TheChek News Flow

UK set to decide on allowing Chinese equipment into 5G network in face of US lobbying

Andrew Parker, head of MI5, says he has “no reason to think” that the UK’s intelligence-sharing relationship with the US would be hit if Britain adopted Huawei technology in its 5G mobile phone network, as a key decision on the issue looms.

Sir Andrew’s comments will increase expectations in UK government and industry circles that the Chinese company’s equipment will be permitted for use in some “non-core” parts of the network.

Boris Johnson’s government will on Monday face last-minute lobbying from Washington to exclude Huawei from the country’s 5G network, as the prime minister prepares to make a decision — expected this month — with huge geopolitical and economic consequences.

Washington has warned that if Chinese technology is used by the UK then intelligence sharing could be undermined. But blocking Huawei would be costly to the telecoms sector and deal a heavy blow to the rollout of the new data technology in Britain.

Beijing has also been putting pressure on Mr Johnson not to jeopardise the UK-China relationship and the decision will be seen as a key indicator of how the prime minister intends to position Britain in a post-Brexit world.

A US delegation comprising representatives from the National Economic Council and National Security Agency will arrive in London for a last-minute lobbying effort with UK officials on Monday.

But in an interview with the FT, Sir Andrew, who is stepping down as director-general of MI5 in April, said the links in the “five eyes” intelligence partnership between Britain, the US, Canada, Australia and New Zealand were “the strongest they’ve been”.

He said the US-UK partnership was “very close and trusted”, adding: “It is, of course, of great importance to us. And, I dare say, to the US too, though that’s for them to say. It is a two-way street.”

When asked specifically whether he thought that the UK would lose out on intelligence relationships if the government decided to go ahead with Huawei, he said he did not think this was a danger. “I’ve no reason today to think that,” he said.

Sir Andrew acknowledged that security concerns alone should not always “dominate and dictate” a decision, and that Mr Johnson and his national security council had been left with a difficult decision because there were so few suppliers in the market.

All four mobile networks in Britain have now launched 5G with Vodafone, BT, EE and Three all using the Chinese company’s equipment at the so-called non-core level — such as the antennas and base stations used on masts and rooftops — but not in the “core” network operations where customer details are held and calls are routed.

“Perhaps the thing that needs more focus and more discussion is how do we get to a future where there’s a wider range of competition and a wider range of sovereign choices than defaulting to a yes or no about Chinese technology,” Sir Andrew said.

British government officials admit that blocking Huawei now would deal a blow to consumers, noting that Huawei was being used because its equipment was seen as good value.

In spite of US pressure, some inside the UK government and within the telecoms industry expect Mr Johnson to arrive at a similar decision to the one taken by Theresa May’s national security council in April 2019, when ministers agreed to allow Huawei to build some “non-core” parts of the network.

A subsequent decision to review the issue — following pressure from the Trump administration — has created great uncertainty in the industry.

Downing Street insiders stress that no decision has been taken and that the ministers making the decision this month — including Mr Johnson — were “a new cast” who were looking at the evidence afresh. Only Sajid Javid, now chancellor but then home secretary, remains of the ministers on Mrs May’s NSC in April 2019.

Two aerospace companies have combined sales of $5.3 billion

Woodward Inc. WWD -0.21% and Hexcel Corp. HXL -1.87% set plans to merge, a deal that would combine two big Boeing Co. BA -1.91% suppliers as aerospace companies grapple with fallout from the grounding and halted production of the 737 MAX.

The two U.S. companies produce parts and spares for Boeing and Airbus SE jets as well as a range of military aircraft. They said on Sunday that their proposed deal would help accelerate research and development spending on new technologies. Together, Woodward Hexcel would rank among the aerospace industry’s largest suppliers, with combined sales of $5.3 billion last year and 16,000 staff.

The deal would be the first big transaction in the industry since Boeing said it would freeze production of the MAX. Many potential deals have been placed on hold or abandoned because of uncertainty over future production of the MAX, said aerospace bankers.

Both Woodward and Hexcel have reported a limited impact on their businesses since MAX production was reduced last year. But they have said sales of spares have been hit by the absence of deliveries.

Fort Collins, Colo.-based Woodward makes cockpit systems and actuators—the motors that control wing flaps and other flight-critical functions—for commercial and military aircraft. Stamford, Conn.-based Hexcel is a specialist in composite materials such as carbon fiber, which are increasingly used in aircraft and their engines systems.

Boeing has been moving production of some of that work in house, opening its own actuator plant in the U.K., and has considered buying Woodward in the past.

The proposed deal would be structured as a merger of equals, with Woodward shareholders owning 55% of the combined entity. Hexcel Chief Executive Nick Stanage would lead the combined company with Woodward CEO Tom Gendron becoming executive chairman.

The proposed terms call for Hexcel shareholders to receive 0.625 Woodward shares for each one they hold.

