Cloning Tesla: electric-vehicle wars in China

WILLIAM BIN LI is as close as China may have come to cloning Elon Musk. The founder of NIO, a swanky electric-vehicle (EV) company, is in his 40s, a tech nerd, and though not as meme-able as the founder of Tesla, is treated like a rock star by his adoring customers. NIO, worth $4bn, is a fraction of the size of Mr Musk’s Tesla, valued at $75bn, but of all China’s 30-odd EV startups, it is the best known. It also raises and dashes investors’ hopes with Tesla-like frequency. On December 30th NIO’s shares soared 54% when Mr Li said output had probably reached 8,000 vehicles in the fourth quarter from almost 4,800 in the third. But over the whole of 2019 they lost almost 40% (see chart).

In truth, Mr Musk is in a league of his own. But Mr Li has long had the edge on him in one respect. As our Technology Quarterly in this issue reports, NIO is emblematic of China’s ambition to be a hub of global EV production, dominating electric vehicles in the 21st century as squarely as America did the internal-combustion engine in the 20th. As such, China would be a natural place to produce a “Tesla killer”, as NIO was dubbed during a CBS interview with Mr Li aired in 2019.

Yet if NIO is trying to topple Tesla, it is going about it in an odd way. It is copying some of the very aspects of Tesla’s business model that have made the American firm’s survival a matter of constant concern, such as lavish spending on sophisticated technology, resulting in correspondingly large holes in its cashflow statements. If anything can kill Tesla, it is more likely to be its perennial difficulty in generating cash than competition from a Chinese upstart with the same problem. Ironically, it could be China that ultimately secures Tesla a bright future. If only NIO could be so lucky.

Not long ago NIO was considered the more promising of the two. In the world’s largest car market, where sales of luxury vehicles are booming, it got its start in 2014 when state and local governments were throwing subsidies at both buyers and manufacturers of EVs. Venture-capital backing was abundant. NIO delivered its first commercial car, the ES8 SUV priced at above $70,000, in 2018. Shortly afterwards it issued shares on the New York Stock Exchange, both to raise money and to heighten its international profile so that it could sell cars around the world. Its shareholders include Baillie Gifford, an Edinburgh-based fund manager that is the largest institutional investor in Tesla.

Tu Le of Sino Auto Insights, an advisory firm, says NIO’s Tesla-killing aspirations got the better of it, though. It was rash to think it could quickly take on a firm 11 years older with huge global brand recognition and several models. NIO’s revenues, estimated at around $1.2bn for 2019, are dwarfed by the $24bn projected for Tesla. Yet since the start of 2017 its cumulative losses have overtaken those of Tesla (see chart). NIO has splashed out on spacious stores with libraries, coffee shops and crèches, sometimes directly across the street from Tesla showrooms. But unlike Tesla it has not invested much in factories, contracting manufacturing to JAC Motors, a state-owned carmaker, instead.

Furthermore, a cut in state subsidies for EV purchases since June has hurt investor sentiment, prompting fears of a funding crunch. NIO raised $100m from Tencent, the tech giant that is also one of its leading shareholders, in the third quarter, and Mr Li is expected to pitch in as much himself. But NIO burned through even more than that in the third quarter and has net debt of $1.3bn, according to Bernstein, an investment firm. Though NIO’s sales rose 22.5% in the third quarter compared with the previous three months, and it launched a third SUV on December 28th, it admits it needs funding if it is to survive for another year.

Given the precarious circumstances, the Chinese government might be expected to throw NIO a lifeline. Instead, it is Tesla that is getting the breaks. On December 30th, the day of NIO’s relief rally, the first Model 3s rolled out from Tesla’s Gigafactory in Shanghai, costing a mere $50,000 each. Though work started on the plant less than a year ago, production is already running at about 1,000 cars a week. Days before, the American firm received $1.3bn-worth of funding from Chinese lenders to complete the Shanghai-based factory. Production in China spares Tesla from import tariffs on finished vehicles, and its locally made cars also qualify for subsidies. Its shares have soared to record highs in recent days, though there are still nagging doubts about its ability to increase volumes, margins and cash generation. Perversely, Tesla may even have benefited from China’s trade war with America. The government hopes to portray Tesla’s investment, the first fully foreign-owned car plant in China, as a symbol of its openness.

NIO, despite being Chinese, does not offer the same geopolitical advantages, and without its own factories it has less leverage when asking state governments to support it. As Michael Dunne, the Tesla-driving boss of ZoZo Go, a car advisory firm, puts it, “NIO doesn’t have a clear-cut godfather in the Chinese government.” It is competing with a host of EV startups, such as Byton, WM and Xpeng, for funding. There is no guarantee all of them will survive.

In this fraught market, fortunes could quickly reverse again. NIO says it may soon announce new funding arrangements. A state-backed carmaker could take a big stake in it. Some analysts say it is unlikely the government will let NIO go bust, because it is such a symbol of China’s technological ambitions.

So much giga and greater than America

For now, though, Tesla is in pole position. In fact, says Mr Dunne, China must already feel like home to Mr Musk. The government’s EV ambitions give Tesla a tailwind that it lacks in America; on January 1st its customers there stopped benefiting from a tax credit. Consumers love luxury-car brands; Tesla’s main competition will be with Germany’s premium carmakers, not Chinese ones. China’s manufacturing prowess will help Tesla overcome the “production hell” it suffered back home. And China may be quicker to encourage autonomous driving than America. For Mr Musk, the main drawback could be that Twitter, his favoured megaphone, is blocked behind the great firewall. But for Tesla that too must be a blessed relief.

