Philippa Kaur

SAM ZELL called himself “the Grave Dancer”, even though, as he explained, his penchant for buying distressed assets “wasn’t so much dancing on graves as …raising the dead”. In the mid-1970s, when he coined this nickname, America’s property market was struggling. Mr Zell, who died on May 18th at the age of 81 and with a fortune of more than $5bn, had already made good money erecting and managing apartment buildings in small but growing cities. But after others cottoned on to the same opportunity, the market became saturated. Supply exceeded demand; property prices crashed. Undeterred, he bought flats, offices and retail space, often for pennies. As America’s economy boomed in the 1980s, their value soared. He danced on more graves after Black Monday in October 1987. With rents and occupancy rates falling, indebted property owners needed money, and turned to capital markets. He created a fund with Merrill Lynch, an investment bank, that raised capital from investors to buy distressed properties. Such real-estate investment trusts (REITs), which own, run or finance properties, date back to the 1960s. But it was Mr Zell who helped usher in their modern version, says Michael Knott of Green Street, a firm of real-estate analysts. Mr Zell was born to Polish-Jewish parents who narrowly escaped the Holocaust. He got his start in business early, buying Playboy magazines in downtown Chicago, where he went to Hebrew school, for 50 cents and selling them to classmates in the suburb where he lived for $3. He wore jeans to work long before office-casual was a thing, and took motorcycle-riding trips around the world with a group of friends, “Zell’s Angels”. He explained his business philosophy as “If it ain’t fun, we don’t do it.” His timing was impeccable. In 2007 he sold his office-landlord business to Blackstone, a private-equity giant, for $39bn. A year later Lehman Brothers collapsed—and the commercial-property market with it.Where would a young Mr Zell look to build his fortune today? Stephanie Wright of New York University thinks that, given his preference for easy-to-understand markets with limited competition, outdoor storage facilities could pique his interest. They are big but employ few people, meaning cities dislike them and limit their growth, even though demand remains robust. The same goes for parks of prefabricated homes, the business of the first company Mr Zell ever took public, in 1993. People still buy them, yet zoning laws restrict them. Once a house is installed on the property, homeowners rarely move it. On the rare occasions when one does, the developer still has the land and can put another home in its place.Conventional wisdom argues for staying away from the office and retail assets that helped make Mr Zell a billionaire. American malls have long been written off for dead, bricks and mortar deemed to be no match for e-commerce. In the era of remote and hybrid work, leasing activity is slowing across most big American cities even as employment continues to rise, according to CBRE, a property manager. Office-vacancy rates are increasing—to 17.8% across America in the first three months of 2023, the highest level in 30 years. Even though some upscale malls and office buildings are thriving, many older and shabbier properties look destined for obsolescence. Yet to Mr Zell those failing assets may have looked the most attractive of all. For in failure, as any grave dancer knows, lies opportunity. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

On May 22nd the EU whacked Meta with a €1.2bn ($1.3bn) fine for transferring users’ data to America, in breach of European privacy rules (which turn five this week). The social-media giant is a repeat offender when it comes to privacy breaches. But the EU has reserved the biggest penalties for other sins. Between 2017 and 2019 Google was fined a total of over €8bn for abusing its dominance in search and advertising. Both Google and Meta can afford it; the fines represent a fraction of their profits.■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

“TODAY WE SEE the birth of a new species,” declared Julio Friedmann, gazing across the bleak landscape. Along with several hundred grandees, the renowned energy technologist had travelled to a remote corner of Texas’s oil patch called Notrees at the end of April at the invitation of 1PointFive, a division of Occidental Petroleum, an American oil firm, and of Carbon Engineering, a Canadian technology startup backed by Bill Gates. The species in question is in some ways akin to a tree—but not the biological sort, nowhere to be seen on the barren terrain. Rather, it is an arboreal artifice: the first commercial-scale “direct air capture” (DAC) plant in the world. Like a tree, DAC sucks carbon dioxide from the air, concentrates it and makes it available for some use. In the natural case, that use is creating organic molecules through photosynthesis. For DAC, it can be things for which humans already use CO2, like adding fizz to drinks, encouraging faster plant growth in greenhouses or, in Occidental’s case, injecting