10bn passengers by mid-century (see chart 1). Boeing, an American planemaker, estimates that this will require the global fleet to roughly double from around 26,000 in 2019 to 47,000 by 2040. After a pandemic blip, investors are more bullish again about the sector’s prospects (see chart 2). Showing its confidence, on May 9th Ryanair, a giant of low-cost air travel, placed an order worth $40bn for 300 new Boeings.Second, as other carbon-belching industries, from electricity generation and road transport to steel- and cement-making, go green, air travel is proving harder to decarbonise. If the aviation business is to reach the industry’s goal of net-zero emissions by 2050, tomorrow’s fleet will need to be much cleaner than today’s. Mission Possible, an industry consortium, reckons this could only be done by doubling historical fuel-efficiency gains, putting aircraft powered by novel technologies in the air by the mid-2030s and rapidly rolling out sustainable fuels (plus carbon-capture technology to offset residual emissions, see chart 3).A recent report by SEO Amsterdam Economics and the Royal Netherlands Aerospace Centre, two think-tanks, puts the necessary investment between now and 2050 in Europe alone at some €820bn ($900bn) at 2018 prices, on top of the €1.1trn required for business as usual. Alas, the aviation industry’s current state-of-the-art technology and its economics make Mission Possible sound anything but.When it comes to cutting emissions, aviation has a “wonderful history” compared with other sectors, says Steven Gillard, a director of sustainability at Boeing. He is not wrong. Carbon emissions per kilometre travelled by the average passenger fell by more than 80% over the past 50 years. Each new generation of aircraft generally consumes 15-20% less fuel than the previous one, largely thanks to improved engines. Boeing’s boss, Dave Calhoun, told investors last year he wants his next model to be “at least 20%, 25%, maybe 30% better” than aeroplanes it replaces. The trouble is that the technology that might help Mr Calhoun meet this goal is barely perceptible on the horizon. As the jet age nears its centenary, even the historic pace of improvement is becoming tougher to sustain. “Every leap in tech makes the next one harder,” says Andrew Charlton of Aviation Advocacy, a consultancy. And not just for Boeing and its European arch-rival, Airbus. Take engines. CFM, a joint venture between GE and Safran, two engine-makers, has over 1,000 engineers working on Rise, an open rotor-engine that does away with the cowling that covers the fan blades. Rolls-Royce and Pratt & Whitney, two other big engine-makers, are also beavering away on their own ideas. But neither engine is likely to provide the efficiency gains that Boeing is after. Tweaking the airframes, such as the potential upgrade to Airbus’s A320 short-haul jets with composite wings that can carry larger, more efficient engines, may help—but only a bit. Work on more radical airframe redesigns is preliminary at best. Boeing and NASA, America’s space agency, are developing a narrower, lighter wing held in place with a strut extending from the bottom of the fuselage as in small propeller planes. If Mission Possible’s efficiency targets look distant, the prospects for new types of planes or fuel seem remote. A few startups, such as Electra.Aero and Heart Aerospace, are working on battery-powered prototypes. Heart already has orders from Air Canada and United Airlines for 30-seaters that could fly 200km on batteries alone, or double that with hybrid power using sustainable fuel. If all goes well, these could be in the air by 2028. Anders Forslund, Heart’s boss, reckons that by 2050 all routes up to 1,500km could be served by electric planes. But such trips account for only 20% of today’s airliner emissions. Another option is liquid hydrogen. In 2020 Airbus said it would start work on this technology, with the aim of having a short-haul commercial jet in the air by 2035. This seems unlikely. Hydrogen must be stored below -235°C and takes up more space than kerosene per unit of energy. Using it would thus require a thorough redesign of the aircraft—with heavy cooling systems and bigger fuel tanks that leave less room for passengers—and of airports, which are not equipped to deal with the gas. If hydrogen can be made to work, it would, like battery-powered flight, probably be limited to short-haul flying. Reducing the carbon footprint of long-haul flight requires something else. The most promising something on offer is sustainable fuel, which though not fully carbon-free emits 80% less greenhouse gas than kerosene. Such fuels are currently produced from old cooking fat, and occasionally blended in small quantities with the conventional stuff. Boeing has promised that all of its planes will be capable of running on 100% sustainable fuels by 2030. Many airlines and energy firms have announced joint schemes to boost production and bring down the cost, which currently stands at roughly twice that of kerosene. Output reached 300m litres in 2022, according to IATA, a three-fold increase on the year before.That is still a drop in the bucket. For sustainable fuels to get the industry 65% of the way to net zero by 2050 would require 450bn litres a year by then, iata reckons. Obstacles to achieving such scale remain formidable. A big one is availability of feedstocks. Second-hand cooking oil is not mass-produced in sufficient quantities. Nor are household waste and by-products of forestry, two other potential sources. Converting food crops to fuel use