This post was originally posted at https://www.economist.com/business/2020/01/04/cloning-tesla-electric-vehicle-wars-in-china.

Tencent buys a stake in Universal Music

IT WAS A nice example of nominative determinism. On December 31st a consortium led by Tencent, a giant Chinese digital conglomerate, announced it was buying 10% of Universal Music Group, a subsidiary of Vivendi, a French company, for €3bn ($3.4bn). The deal, first mooted in August, gives Tencent a stake in a firm whose catalogue spans artists from ABBA and Bob Marley to Jay-Z and Taylor Swift.

Tencent’s purchase values Universal at around €30bn. That is remarkable, for two reasons. The first is that Vivendi’s total market capitalisation is just €31.5bn. But Universal is merely the largest component of a conglomerate that also includes Canal+, a French pay-TV channel, and Havas, a PR-and-advertising firm. Both bring in profits of hundreds of millions of euros, and Vivendi is only lightly indebted.

The second is that it illustrates the recorded-music industry’s remarkable recovery over the past few years. The International Federation of the Phonographic Industry, a trade body, reckons that sales of recorded music were $23.9bn in 2001. By 2014 that had dropped by 40%, to $14.3bn (see chart). The industry laid much of the blame on piracy fuelled by the internet.

Nowadays, though, the internet has become the music industry’s best friend. Music-streaming firms like Spotify, a Swedish company, and Deezer, a French one, have outcompeted the pirates with a mix of the go-anywhere convenience enabled by smartphones and subscription-based pricing. For $9.99 a month, Spotify users get access to more than 50m songs (true skinflints can pay nothing, if they are prepared to put up with adverts). High volumes make up for low prices. Spotify alone has over 100m paying users, which helped the firm achieve a valuation of $27bn in its April flotation. It has also helped reverse the decline in music-industry revenues, which are up 34% from their 2014 nadir.

The streaming market is highly concentrated. Spotify and Apple between them account for over half of it. But plenty of firms are nonetheless trying their luck, including Google, Amazon and Tencent itself, whose music-streaming subsidiary has around 35m paying users in China. The latest entrant is ByteDance, best-known for developing TikTok, a trendy social-media app; Resso, its streaming service, was released in India and Indonesia last month.

That rush of new entrants will bring new customers, helping the market grow. It will also boost the firms, like Universal, that control the music that streaming firms must license. Universal’s revenue grew by 24% last year. Tencent’s purchase therefore looks like an attempt to profit from both sides of the game.

It also fits with Tencent’s taste for investing in other firms, and with its growing presence in the Western entertainment industry. The firm is best known for WeChat, a multi-purpose chat, payment and social media app with over a billion users. But it has stakes in hundreds of smaller firms. It is the world’s biggest video-game company: revenues from gaming accounted for around two-fifths of its 2018 total of 313bn yuan ($47bn). It owns Riot Games, the makers of “League of Legends”, an e-sports title whose biggest matches attract tens of millions of viewers. It has a controlling stake in Supercell, the Finnish studio behind the hit mobile game “Clash of Clans”. And it has a 40% share in Epic Games, an American firm whose offerings include “Fortnite”, a popular online shooter. Epic Games was valued at nearly $15bn in 2018.

Tencent Music Entertainment Group, the firm’s streaming subsidiary, was listed on New York’s stock exchange in 2018. Its film-production company was involved with films such as “Wonder Woman” and “Terminator: Dark Fate”, the sixth instalment in the interminable “Terminator” franchise. The Universal deal may likewise not be the end of the story. Vivendi has given Tencent the option to double its stake at the same price, and has hinted that it might sell even more of Universal to the Chinese giant in future. Will Tencent be back?

This article appeared in the Business section of the print edition under the headline “Tencent buys a stake in Universal Music”

Reuse this contentThe Trust Project

This post was originally posted at https://www.economist.com/business/2020/01/04/tencent-buys-a-stake-in-universal-music.

LG, South Korea’s cuddliest chaebol, wants a sharper edge

BEFORE LG EXECUTIVES mull a new product, corporate types in South Korea like to joke, they first ask themselves: “Has Samsung already done this?” Only if the answer is “yes” does the country’s fourth-biggest conglomerate, which makes everything from consumer electronics and cosmetics to chemicals and health-care goods, move ahead with the plan.

The gibe says a lot about how LG is perceived on its home turf. Unlike Samsung, South Korea’s largest chaebol, which has been mired in scandal, LG oozes reliability and law abidance. When the government urged large groups to unwind their convoluted cross-shareholding structures, LG was one of the first to do so. But cuddliness may have blunted LG’s innovative edge. After years of profit growth the group’s performance has started to show cracks. LG Electronics, its flagship affiliate, has been struggling with plunging earnings in its mobile-phone division, where it faces fierce competition from Samsung, as well as Apple and China’s Huawei. Many are wondering if the “follower” strategy that has served LG well is still fit for purpose.

Koo Kwang-mo, the group’s chairman, may be among them. The 41-year-old took the reins in 2018 after the sudden death of his adoptive father, himself a descendant of the conglomerate’s founder. Although he keeps a similarly low profile to his predecessor, Mr Koo is testing out a more aggressive approach.

