Philippa Kaur

When Schumpeter recently visited New York, it was at its springtime best. There were cherry blossoms in Central Park, birdsong in the bushes, and—to drown out any false sense of serenity—the usual cacophony of car horns and jackhammers in the streets. Whoosh up in elevators to the salons of Wall Street’s gilded elite, and it only gets better. The views are breathtaking, the preferences revealing—CDs lining the shelves of one legal beagle, a handkerchief in the top pocket of another. Yet if you thought such veterans had seen it all, think again. “It’s a shitload more complicated than it’s ever been,” says the boss of one bank.The hierarchy of concerns changes depending on whom you talk to. But the components are the same. An interest-rate shock not seen for more than a generation. The difficulty of doing deals when money is no longer cheap. A maverick approach to antitrust from the sheriffs in Washington, DC. The rhetorical—if not yet real—decoupling between America and China, which business is afraid to speak out against, however much it stands to lose. So it was serendipitous that one of the New York companies your columnist visited was Pfizer, at its new headquarters in Hudson Yards. The pharma giant, worth $220bn, is rare among American firms in shrugging off many of the sources of uncertainty. Its covid-related partnership with BioNTech, a German vaccine developer, has given it a strong enough balance-sheet to take higher interest rates in its stride. It is a dealmaking machine, uncowed by the trustbusters. And it remains proud of its business in China. It may be sticking its neck out. But if that helps stick a needle into the skittish rump of corporate America, all the better. You can tell Pfizer is flush with cash by visiting its new digs. The main meeting room is a futuristic “purpose circle”. The shimmering executive suites look like they belong on the starship Enterprise. A spiffy newish double-helix logo emphasises its devotion to science. The first topic of conversation is mergers and acquisitions. In little over a year it has splashed out $70bn. That includes the $43bn takeover of Seagen, a maker of cancer medicines, announced in March. It is the biggest pharma deal since 2019.Pfizer can do M&A because unlike most firms, it is not paralysed by the short-term economic outlook. Instead it is galvanised by the certainty that its covid-related bonanza is tapering off. Though sales of pandemic-related vaccines and antivirals beat Wall Street’s expectations in its first-quarter results on May 2nd, they still contributed to a 26% drop in overall revenues compared with the same period in 2022—and will fall further this year. It also faces a looming patent cliff from 2025 onwards, affecting non-covid blockbusters such as Eliquis, an anticoagulant, and Ibrance and Xtandi, two cancer drugs. To offset both of these forces, Pfizer is buying and developing a pipeline of new drugs that it hopes will boost revenues by $30bn in 2030. Like the rest of big pharma, it benefits from the fact that smaller, cash-strapped biotech firms are struggling in the high-interest-rate environment. That makes them relatively receptive to takeovers.In doing such deals, Pfizer is unintimidated by the trustbusters, who are having a chilling effect on dealmaking in other industries. Jeff Haxer of Bain & Company, a consultancy, notes that America’s Federal Trade Commission and Department of Justice are likelier to sue to stop deals taking place than tackle M&A-related competition concerns through remedies such as divestments. So far they have failed to block many transactions, but the timeline for doing deals has lengthened. That affects the cost of financing for the buyer, and raises risks that the seller could be left stranded. Pfizer has taken steps to head off the trustbusters, such as playing down cost-cutting (ie, job-threatening) “synergies”, and playing up its commitment to cancer innovation. It insists the Seagen acquisition will close by early 2024.Unlike many other American firms, Pfizer also remains unusually bullish about its business in China. It employs 7,000 people in the country, which helped bolster covid-related revenues in the first quarter. Its CEO, Albert Bourla, was one of a few bosses of well-known American firms to attend the China Development Forum in Beijing in March (Apple’s Tim Cook was another). Reuters reported that last month Pfizer signed an agreement with Sinopharm, a Chinese drugmaker, to market a dozen innovative drugs in China. It may make sense for a company with a promising business there to double down on its operations. But in a tense geopolitical climate in which many American businessmen fear a backlash