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2018-04-24T10:56:50.695Z
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{"feed":"The-Economist-Business","feedTitle":"The Economist: Business","feedLink":"/feed/The-Economist-Business","catTitle":"Business","catLink":"/cat/bussiness"}

WHEN flag carriers such as British Airways (BA) ruled the skies, only the rich could afford to fly across the Atlantic. That was until Freddie Laker, a British entrepreneur, came along. His dream was to open long-haul travel to the masses. In 1977 he launched Skytrain, the first low-cost long-haul flights between London and New York. “Thanks to Freddie Laker you can cross the Atlantic for so much less,” declared Margaret Thatcher in 1981. “Competition works.” But within a year of her speech Laker Airways had gone bust, amid accusations of predatory pricing.

Since 2013 Norwegian, another low-cost carrier, has been trying to make Laker’s dream a reality. Last year it painted his face onto one of its jets to show it is serious about disrupting transatlantic air travel. But just like Laker Airways, it has run into financial headwinds. And BA is once again a potential beneficiary. On April 12th IAG, a group of flag carriers including BA, said that it had bought 4.6% of its budget rival as a precursor to...

The Pony Express, British style

IT MAY be hard to imagine a world without cheap postal services, but 200 years ago sending mail was a luxury. Posting a letter from London to Edinburgh cost an average daily wage. In 1840, after a proposal by Rowland Hill, an inventor, Britain launched the Penny Post, the world’s first universal mail service. The state-run post office was given a mail monopoly in return for delivering letters to any address in the country at the same rate. Cheaper postage proved wildly popular and the flows of information it enabled boosted economic growth. But the scheme’s finances proved controversial. The low cost of the service hit profits and the government introduced income tax to fill the fiscal hole.

That did not stop the idea of a “universal service obligation” for post spreading across the entire rich world over the next century. At the industry’s peak, post offices worldwide delivered nearly 350bn items of mail in 2007. But over the past...

DEUTSCHE BANK is one of the financial industry’s hardest problems. It is not a viable business when judged by any sensible yardstick, because it is unable to make enough profits to generate a remotely adequate return. Its existence does not seem to be in the public interest, since it is dominated by an investment bank that has paid its lucky staff a colossal €40bn ($49bn) over the past decade. The bank’s governance has misfired for ages. On April 8th Deutsche fired John Cryan, its chief executive, in the third regime change in seven years. If the rules of capitalism apply to banks, Deutsche should be wound down. Is that possible?

Deutsche was founded in 1870 to help German companies go abroad. In 1999 it bought Bankers Trust, a Wall Street firm, and went on a long expansion in the investment-banking business. Today it has four elements. A decent asset-management operation called DWS; a profitable payments business that ships money around the world for companies; a mediocre German retail bank...

The Economist is looking for a business correspondent to work at its headquarters in London. An ability to write informatively, succinctly and wittily, combined with numeracy and curiosity, matter more than prior experience. Applicants should send a CV and an article which they think would be suitable for publication in the Business section to businessjob@economist.com. The closing date for applications is May 18th 2018.

DURING his spectacular rise from London beancounter to the globe-trotting boss of WPP, the advertising powerhouse he created out of a backstreet wire-basket and trolley company, Sir Martin Sorrell was rarely sentimental. The man who helped turn a ramshackle but chic industry into a global force poached accounts mercilessly and often pitted his own firms against each other in the quest for clients.

Not for nothing did the late David Ogilvy, one of the industry’s founding patriarchs, reputedly describe him as an “odious little shit” when WPP came after the Ogilvy Group in the late 1980s at the dawn of its decades-long acquisition spree (see chart). But Ogilvy later became WPP’s non-executive chairman, and the company turned into the world’s largest marketing conglomerate with more than $20bn in annual revenues. In business, Sir Martin charmed as well as cajoled.

...

ENRIQUE IGLESIAS, a Spanish pop singer, plays an unlikely part in the story of Indian capitalism. His presence at a party to mark Vijay Mallya’s 60th birthday, in December 2015, was, literally, a showstopper. A flamboyant booze heir, Mr Mallya was then best known for founding Kingfisher Airlines, which had earlier imploded because of its debts. Given that he had personally guaranteed some of these loans, the self-proclaimed “king of good times” was assumed to have been chastened. Upon hearing of Mr Iglesias’s performance, bankers—and politicians—started asking how Mr Mallya had continued to live so large. The party had lasted for three days.