it into underground oil reservoirs to squeeze more drops of crude from the nooks and crannies.Yet some of the 500,000 tonnes of CO2 that the Notrees plant will capture each year once fully operational in 2025 will be pumped beneath the Texas plains in the service of a grander goal: fighting climate change. For unlike the carbon stored in biological plants, which can be released when they are cut down or burned, CO2 artificially sequestered may well stay sequestered indefinitely. Companies that want to net out some of their own carbon emissions but do not trust biology-based offsets will pay the project’s managers per stashed tonne. That makes the Notrees launch the green shoot of a something else, too: a real industry.Carbon Engineering and its rivals, such as ClimeWorks, a Swiss firm, Global Thermostat, a Californian one, and myriad startups worldwide, are attracting private capital. Occidental plans to build 100 large-scale DAC facilities by 2035. Others are trying to mop up carbon dioxide produced by power plants and industrial processes before it even enters the atmosphere, an approach known as carbon capture and storage (CCS). In April ExxonMobil unveiled ambitious plans for its newish low-carbon division, whose long-term goal is to offer such decarbonisation as a service for industrial customers in sectors, like steel and cement, whose emissions are otherwise hard to abate. The oil giant thinks this sector could be raking in annual revenues of $6trn globally by 2050.The boom in carbon removal, be it from the atmosphere or from industrial point sources, cannot come fast enough. The UN-backed Intergovernmental Panel on Climate Change assumes that if the world is to have a chance of limiting global warming to 2°C above pre-industrial levels, in line with the Paris climate agreement, renewables, electric vehicles and other decarbonisation technologies are not enough. CCS and sources of “negative emissions” such as DAC will need to play a part. America’s Department of Energy calculates that the country’s climate targets require capturing and storing between 400m and 1.8bn tonnes of CO2 annually by 2050, up from 20m tonnes today. Wood Mackenzie, an energy consultancy, reckons that globally various forms of carbon removal account for a fifth of the emissions reductions required to reach net-zero greenhouse-gas emissions by 2050. If Wood Mackenzie is right, and given that humanity belches more than 40bn tonnes a year, this would be equivalent to sucking up more than 8bn tonnes of CO2 annually. And that requires an awful lot of industrial-scale carbon-removal ventures (see chart 1).For years such projects were regarded as technically plausible, perhaps, but uneconomical. An influential estimate by the American Physical Society in 2011 put the cost of DAC at $600 per tonne of CO2 captured. By comparison, permits to emit one tonne currently trade at around $100 in the EU’s emissions-trading system. CCS has been a perennial disappointment. Simon Flowers of Wood Mackenzie notes that the power sector has spent some $10bn over the years trying to get the technology to work without much to show for it.Backers of the new crop of carbon-removal projects think this time is different. One reason for their optimism is better and, crucially, cheaper technology (see chart 2). The cost of sequestering a tonne of CO2 beneath Notrees has not been disclosed but a paper from 2018 published in the journal Joule put the price tag for Carbon Engineering’s DAC system at between $94 and $232 per tonne when operating at scale. That is much less than $600 and not a world away from the EU’s carbon price. CcS, which should be considerably cheaper than DAC, is also showing a bit more promise. Svante, a Canadian startup, uses inexpensive materials to capture CO2 from dirty industrial flue gas for around $50 a tonne (though that price tag excludes transport and storage). Other companies are converting the captured carbon into products which they then hope to sell at a profit. CarbonFree, which works with US Steel and BP, a British oil-and-gas company, takes CO2 from industrial processes and turns it into speciality chemicals. LanzaTech, which has a commercial-scale partnership with ArcelorMittal, a European steel giant, and several Chinese industrial firms, builds bioreactors that convert industrial carbon emissions into useful materials. Some make their way into portable carbon stores, such as Lululemon yoga pants.All told, carbon capture, utilisation and storage (CCUS in the field’s acronym-rich jargon) is set to attract $150bn in investments globally this decade, predicts Wood Mackenzie. Assessing current and proposed projects, the consultancy reckons that global CCUS capacity—which on its definition includes cCS, the sundry ways to put the captured carbon to use, as well as DAC—will rise more than seven-fold by 2030. The second—possibly bigger—factor behind the recent flurry of carbon-removal activity is government action. One obvious way to promote the industry would be to make carbon polluters pay a high-enough fee for every tonne of carbon they emit that