All posts on June, 2017


ApprovedBusinessBusiness and finance

What Rosneft’s purchase of Essar’s oil refinery means

Turning on the loan pipe

CONGLOMERATES sometimes sell their least promising units, thereby ginning up returns for the remaining empire. But groups saddled with huge debts do not have that luxury; only by disposing of the most profitable parts can they raise enough funds to satisfy creditors. Such is the story of the Essar Group, which is in the final stages of selling its crown jewel, India’s second-biggest private oil refinery, to a consortium led by Rosneft, a Russian oil titan. The slimming of what was once the country’s third-largest diversified corporate group is a welcome signal that an era of powerful industrialists running rings round their creditors is ending.

The purchase by Rosneft (along with a Russian investment fund and Trafigura, a trading firm) of the giant Vadinar refinery in the state of Gujarat for $12.9bn will be the largest-ever foreign investment in India. It has been a long time coming. It was first mooted over two years ago and…Continue reading

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ApprovedBusinessBusiness and finance

The new old thing

In Apple we trust

APPLE has a new hit device, so popular that it has sold out across most of America and Britain. If you order it online it takes six weeks to arrive. “Best Apple product in a long time,” sings one online review. Useful and (of course) slickly designed, it enjoys the highest consumer satisfaction of any Apple product in history, according to a study by two firms, Creative Strategies and Experian.

Such enthusiasm must be bittersweet for Apple’s bosses. The gadget in question is AirPods, a set of wireless headphones that look a lot like Apple’s traditional ear buds, just without a wire. Priced at $159, AirPods could become a business worth billions of dollars, like the Apple Watch, a wearable device that Apple started selling in 2015. But headphones are hardly the transformative, vastly profitable innovation that many have been waiting for.

That wait started only a few years after its biggest blockbuster launched. On June…Continue reading

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ApprovedBusinessBusiness and finance

An activist investor bites into Nestlé

NESTLÉ is not easily rattled, to some investors’ chagrin. The world’s biggest food company accounts for about half of all sales of instant coffee, not to mention one quarter of grub for babies, dogs and cats. Thirty-four of its brands, including KitKat and Nespresso, earn over $1bn each. Yet many investors complain that Nestlé is falling behind, and this week Daniel Loeb, an American activist investor who runs Third Point, a hedge fund, gave voice to their concerns. On June 25th, in a letter, he attacked Nestlé’s “staid culture and tendency towards incrementalism”.

Third Point has acquired a small stake in Nestlé, less than 2% of the company. But it was enough to spark a jump of over 4% in the company’s share price on hopes that its bosses would respond. On June 27th Nestlé announced its own menu of changes—all unrelated, the company claimed, to the urging of any individual investor. Third Point will keep pushing for more.

The skirmish points to a basic question facing not just Nestlé but many of its peers: how should a consumer-goods giant operate? Big brands can no longer assert their dominance by securing spots on store shelves and spending millions on television ads. Now they must also succeed online and meet demand for “healthy” and “natural” fare. In rich countries, in particular, large companies are squeezed on one side…Continue reading

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ApprovedBusinessBusiness and finance

Takata’s bankruptcy is a result of familiar failings

AIRBAGS are meant to make driving safer. But for years, some made by Takata, a Japanese firm, inflated with such vigour that shards of metal and plastic were launched at occupants of vehicles in even minor collisions, causing serious injury and in some cases death. The costs of the biggest-ever recall of vehicles, hauled back to correct the problem, and the associated lawsuits claimed another victim on June 26th. Takata itself filed for bankruptcy in America and Japan, and sold its surviving operations to a competitor, Key Safety Systems (KSS).

It is the latest in a series of self-inflicted wounds by Japanese corporate giants. Takata’s travails come on the heels of other disasters, including insolvency at Sharp, a formerly dominant consumer-electronics firm, and massive losses at Toshiba, a nuclear power and consumer-electronics empire. All suggest a recurring pattern of lack of transparency and leadership.

Takata’s bankruptcy is due to its airbags’ use of chemicals…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

Pakistan’s old economic vulnerabilities persist

THE IMF, claims Pakistan’s government, is surplus to requirements. Ministers in its business-minded ruling party, the Pakistan Muslim League-Nawaz (PML-N), boast of a record that means the country can pay its own bills. “We will not go back to the IMF programme,” declared Ishaq Dar, the finance minister, in May, almost a year after the completion of Pakistan’s most recent, $6.6bn bail-out. In a country that mistrusts Western assistance and where protesters portray the IMF as a bloodthirsty crocodile, such words have a heady appeal. But they ring hollow.

On June 16th the IMF warned of re-emerging “vulnerabilities” in Pakistan’s economy. It praised GDP growth of above 5% a year, but noted missed fiscal targets and a ballooning current-account deficit. The fund’s own projections a year ago for the fiscal year ending this June underestimated this deficit by about half the final total of $9bn. And based on trends in early April it overestimated the fiscal-year-end foreign-exchange reserves by $3bn.