would get you further. But this is politically thorny at a time when food prices are already rising fast. To avoid controversy, international sustainable-fuel standards currently prohibit using food crops as a feedstock altogether. Synthetic alternatives, made from carbon captured from industrial sources or directly from the air, are so far the preserve of a few pilot projects.Overcoming the technological hurdles is made harder by the competitive dynamics of the planemaking duopoly. The covid crisis and the grounding of the 737 MAX, Boeing’s short-haul workhorse, for 20 months after fatal crashes in 2018 and 2019 have left the American firm with long-term debts of $47bn. It is already busy launching a bigger version of the MAX and certifying the 777X, a variant of its popular long-haul jet. If it does not launch an all-new plane until late this decade, that will be a gap of 25 years from its last big debut, of the 787 in 2005. Its engineers’ skills may atrophy. A new plane programme that might cost up to $30bn and take ten years from launch to commercialisation would not sit well with Boeing’s other aim: to resume returning money to shareholders by 2026. Airbus’s finances are healthier. But it, too, has little incentive to place a giant bet on an untested new technology with its American nemesis in no position to exert competitive pressure. As it is, the European company’s orders are already around 7,000 planes, roughly 50% more than Boeing’s. Flying is, then, unlikely to become radically climate-friendlier soon. Scott Deuschle of Credit Suisse, a bank, calls the industry’s net-zero target “low probability”. The only other option is for governments to get serious about the matter. Some are. The EU is phasing in a mandate for sustainable fuels, whose share in European airlines’ tanks will need to rise from 2% in 2025 to 70% by 2050. In 2026 the bloc will start phasing out free emissions allowances for carriers under its emissions-trading scheme. As part of its covid bail-out of Air France, the French government forbade the carrier from competing with trains on routes of less than two and a half hours. The Dutch authorities ordered a reduction by late 2023 in the number of flights at the state-owned Schiphol airport, the Netherlands’ biggest, by 8%, to 460,000 a year, mainly to cut noise pollution though carbon emissions were also a concern. The French ploy may work, though just how much good it will do is debatable. The Dutch one was foiled in April by a court, with the backing of several airlines. The aviation business wants climate virtue—but not yet. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

Soft skills matter to employers. Writing in the Harvard Business Review last year, Raffaella Sadun of Harvard Business School and her co-authors analysed almost 5,000 job descriptions that Russell Reynolds, a headhunter, had developed for a variety of C-suite roles between 2000 and 2017. Their work showed that companies have shifted away from emphasising financial and operational skills towards social skills—an ability to listen, reflect, communicate and empathise. Other research has reached similar conclusions about jobs lower down the pay scale: being able to work well with people is seen not as some fluffy bonus but as a vital attribute. Listen to this story. Enjoy more audio and podcasts on More

SIX DECADES ago, when Japan’s carmakers were minnows outside their home market, the future giants of global car manufacturing—Toyota, Nissan and Honda among them—began to expand production in Thailand. The South-East-Asian country’s early presence in the automotive supply chains means it is the tenth-largest producer of cars in the world, surpassing countries like France and Britain.Listen to this story. Enjoy more audio and podcasts on More

At the steelworks near the German city of Salzgitter, ironmaking is a dramatic affair. Red-hot molten metal pours forth from the bottom of towering blast furnaces. The noise is deafening. Sparks fly everywhere. Soon things will be much more sedate. Seven wind turbines already tower over the site, run by a firm called Salzgitter AG. In a few years the electricity they generate will power banks of electrolysers, container-sized machines that split water into oxygen and hydrogen. The hydrogen will replace coke in reducing iron ore to iron in a new type of furnace, which will operate at much lower temperatures. Instead of CO2, the process will emit H2O. Listen to this story. Enjoy more audio and podcasts on More

You cannot see the Hollywood sign from the picket line outside Netflix’s compound on Sunset Boulevard. It is obscured by an office tower with a busty advertisement for a “Bridgerton” spin-off splashed on the wall. Yet Hollywood, with its arcane paraphernalia, is all around you. The Writers Guild of America (WGA), which called the strike, traces its roots back to cinema’s early days. The language that the strikers use is steeped in history. They talk of “rooms” where writers gather to work on a script and of “notes”, the often brutal feedback they receive from studio executives. In Los Angeles, Hollywood still confers cachet. You can tell from the horns blasting out in support of the strikers from passing cars. It is a town, and an industry, in upheaval, though. The strike, the first in 15 years, is the latest manifestation of that. Cinemas are still struggling to lure audiences back after the pandemic. Media companies are drowning in debt. Amid a surfeit of TikTok celebrities and minor Hollywood glitterati, only a few old warhorses like Tom Cruise are