it would be in their interest to pay carbon removers to mop it all up, either at the source or from the atmosphere. A reasonable carbon price like the EU’s current one may, just about, make CCS viable. For DAC to be a profitable enterprise, though, the tax would probably need to be a fair bit higher, which could smother economies still dependent on hydrocarbons. That, plus the dim prospects for a global carbon tax, means that state support is needed to bridge the gap between the current price of carbon and the cost of extracting it. The emerging view among technologists, investors and buyers is that carbon capture will develop in the way that waste management did decades ago—as an initially costly but necessary endeavour that needs public support to get off the ground but can in time become profitable. That view is increasingly also held by policymakers.Some of the hundreds of billions of dollars in America’s recently approved climate handouts are aimed at bootstrapping the carbon-removal industry into existence. An enhanced tax credit included in one of the laws, the Inflation Reduction Act, provides up to $85 per tonne of CO2 permanently stored (as well as $60 per tonne of CO2 used for enhanced oil recovery, which also sequesters CO2 albeit in order to produce more hydrocarbons). Clio Crespy of Guggenheim Securities, an investment firm, calculates that this credit increases the volume of emissions in America that are “in the money” for carbon removal more than ten-fold. The EU’s response to America’s climate bonanza is likely to promote carbon removal, too. Earlier this year the EU and Norway announced a “green alliance” to boost regional carbon-capture plans.With the price of scrubbing a tonne of CO2 no longer completely otherworldly, buyers are beginning to line up. Big tech, with deep pockets and a progressive image to burnish, is particularly keen. On May 15th Microsoft unveiled plans to purchase (for an undisclosed sum) more than 2.7m tonnes of carbon captured over a decade from biomass-burning power plants in Denmark run by Orsted, a big Danish clean-energy firm, and transported for underground sequestration in the North Sea by a consortium involving Equinor, Shell and TotalEnergies, three European oil giants. Three days later Frontier, a buyers’ club with a $1bn pot for carbon-removal investments bankrolled mainly by Alphabet, Meta, Stripe and Shopify, announced a $53m deal with Charm Industrial. The firm will remove 112,000 tonnes of CO2 between 2024 and 2030 by converting agricultural waste, which would otherwise emit carbon as it decomposes, into an oil that can be stored underground. Carbon middlemen are emerging to connect projects and buyers. NextGen, a joint venture between Mitsubishi Corporation, a Japanese conglomerate, and South Pole, a Swiss developer of carbon-removal and -management projects, intends to acquire over 1m tonnes in certified carbon-removal credits by 2025, and has lined up big buyers. It has just announced the purchase of nearly 200,000 tonnes’ worth of carbon credits from 1PointFive and two other ventures. The end buyers include SwissRe and UBS, two Swiss financial giants, Mitsui OSK Lines, a Japanese shipping company, and Boston Consulting Group. Maybe the biggest sign that the carbon-removal business has legs is its embrace by the oil industry. Occidental is keen on DAC. ExxonMobil says it will spend $17bn from 2022 to 2027 on “lower-emissions investments”, with a big slug going to ccs. Chevron, ExxonMobil’s main American rival, is hosting Svante at one of its Californian oilfields. As the Microsoft deal shows, their European counterparts want to convert parts of the North Sea floor into a giant carbon sink. Equinor and Wintershall, a German oil-and-gas firm, have already secured licences to stash carbon captured from German industry in North Sea sites. Hugo Dijkgraaf, Wintershall’s technology chief, thinks his firm can abate up to 30m tonnes of CO2 per year by 2040. The idea, he says, is to turn “from an oil-and-gas company into a gas-and-carbon-management company”. Saudi Arabia, home to Saudi Aramco, the world’s oil colossus, has set itself a goal of increasing its CCS capacity five-fold in the next 12 years. Its mega-storage facility at Jubail Industrial City is expected to be operational by 2027. ADNOC, the United Arab Emirates’ national oil company, wants to ramp up its capacity six-fold by 2030, to 5m tonnes per year. The oilmen’s critics allege that their enthusiasm for carbon removal is mainly about improving their reputations in the eyes of increasingly climate-conscious consumers, while pumping more crude for longer. There is surely some truth to this. But given the urgent need to both capture carbon at source and achieve voluminous negative emissions, the willing involvement of giant oil firms, with their vast capital budgets and useful expertise in engineering and geology, is to be welcomed. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