In November he appointed Brian Kwon, who had previously run LG Electronics’ mobile-phone and home-entertainment businesses, as boss of the whole affiliate. Mr Kwon’s battle with Samsung in flat-screen televisions involved taking out advertising explicitly mocking Samsung’s QLED technology as a has-been. Such brashness would have been unthinkable under the old guard, says Park Ju-Gun of CEOScore, a corporate watchdog in Seoul. LG Display, which makes the rival OLED technology used in LG’s televisions, is also being overhauled. In September its boss unexpectedly resigned and the company has since sacked dozens of executives and offered redundancy packages to many workers. In order to maintain its lead in large OLED panels it has ramped up capacity at its factories in South Korea and China. It has also sacrificed margins by pouring cash into research and development, hoping to catch up with Samsung in smaller, more profitable screens used in mobiles.

The newish head of LG Chem, Shin Hak-cheol, likewise has a reputation as a risk-taker. Last month the chemicals arm (which, like most parts of LG, is listed but ultimately controlled by the holding company Mr Koo heads) announced a joint venture with General Motors to produce batteries for its electric vehicles in a new factory in Ohio. Although demand for batteries is expected to grow, LG will be exposed to the fortunes of a single carmaker. These developments may be trial balloons for a plan to adopt a less risk-averse strategy for the group as a whole. So far, investors appear unimpressed. Shares of LG’s biggest companies have tumbled in the past two years; for all its scandals and deserved criticism of its governance, Samsung has done better (see chart). LG’s efforts to distinguish itself from Samsung’s vices are laudable. Mr Koo may need to do more to emulate its innovative virtues.

This post was originally posted at https://www.economist.com/business/2020/01/04/lg-south-koreas-cuddliest-chaebol-wants-a-sharper-edge.

Despite political woes, America Inc is still thriving in China

FOUR DECADES ago communist China officially opened its doors to America and its capitalist firms. Politics, once seemingly set aside for the purpose of commerce, has recently made a comeback. President Xi Jinping has stirred up nationalism as part of his effort to consolidate power—worryingly for American firms seen as insufficiently deferential to China’s line on Hong Kong among other sensitive political topics. President Donald Trump’s trade war against China and his crackdown on Huawei, a domestic telecoms-equipment giant, have provoked further anti-American sentiments.

On December 31st Mr Trump tweeted that he will soon sign a “phase one” trade agreement with China. That will lead to some tariff cuts on Chinese imports, and to a presidential trip to Beijing for further haggling. When he visits, Mr Trump will surely hear grouses from his country’s firms about their troubles in China. What they are less likely to trumpet is how surprisingly well they are still doing there.

Some firms are suffering from a backlash arising from the trade war. But its effect on America Inc has been exaggerated. For one thing, American companies on average get only about 5% of their revenues from China (see chart), according to Morgan Stanley, a bank. Though the technology, automobile and consumer-products industries have greater exposure, for others China is an afterthought.

A third of respondents to a survey by the US China Business Council (USCBC), a trade group, claim they have been subjected to “increased scrutiny from Chinese regulators as a result of bilateral trade tensions.” However, local governments with their own growth targets have been rolling out the red carpet this year, foreign executives say. Thanks in part to such efforts, the share of American firms claiming their local operations had been hurt by “Made in China 2025”, an indigenous-innovation scheme America is wary of, plunged from 20% in 2017 to 12% in 2019.

Rising nationalism, stirred up by Mr Xi and embraced with zeal by mainland netizens, may prove a bigger problem than trade tensions. In November DC Comics was forced to pull a promotional poster for a Batman comic book from social media (Batwoman was shown throwing a molotov cocktail) as Chinese critics on social media drew parallels with the pro-democracy movement in Hong Kong. That came on the heels of a much-publicised row involving the National Basketball Association (NBA), after an executive at the Houston Rockets tweeted support for Hong Kong’s molotov-chuckers.

Previous nationalist backlashes stirred up by the Communist Party, for example against Lotte, a South Korean supermarket chain, and Toyota, a Japanese carmaker, led to no more than flash-in-the-pan boycotts. The basketball row, in contrast, is dragging on; the Rockets remain blacklisted in China, and by one reckoning have lost nearly $20m in sponsorship deals as a result.

Being seen to kowtow to China presents its own risks nowadays. The NBA, which claims 600m fans in China, promptly apologised—only for its apology to come under fire in America, including a reprimand from Mike Pence, the vice-president. In July Google scrapped a mooted return to the mainland’s censored online-search market after an employee revolt. Shutterstock, an online-photo agency, faced similar outrage from its workers in November over its decision to censor images in China.

American bosses are now in the unenviable position of having to weigh up the prospect of Chinese official ire with the sensibilities of politicians, employees and consumers at home. This risk will be heightened by increasing international concern over Xinjiang, a province in the west of China where officials stand accused of abusing Uighurs, the largest Muslim group in the country. American firms ranging from Kraft Heinz, a food giant, Coca-Cola, a fizzy-drinks colossus, and Nike, a sporting-goods brand, are reported to have supply chains that stretch into Xinjiang.

Despite these complications, most American firms remain committed to the mainland. The latest survey by the American Chamber of Commerce in Beijing finds that China remains in the top three as a global investment destination for 62% of its members, up from 56% in 2016; 87% of member firms tell the USCBC that they plan to keep doing business in China, roughly the same proportion as in recent years.

The reason is that the mainland remains a huge and growing market for most industries. American firms are still making money there. Andy Rothman of Matthews Asia, an investment firm, even argues that China is “the world’s best consumer story.” In dollar terms, retail sales in China are nearly as big as those in America, but they surged by 6% last year compared with a 2% rise in America. Chinese real incomes rose 120% over the last decade, whereas American ones grew by 17%. American multinationals are benefiting from this rising tide: the vast majority of their operations are not only profitable, but often increasingly so. Nearly half reported their Chinese operations were more profitable than elsewhere in 2019, up from 38% a year earlier.

