TheChek News Flow

Competitive pressures will limit companies’ ability to pass on higher costs

The global shortage of semiconductors has an upside — at least it seems that way to the chief financial officers of BMW and Daimler: it has revealed just how much “pricing power” they have. In future, even once the scarcity of chips eases, the two automakers plan to limit sales of their most premium cars, permanently locking in the higher prices — and boosting inflation.

The comments by the carmaking executives, in an interview with the Financial Times, feed into fears that temporary interruptions to international supply chains will lead to higher prices. The disruptions have causes ranging from pandemic-provoked factory closures and disruptions to global shipping to the after-effects of natural disasters. But a top executive at the logistics chain UPS said this week that multinationals were already retreating from globalisation as a result, shifting production to more expensive but closer locations. This, he said, would lead to permanent scars on the economy.

Sustained higher inflation has been towards the top of investors’ list of worries as the coronavirus pandemic eases. While total spending has been boosted by the combination of high consumer savings, easy monetary policy and government stimulus, the capacity of the economy to supply the goods and services to meet that demand has been harmed by lockdown restrictions and other bottlenecks. Debate between economists has focused on whether these pressures will prove transitory and ease as economies reopened — or whether they will lead to something more permanent and will soon be embedded in long-term expectations.

Daimler and BMW’s conviction that their ability to charge more is due to their own pricing power will be tested by the competitive pressures of the market. At present, their competitors are facing the same supply shortage as they are; would-be luxury car buyers face a wait and higher prices whoever they choose to buy from. If the bottlenecks ease, then consumers may be able to choose, instead, between paying more for a luxury BMW or less for one of its competitors’ cars. Profit margins that can be sustained in one market cannot necessarily be sustained in all.

When it comes to deglobalisation, too, companies will face similar calculations. Adopting more “resilient” but less efficient production processes could raise costs. That might make sense for some businesses, using “just in case” rather than “just in time” processes as a form of insurance against disruption. Yet it could leave others exposed to lower cost producers that stick with further-flung, yet cheaper, supply chains allowing them to pass on the savings to their customers and undercut their more circumspect competitors on price.

It is the labour market, however, that central bankers are watching most closely for any signs that temporary bottlenecks and shortages are leading to a more permanent increase in prices. For the moment, while truck drivers and others in certain high-demand professions are enjoying their first pricing power in decades, there is little sign yet of wider increases in pay. It is unlikely that workers today have the same sort of ability to restrict supply that their more heavily unionised predecessors enjoyed in the 1970s, the last period of sustained inflation in many rich countries.

Companies, too, may find that when faced with higher wage demands from workers it makes more sense to absorb those costs, maintain market share and earn a lower profit margin, rather than passing them on to customers. Unfortunately for BMW and Daimler, it is not always clear exactly where “power” lies.

Sportradar follows Genius Sports to public markets as wagers add up to billions of dollars

The legalisation of US sports betting is driving new demand for statistics on players, games, teams and performance. A pair of sports data companies have installed themselves as the gatekeepers to this information trove.

Sportradar Group and Genius Sports license data from hundreds of professional sports competitions including the National Football League, Major League Baseball, the English Premier League and the PGA Tour. They package and sell it to betting platforms and media companies, which in turn use it to offer wagers or create graphics and scoreboards on broadcasts.

Both companies have tried to capitalise on the growing financial stakes tied to sports data. While versions of each have been around since the turn of the century, business has accelerated since the US Supreme Court struck down a federal ban on sports wagering in 2018. 

Swiss-based Sportradar listed on the Nasdaq stock market on Tuesday with a market capitalisation of $28bn. London-based Genius went public through a reverse-listing with a special purpose acquisition company in April, and is now valued at $3.8bn.

Americans placed more than $27bn in sports bets in the first seven months of this year, according to the American Gaming Association, generating tax revenues to US states of more than $2bn. In July the tax revenues were six times higher than in July 2019. 

Data has become an increasingly valuable commodity in all types of financial risk taking, from sports betting to stock trading. Financial exchange groups now view the data generated through buying and selling as an important source of revenue.

Both Sportradar and Genius have negotiated new deals to license statistics from top leagues. While they dominate the sports data industry, they have little bargaining power with their suppliers, analysts said. Genius wrested exclusive data rights for the NFL, the most popular US sport, from Sportradar in April, paying a reported $120m a year.

In an interview this week, Sportradar founder and chief executive Carsten Koerl said his group would not get into bidding wars over data.

“If a deal makes commercially no sense for us or is commercially on a level that we think we cannot do it, we can’t close every deal”, he said.