Mr Mallya is hardly the only embattled Indian tycoon to have cocked a snook at his bankers. Some “promoters” of companies, as founding shareholders of Indian companies are known, have long made full use of a loophole of local corporate law that thwarted banks’ attempts to seize companies in default on their loans. A bunged-up court system made foreclosure...

TALK of restricting the use of Chinese telecoms equipment in the West is growing. This week the curbs went the other way, when America banned its companies from selling hardware and software for seven years to one of China’s state-owned tech champions, ZTE. On April 16th America’s Department of Commerce said that China’s second-largest telecoms firm had trampled on a settlement reached in March 2017 over ZTE’s illegal shipments since 2010 of American-made technology—telecommunications equipment to Iran, and routers, servers and microprocessors to North Korea—in known violation of trade sanctions.

The one at risk of being crippled by an embargo is now ZTE. In 2016 UBS, a bank, estimated that 80-90% of its products relied on American parts. Jean Baptiste Su of Atherton Research, an American technology-research outfit, described the ban as “devastating” for ZTE, especially the loss of chips made by America’s Qualcomm used in about 70% of ZTE’s smartphones. Although ZTE makes most of...

Hipster Hells Angel

“WHEN you enter [the marketplace] with that level of hubris and arrogance, you don’t create trust.” So declared a member of San Francisco’s Board of Supervisors this week. He was upset about the sudden appearance of dockless electric scooters, rented via smartphone, all over the city. Several American startups are battling each other and the authorities to promote them. They are clean, cheap and convenient. The snag is that some users ride them wildly or dump them willy-nilly after use. On April 17th the city passed an ordinance requiring a permit to park scooters on its pavements.

Similar clashes have taken place elsewhere. Bird, a Californian startup that raised $100m in venture-capital funding last month, launched its rental service for electrified scooters in September at its home base of Santa Monica. Since then, the beach town’s hipsters have completed over half a million rides on its scooters. Rather less keen were city officials, who filed...

THE Bralima brewery in Kinshasa, the capital of the Democratic Republic of Congo (DRC), is an island of modernity in a city where chaos is the norm. Inside a building near the docks where barges begin the journey up the Congo river, conveyor belts rattle as thousands of glass bottles are washed and filled with amber liquid. A generator hums to power the new brewing machinery, creating enough booze to fill 28,000 crates every two days.

Yet the real achievement of Bralima, which is owned by Heineken, a Dutch brewer, is not making the beer. It is what happens when it leaves the factory. Congo is one of the worst-connected, most dysfunctional countries on Earth. Four times the size of France, it has almost no all-weather roads. In large parts of eastern DRC, the state is a fiction and rebels control the roads. Yet there is scarcely a village where it is impossible to get a beer.

Bralima was founded in 1923. Its main competitors, Bracongo and Brasimba, both owned by Castel, a secretive French family firm that operates across Africa, have been there almost as long. They are among the only surviving companies from the colonial era. By his fall, and the start of the first Congo war in 1997, Mobutu Sese Seko, Congo’s flamboyant post-independence dictator, had looted almost everything else. Today Congo is falling back into...

THE first week for ESPN+, a sports streaming service that Disney, owner of ESPN, launched in America on April 12th, had none of the razzmatazz associated with a firm known for blockbuster openings. Forget marquee matchups from the National Basketball Association. The games come from lesser-known football (ie, soccer) leagues, minor college sports and international fixtures with limited American audiences, like rugby and cricket.

This was tactical, says Kevin Mayer, the boss of Disney’s first shot at streaming in America. At $5 a month, the aim is to create a sort of mini-Netflix for sports. But Disney is loth to take customers away from the company’s lucrative ESPN networks on pay-TV. It wants to avoid the own goal of disrupting itself.