More Budweiser beer is consumed in China than in America, notes Bruno Lannes of Bain, a consultancy. ABInBev, which brews the quintessentially American tipple, has seen its revenues in China grow more than six-fold even as its profit margins have fizzed. China’s market for fast-moving consumer goods rose by 5.2% in 2018, and foreign firms have benefited. Procter & Gamble, an American consumer-products goliath, says China represents more than 30% of its global sales growth. In December Tesla, an electric-vehicle pioneer, delivered the first EVs produced at its new factory in Shanghai (see Schumpeter).

If the threat from politics seems overblown, there is a genuine worry for American bosses on the mainland: market competition. Chinese smartphone makers have increased their share in the local market for phones costing over $400 from 12% in 2014 to 67% in 2018, says McKinsey, a consultancy. Domestic carmakers, who once made subsidised hunks of junk, have managed to reduce their defect rate by an order of magnitude since 2003; their market share has jumped from 26% in 2014 to 38% in 2018.

This is primarily the result of nimbleness, not subsidies. Unlike state-owned firms, which Mr Xi is propping up with renewed vigour, most Chinese private companies are frugal innovators. Only 9% of American firms complain that local private firms get unfair advantages like tax breaks, licensing approvals and subsidies. Political rows dominate the headlines today, but the longer-term challenge for American firms may prove to be the rise of China Inc.

This article appeared in the Business section of the print edition under the headline “Despite political woes, America Inc is still thriving in China”

Reuse this contentThe Trust Project

This post was originally posted at https://www.economist.com/business/2020/01/04/despite-political-woes-america-inc-is-still-thriving-in-china.

A manager’s manifesto for 2020

THE START of the year is traditionally the time to make resolutions to change your behaviour. Hardly anyone keeps them, of course, but in the spirit of optimism, here are Bartleby’s eight suggestions for what managers ought to resolve to do in 2020.

1. Give out some praise. People don’t come to work just for the money. They like to feel they are making a valuable contribution. Praise doesn’t have to happen every day and it cannot be generic. Pick something specific that a worker has done which shows extra skill or effort and single them out; ideally so that others can hear the compliment. This is particularly important for the most junior employees, who will feel anxious about their status.

2. Remember that you set the tone. If a manager is angry and swears a lot, that will be seen as acceptable behaviour. If bosses barely communicate, they are unlikely to receive useful feedback. If they fail to keep their promises, workers will be less likely to co-operate. And if a manager frequently belittles a particular employee, that person is unlikely to get the respect of their colleagues. In contrast, a more relaxed, open boss is likely to lead to a relaxed, open workplace.

3. The buck also stops with you. If a team member makes a mistake, it needs to be fixed. And the manager is responsible for making that happen. It may well be that the mistake stems from inadequate instructions or giving the task to the wrong person. So the manager, as well as the staff member, needs to learn a lesson from the failure.

4. Make your priorities for the next year clear, and communicate them well. Is the company (or division) trying to launch a new product? Or to boost sales of existing products? Or to control costs? If you are not sure, then those who work for you will have no idea. That can lead to a lot of wasted effort.

5. To that end, cut out the jargon. The use of pretentious phrases and complex acronyms is generally designed to obfuscate rather than elucidate. In Bartleby’s experience, the reason people use unclear language is that they have nothing clear to say. If you are sending a general memo to all the staff, look carefully through it and ask whether you would have understood it on your first day of work. If not, make it simpler. Remember George Orwell’s maxim: “Never use a foreign phrase, a scientific word, or a jargon word if you can think of an everyday English equivalent.” It applies to other tongues, too.

6. Listen to your staff. They are the people who are dealing with customers and suppliers, and grappling with the bureaucracy of the organisation. Their feedback is essential, beyond annual engagement surveys. You hired them for their skill and expertise: learn to rely on it. If you don’t trust their judgment, you have hired the wrong people. If you don’t like listening to employees, go and set up as a sole trader.

7. Keep meetings short. Ideally, a meeting should be the length of a sitcom episode not a film by Martin Scorsese. Bartleby’s law is that 80% of the time of 80% of the people at meetings is wasted. If you doubt the numbers, have a think about the last big meeting you attended. Did everyone speak or was the discussion dominated by a small subset? How many people were gazing at their phones? A lot of people attend meetings out of a sense of duty or FOMO (fear of missing out). And what is the purpose of the meeting? If it is just to update people on progress, that can be done in an email or in a one-to-one conversation (which has the added benefit of allowing you to talk to your staff). Big meetings involving all the staff should be reserved for big news like acquisitions or lay-offs.

8. Drop the team-building exercises. Paintballing in the woods, tackling an army assault-course, constructing a model of the Empire State Building from matchsticks—no one wants to do this stuff. They don’t want to go to an awayday weekend, either; they would much rather be at home with their families. Why not build a team by introducing its members and explaining what you want each of them to do? It is a lot cheaper. It also wastes a lot less of everybody’s valuable time.

Will following these eight rules lead to instant business success? Of course not. None of this will work if the company lacks an attractive product or a decent business plan. But these rules might just make your firm a more efficient and pleasant place to work. And that is a reasonable goal for 2020.

This post was originally posted at https://www.economist.com/business/2020/01/01/a-managers-manifesto-for-2020.

2019 in review: coping with geopolitics and anti-capitalism

The year in corporate boardrooms


THE LOT OF the company is never easy. It must juggle the demands of shareholders, employees, customers, politicians and regulators. In 2019 the juggling act may have become a bit harder. Besides bracing itself for the inevitable next downturn—and, especially in America, declining profits—in the past year the corporate world has had to contend with two new, or newly salient, sets of challenges.