guaranteed to bring out the crowds. The main cause of the turmoil is streaming. Its firehose of content keeps people at home, rather than going to the multiplex. Its shows cost the film industry a fortune to make. And they are served up with such blink-and-you-miss-them rapidity that it is harder than ever to create universal cultural icons. Yet as leisure activities go, there are few better ways to get a bang for 15 bucks or less. Streaming hasn’t just changed the way people watch TV. It has changed the business model, too. With studios and streamers under the same roof, what used to be a value business driven by hits has turned into a volume business driven by subscriptions. MoffettNathanson, a media-focused consultancy, vividly illustrates this with a quote from a talent agent: “Streaming turned an industry with a profit pool that looked like New York’s skyline into the Los Angeles skyline.” In other words, a few monumental hits, with a sprawl of minor hits and misses in between. Over this landscape, no streamer stands taller than Netflix. Not for nothing is Hollywood calling this “the Netflix strike”.Netflix may not have single-handedly changed Hollywood; HBO, a maker of edgy TV, deserves a screen credit. But its success shows there is no going back. At the end of March it had 232.5m subscribers worldwide. That gives it a huge base for absorbing the costs of shows. Unlike its rivals, its streaming service is profitable, which allows it to reinvest in better content. Its geographic reach lets it take low-budget series from local markets, as it did in 2021 with “Squid Game”, a dystopian South Korean satire on inequality, and turn them into global hits. Its new cheap ad-supported tier offers huge potential to increase revenue and subscriber growth.Given its strength, one might think it could afford to splash out on writers. Perish the thought. In a volume business, cost is key. Its ability to control production expenses helped bolster its cashflow in the first quarter. Investors loved it. Writers, once accustomed to more lavish treatment, did not. Their retort, visible on the picket lines outside Netflix offices: “Fists up. Pencils down.”Talk to the strikers and it is hard not to feel sympathetic. In the pre-streaming era, writing for a moderately successful film or TV series guaranteed a steady income. Writers’ rooms, with at least eight scribes firing off each other, were common when working in pre-production, on set and during editing. Helping write a 26-episode TV show could take up most of the year. Once a film was released, or a TV show broadcast, there was a lucrative aftermarket, including home video and syndicated sales, which brought in residual royalties. It was easy to measure success. Third-party firms reported ratings, box-office numbers and after-sales. The early days of streaming were, if anything, even better. Not only did Netflix, and deep-pocketed tech giants such as Apple and Amazon, spray cash on content to attract subscribers. They made payments up front, regardless of success (they kept most of the viewing figures to themselves). They gave writers unusual creative freedom. The streaming wars gave rise to a golden age of TV. But since investors have taken fright at the ballooning budgets, the money-spigot has been turned off. Shows are shorter than in the pre-streaming era, and work is intermittent. Writing after pre-production has virtually ground to a halt, says Danielle Sanchez-Witzel, union captain and writer for Netflix, whose comedy show, “Survival of the Thickest”, comes out this summer. She says she was shocked at how intransigent the platform was when she asked for more writers on set. “It’s led to a lot of soul-searching.” It isn’t just the WGA. Directors and actors are starting separate contract negotiations with the Association of Motion Picture and Television Producers (AMPTP), which represents the studios, ahead of a June 30th deadline. They, too, have concerns about pay, staffing and residuals. In the background lurks artificial intelligence, and the question of whether it will change the economics of the movie industry as much as—or more than—the internet did. Sunset Boulevard, sunset industry Given such seismic changes, it would not be surprising if the guilds dig in their heels. They have loud voices on social media. The lavish salaries studio bosses pay themselves, while cutting costs elsewhere, make for easy targets. Yet the strikers’ leverage is limited. Netflix’s rivals could have offered more generous terms to win the war for talent. They didn’t, instead joining under the AMPTP umbrella. Netflix may be one of their biggest targets, but it has a large slate of releases ready to go that may insulate it better than its peers from a lack of new scripts. The global reach of the streamers could undercut American content creators; there are plenty of non-unionised foreigners keen to step into their shoes. This is a world where unscripted fare, including YouTube and TikTok, competes with traditional media for viewers’ attention. The skyline has changed. It is foolish to think Hollywood will not change with it. ■ More

