TheChek News Flow

Chinese telecom groups have been challenged to take on Google’s dominance

At first sight, the recent US executive order blacklisting Chinese group Huawei looks like a classic Donald Trump move: brash, assertive, nationalistic. But look closer and it is clear that putting “America first” could ultimately mean the US finishes last.

The US pushback against Huawei began with its 5G infrastructure business. Citing security concerns, the US made a concerted effort to convince western allies to drop the company from their 5G networks — with mixed success. The fight has now morphed into a broader ban that makes it near impossible for US companies — and any firm with US interests — to do business with any part of the Huawei empire. That includes Huawei’s up-and-coming consumer division, the world’s second-biggest smartphone producer.

For Huawei, it looks like a body blow. US groups such as Qualcomm must stop supplying it, but so must UK-based Arm, which has American ties. Then again, Huawei is the world’s biggest telecoms equipment manufacturer, and only draws a small, if important, part of its inputs from the US. The Chinese group could work round the ban, if it finds suppliers to replace the high-end mobile phone glass it gets from Corning.

Any short-term benefit to Huawei’s US competitors will be offset by hits to the company’s suppliers and customers as well as reduced impetus for innovation. Further out, this protectionist move will encourage Huawei and other Chinese groups to develop their own technology. Given how far they have already come, that might wind up doing further harm to US suppliers and their dominance of the market.

However, devices such as phones do not stand alone. They are part of ecosystems, such as Google’s Android platform and related apps including Netflix, WhatsApp and YouTube. Devices, operating systems, apps, services and accessories come together to create a unified customer experience.

These global ecosystems are largely managed by American companies, and the executive order all but forbids Google, along with US-based Android developers, from working with Huawei phones. In other words, President Donald Trump has banished Huawei from the Google ecosystem.

Initially, losing Google’s ecosystem partners could hurt Huawei even more than having its supply chain upended, as customers may stop using Huawei kit that can’t offer the complements they know and love. But in the short to medium term we can expect Huawei to start building its own competing ecosystem, while protecting its position in China and other national markets.

This rival ecosystem might not overtake Google’s Android, but Huawei would be foolish not to try. The challenge is clear — and if anyone can overcome it, it’s the Huawei of 2019. If this had happened four years ago, the technology gap might have been too wide for the Chinese group to bridge. But today’s Huawei might rise to the dare and win — and that would transform the entire mobile sector.

The Trump administration hasn’t just stepped up the trade war; it may have changed the future face of mobile technology. Without an external shock, Huawei could have profitably stuck with Google’s ecosystem. But now the gauntlet is down: Huawei and others have been pushed to challenge Google’s dominance to ensure their own survival.

Google understands the risk to its dominance. It has just asked for the Android operating system to be exempted from the export ban. But it may be too late. Even if the Trump administration agrees or it lifts the ban as part of a broader trade deal, the Rubicon has been crossed, and the risk to Huawei and other Chinese companies has become visible.

These actions by the Trump administration have not only pushed us closer to a world split between a “Chinese-based” and “US-based” internet; they may also have dented the ability of America’s tech champions, especially Google, to maintain their dominance. This brash nationalistic trade policy may end up backfiring badly. The game is on.

Celebrated investor’s decision to run an open-ended fund suited everyone except investors

In the days since Neil Woodford shuttered his Equity Income Fund to redemptions, many have questioned why the celebrated asset manager ever structured this one-time £10bn monster as an open-ended investment scheme.

The main perceived benefit of such funds is the ATM-like promise of instant liquidity. Which means the manager must always be prepared to liquidate to satisfy redeeming investors. Yet Mr Woodford’s prized forte was long-term investing, not benchmark-hugging. Not only had he put the fund into some illiquid unquoted investments, thinking they would do better in the long term, Mr Woodford had even gone so far as to stop paying his staff short-term incentives. He preferred to put them on straight salaries to keep them focused on the longer goal.

Mixing long-term strategies with ATM promises created a vulnerability that might have been avoided had he established a closed-end fund that was not at risk of opportunistic liquidation. Indeed, the open-ended structure contributed to the pickle that Mr Woodford and his investors now find themselves in.

So why do it? Those seeking an answer could do worse than follow the investor’s dollar. Independent financial advisers such as Hargreaves Lansdown and St James’s Place are the key gatekeepers for retail investors. For the IFAs, there’s a financial advantage to peddling open-ended structures. While these may not be as lucrative, fee-wise, as more specialist asset classes such as private equity, they are marketable to the widest retail audience.

And that’s not their only merit. Open-ended funds are also easily scalable, subject only to demand or the fund manager’s discretion. In this they differ from closed-end schemes, such as investment trusts, which take a fixed chunk of money. IFAs can put such products on their platform’s so-called “best buy” lists for steady sale, negotiating a discount with the manager and inserting their own fees gently into the compensation equation.

Marketing Mr Woodford’s fund was lucrative for Hargreaves Lansdown. When the manager obligingly cut his fees they were able to shoehorn in their own charge of 0.45 per cent per annum on top. The firm carried on flogging the fund long after its decline.