if they raise their voices in defence of the trade relationship, it is bold nonetheless. So far Wall Street has given Pfizer little credit for its purposefulness. Its share price has fallen by almost a quarter this year. Critics argue that it may be overpaying for Seagen, and that the acquired drugs may not generate enough revenues to move the needle at Pfizer. They worry that pressures on drug pricing in America may end up destroying some of the economic rationale for its acquisitions. Pfizer still has its work cut out convincing investors its post-covid future is a bright one. As Mr Bourla put it: “It’s not enough to save the world. We need to increase the stock price.”Seeing the vial as half-full Other industries might argue that big pharma, with some of the juiciest margins outside the tech industry, is unrepresentative of corporate America, and offers few lessons in how to cope with the current wave of uncertainty. Yet it is worth remembering that it is often in the depths of M&A squeamishness that companies with strong balance-sheets strike the best deals. An investment banker notes that in 2009, during the global financial crisis, Pfizer paid $68bn for Wyeth, a vaccine-maker, despite misgivings on Wall Street. As luck would have it, more than a decade later that underappreciated business helped Pfizer rescue the world during the covid crisis. It can pay to be bold—even in mysterious ways. ■ More

After a four-year spruce up Tiffany & Co, an upmarket American jeweller, reopened the doors of its flagship store on New York’s Fifth Avenue to the public on April 28th. At first glance the grand unveiling seems conspicuously ill-timed. Hours earlier the Bureau of Economic Analysis had reported that nominal consumer spending in America barely grew in March, amid stubbornly high inflation and a slowing job market.Yet the throng of well-heeled New Yorkers who queued up on opening day to enter what Tiffany has modestly rechristened “The Landmark” hints at a more nuanced story. Hard economic times have, as in the past, pushed consumers of middling means to trade down to budget-friendly stores and products, boosting the performance of those businesses. Wealthy households, however, remain flush with cash, leaving businesses that cater to the affluent surprisingly buoyant. That has raised awkward questions for firms that offer their customers neither frugality nor luxury, but something in between.It has been a rollercoaster three years for America’s consumers—and the businesses that cater to them. The onset of the covid-19 pandemic in early 2020 brought on a sharp contraction in spending that was followed by an orgy of indulgence (see chart 1). Even lower-income households partook in the revelry, spurred on by juicy stimulus cheques and an uptick in wages for less skilled workers as businesses raced to rehire waiters, shop clerks and the like.Then, around 12 months ago, surging inflation led consumers to start tightening their belts, albeit with significant variation across the income distribution. A sharp spike in food and fuel prices triggered by Russia’s invasion of Ukraine coupled with a jump in rental prices hit households further down the income ladder particularly hard, given the higher share of spending they allot to such essentials. Over the course of 2022 the inflation rate for households in the bottom income quintile was one-fifth higher than that for the top quintile, according to Goldman Sachs, a bank, offsetting faster wage growth among low-earners (see chart 2).While annual consumer-price inflation in America has begun to ease, falling from an average of 6.5% last year to 5.0% in March, elevated price levels are weighing heavily on the less affluent, notes Gregory Daco of EY, a consultancy. Extra household savings amassed during the pandemic have dwindled from a peak of nearly $2.5trn in the middle of 2021 to roughly $1.5trn, with the bulk now held mostly by high-income households, according to Joseph Briggs of Goldman Sachs. Wallets at the top of the income distribution have also been fattened by a surge in asset prices in recent years, notes Paul Lejuez of Citigroup, another bank. Although markets have fallen from their frothy peaks, the S&P 500 index of large companies is still up by 26% compared with January 2020. House prices have risen by 38%.This unevenness in the financial health of consumers has had two effects. First is that businesses at the wallet-sparing end of the price spectrum have scored new customers. While the poorest households have cut back on all but essential spending, those of middling means—with larger shopping carts—have been shifting to cheaper stores and brands, says Sarah Wolfe of Morgan