The first has to do with the rebirth of geopolitics. In the decades after the second world war the world globalised broadly within the two warring ideological camps. Supply chains fanned out across the democratic West or the communist East but seldom straddled the two. This began to change when China opened up in the late 1970s, and accelerated as communism crumbled in Europe a decade later. With cold-war divisions a thing of the past, multinationals let themselves be guided by the profit-maximising logic of commerce.

No longer. From trade wars to Brexit, geopolitical barriers are going up again, cutting across the globe’s supply chains. Technology firms, which obtain critical components from a surprisingly small number of manufacturers, many of them in vulnerable Taiwan, are particularly exposed. Western firms such as Apple continue to rely heavily on Chinese manufacturers. Even though Westerners increasingly covet Chinese technology, many Chinese companies still rely on Western know-how. When America’s government barred its companies from doing business with Huawei on national-security grounds in May, some predicted that the Chinese maker of telecommunications gear might collapse.It didn’t. But foreign suspicions of Huawei are hemming in the global rise of China Inc. Perhaps in an effort to allay them, Huawei’s boss told The Economist in September that he would consider selling its foreign business to a Western buyer. Expect geopolitical preoccupations to hang over boardrooms in 2020.

The second set of problems for chief executives stems from a backlash against capitalism—or at least the version of it practised so far this century. Companies are increasingly urged to find purpose beyond maximising profits. They are expected to be more diverse, greener and generally kindlier. Internet companies in particular are being hounded by authorities on bothsides of the Atlantic for playing fast and loose with user data and fuelling political polarisation. Calls to break up Big Tech are growing louder. This has not yet affected their juicy profits. But it has led Mark Zuckerberg to consider a new business model for Facebook less dependent on online advertising (even if Facebook’s nascent crypto-currency has gone nowhere fast). It may also have prompted Google’s founders, Sergey Brin and Larry Page, formally to hand over the running of its parent company to Sundar Pichai, boss of its core search business.

Nor is it just corporations. In both America and Asia, business schools are likewise reinventing themselves for the new era. Billionaires are in the crosshairs of millennial socialists. Even reclusive German business barons are finding it harder to keep a low profile and the high priests of management consultancy at McKinsey are rethinking their role.

Yet 2019 has also seen plenty of examples of capitalism’s capacity for self-correction. Companies are evincing greater awareness of the risks from climate change, to their reputations and operations alike (even if too few still do anything about it). True, plenty of money is still chasing carbon-cuddling industries, as Saudi Aramco’s $25.6bn initial public offering in December attests. But a clutch of climate tycoons is also putting serious money into planet-healing investments—hoping for a healthy return.

Stockmarkets may be frothy but throughout the year they have shown less patience for loss-making unicorns such as Uber and Lyft than gung-ho venture capitalists did. WeWork, an office-rental firm masquerading as a tech company, imploded after investors raised questions about its billions in losses and shabby corporate governance ahead of its abortive initial public offering (giving a black eye to its main backer, Masayoshi Son, and to VCs more broadly). As long as competition and capital markets work properly—as in the thriving entertainment industry—capitalism can, 2019 has shown, serve consumers and shareholders alike.

Reuse this contentThe Trust Project

This post was originally posted at https://www.economist.com/business/2019/12/27/2019-in-review-coping-with-geopolitics-and-anti-capitalism.

Non-Compete Clauses Are Suffocating American Workers

IDEAS
Jaret is assistant general counsel for the United Food and Commercial Workers. Vaheesan is legal director at the Open Markets Institute.

Through non-compete clauses, employers have robbed tens of millions of workers of the right to practice their trade where they want. Non-competes can bar workers from accepting new employment in their field or industry for a year or more after they leave. Policymakers are now engaged in a largely unacknowledged debate over how to regulate non-competes. Federal and state legislators are deciding whether the right to leave should be universal or granted to only some workers. Should all workers have the freedom to find and take new work when and where they want, or should this right be conditional on income or occupation?

Earlier this fall, Democrat Chris Murphy and Republican Todd Young introduced the Workforce Mobility Act in the Senate, which would ban non-competes for all workers across America. Other lawmakers have pursued more targeted solutions. For instance, in 2019, legislators in Maryland, Maine, and New Hampshire passed bills prohibiting non-competes for low-wage workers. The city council in Washington, D.C. has proposed outlawing non-competes for workers making up to $87,654. In 2018, Colorado was even more “surgical” and limited non-competes for physicians treating rare disorders.

A universal national solution is necessary. The freedom to exit should be a basic right, not a privilege for a subset of workers. Even if Congress does not pass the Workforce Mobility Act of Senators Murphy and Young, the next president, acting through the Federal Trade Commission (FTC), can ban non-competes and restore all workers’ freedom to practice their trade. Nineteen state attorneys general endorsed FTC action as “offer[ing] the quickest, most comprehensive regulatory path to protecting all workers from these exploitative contracts.”

Somewhere between 36 million and 60 million workers are bound by non-compete clauses today. Hardly any profession is free from them. Home health workers in Oregon have been forced to accept them and threatened with dismissal for wanting to take additional work in violation of their non-competes. In Washington, D.C., Compass Coffee, a popular chain, has made accepting non-competes a condition of employment for baristas, coffee roasters, and managers. Amazon required warehouse workers to sign potentially global non-competes until this practice was publicized in a 2015 report.