Independent economists point out that, many times before, collapse has come on the heels of an IMF programme’s conclusion. Sakib Sherani, a former government economist, says that to avoid “egg on its face” for cheerleading Pakistan’s economic recovery just months ago, the IMF is slowly changing its story. By the end of 2018, many predict,…Continue reading

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ApprovedBusinessBusiness and finance

China bulks up in cruise-ship construction

AT FIRST glance the balcony-lined silhouette of the Norwegian Joy, a new cruise ship, looks like any other Western liner moored in Shanghai. But a 333-metre-long Chinese artwork of a phoenix on its topsides signals its distinctive status as the first ship designed especially for China’s expanding cruise market. A pop star, Wang Leehom, christened it on June 27th.

Norwegian Joy was built by Meyer Werft in Germany, in response to a booming Chinese market for cruises. Over the past year the number of Chinese holidaying at sea has more than doubled, to 2.1m, according to the Cruise Lines International Association, a trade group. These numbers are likely to encourage other lines to build ships just for China, instead of using cast-offs from America and Europe. The Norwegian Joy has a much bigger casino than usual, to cater for the Chinese love of gambling. The shops are also twice as large as on Norwegian…Continue reading

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ApprovedBusinessBusiness and finance

The European Commission levies a huge fine on Google

SHE was born to Lutheran ministers known to be both tough and principled. As a child, she thought it unfair that pupils were not allowed to sell fruit and milk in school and successfully lobbied for change. In her office in Brussels she keeps a statue of a raised middle finger, a gift from a trade union when she was deputy prime minister of Denmark, as a reminder that there will always be critics.

It shouldn’t have come as a surprise that Margrethe Vestager, the European Union’s competition commissioner, took a tough line against Google this week. The size of the fine the tech giant will have to pay for abusing its monopoly in online search, €2.4bn ($2.7bn), sets a record for European antitrust penalties (see chart). Yet more important than the amount is that she provided a rough guide to how the European Commission plans to deal with online firms which not only dominate a market, but essentially are the market.

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ApprovedBusiness and financeFINANCEFinance and economics

America’s banks pass the Federal Reserve’s tests

OVER the years, the grumbles have got louder. Since 2011 America’s big banks have undergone annual “stress tests” overseen by the Federal Reserve, along with scrutiny of their plans for paying dividends and buying back shares. A product of the post-crisis Dodd-Frank act, the tests are intended to make sure that lenders have enough equity on hand should catastrophe strike again. But banks say they are both opaque and burdensome. And because failure can mean a block on payouts, the tests have bred caution and ire.

The time for caution seems to be over. On June 28th the Fed said it had approved the dividend and buy-back plans of all 34 banks tested this year—plans which propose handing shareholders a pile of cash. All 34 also passed the first stage, results of which were revealed six days earlier and which assume no repurchases and unchanged dividends. Even under a “severely adverse” scenario involving a nasty recession, all would keep key capital ratios above the…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

Developing countries rebel against the credit-rating agencies

EARLIER this year, a crowd of patriotic Indian students bristled when Arvind Subramanian, the government’s chief economic adviser, showed them a slide with two charts. One showed India’s steady economic growth and flat debt-GDP ratio; the other China’s slowing growth and fast-rising debt. Yet India’s credit rating from S&P Global Ratings (formerly Standard and Poor’s), has been stuck at BBB-. China, on the other hand, was upgraded from A+ to AA- in 2010 even as its debt shot up. The slide was pithily titled “Poor Standards”.

Rating government debt is always controversial. And India v China is often a grudge match. But many emerging-market governments agree with Mr Subramanian, who has contrasted the rating agencies’ treatment of India with that of the rich world in the 2008 crisis, when they “closed the stable doors after the horses bolted”.

In frustration, the BRICS grouping—Brazil, Russia, India, China and South Africa—plans to set up an…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

America’s programme to help trade’s losers needs fixing

Alas, poor Warrick

BRIAN AUNSPACH thought he had a job for life. After six years at a smelter owned by Alcoa, America’s largest aluminium company, his work was hard but the benefits decent. Warning signs came with crashing aluminium prices in the summer of 2015 and murmurings about unfair Chinese competition. Then reality hit: in January 2016 Alcoa announced the smelter’s closure. Around 600 people lost their jobs.

The events of 2016, from Brexit to Donald Trump’s election, were widely seen as a backlash against globalisation. The Warrick smelter in Indiana, which shut amid “challenging market conditions”, was perceived to be a victim of free trade. And the likes of Mr Aunspach, an American displaced by trade, are the objects of keen attention from wonks as well as politicians.

His is an old problem, with old solutions. Since 1962 America has earmarked funding to help people adjust to trade-related shocks. Trade-Adjustment Assistance (TAA)…Continue reading

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ApprovedBusiness and financeFINANCEFinance and economics

Kenya launches the world’s first mobile-only sovereign bond

Trading floor of the future

MOBILE money is ubiquitous in Kenya. Someone tapping on their phone might be paying school fees, sending money home or donating to a church. Soon they might be trading bonds. On June 30th the Kenyan government was due to launch M-Akiba, the world’s first sovereign bond to be sold exclusively through mobile platforms.

The bond is marketed at small investors, who will not need a bank account to take part. They can register on their phone in a few minutes and invest as little as 3,000 shillings ($29), far less than the 50,000 shillings needed to buy other treasury bonds. “Akiba” means savings in Kiswahili. The government is keen to promote thrift and is offering a juicy 10% annual return on the three-year bond, about three percentage points above deposit rates at commercial banks. Coupon payments are made through mobile money.

A pilot offer in March lured over 100,000 people to register. But only 5,692 of them went on…Continue reading

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