Living in California, as Schumpeter does, you would think licence plates called it the Red Tape State, not the golden one. Last August it led the world in announcing a ban on new gasoline-fuelled cars by 2035. In December its petrol prices soared higher than anywhere else in America, leading to an onerous cap on refiners’ profit margins. Early this year you could barely find an egg to fry, partly because of an animal-welfare measure from 2018 that keeps eggs off its shop shelves if they are laid in cages.California has the privilege of being a colossal market irresistible to manufacturers, so some of its rules become standards well beyond its borders. But it is not unique in wanting to go its own way. Across America, a mishmash of regulations from state to state differ on everything from how to manufacture lifts and how to produce liquor to how to run a bank. In theory that is all well and good. Regulatory experimentation can be healthy. In practice it creates a minefield. Every American state border is festooned with so much red tape that it costs businesses an arm and a leg. For a columnist from Britain, this is strange. Having grown so accustomed to hearing about the shortcomings of the European Union’s single market, it is a shock to realise that America’s interstate equivalent is no paradise, despite being bigger, constitutionally protected and far more rooted in history than the EU’s. And if anything, it is in danger of fraying further. A combination of local one-party supermajorities, populism and the culture wars are making states—led by chest-thumping attorneys-general—only too eager to get into the ring with business. Companies have long feared the Democratic sucker punch. Now Republicans are threatening business, too, their free-market instincts overtaken by their desire to assert state interests over federal regulatory authority. This political polarisation raises two big questions. Does it affect the ability of American firms to do business at home? And what are they doing about it? Companies face several challenges. The first is legal, exemplified by moves to ban abortions. Take Walgreens, America’s second-biggest pharmacy chain, which this year found itself in a Catch-22. In February it received a letter from 20 Republican attorneys-general warning it that it might be breaking federal and state laws if it mailed mifepristone, an abortion pill, to their states. It then made the seemingly unobjectionable point that it would only supply the medication to states where it was legally permissible. In response, California’s Democratic governor, Gavin Newsom, scuttled a state contract with Walgreens and threatened a boycott. Walgreens’ rivals, such as CVS, wisely kept quiet. Yet they, too, may find themselves in a similar legal quagmire if the issue becomes politicised even further. The second headache is cultural. Among blue states, California has passed laws (later struck down in court) encouraging racial diversity on company boards. Among Republican-leaning states, Florida, via the “Stop WOKE Act”, has sought to outlaw discrimination by race, even in pursuit of diversity, equity and inclusion. Such inconsistencies make it hard for firms to apply a one-size-fits-all policy. Different state governments have different views as to what kinds of diversity ought to be promoted. This month 19 Republican attorneys-general attacked JPMorgan Chase, America’s biggest bank, for a “double standard” on inclusiveness. They noted that the lender had affirmed its “unwavering commitment” to LGBT+ Americans. The same commitment had not been extended to religious or conservative groups, they said.The third pitfall has to do with greenery. According to Ropes & Gray, a law firm that tracks environmental, social and governance (ESG) legislation, states are introducing contradictory regulations about oil, gas and coal investments. In 2021 Maine, a blue state, got the ball rolling with legislation prohibiting its public pension fund from investing in big fossil-fuel producers, and set out a timetable for divestment. The same year Texas banned state funds from having relationships with financial firms that boycott energy companies. More than a dozen blue and red states have followed their respective leads. These initiatives are linked to Democratic support for ESG and Republican hostility to anything that smacks of “non-pecuniary” investment considerations. Compounding the problem, says Joshua Lichtenstein of Ropes & Gray, is that doing business in the EU may require sustainability reporting, which is anathema in parts of America.Firms may be accused of sleepwalking into their predicament. During Donald Trump’s presidency they stuck their necks out on hot-button issues, for instance opposing North Carolina’s “bathroom bill” that would bar transgender women from ladies’ toilets. They embraced ESG-infused stakeholder capitalism, hoping to attract consumers and workers. Then came the “wokelash”. Florida’s war on Disney, after the firm opposed a bill barring talk of sexual and gender identity in some primary-school year groups, marked “a fork in the road”, says Maggie Mick of MultiState, a consultancy. Since then, companies have had a rethink. One way they have done so is by