Stanley, one more bank.Analysts reckon that sales at Burlington, a discount department store, grew by 13.2% year on year in the first quarter of this year, compared with a decline of 4.2% for Macy’s, a middle-class stalwart. Growth at Walmart, a big-box retailer favoured by the thrifty, is expected to clock in at a respectable 4.9% for America last quarter, while Albertsons and Kroger, two mid-range supermarkets, are forecast to eke out a meagre 2.5% and 1.3%, respectively. A similar pattern is on display within retailers: in-house brands at Walmart are snatching sales away from branded goods from suppliers like Procter & Gamble and Unilever, which have jacked up prices to protect margins. Consumers are bargain-hunting beyond supermarkets and department stores. On April 25th McDonald’s, a purveyor of cheap calories, announced an expectations-beating 12.6% sales growth in America for the first quarter, compared with the previous year. On April 20th IKEA, a Swedish maker of cheap furniture and homeware, said it was investing $2.2bn to expand its presence in America—days before Bed Bath & Beyond, an assuredly middle-class rival, declared bankruptcy.The second upshot of the uneven health of consumers is that, as wealthy shoppers keep splurging on the finer things in life, businesses at the wallet-emptying end of the price spectrum continue to thrive. Last year the market for luxury goods in America grew by a handsome 8.7%, well above inflation, according to Euromonitor, a market-research firm (see chart 3). On April 12th LVMH, the world’s largest luxury conglomerate and owner of Tiffany & Co, reported first quarter sales growth of 8%, year on year, in America—down from 15% in 2022 but still bubbly. Hermès, a maker of eye-wateringly expensive handbags, saw no slowdown in sales in America in the first quarter. The pattern extends well beyond designer wear. Luxury-car sales have been on a two-year tear, hitting a record 19.6% of the total market in January, according to data from Kelley Blue Book, another market researcher.The resilience of the luxury business has been helped by a shift in focus since the financial crisis from the merely rich to the positively loaded, notes Claudia D’Arpizio of Bain, a consultancy. The penthouse floor of “The Landmark” is dedicated entirely to such ultra-high-net-worth shoppers. Whereas aspirational buyers may in good times splash out on a pair of Gucci sneakers, those at the tippy-top of the income distribution are reliable patrons even when the economy looks shaky. That has made luxury a less cyclical business than it once was.The centre doesn’t holdWith consumer spending shifting to the two extremes of the price spectrum, some companies have already begun to reposition themselves. One strategy is to beef up pricier ranges. On April 3rd L’Oréal, a beauty giant whose brands range from the moderately priced Garnier to the luxuriously expensive Lancôme, said it would spend $2.5bn buying Aesop, a maker of $40 hand soaps. Other businesses are reducing exposure to the shaky middle. On April 14th Walmart announced it was selling Bonobos, a mid-range menswear brand, for a mere $75m, well below the $310m it paid to acquire it in 2017. A third strategy is to invest in offerings for the budget-conscious. Video-streamers from Netflix to Disney have launched ad-supported tiers to mop up customers who balk at rising subscription prices.Investors would do well to take note. Conventional market wisdom dictates steering clear of businesses in “discretionary” spending categories (cars, clothes and other non-essentials) in favour of “staples” (necessities such as groceries) in tough economic times. The new logic of consumption suggests that the pedlars of the most essential fare can expect to do well as the economy sours. But so can sellers of the exceedingly discretionary. ■ More

The defining deal of the mining industry’s last merger wave never happened. bhp Billiton’s audacious $150bn bid in 2008 for a rival, Rio Tinto, which would have created a commodities super-group, captured the debt-fuelled spirit of the commodities “supercycle” of the 2000s. As China’s growth slowed and the miners’ capital spending peaked, things fell back to earth. The industry has atoned for its sins by cleaning up its balance-sheets and returning record sums to shareholders. Years of discipline, a surge in commodity prices and the prospect of an explosion in demand for “green” metals have mining bosses again dreaming up fantasy deals. For growth-hungry firms, the high costs and risks of developing new projects and relatively cheap valuations for companies in the sector mean that buying looks more attractive than digging. Last year, as dealmaking slumped in other sectors, mining bosses shook hands at a rate not seen in a decade.Listen to this story. Enjoy more audio and podcasts on More