IF YOU LISTEN to the bombastic rhetoric in Beijing and Washington, America and China are engaged in an all-out contest for technological supremacy. “Fundamentally, we believe that a select few technologies are set to play an outsized importance over the coming decade,” thundered Jake Sullivan, President Joe Biden’s national security adviser, last September. In February Xi Jinping, China’s paramount leader, echoed the sentiment, stating that “we urgently need to strengthen basic research and solve key technology problems” in order to “cope with international science and technology competition, achieve a high level of self-reliance and self-improvement”. No technology seems to obsess policymakers on both sides of the Pacific more right now than artificial intelligence (AI). The rapid improvements in the abilities of “generative” AIs like ChatGPT, which analyse the web’s worth of human text, images or sounds and can then create increasingly passable simulacrums, have only strengthened the obsession. If generative AI proves as transformational as its boosters claim, the technology could give those who wield them an economic and military edge in the 21st century’s chief geopolitical contest. Western and Chinese strategists already talk of an AI arms race. Can China win it?On some measures of AI prowess, the autocracy pulled ahead some time ago (see chart 1). China surpassed America in the share of highly cited AI papers in 2019; in 2021 26% of AI conference publications globally came from China, compared with America’s share of 17%. Nine of the world’s top ten institutions, by volume of AI publications, are Chinese. According to one popular benchmark, so are the top five labs working on computer vision, a type of AI particularly useful to a communist surveillance state.At the same time, when it comes to “foundation models”, which give the buzzy generative AIs their wits, America finds itself firmly in front (see chart 2). ChatGPT and the pioneering model behind it, the latest version of which is called GPT-4, are the brain child of OpenAI, an American startup. A handful of other American firms, from small firms such as Anthropic or Stability AI to tech giants like Google, Meta and Microsoft (which part-owns OpenAI), have their own powerful systems. ERNIE, a Chinese rival to ChatGPT built by Baidu, China’s internet-search giant, is widely seen as less clever than most of them (see chart 3). Alibaba and Tencent, China’s mightiest tech titans, have yet even to unveil their own generative AIs. This leads those in the know to conclude that China is two or three years behind America in foundation-model building. There are three reasons for this underperformance. The first concerns data. On the surface, a centralised autocracy should be able to marshal a lot of it—the government was, for instance, able to hand over its troves of surveillance information on Chinese citizens to companies such as SenseTime or Megvii that, with the help of the country’s leading computer-vision labs, then used it to develop top-notch facial-recognition systems. That advantage has proved less formidable in the context of generative AIs, because foundation models are trained on the much more voluminous unstructured data of the internet. American model-builders benefit from the fact that 56% of all websites are in English, whereas just 1.5% are in Mandarin or China’s other languages, according to data from the W3Techs, an internet-research site. As Yiqin Fu of Stanford University points out, the Chinese interact with the internet primarily through mobile super-apps like WeChat and Weibo. These are “walled gardens”, so much of their content is not indexed on search engines. This makes that content harder for AI models to suck up. Lack of data may explain why Wu Dao 2.0, a Chinese model unveiled in 2021 by the Beijing Academy of Artificial Intelligence, a state-backed outfit, failed to make a splash despite its possibly being more computationally complex than GPT-4.The second reason for China’s lacklustre generative achievements has to do with hardware. Last year America imposed swingeing export controls on any technology that might give its main geostrategic rival a leg-up in AI. In particular, that includes the powerful chips used in the cloud-computing data centres where foundation models do their learning, and the chipmaking tools that could enable China to build such semiconductors on its own. That was a blow to Chinese model-builders. An analysis of 26 big Chinese models by the Centre for the Governance of AI, a British think-tank, found that more than half depended on Nvidia, an American chip designer, for their processing power. Some reports suggest that SMIC, China’s biggest chip manufacturer, has produced prototype chips which are just a generation or two behind TSMC, the Taiwanese industry leader that manufactures chips for Nvidia (see chart 4). But the Chinese firm may only be able to mass-produce chips which TSMC was churning out by the million three or four years ago. A professor at a leading Chinese university laments his country’s weakness in such “basic infrastructure” of AI.Chinese AI firms are also having more trouble getting their hands on another American export: know-how. America remains a magnet for the world’s tech talent; two-thirds of AI experts in America who present papers at the biggest AI conference are foreign-born. Chinese engineers made up 27% of that select group in 2019. Many Chinese AI boffins studied or worked in America before bringing their machine learnings back home. (Few non-Chinese boffins would consider moving to a police state a wise career move.) The covid-19 pandemic and rising Sino-American tensions are causing their numbers to dwindle. In the first half of 2022 America granted half as many visas to Chinese students as in the same period in 2019. The triple shortage—of data, hardware and expertise—has been a genuine hurdle for China. Whether it will hold Chinese AI ambitions back much longer is, though, another matter. Info