making political donations more bipartisan. Another is to go quiet on their climate commitments, a tactic known as “green-hushing”. Equally quietly, some asset managers are lobbying state governments to reverse their ESG prohibitions. As yet, no one is throwing in the towel on the United States. From Brexit to Texit Craig Parsons of the University of Oregon notes that, for all its frailties, America’s single market has some resounding strengths, such as use of a common language and a shared culture. That heritage is delicate, though, especially in the context of the culture wars and political schisms. If the trend of state supermajorities persists after the 2024 elections, things could get worse. America should be careful. Its coast-to-coast marketplace is far too important to take for granted. Take that on trust from a Brit. ■Read more from Schumpeter, our columnist on global business:Writers on strike beware: Hollywood has changed for ever (May 10th)America needs a jab in its corporate backside (May 3rd)Is mining set for a new wave of mega-mergers? (Apr 27th)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 Goal” is a notable business book for two reasons. The first is its unusual genre. First published in 1984, it is a management tome dressed up in the clothes of a thriller. The book, written by Eliyahu Goldratt and Jeff Cox, tells the story of Alex Rogo, a plant manager who has to overhaul his factory within three months or face closure. To the objection that this is not thrilling at all, consider that it could have been a lot worse (“Alan Key must format a slide deck by midnight or he won’t get enough sleep to function properly the next day”). And Rogo’s efforts to reduce excess inventory and win over Bill Peach, his hard-driving boss, are weirdly entertaining. In any case readers lapped it up. “The Goal” sold millions. It has been reprinted several times. It even got turned into a graphic novel.Its second contribution was to popularise thinking about bottlenecks. The novel was written to get across Goldratt’s “theory of constraints”, a method for identifying those resources whose capacity does not match the demands placed on them. (This definition comes from one of the book’s protagonists—Jonah, a brilliant, globe-trotting business adviser whose resemblance to a real person seems unlikely to be coincidental.) Bottlenecks are often thought of as physical constraints. In Rogo’s factory, for example, the bottlenecks are two particular machines whose through-put must be increased in order to ship orders faster. In recent years the pandemic has increased awareness of such bottlenecks in the wider supply chain, whether because of the impact of semiconductor shortages or the effect of backlogs at congested ports. Policies can be bottlenecks, too. The pandemic also forced vaccine manufacturers to ditch normal patterns of working. In “Vaxxers”, a book about their work to develop the Oxford-AstraZeneca covid-19 jab, Sarah Gilbert and Catherine Green describe how they did more “at risk” work, doing things in parallel that would usually have been done sequentially. That would have meant wasted work if they had hit a problem, but also that scientists got stuff done much faster than usual. Bill Peach would have approved. People are also bottlenecks. Within organisations, managers themselves are frequently the points at which things get bunged up. That might be because executives simply have too much to do. Estimates vary on how many direct reports a manager should ideally have. But if they don’t all fit in a lift, you almost certainly have too many. It might be their own fault—if they are micromanagers, say, offering up helpful opinions on everything from font sizes to office furniture. It might be because no one is comfortable making a decision for fear of being hauled over the coals later by their own boss. It might be because there is jockeying and confusion over who has the right to make a call (an “upward status disagreement”, if you like jargon; a “pissing contest”, if you don’t). Bottlenecks can stem from good behaviour as well as bad. Collaboration is normally celebrated, but it can easily result in more delays if people’s time is being soaked up on non-essential tasks. Similarly, the person who responds to every message quickly and clears their inbox every night looks like the very opposite of a bottleneck, but that depends on two things: on what work they are not doing while they manically check their email, and on whether those messages are about trivial things. If people are responding at great speed on matters of zero importance—especially if they are high up the ladder and colleagues are therefore likely to respond to them in turn—they are probably creating trouble of some sort. Whatever the causes of congestion, the costs can be material. Daniel Ek, the boss of Spotify, attributed a recent restructuring at the music-streaming company to the need to make faster decisions. Consultants at McKinsey have estimated that about 530,000 days of managers’ time each year may be wasted on broken decision-making processes at a typical Fortune 500 company. “The Goal” is not the greatest thriller ever. No one dies. The only real violence done is to the English language (“It’s not until I’m busy with my delicious veal parmesan that my thoughts start to crystallise”). But it is a lot more readable than most business books, and it makes you think about a subject that is relevant not only to supply-chain managers and operations managers but to bosses everywhere. Bottlenecks abound. They just need to be found. ■Read more from Bartleby, our columnist on management and work:How to recruit with softer skills in mind (May 11th)A short guide to corporate rituals (May 4th)If enough people think you’re a bad boss, then you are (Apr 23rd)Also: How the Bartleby column got its name More