Employers also use non-compete clauses to restrict the movement of workers in the arts and media. Non-competes compound the precarity of these traditionally middle-income workers’ jobs. For example, the organizer of the music festival Coachella prohibits artists from performing at any other festival in North America or any venue in Southern California between December 15th and May 1st. Not only do non-competes interfere with these workers’ freedom to pursue their trades, they also hinder artistic collaboration and impede the flow of information.

One widely publicized case involved the legal news site Law 360, which required its reporters to accept non-competes that restricted their ability to find work with other digital news outlets. Law 360 threatened to enforce the non-compete against a reporter who had left to accept a position with the Reuters legal news team, and she was terminated soon after by Reuters. After the New York State Attorney General filed suit, Law 360 stopped requiring reporters to sign non-competes. (On a positive note: This incident sparked a successful union organizing campaign among the Law 360 reporters, who were aware that journalists with union contracts were not required to sign non-competes.)

Non-competes bind workers near the top of the income distribution too. Approximately 45% of primary care physicians are subject to non-compete clauses. Doctors are increasingly employed by hospitals and insurers (instead of running their own practice) and may have little power to resist non-competes, due to student debt burdens and other financial constraints. And in metropolitan areas, counties, and states with a dominant hospital network, physicians can face the choice of accepting a non-compete or not working at all.

Non-competes in medicine can abruptly sever long-term physician-patient relationships and put patient health at risk. In one extreme case, the enforcement of a non-compete against a colorectal surgeon in a Midwestern community meant that a single colorectal surgeon had to serve a population of 700,000. Due to this specialized surgeon shortage, patients with colorectal cancer, rectal bleeding, and other serious ailments had to delay lifesaving procedures.

Employers generally don’t enforce non-compete restrictions in court—and don’t need to. Simply imposing a non-compete discourages workers from looking for new work and switching jobs. Even for well-paid professionals with access to legal services, the mere threat of employer enforcement, backed by rare follow through, is often enough to bind them to their current jobs.

Importantly, many employers ask job applicants whether they are bound by a non-compete and use the existence of a non-compete as a screen when reviewing applications. For employers, why run even a slight risk of litigation with a new hire’s former employer when job seekers are plentiful?

Employers’ arguments for imposing non-competes on certain workers should be treated with skepticism. In a fair labor market, firms afraid of losing workers have a simple way of retaining them: raise salaries, improve benefits, and offer promotions. They can also use employment contracts that commit both parties to the employment relationship for a fixed period. Think of guaranteed contracts in professional sports. In addition, employers have other legal tools, including copyright, patent, and trade secret law, to protect the valuable business information and job training they purportedly provide to workers.

The Federal Trade Commission already has the authority to ban non-competes for all workers. In March, our organizations, as well as 18 other labor and public interest groups and 46 advocates and scholars, petitioned the FTC to use its rulemaking power to free workers from non-compete clauses. The current chairman of the Republican-majority FTC, Joseph Simons, has expressed interest in the issue but taken no concrete steps toward initiating a rulemaking. Both Democratic members of the FTC—Rohit Chopra and Rebecca Kelly Slaughter—have endorsed a rulemaking on non-competes, suggesting a third Democrat appointed (to the five-person Commission) by President Biden, Sanders, or Warren could make an FTC rule a reality.

Employers in a wide range of industries have deprived workers of the basic freedom to leave their jobs to pursue their trades elsewhere. In an economy with low union density and persistent unemployment or underemployment, threatening to leave is often the only way millions of workers can obtain decent wages or fair treatment. But for workers subject to a non-compete, speaking up about pay or other conditions of employment can mean not only losing their current job, but also risking their entire livelihood. The freedom to leave should be universal, not available only to some.

Contact us at editors@time.com.

This post was originally posted at http://feedproxy.google.com/~r/time/topstories/~3/uF8kpJMZ77M/.

Putting Pressure on the Finance World Could Be One of the Most Effective Ways to Fight Climate Change

IDEAS
McKibben is the author of Falter: Has the Human Game Begun to Play Itself Out? and a co-founder of 350.org

Time for something like panic: last week the UN climate talks in Madrid essentially collapsed, even as scientists were reporting that the 2010s had been by far the hottest decade since records began. Most of the blame fell on countries like the U.S., Brazil, and Saudi Arabia, but around the world political systems simply aren’t responding to the greatest crisis they’ve ever faced—they’re so corrupted by fossil fuel money, so overcome by inertia, so preoccupied with the next election or coup.

But, amid the desolation, there were a couple of signs of hope. They came from the world of high finance.

Just as young people and indigenous leaders were being kicked out of the UN talks for their protests, the Liberty Mutual insurance company became one of the first big U.S. insurers to announce it would stop aiding coal companies. The announcement came after sustained pressure from a coalition of environmental groups called Insure Our Future, and though Liberty’s pledges are just a beginning—oil and gas are the bigger future threats at this point, as coal’s decline is already underway—it was proof that even vast sums of money can’t insulate companies from activism.

That point was underscored over when Goldman Sachs announced on December 14 that it would restrict its lending to the coal industry, and further that it wasn’t interested in funding the drilling of the Arctic. Again a coalition of groups—from the Gwich’in tribe in Alaska’s Arctic National Wildlife Refuge to the Sierra Club and the Rainforest Action Network—had pressed hard. And again Goldman’s response was just a first step. But given the imbalance in forces—a remote native band against one of the world’s biggest banks—it was a hopeful sign.