The delicate positioning of ESPN+ reflects an industry in flux. Cable networks are losing millions of subscribers to “cord-cutting”, whereby customers drop expensive pay-TV packages in favour of much cheaper internet services like Netflix. In response to this threat Disney decided to pull its films from Netflix and to develop its own internet-only entertainment service, which is scheduled to debut next year. In December the company agreed a $66bn deal to buy much of the entertainment business of 21st Century Fox, in order to gain the heft to compete with Netflix. Disney is betting that streaming is the future.

...

“THIS is what $3bn looks like.” So beams a manager at Chevron Phillips Chemical (CPC), a petrochemical company jointly owned by Chevron and Phillips 66, both American oil firms. She throws open her arms in a figurative embrace of a giant cracker (pictured) built by the firm in Baytown, a gritty part of Houston. The new plant turns vast quantities of ethane, which is derived from natural gas, into ethylene, an important building block in plastic. Another nearby facility, which the firm has recently expanded, converts the ethylene into plastic resin that is sold worldwide. All told, CPC has spent some $6bn expanding its chemicals-production infrastructure around Houston.

A decade ago, this would have been unimaginable. Chemicals firms in America, beaten down by rivals from the Middle East that enjoyed cheap feedstocks and others from China feasting on subsidised capital, had not invested in new local plants in years. Growth in global demand for chemicals, once roaring, had slowed thanks to the...

ALMOST all Canada’s oil and gas is landlocked, so getting it to market requires pipelines—lots of them. But building them requires skills more suited to circus artists than engineers. They must walk the financial high wire, jump through ever-changing regulatory hoops and juggle conflicting demands from environmental groups and numerous governments. The list of failures is long. It includes Northern Gateway, meant to bring Alberta crude to a port in northwestern British Columbia; Energy East, which would have linked Alberta to the Atlantic coast; Pacific Northwest, to bring gas to the west coast; and the legendary Mackenzie Valley gas pipeline, first proposed in 1974 and dropped in 2017 by its last, exhausted promoter.

...

RAKUTEN is a jack-of-all-trades. Since pioneering e-commerce in Japan in 1997, it has been a rare example of a highly entrepreneurial Japanese firm. Today it spans more than 70 businesses providing credit cards, a travel agency, a golf-reservation system, matchmaking, wedding planning and insurance. It owns Viber, a calling and messaging app and has invested heavily in Lyft, a car-hailing service. Now it is adding another: on April 9th the government gave Rakuten a concession to operate Japan’s fourth mobile network (Rakuten currently runs mobile services using another operator’s infrastructure).

Rakuten sees this as the next step in building its “ecosystem”. It reckons it retains its approximately 95m registered users in Japan by being a trusted brand that can provide customers with everything they need at every stage of their life, and by rewarding their loyalty. Customers get points if they use their popular Rakuten credit cards, for example. These they can then spend on other...

MOST of London’s “magic-circle” law firms are intrepid creatures. Over the past 20 years they have busily expanded abroad, opening offices everywhere from Antwerp to Yangon. But despite having hundreds of lawyers on the ground in America, one prize has proved elusive: laying down deep roots in the world’s most litigious market.

Allen & Overy, a top-tier London firm, would like that to change. It has reportedly been in merger talks with an American firm, O’Melveny & Myers. With O’Melveny denying any plans to merge, a union, which would create one of the world’s largest law firms by revenue, may not get off the ground. But that is unlikely to stop Allen & Overy from approaching others in its pursuit of an American alliance.

For the big British firms, America holds the key to greater profitability. Its allure in part reflects its importance on the world stage. Judgments made in America’s courts, such as those in anti-bribery cases, have ramifications beyond its borders....

“THIS is what $3bn looks like.” So beams a manager at Chevron Phillips Chemical (CPC), a petrochemical company jointly owned by Chevron and Phillips 66, both American oil firms. She throws open her arms in a figurative embrace of a giant cracker (pictured) built by the firm in Baytown, a gritty part of Houston. The new plant turns vast quantities of ethane, which is derived from natural gas, into ethylene, an important building block in plastic. Another nearby facility, which the firm has recently expanded, converts the ethylene into plastic resin that is sold worldwide. All told, CPC has spent some $6bn expanding its chemicals-production infrastructure around Houston.