It had all the hallmarks of a coming-out party—or, more accurately, a coming-out-again one. After being uncharacteristically absent from public view for a few years, Mukesh Ambani re-emerged at the end of March for the opening of the Nita Mukesh Ambani Cultural Centre in Mumbai’s new business district. It houses three theatres, a conference hall for trade shows, as well as a small museum. Plans are afoot to build an adjoining apartment complex and shopping mall. The precise cost of the project is veiled in secrecy, though the figure of $1bn has been rumoured. A single lift, said to be the world’s largest, with a capacity of 100 people, is thought to have set the tycoon back $45m. The sprawling and opaque endeavour is an apt metaphor for Reliance Group, the business empire that has made Mr Ambani Asia’s richest man. The conglomerate reported record profits in the fiscal year to March, stealing the limelight from a rival tycoon, Gautam Adani, whose businesses are on the defensive after an attack in January by a short-seller. Last year its listed flagship, Reliance Industries, accounted for 21% of the collective revenue of the 30 Indian blue-chip firms in Mumbai’s Sensex index, and 13% of their net profits. With the beleaguered Mr Adani reining in investments, Mr Ambani remains a rare Indian industrialist who is keen to build. Reliance Industries’ capital spending grew from $10bn in fiscal 2021 to $14bn a year later. Last year it spent $18bn, equivalent to 45% of the Sensex total.In the sectors where Reliance operates, it is dominant. Its Jio telephony unit went from nothing to 439m mobile customers, or 37% of India’s total, in seven years. It gained 1m users in February even as Vodafone, the erstwhile market leader, lost double that number. Reliance’s retailing arm has 18,000 stores, up from 12,000 two years ago, a digital marketplace and a logistics network. It sells everything from gadgets and groceries to garments (many coming straight from numerous fashion brands that Reliance has been acquiring). Its renewable-energy arm has grand ambitions in solar power, green hydrogen and other climate-friendly businesses. On May 2nd the group spun out Jio Financial Services, which could fast become a force in payments and consumer lending thanks to troves of data on Jio’s mobile customers. Then there is Reliance’s core business: petrochemicals. It is less sexy than the much-trumpeted new-economy ventures, but more lucrative. Last year the group’s refining operations produced 56% of its total revenues and 59% of earnings before interest and taxes. Reliance is believed to be the single biggest beneficiary from India’s abrupt transformation into a huge importer of sanction-hit Russian oil and a leading exporter of refined products. Mr Ambani’s business benefits from both ends of this equation, buying cut-price Russian crude and selling the refined stuff into global markets, where prices remain elevated. According to Jefferies, an investment bank, this adds up to $5 of gross margin to every barrel of Reliance’s refined oil. The company says that “As part of overall crude sourcing strategy, Reliance is always in the market to source arbitrage barrels.” Yet Reliance’s ambitions have a flipside. It makes relatively little money from its operations. Though its return on capital is higher than for the Sensex as a whole, it has not exceeded 10% since 2007 (see chart 1). Last year it was 5%. Year-on-year revenue growth slowed in each of the past three quarters. Debts are up (see chart 2), having dropped in 2021 after capital injections from foreign tech giants such as Alphabet and Meta, and sovereign-wealth funds, which all saw teaming up with a local titan as a way to partake in India’s rise. Net debt trebled in the last financial year, relative to the one before.In the 12 months to March Reliance Industries’ market value fell by 18% in dollar terms, or $43bn. Among big Indian firms, only Mr Adani’s battered businesses and two IT giants caught up in the global tech crunch, Infosys and TCS, did worse. Reliance has since clawed back some of that. But it will take more than a snazzy cultural centre to impress 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