Hopeful because these kinds of campaigns are going to expand and build. More and more, organizers are deciding that, after decades of asking governments to change, they’re also going to have to go after other power centers. Washington and Wall Street are deeply linked, but they’re also distinct, and both need to shift dramatically.

And hopeful for other reasons too. Even if we can get politicians to make real change, it will come slowly, and one national capitol at a time. But if these financial giants begin to move, the effects will be both quick and global—and those are the two things most required for effective progress on the climate.

This winter will likely see a prolonged campaign against big insurers, big asset managers like Blackrock, and big banks. Chase Bank exemplifies the problem: they’re the worst, lending hundreds of billions of dollars for the most extreme fossil fuel projects on earth. They’ve dramatically increased their lending since the Paris accords; they’re the bankroll for the most dangerous activity on planet earth. If these bankers plugged the money pipeline, the fossil fuel industry would have to stop expanding—which is precisely what scientists have told us is now required.

It may seem impossible to take banks that size on—they’re literally a central pillar of global capital. But look at them another way: unlike Exxon or Shell, they’re able to make plenty of money from things other than fossil fuel. Destroying the planet is only a side business for them—heck, they could make money financing the transition to sun and wind. And they’re potentially vulnerable to citizen anger. Activists, more and more, are taking up the cry of “Make Them Pay,” understanding that it’s not okay to pile up profits by devastating the planet. Chase has 5,000 branches spread across America. Indigenous activists joined by my colleagues at the 350 Seattle chapter shut down all 44 branches in their city for a day last spring, and there’s no reason not to try the same thing across the country. Anyone with a pair of scissors can cut up a credit card.

Think about that electoral map that Trump always holds up to taunt his foes, the one with the huge patches of red. Well, a map of the country’s money shows that most of it is in those blue patches where people care deeply about climate change: if electoral power is unfairly spread, so is financial power, but this time in a way that might work to put pressure on the banks.

The political and the financial are not completely separate tracks for activists, of course. Around the world, campaigners are also going after central banks, the government-sponsored institutions that control much of the planet’s monetary policy. The European Investment Bank announced earlier this autumn that it would no longer finance fossil fuel projects; campaigners in Switzerland said December 16 that they were getting closer to persuading the Swiss Central Bank to take action (and Swiss banks are no small thing!). But the truly big money is piled up in those American institutions that dominate global finance. That dominance is not fair nor wise, but right now it gives us one more lever to reach for in this moment of climate crisis.

Contact us at editors@time.com.

This post was originally posted at http://feedproxy.google.com/~r/time/topstories/~3/_EZDHrmkI70/.

Companies should take California’s new data-privacy law seriously

HISTORY DOES not repeat but sometimes it rhymes. So, it seems, do efforts to protect netizens’ privacy. The European Union led the world with its General Data Protection Regulation (GDPR), which came into force in May 2018. That law shook up internet giants and global advertising firms, both of which had previously used—and at times abused—consumer data with little oversight. On December 11th India’s government introduced a bill that would force firms to handle data only with consumer consent and give the authorities sweeping access to them. The same day Scott Morrison, Australia’s prime minister, promised a review of privacy laws and said the competition authority will monitor how advertising is done on digital platforms. But the most important piece of legislation rhyming with GDPR right now is the California Consumer Privacy Act (CCPA), which comes into force on January 1st. To online businesses, it jars.

The Californian law copies some of the GDPR’s provisions. It gives consumers the right to know what online information is collected about them and how it is used, permits them to demand that their data be destroyed and to sue companies for data breaches. In some ways, the CCPA is looser than its European predecessor. It does not, for instance, insist that firms have a “legal basis” for collecting and using personal data or restrict the international transfer of data. It also stops short of demanding the appointment of corporate data-protection officers and assessments of projects’ data-protection risks. And whereas the GDPR lets individuals demand that private information about them be removed from the web under certain circumstances, the First Amendment makes this “right to be forgotten” a non-starter in America.

In other respects, though, California goes further than the EU. The CCPA adopts a broader definition of personal information (which extends to such things as internet cookies that identify users on websites) and it explicitly forbids discrimination (by offering discounts to those who grant firms access to their data). Companies must enable Californians to opt out of the sale of personal data with a clear “do not sell” link on their home page, rather than through GDPR’s fiddlier process. Michelle Richardson of the Centre for Democracy and Technology, a privacy-advocacy group which is bankrolled in part by big tech companies, calls the CCPA “ground-breaking”.

The California law will apply to firms with revenues of $25m or more that do business in the state or process its residents’ data, even if not based there. Any for-profit entity anywhere that buys, shares or sells the data from more than 50,000 Californian customers, households or devices a year is also covered. Law-breakers face fines of up to $7,500 for every violation, compared with 4% of global annual revenues or €20m ($22m), whichever is higher, for the GDPR. But California’s relatively trifling ceiling can add up quickly for firms with thousands of users.

The GDPR’s track record suggests the effects of the CCPA will be far-reaching. Some 250,000 complaints have been lodged under the EU rules, and some penalties approach €100m. If breaking the rules could prove expensive, so is respecting them. The International Association of Privacy Professionals, an industry body, and EY, an accountancy, reckon that complying with the GDPR costs the average firm $2m. Tech firms spend over $3m; financial firms, more than $6m. By one estimate, the total cost to all American firms with more than 500 employees could reach $150bn.

“Initial compliance” with the CCPA may, for its part, cost the estimated 500,000-odd affected American firms $55bn, according to a study commissioned by California’s attorney-general. Any such estimates should be taken with a grain of salt. For one thing, global firms that are already GDPR-compliant have a head start, even if differences between the two laws mean abiding by the Californian one will be far from automatic. Big firms, which are already on the hook for GDPR, are expected to spend another $2m each. For the tech giants that looks like chump change. Microsoft and Apple say they are not only ready for CCPA, but also plan to implement it across America.