ANNALENA BAERBOCK kicked off her first trip to China as Germany’s foreign minister in April with a visit to a production site of Flender. The Mittelstand firm makes parts for wind turbines in Tianjin, a coastal city around 130km south-east of Beijing. Ms Baerbock toured the facility for about an hour, all the while bombarding her hosts with questions, such as whether its suppliers are local. It is unusual for a foreign minister to tour a factory, but it shows the importance of business ties between Germany and China. The country is Germany’s biggest trade partner and an important destination for foreign investments in several industries that are the backbone of the Mittelstand. Yet as the value of trade increased for the seventh consecutive year in 2022, the bilateral deficit widened. German imports from China rose by a third compared with 2021 to €192bn ($202bn), whereas exports of German wares to China increased by only 3% to around €107bn.Ms Baerbock’s ministry is spearheading efforts to write a new China strategy. Its much-awaited publication has been repeatedly postponed because of the need to strike a balance between boosting German business while at the same time encouraging some firms to diversify and make Germany less dependent on imports of critical raw materials from China. As Germany’s government recalibrates its China strategy two trends are emerging. One is that the companies already heavily invested in China are doubling down. Some of the country’s largest companies greatly rely on Chinese customers and suppliers. That includes its three big carmakers (Volkswagen, Mercedes-Benz and BMW); BASF, a chemicals giant; and Bosch, a car-components supplier. BASF is charging ahead with its €10bn investment in a new production site in southern China. In October vw announced a €2.4bn investment in a joint venture with a Chinese firm for self-driving cars and will spend €1bn on a new centre for developing electric cars. The other is that German companies are increasingly producing in China for China. Flender’s factory in Tianjin serves only the Chinese market. This reinforces an uncomfortable position for policymakers. Overall Germany may be less dependent on China than generally assumed. A recent study published by the Bertelsmann foundation, the German Economic Institute in Cologne (iw), merics, a think-tank, and the bdi, an association of German industry, scrutinised investment in China. It showed that between 2017 and 2021 China accounted for, on average, 7% of German foreign-direct investment and 12-16% of annual corporate profits, much the same as America, but far less than the eu, which provided, on average, 56% of corporate profits in the same period. And only around 3% of German jobs either directly or indirectly depend on exports to China, says Jürgen Matthes of iw. Yet that is not a reason to be less concerned about China, warns Max Zenglein of merics. In the past the assumption was that business in Germany would automatically benefit from investment in China, he says. With German companies increasingly spending on local production and research and development, the bulk of local profits is now often being reinvested there. And in the longer term the “local to local” trend could hurt both German jobs and exports to China. Another cause for concern is the cluster of huge German firms and industries that continue to rely heavily on China. The survival of its large carmakers and chemicals firms could hinge on access to the country. And China supplies 95% of the solar cells installed in Germany as well as 80% of laptops, and 58% of the circuit boards that are integral to other electronic goods. Germany also depends on China for the rare-earth metals needed to make semiconductors and lithium-ion batteries as well as antibiotics and other important medicines. Mr Matthes warns that companies will continue to pour billions into China unless the new policy provides incentives to do otherwise. If China’s threats to Taiwan turn nastier the consequences could be devastating for firms doing an ever-bigger slice of their business there. The latest tentative date for the publication of the new strategy is just after a meeting on June 20th between Olaf Scholz, the German chancellor, and Li Qiang, China’s prime minister. It is high time for a rethink. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