Last week Genius announced a deal with the gambling company Penn National Gaming to provide official data and “fan engagement solutions” for sports books in nine US states.

A spokesman for Genius said its role as a gatekeeper of league data helped to preserve the integrity of legal sports betting.

“Our official data strategy ensures that sports control the capture and distribution of their proprietary data to deliver the most engaging and competitive products available for sports fans across the betting and media. With official data, everyone wins,” he said.

Sportradar has used data licensed from leagues to invent its own products, such as “integrity services” to ensure matches are not fixed or tampered with, according to a description of the service in a regulatory filing.

“The data is one piece of it,” Koerl said. “We are making value-add services on top of the data, which is very important for us. We are creating probabilities, we are creating trading services, management services, platforms [and] advertising products.”

Jed Kelly, senior equities analyst for Oppenheimer, said part of what investors saw in Genius and Sportradar was their ability to feed real-time data to betting platforms and media companies while games were under way. “Where you make your money is live betting,” he said.

So far, the sector has drawn interest from some of the top names in sport. Sportradar’s minority investors include Dallas Mavericks owner Mark Cuban and basketball legend Michael Jordan, who was on hand on Tuesday to ring the Nasdaq opening bell with Koerl.

Koerl takes pains to convey an air of neutrality within the hyper-passionate world of sports fandom. Shuttling between investor meetings in Manhattan this week, he said he found himself discussing the topic of the greatest basketball player of all time with his taxi driver.

The Germany-born entrepreneur mentioned his affiliation with Jordan, while the driver insisted that Los Angeles Lakers star LeBron James was better, calling him a more complete player.

Koerl said he preferred to entrust qualitative sports judgments to his associates. “I think the [NBA] commissioner knows it even better and if a commissioner is saying he’s the best player in a sport, I would follow his opinion,” he said.

Wall Street’s initial judgment of his company was less than enthusiastic: on Tuesday Sportradar’s shares fell 7 per cent.

Shortages of component have squeezed industries from carmaking to consumer electronics

The EU must offer at least €20bn in subsidies if it wants to “move the needle” on computer chipmaking in the bloc, according to the head of one of France’s leading suppliers of semiconductor materials.

Paul Boudre, chief executive of Soitec, a €7bn supplier of the silicon wafers that are used to make chips, told the Financial Times that Europe was capable of building a significant sovereign supply of chips. “But is it going to play? That’s the answer we are waiting for,” he said.

In recent months, as chip shortages have squeezed industries from carmaking to consumer electronics, the EU has said it is interested in doubling domestic production to 20 per cent of the global market by 2030.

Earlier this year Thierry Breton, the EU’s internal market commissioner, told the FT that the bloc’s €800bn Next Generation EU economic recovery plan provided a unique window to allocate investment from member states towards the chip sector.

Limited financial support has been offered to date. The US, meanwhile, is close to finalising a $52bn subsidy package for its chipmakers.

Boudre said that for EU chipmakers such as Infineon, Bosch and STMicroelectronics to win a bigger share of the global market, they needed to receive the “equivalent capabilities and support they would get in other regions of the world”.

A €20bn package should be directed strategically to the manufacture of products where the continent already has expertise, he added. These include the market for chips that are 22-nanometer or bigger instead of the smaller chips that are currently at the cutting edge, as well as expanding into the market of products between 22nm and 10nm over the next three years.

“Going down to 10nm, we have skills, we have capacity,” Boudre said, adding that the even smaller chips, up to 2nm in size, which are more powerful, fast and costly to produce, are largely the domain of big producers in China, Taiwan, Japan and the US.

Soitec has seen its share price rise by a third this year, as the pandemic has throttled chip supplies, turbocharged demand from tech companies and driven up prices. The vast majority of its chip materials — known as silicon on insulator (SOI) — are supplied to telecoms companies for chips in smartphones, tablets, computers and data centres.

Boudre dismissed the idea that the industry was poised for another downturn after the pandemic, saying that semiconductors have replaced oil and gas as the “gold of modern industry” and will be needed in every aspect of the world’s rapidly accelerating technological development.

But Chad Brown, a trade specialist at the Peterson Institute for International Economics, disagreed that a $20bn subsidy package from EU nations would do much to relieve severe chip shortages in Europe and cautioned that the growing tendency towards government subsidies could deteriorate into an “arms race”.

Soitec, whose two biggest investors are funds owned by the French and Chinese state, exports 90 per cent of its products outside of France and 65 per cent outside Europe.

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