Given the political weather, Western makers of wind turbines should be flying high. America’s Inflation Reduction Act is stuffed with goodies for all sorts of renewable energy. In late April European leaders pledged to increase the North Sea’s offshore-wind capacity to 300 gigawatts by 2050, from about 100 gigawatts today and double a previous commitment. That looks like an awful lot of future business for turbine manufacturers. If only shorter-term forecasts were as clement.The four biggest Western makers of wind turbines—GE Renewable Energy, Nordex, Siemens Gamesa and Vestas—supply about 90% of the market outside China. Together they made revenues of €42bn ($46bn) in 2022. But whereas wind-farm operators benefited handsomely from high electricity rates after Russia invaded Ukraine in February last year, the turbine-makers sank into the red and their suppliers barely made money (see chart). Last year the big four racked up combined net losses of nearly €5bn. In recent weeks GE Renewable Energy, Nordex and, on May 15th, Siemens Gamesa, reported more losses in the first three months of the year. Although Vestas, the biggest of the lot, eked out a slim net profit of €16m on sales of €2.8bn, its chief executive, Henrik Andersen, nevertheless conceded that conditions were still “challenging”.The struggle of wind-turbine companies to make money is the result of market forces blowing in opposite directions. On the one hand, prices that turbines can fetch have been coming down. In the past few years Vestas and its competitors rushed to outdo each other by building ever-bigger turbines that offer ever-cheaper capacity to wind-farm developers, a group that includes big utilities and private infrastructure investors. On the other hand, those buyers’ appetite for new kit has been cooled somewhat by the difficulty of securing the permits necessary to install it. The average selling price per megawatt, the industry’s preferred measure, fell from nearly €1m in the mid-2010s to about €700,000 in 2020.The time between signing a contract with wind-farm developers to actually erecting the turbines and getting paid is as much as three years on average for onshore projects and five for offshore ones, estimates Endri Lico of Wood Mackenzie, a consultancy. Because terms are mostly locked in during that time, that exposes turbine-makers to any market vagaries. Lately these have combined into a “perfect storm”, in the words of Mr Lico: supply-chain disruptions, lack of raw materials and components, inflation, higher interest rates and geopolitical tensions. The race to develop bigger turbines may come to haunt the industry for a longer period, says Thomas Cobet of AlixPartners, another consultancy. The largest machines are not yet a mature technology. They could also prove costly for turbine-makers to maintain. This, in turn, would hurt the margins of the manufacturers’ biggest moneymaker: service contracts in which operators pay them a predetermined fee for everything from spare parts to full operations programmes.The industry would also love to avoid the fate that befell Europe’s solar-panel industry, which lost an early lead to cheaper state-subsidised Chinese rivals. China’s turbine-makers are growing quickly—and profitably. The world’s biggest such firm is now Goldwind, which installed 12.5 gigawatts of capacity in 2022, for the first time edging ahead of Vestas, while generating an annual net profit of around $340m. Although the Chinese firms mostly cater to their home market, in which Western companies are not allowed to compete, they are also eyeing foreign customers, notably in countries along China’s Belt and Road Initiative of infrastructure projects. Amid rising Sino-Western tensions, and a broader protectionist mood gripping Washington and European capitals alike, Chinese manufacturers are increasingly unwelcome in America and Europe. Europeans in particular, having been burned by a dependence on cheap Russian gas as war broke out on their doorstep, do not want to rely on cheap Chinese turbines, says Harriet Fox of Ember, one more consultancy. But if Vestas and other Western turbine companies are to do their part in the continent’s decarbonisation, they must first return to profitability. In today’s adverse market conditions, this may necessitate government action. In April the EU agreed to make permissions for new wind farms and related infrastructure easier to obtain, for instance by allowing the creation of “renewable acceleration areas”, where projects may be approved in one year or less. That is a start. Still, argues Phuc-Vinh Nguyen of the Jacques Delors Institute, a think-tank in Paris, the EU needs to do more to reduce the uncertainty for turbine-makers and wind-farm developers—something that the Inflation Reduction Act does much better than Europe’s current rules do. This does not necessarily mean more public money. Europe is actually held back by a lack of concrete timelines for investments and clear regulations. Without them, the forecast for Western turbine-makers will remain choppy. ■To stay on top of the biggest stories in business and technology, sign up to the Bottom Line, our weekly subscriber-only newsletter. More

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