ANNALENA BAERBOCK kicked off her first trip to China as Germany’s foreign minister in April with a visit to a production site of Flender. The Mittelstand firm makes parts for wind turbines in Tianjin, a coastal city around 130km south-east of Beijing. Ms Baerbock toured the facility for about an hour, all the while bombarding her hosts with questions, such as whether its suppliers are local. It is unusual for a foreign minister to tour a factory, but it shows the importance of business ties between Germany and China. The country is Germany’s biggest trade partner and an important destination for foreign investments in several industries that are the backbone of the Mittelstand. Yet as the value of trade increased for the seventh consecutive year in 2022, the bilateral deficit widened. German imports from China rose by a third compared with 2021 to €192bn ($202bn), whereas exports of German wares to China increased by only 3% to around €107bn.Ms Baerbock’s ministry is spearheading efforts to write a new China strategy. Its much-awaited publication has been repeatedly postponed because of the need to strike a balance between boosting German business while at the same time encouraging some firms to diversify and make Germany less dependent on imports of critical raw materials from China. As Germany’s government recalibrates its China strategy two trends are emerging. One is that the companies already heavily invested in China are doubling down. Some of the country’s largest companies greatly rely on Chinese customers and suppliers. That includes its three big carmakers (Volkswagen, Mercedes-Benz and BMW); BASF, a chemicals giant; and Bosch, a car-components supplier. BASF is charging ahead with its €10bn investment in a new production site in southern China. In October vw announced a €2.4bn investment in a joint venture with a Chinese firm for self-driving cars and will spend €1bn on a new centre for developing electric cars. The other is that German companies are increasingly producing in China for China. Flender’s factory in Tianjin serves only the Chinese market. This reinforces an uncomfortable position for policymakers. Overall Germany may be less dependent on China than generally assumed. A recent study published by the Bertelsmann foundation, the German Economic Institute in Cologne (iw), merics, a think-tank, and the bdi, an association of German industry, scrutinised investment in China. It showed that between 2017 and 2021 China accounted for, on average, 7% of German foreign-direct investment and 12-16% of annual corporate profits, much the same as America, but far less than the eu, which provided, on average, 56% of corporate profits in the same period. And only around 3% of German jobs either directly or indirectly depend on exports to China, says Jürgen Matthes of iw. Yet that is not a reason to be less concerned about China, warns Max Zenglein of merics. In the past the assumption was that business in Germany would automatically benefit from investment in China, he says. With German companies increasingly spending on local production and research and development, the bulk of local profits is now often being reinvested there. And in the longer term the “local to local” trend could hurt both German jobs and exports to China. Another cause for concern is the cluster of huge German firms and industries that continue to rely heavily on China. The survival of its large carmakers and chemicals firms could hinge on access to the country. And China supplies 95% of the solar cells installed in Germany as well as 80% of laptops, and 58% of the circuit boards that are integral to other electronic goods. Germany also depends on China for the rare-earth metals needed to make semiconductors and lithium-ion batteries as well as antibiotics and other important medicines. Mr Matthes warns that companies will continue to pour billions into China unless the new policy provides incentives to do otherwise. If China’s threats to Taiwan turn nastier the consequences could be devastating for firms doing an ever-bigger slice of their business there. The latest tentative date for the publication of the new strategy is just after a meeting on June 20th between Olaf Scholz, the German chancellor, and Li Qiang, China’s prime minister. It is high time for a rethink. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

Goings-on in mexican telecoms are akin to a telenovela. América Móvil, the empire owned by the country’s richest man, Carlos Slim, stars in every season. So it is with the latest instalment of the soap opera. Televisa, a heavyweight of Mexican broadcasting, at&t, an American telecoms group with big operations in the country, and Mexico’s chamber of telecommunications have asked the Federal Telecommunications Institute (ift), the industry regulator, to order that Telmex, the broadband and fixed-line subsidiary of América Móvil, be split into separate firms with two sets of shareholders. That, its rivals contend, would increase competition.Listen to this story. Enjoy more audio and podcasts on More