Japanese carmaker examines going it alone in engineering and manufacturing

Senior executives at Nissan have accelerated secret contingency planning for a potential split from Renault as the downfall of Carlos Ghosn continues to reverberate through the 20-year-old automotive alliance.

The plans include war-gaming a total divide in engineering and manufacturing, as well as changes to Nissan’s board, according to several sources, and have been ramped up since Mr Ghosn’s dramatic escape from Japan in late December.

The move to map out a potential split is the latest sign of tension in the alliance held together for nearly two decades by Mr Ghosn, former chief executive and chairman of both companies.

Despite efforts to improve relations on both sides, the partnership with Renault — which produces 10m cars a year — had become toxic, said two of the people, with many senior Nissan executives now believing the French carmaker is a drag on its Japanese counterpart.

A full split would probably force both carmakers to seek new partners in an industry grappling with falling sales and rising costs from the shift to electric vehicles.

It would also leave both businesses smaller at a time when rivals are bulking up, with Fiat Chrysler and PSA merging and Volkswagen and Ford forming their own alliance.

Preliminary discussions for a separation come at a particularly sensitive moment for Renault and Nissan.

In the coming weeks, Jean-Dominique Senard, Renault’s chairman, is due to unveil several combined projects designed to demonstrate that the alliance can still function. “We cannot survive if we don’t move quickly now to do real sharing,” Mr Senard told the FT in an interview last month.

Mr Senard, who himself held doubts the partnership would endure after he replaced Mr Ghosn last year, had hoped that new leadership at both companies would reset a relationship that became strained in the wake of Mr Ghosn’s arrest in late 2018.

A person close to the Nissan management said Makoto Uchida, the newly appointed chief executive, was working closely with Mr Senard to launch the new projects.

Nissan’s contingency planning has focused on the engineering and technology side of the business, according to people familiar with the matter, specifically what Nissan was gaining from the alliance and what it would need to do if it were obliged to provide those elements independently.

Even during the Ghosn era, when the alliance was functioning more smoothly, people close to Nissan said discontent was growing among some engineers about the former chairman’s push to combine engineering and manufacturing, which is at the heart of the Japanese group’s technology.

But the integration that did occur under Mr Ghosn means ending the alliance would now be painful. The purchasing function is totally combined, while Nissan is preparing to launch the Ariya, an all-electric sport utility vehicle, within the next three years, using a new platform co-developed with Renault.

Separately, there are people within Nissan who say that Mr Senard’s efforts to present the alliance as unified and ready to progress have badly misread the mood on the ground across Nissan’s global operations.

The appointment of Mr Uchida has failed to quell distrust of Renault within Nissan, which runs deep inside the company, according to several people.

Nissan’s three-member leadership team faced upheaval after Jun Seki, the executive in charge of Nissan’s revival, was poached by Apple supplier Nidec when he lost out in the race for the top job.

Nissan and Renault declined to comment.

Department of the Interior is planning to halt the use of its nearly 1,000 drones

The Trump administration is set to ground one of its biggest civilian drone programmes permanently because the devices have been made at least partly in China, in the latest sign of concern in Washington about US exposure to Chinese technology.

The Department of the Interior is planning to halt the use of its nearly 1,000 drones, according to two people briefed on the plans, after concluding there was too high a risk that they could be used by Beijing for spying.

The decision is being made despite widespread concerns among department staff that taking the fleet out of action will cost the government significant time and money. Documents seen by the Financial Times reveal that staff at various agencies have protested against the proposals.

David Bernhardt, secretary of the interior, has not yet signed off on a final policy, but people briefed on his thinking say he is planning to pull the fleet from action, with exceptions made for emergencies such as fighting wildfires and possibly for training.

The interior department did not respond to a request to comment.

Chinese-made civilian drones have recently become a major area of security concern for the US government, with officials warning that the images captured on their cameras could be accessed by Beijing.

The US army has already issued a directive banning drones made by the Chinese company DJI, which sells more than 70 per cent of the world’s civilian drones, while Congress is debating a bill that would ban the federal government from buying any more Chinese drones.

The US government has been looking at ways to encourage the development of a purely American made-drone, but this is likely to take years, officials say. Several western companies have already admitted defeat in their attempts to take on DJI in the consumer market, confounded in part by the costs of manufacturing.

The interior department uses drones to tackle wildfires, to map terrain and to monitor natural resources. It announced last October it would temporarily ground 810 camera drones while Mr Bernhardt reviewed their security risks.

A spokesperson for DJI, which made 121 of the department’s drones, said: “While we have not seen the new policy, we look forward to reviewing the findings of DOI’S comprehensive review of its drone programme, given the lack of credible evidence to support a broad country-of-origin restriction on drone technology.”

Dozens of members of staff at several agencies have protested against the plan to ground them permanently, according to documents seen by the FT.