attainmentTake data. On February 13th the local authorities in Beijing, where nearly a third of China’s AI firms are located, said they were releasing data from 115 state-affiliated organisations, giving model-builders 15,880 data sets to play with. The central government has previously signalled it wants to dismantle Chinese apps’ walled gardens, potentially liberating more data, says Kayla Blomquist, a former American diplomat in China now at Oxford University.Most important, the latest models appear able to transfer learnings from one language to another. In the paper describing GPT-4, OpenAI said that the model performed remarkably well on tasks in Chinese despite the dearth of Chinese source material in the model’s training data. Already Baidu’s ERNIE was trained on lots of English-language data, notes Jeffrey Ding of George Washington University. In hardware, too, China is finding workarounds. The Financial Times reported in March that SenseTime, which is blacklisted by America’s government, has used intermediaries to skirt the export controls. Some Chinese AI firms are able to harness the computing power of Nvidia’s advanced chips through cloud servers based in other countries. Alternatively, they can simply buy more of Nvidia’s less advanced semiconductors or use them more efficiently with the help of clever software. To continue serving the vast Chinese market, the American company has designed less powerful sanctions-compliant processors. These are between 10% and 30% slower than its top-of-the-range kit, and end up being costlier for the Chinese customers per unit of processing power. But they do the job. China could partly alleviate the dearth of chips—and of brain power—with the help of “open-source” models. Such models’ inner workings can be downloaded by anyone and fine-tuned to a specific task. Most importantly, that includes the numbers, called “weights”, which define the structure of the model and which are derived from costly training runs. Alpaca, a model built by researchers at Stanford University using the weights from LLaMA, a foundation model created by Meta, was made for less than $600, compared with sums on the order of $100m for training something like GPT-4. Alpaca performs just as well as the original version of ChatGPT on many tasks. Chinese AI labs could similarly avail themselves of open-source models, which embody the collective wisdom of international research teams. Matt Sheehan of the Carnegie Endowment for International Peace, another think-tank, says that China has form in being a “fast follower”—its labs have absorbed advances from abroad and then rapidly incorporated them into their own models, often with flush state resources. A prominent Silicon Valley venture capitalist is more blunt, calling open-source models a gift to the Communist Party.Such considerations make it hard to imagine that either America or China could in the long run build an unbridgeable lead in AI modelling. Each may well end up with AIs of roughly similar ability, even if it costs China over the odds to keep up in the face of American sanctions. But even if the race of the model-builders is a dead heat, America has one thing going for it that could make it the big AI winner—its peerless ability to spread cutting-edge innovation throughout the economy. It was, after all, more efficient diffusion of technology that helped America open up a technological lead over the Soviet Union, which in the 1950s was producing twice as many science PhDs as its democratic adversary.China is, of course, far more competent than the Soviet Union ever was at adopting new technologies. Its fintech platforms, 5G telecoms and high-speed rail are all world-class. But those successes may be the exception, not the rule, says Mr Ding. Particularly in the deployment of sensors, cloud computing and business software—all complementary to AI—China has done less well. Although American export controls may not derail all Chinese model-building, they do constrain China’s tech industry more broadly, thereby slowing the adoption of any new technology. Moreover, corporate China as a whole, and especially small and medium-sized companies, is short of technologists who act as conduits for technological diffusion. Swathes of the economy are dominated by state-owned firms, which tend to be stodgy and change-averse. China’s “Big Fund” for chips, which raised $50bn in 2014 with a view to backing domestic semiconductor firms, has been mired in scandals. Many of the thousands of AI startups created in recent years have simply slapped on the AI label in the hope of getting a slice of the lavish subsidies doled out by the state to the favoured industry. As a consequence, China’s private sector may find it hard to take full advantage of generative AI, especially if the Communist Party imposes heavy regulations to prevent chatbots from saying something its censors do not like. Such handicaps would come on top of Mr Xi’s broader suborning of private enterprise, including a two-and-a-half-year crackdown on China’s tech industry. Although this anti-tech campaign has officially ended, it has left businesses scarred. The result is a chill in tech sentiment. Last year private investments in Chinese AI startups amounted to $13.5bn, less than one-third the amount that flowed to their American rivals. In the first four months of 2023 the funding gap appears only to have widened, according to PitchBook, a data provider. Whether or not generative AI proves revolutionary, the free market has placed its bet on who will make the most of it. ■ More