For America’s legions of smaller online trinket-sellers, app-makers or other firms present on the internet the Californian law will be onerous. They can ignore European regulations, because most have no EU business, but cannot easily stay away from one of America’s biggest domestic markets. A new survey by the US Chamber of Commerce, a lobby group, claims that only 12% of small businesses in America know about the law, let alone have prepared for it.

The impact of the CCPA is being felt beyond boardrooms. Big Tech is lobbying lawmakers in Washington, DC, for a federal statute on the subject. “We really, really support an omnibus federal privacy law,” says a data-privacy official at a large American technology company. Facebook and Google do, too, they profess. The US Chamber of Commerce, better known for opposing regulations, is also now in favour.

One explanation for tech firms’ sudden enthusiasm to safeguard user information is their reasonable desire to avert a balkanised mess of contradictory state laws. Illinois, New York and Washington have differing state legislation in the works. Many others are looking into the matter.

Tame west, wild east

Tech companies could have another motive to back federal rules. Because much online activity crosses state boundaries it falls under federal jurisdiction. A national data law would therefore supersede California’s, unless it explicitly made federal rules the floor which states could raise if they wished. A Democratic proposal in the Senate does just this. A rival Republican one would set business-friendlier rules as the ceiling, in effect obviating the CCPA. No points for guessing which one of these America Inc would prefer. Neither is likely to pass before November’s presidential elections. Until then companies will need to heed California’s data sheriffs. After that, expect a shoot-out.

This post was originally posted at https://www.economist.com/business/2019/12/21/companies-should-take-californias-new-data-privacy-law-seriously.

An inspiring holiday message

DEAR PARTNERS, colleagues and (dare I say it) close personal friends. As the new boss of Multinational United Subsidiary Holdings (MUSH), I am proud to look back on another year of success at our great company. Our performance is largely down to you and your efforts, and we hope that next year those efforts will be rewarded with the end of our long-running pay freeze.

Under my tenure, CEO does not stand for Chief Executive Officer but for cheerleader extraordinaire. I feel passionate about reaching out to as many of you as possible (if not quite as passionately as our Chief Technology Officer, who is still on suspension until the employment tribunal makes its decision). The door to my office is always open, especially now that we are in an open-plan building. When it comes to 360-degree feedback, I have unlimited bandwidth.

What was my highlight of the year? It has to be the arrival of cultural facilitator (and part-time rapper) Monica Strutt, aka the “monster”. We all remember how we felt when we heard her first freestyle slam: “Use your energy/to create more synergy/our transformation/will be a corporate sensation/all your learnings/will boost our earnings”. Inspirational at the meta-level.

I am also excited about the reorganisation that saw the appointment of our first Chief Diversity Officer, who ticks all the boxes—as should you when the latest employee-satisfaction survey hits your email address. The revamp also saw the creation of two new senior roles: Corporate Responsibility Advance Principal and, pushing the envelope, our Thinking Outside the Silo Head. I expect plenty of both CRAP and TOSH next year. They will be cascading memos down the corporate waterfall as they try to define their roles.

Admittedly, 2019 has had its share of painful experiences. My predecessor’s decision to centralise all group functions did not work, resulting in some exceptional and extraordinary losses for the fifth year running. This forced us to close a few factories. On the bright side, our carbon emissions fell considerably as a result. Just doing our bit for the planet. I plan to return more power to the remaining staff by delegating control to the individual business units. Going forward, we will be moving backwards.

This means that now more than ever we need your input and inspiration for 2020. Please ideate 24/7. We need greater granularity and more thought leadership. Let us create a snowstorm and see what lands. If we architect successfully and get our ducks in a row, we can blitzscale MUSH and impact the market via a paradigm shift.

Business is getting a bad press at the moment for prioritising shareholders above all else. As our results make clear, we have managed to avoid this. What’s more, our company has a purpose, and next year we intend to find out precisely what it is. Those of us in the C-suite have been kicking around some ideas, starting with the creation of a cross-disciplinary taskforce. Does becoming part of that winning team fit into your wheelhouse? If so, let our HR department know and someone from the staff interface community will circle back to you.

Where will our corporate journey take us in 2020? Hopefully, to the sunlit uplands where a thousand flowers bloom amid blue-sky thinking. For that to happen, we must join the dots and create a toolkit that will do the heavy-lifting to allow us to leverage our collective skillset. Forget the doomsters and the naysayers, and the investment-bank analysts with their tricky questions about balance-sheet strength and cashflow. Our management consultants say that we are one of the best clients they have ever had and they look forward to seeing us again next year.

As well as a cheerleader, a chief executive needs to be a chef. At MUSH we have wonderful ingredients. With the right mixing, we can create a soup-to-nuts banquet that will have consumers and investors salivating. Does this vision speak to you? Then speak to me in January when I return from my Bhutanese meditation retreat.

In the meantime, have a great holiday season. Many of you are entitled to annual leave. I like to think we are all members of the MUSH community, even those of you on zero-hours contracts. Remember that, in 2020, all your hard work can pay dividends to our shareholders.

All the best to anyone in the group’s employment space.

Stay awesome. Buck Passer

This article appeared in the Business section of the print edition under the headline “An inspiring holiday message”

Reuse this contentThe Trust Project

This post was originally posted at https://www.economist.com/business/2019/12/21/an-inspiring-holiday-message.