“How does a uk court block one American company from buying another American company?” asks a gamer in an online forum, where the chat is more often about high scores than competition law. “We had a war about this, and being independent, can do as we damn well please.”Sadly for gamers—and global tech firms—that is not so. On April 26th Britain’s antitrust regulator, the Competition and Markets Authority (cma), blocked Microsoft’s acquisition of Activision Blizzard, a publisher of games such as “Call of Duty”, arguing that the combined firm could gain too much clout and reduce choice for consumers. The surprise decision has probably killed the deal worldwide.The $69bn acquisition, which would have been Microsoft’s largest and one of tech’s biggest ever, had seemed on track. The European Commission was expected to give it the nod next month. America’s Federal Trade Commission (ftc) had objected, but faced a difficult battle in court to stop it. Britain had long been seen as the hardest of the big three regulators to convince. But when in March the cma dismissed concerns from Sony about Microsoft’s advantage in the console market, and after Microsoft signed ten-year deals to make Activision games available on other platforms, it looked like game on.Instead it seems to be game over. The cma ruled that in cloud gaming, an emerging technology in which games are streamed Netflix-style, Microsoft plus Activision might become excessively dominant. Microsoft is already the biggest player in cloud gaming, with some two-thirds of the worldwide business. Control of Activision’s catalogue of hits might make it unassailable, the cma said, adding that it doubted the effectiveness of ten-year deals in a new and fast-changing market.The cloud-gaming market is indeed new and fast-changing, which makes it an odd place to wield the regulatory sledgehammer. Cloud-streaming subscriptions accounted for less than 1% of games spending last year, and it is far from certain that the technology will take off. Google shut down its Stadia cloud service in January and Amazon’s similar Luna platform is unpopular. Even if Microsoft bucked the trend, it would be good for consumers. Cloud gaming is “a vector of competition” between Microsoft and rivals like Sony and Nintendo, “not a distinct market”, wrote Clay Griffin of MoffettNathanson, a firm of analysts, who accused the cma of applying “faulty logic”. Weakening the main cloud-gaming service will entrench the console industry—and its leader, Sony.Microsoft and Activision will appeal. Yet Britain’s appeals tribunal focuses narrowly on process and tends to defer to the cma. Microsoft’s only other options are to break off a smaller chunk of Activision or carve Britain out of the global deal, both things it has previously indicated it will not do. Without a deal Microsoft’s future in gaming is in question, says Ben Thompson of the Stratechery newsletter. “It’s hard to see how the [gaming] division makes sense if Microsoft has the current business model dictated to them, given just how dominant Sony is with said business model.”Microsoft is not the only big tech firm to have been ambushed by the cma, which last year forced Facebook to undo its acquisition of Giphy, an unassuming generator of internet memes. Another Silicon Valley giant says that, since Brexit, Britain has been the feistiest of the big global regulators. America’s ftc is aggressive but reined in by the courts. The European Commission offers more scope for dialogue, tech lawyers report. The cma, meanwhile, is getting stronger. On April 25th Britain published a bill giving it wide discretion to regulate the biggest tech firms, with the power to dish out fines of up to 10% of global turnover. A separate online-safety bill proposes more rules for tech companies, including restrictions on encryption.Yet Britain’s new global clout may backfire. WhatsApp and others have threatened to exit the country rather than impose its encryption rules worldwide. Activision, whose share price fell by a tenth on the ruling, says it will reassess British plans, adding: “Global innovators large and small will take note that—despite all its rhetoric—the uk is clearly closed for business.”■ More

Greater bay technology’s transformation into a mythical beast has been speedy. The startup, which specialises in super-fast lithium-battery charging, was launched in late 2020. Only 19 months later it had reached a valuation of $1bn, making it a unicorn (ie, an unlisted firm valued at or above that amount). More