A note compiled by the Fish and Wildlife Service outlined the ways in which its operations had already been affected by the temporary ban. The service said it had cancelled flights to monitor controlled burns aimed at reducing wildfires and to help count animals in certain areas.

A separate document prepared by the Geological Survey for the department lists eight different ways its staff have used drones, including for flood response, monitoring agricultural sites and preparing for earthquakes.

One staff member warned: “Unmanned aircraft systems are a unique tool that fit into this mission and allow us to make high-quality surface observations at a fraction of the price of manned aircraft operations.”

Gary Baumgartner, who retired from the Bureau of Land Management last June, told the FT such concerns were widespread among staff who, like him, had relied on the drones for their work. “Without drones, we often have to fly manned aircraft, which is much more expensive — and frequently dangerous for those involved.”

There are many reasons for the US dollar to weaken, which would cause commodity prices to rise

There are plenty of expensive assets in the world today. The past decade of loose monetary policy and central bank money dumps have created the infamous “bubble in everything”. This is one reason we now have the bizarrely yo-yoing investment environment that we do, in which everything from risky stocks to safe gold is rising at the same time.

But one thing has remained reliably cheap — commodities. While the US equity market, which keeps ratcheting up to new highs, is almost as expensive as in the past 150 years, commodities are about as cheap relative to stocks as they’ve been in the past century.

Part of this is natural — and structural. Over the past 200 years, the real price of industrial commodities has been trending downwards. That’s because every time a new peak in prices disrupts what is usually a long-term bear market, companies and consumers adjust. They might substitute in a cheaper commodity for a more expensive one, develop technologies that allow more efficient extraction or (gasp) actually try conserving energy. On that note, who in my generation can forget Jimmy Carter’s 1977 presidential plea, amid an energy crisis, for Americans to turn down their thermostats, which he delivered from the White House while wearing a thick cardigan?

With the exception of a couple of spikes, industrial commodity prices have been falling relative to the S&P 500 ever since. And most people think there’s good reason for that to continue.

In a deflationary world, at the tail-end of a recovery cycle, with ageing populations consuming less and a global economy that’s less dependent on commodity-heavy manufacturing relative to services, there are plenty of factors keeping commodities cheap, even if we don’t experience a recession in the US or the rest of the world.

Add to these factors the wild card of an escalating US-Iran conflict, as well as a global push towards greater action to prevent climate change. The latter may not be a priority for the US administration, but it is for the young activists who make up a growing share of voters.

Like most chief executives, economists and policymakers, younger generations believe a shift further away from fossil fuels is inevitable. In investment circles, there’s even talk of oil tankers becoming “stranded assets”, whose value will fall precipitously as renewable energy takes centre stage.

And yet, having watched the last big demand-driven oil spike in 2008, as well as the more financially driven price spike in 2011-12, which eventually came undone when central bankers pulled back on quantitative easing, I think it’s unwise to assume that we have entered a permanent bear market in commodities — at least not yet.

The looming threat of unfunded US pension and healthcare entitlements, coupled with the willingness of central bankers and policymakers to try to inflate it away by printing money — thus weakening the dollar — could make gold the hottest new asset class of the next few years. Some of the same trends could lead to an upsurge in commodity prices more broadly, even though the prospect of a wider war starting in the Middle East hasn’t yet created a sustained oil spike.

There are plenty of reasons — from deficit spending, to political risk or the popping of a corporate debt bubble — for the dollar to weaken. If that happens, commodities, which move inversely to the dollar, would rise. The US stock market would be likely to fall, since corporate margins are tight and there’s not much room to buffer against rising energy and input prices. If the dollar weakens, all costs from overseas supply chains rise too.

Should that come to pass, there’s little doubt that the US Federal Reserve would try to bolster the market with further monetary easing. But given that every central banker in the world is telling us that monetary policy can’t prop up the market forever, it’s possible that such a move would trigger not a further rise in stocks, but a stampede towards gold and perhaps towards the commodity asset class in general.

QE was a major factor in the last run-up in commodity prices, which aren’t just raw materials for business, but tradable assets for speculators. And this is a theory that is currently being bandied about by some momentum investors.

This scenario would only play out if there was no significant collapse in global growth that changed the underlying demand picture. But it is possible that things could go the other way, particularly if growth in Europe or China started to falter alongside the US.

Still, if commodity prices did rise, there would be myriad ramifications. You would start to see the heads of petro states further emboldened, and populist nationalism increase globally — inflation in food and fuel prices hits the poor hardest, encouraging political volatility. That could, in turn, create new trade turmoil and the sort of disruption that the markets are currently discounting.

On the upside, though, demand for commodities is price elastic — once prices go too high, demand always falls. The cycle of replacing one source of energy with another has been playing out for hundreds of years, and continues. In an ideal world, the next commodities bubble, whenever it comes, could help us make what might be the final shift — away from fossil fuels and towards renewables.