A decade ago, this would have been unimaginable. Chemicals firms in America, beaten down by rivals from the Middle East that enjoyed cheap feedstocks and others from China feasting on subsidised capital, had not invested in new local plants in years. Growth in global demand for chemicals, once roaring, had slowed thanks to the...

From dieselgate to Diess?

MOST chief executives relish a jump in their company’s share price. But spare a thought for Volkswagen’s Matthias Müller as he watched the gauge of value leap by 4.5% on April 10th. That was galling because investors were responding to rumours, in effect promptly confirmed by VW’s board, that he was to depart this week after less than three years as head of one of the world’s top three carmakers.

The pensive Mr Müller, 64, rarely had the air of a man enjoying the limelight. His contract ran until 2020, but he had become increasingly frustrated at internal opposition to his efforts to change the way the company was run in the aftermath of “dieselgate”, a crisis sparked by VW’s rigging of car-emissions tests. To an outsider, changes such as more decentralisation and the sale of peripheral businesses hardly seemed controversial. But they were too much for some. He may be happy to go; the board referred to his “general willingness” to accept the...

FOR all the allure of televised fare like “MasterChef” and “Chef’s Table”, the reality is that many people are loth to rustle up anything more taxing than a bacon sandwich. Cue the recent emergence of more than 150 companies to make cooking easier. Two of the largest, Blue Apron in America and Germany’s HelloFresh, deliver boxes of pre-portioned ingredients and easy-to-follow recipes to doorsteps worldwide for a fee of around $60 a week.

Blue Apron is also serving up a belly full of woe to investors. Less than a year after it went public in June with a $1.9bn valuation, its share price has fallen by 80%. Although the shares of HelloFresh, which debuted on Frankfurt’s stock exchange in November, have risen by 24%, analysts are concerned that both services may fall prey to competition not from rival startups, but from big grocers.

Supermarkets have gobbled up the meal-kit idea and made it their own. Instead of enrolling customers in a weekly menu of meals, these companies offer in-...

ACROSS the river from the International Maritime Organisation (IMO) headquarters in London protesters have pressure-hosed “IMO DON’T SINK PARIS” into the muck lining the walls of the Thames. The river bank is not the only thing that is dirty.

Shipping and airlines were the only greenhouse-gas-emitting industries not mentioned in the 2016 Paris climate agreement. This was, in part, because assigning emissions is hard. To whom should you designate emissions for shipping Chinese goods, made with South Korean components, across the Pacific to American consumers? But similar problems did not stop airlines quickly agreeing on an industry-wide limit. This week delegates to the IMO, a United Nations agency responsible for shipping safety and pollution, met in a belated attempt to catch up. A deal was due as The Economist went to press.

It may not be an impressive one. A preliminary agreement set out to achieve cuts of 50% on 2008 emission levels by...

ALMOST all Canada’s oil and gas is landlocked, so getting it to market requires pipelines—lots of them. But building them requires skills more suited to circus artists than engineers. They must walk the financial high wire, jump through ever-changing regulatory hoops and juggle conflicting demands from environmental groups and numerous governments. The list of failures is long. It includes Northern Gateway, meant to bring Alberta crude to a port in northwestern British Columbia; Energy East, which would have linked Alberta to the Atlantic coast; Pacific Northwest, to bring gas to the west coast; and the legendary Mackenzie Valley gas pipeline, first proposed in 1974 and dropped in 2017 by its last, exhausted promoter.

...

ONE of the most fashionable ideas in business is that companies should earn their crust from subscribers, who are “locked in” for a period of time, rather than from customers who can easily switch to another provider at any time. Subscription models are seen by many investors and executives as the holy grail, because they promise a recurring stream of revenue. But the approach suffers from three underappreciated problems. Acquiring subscribers can be eye-wateringly expensive. Their urge to run away is often only temporarily suppressed. And consumers may have more than one relationship at a time.

The best-known subscription model is probably Amazon Prime. It has about 80m members in America alone and for $99 a year offers films and music, speedy delivery of goods and even discounts on goods such as baby food. There are many other examples. Netflix offers a wall of TV for a monthly fee. And more are coming. Venture-capital firms are pouring money into subscription-based home-delivery firms that...