As to Mr Woodford himself, well the answer perhaps lies in the symbiotic relationship between the manager and these marketing machines. As a star manager setting up on his own, he had a strong incentive to play by the rules set by the biggest retail gatekeepers.

Whatever the fund management industry claims, the overwhelming desire remains to gather assets, assets and more assets. That’s because success at the top for a manager may be fleeting. While you are still in vogue, there is a visceral wish to cash up when you can.

Surveying this patchwork of poor incentives, it is hard to escape the irony. By piling on too many funds too quickly, Mr Woodford actually set himself up to fail. He bid up his chosen pool of stocks with the wall of cash he had assembled. That made their subsequent underperformance more certain. As for the unlisted stocks he bought, they seem to have been a way of diversifying away from overpriced holdings — albeit one that badly misfired.

The one party uncatered for in all this, of course, is the end investor. While the intermediaries are all acting rationally in their own interests, its outcome — and that of society — is distinctly third rate. Consider, for instance, where the costs of Mr Woodford’s venture end up falling. As at the end of March, so before the final swoon, the Equity Income Fund’s overall returns — based on a notional 1 per cent take and using a money-weighted calculation — split 91 per cent to the managers and only 9 per cent to the investors, from Financial Times calculations and using Morningstar data. Things have deteriorated since then. Even at its peak at the end of 2016, the manager’s cumulative take was 10 per cent of returns.

These numbers are simply not sustainable, and point to a yawning gap between the interests of intermediaries and end investors — one made easily exploitable by the information asymmetry between Joe Public and a sophisticated fund management machine.

They are also reflected in the high aggregate costs of fund management services. In several studies it has been shown that these are the same today as they were 70 years ago. Incredibly, the finance industry that funded the economy in the 1950s was as efficient as its counterpart today.

Perhaps investors in Mr Woodford’s fund should have listened to Paul Volcker, who once found himself sitting next to “one of the inventors of financial engineering” and asked what it did for the economy. It did nothing, the US central banker was told, but it “moved around the rents in the financial system and besides that was a lot of intellectual fun”. This is not a game for which savers should be paying.

Chief was intimately involved in drawing up package, says Greg Kelly

One of the most powerful former executives at Nissan has questioned why Japanese prosecutors spared the current chief executive, Hiroto Saikawa, when they arrested former chairman Carlos Ghosn last November and plunged the Japanese carmaker into chaos.

In his first media interview with a Japanese magazine since his own arrest in Tokyo late last year, Greg Kelly, a former Nissan board member who worked closely with Mr Ghosn, said that Mr Saikawa had not only been intimately involved in the former chairman’s post-retirement remuneration package, but had himself attempted to benefit personally from company funds.

Mr Ghosn is on bail awaiting trial on four separate indictments of financial misconduct including two for understating his pay in Nissan’s financial statements by not including more than $80m in deferred remuneration that he was set to receive over an eight-year period. He has denied all charges.

Mr Kelly, who claimed he was never the deposed chairman’s “right-hand man”, used his three-hour interview with Bungei Shunju to deny charges that he conspired with Mr Ghosn to falsify the former chairman’s pay.

“We didn’t violate the law [and] we were trying to protect Nissan in a way that was lawful which was to retain a talented top executive,” Mr Kelly told the monthly magazine. 

“I didn’t think [Mr Saikawa] should be [in the detention centre] but the question was why am I not in the same place as he was. Because essentially we had the same objective, which was to retain Carlos Ghosn in a way that was lawful,” he added.

According to Mr Kelly, Mr Saikawa was directly involved from the outset in compiling a proposed retirement package for Mr Ghosn that included a $40m lump sum payment to ensure that the former boss would not be poached by a rival after he stepped down.

The document is the same 10-year employment contract for Mr Ghosn for his post-retirement role as “chairman emeritus”, which the Financial Times reported in March as being signed by Mr Saikawa himself.

The Nissan chief reportedly told prosecutors that he signed the document regarding Mr Ghosn’s deferred payment “without thinking too deeply.” 

But Mr Kelly said he and Mr Saikawa held discussions to set up the retirement package in the summer of 2011, and had approved the document twice after checking it carefully. The existence of the document was also known by the then head of the chief executive’s office and by external lawyers hired by Nissan.

Nissan has been charged for the same offence of falsifying Mr Ghosn’s pay, but the company has maintained that Mr Saikawa was not aware of the misstated pay. The Nissan chief executive, who has described Mr Ghosn and Mr Kelly as the “masterminds” of the alleged misconduct, has not been indicted. 

“I’ve known Mr Saikawa for many years. He always seemed to be a guy that supported Carlos Ghosn,” Mr Kelly said, questioning why Nissan had not handled the matter internally. “The abrupt arrests in this case is unusual and abnormal”

In the interview, Mr Kelly also revealed that Mr Saikawa had consulted him on whether company money could be used to purchase his new house in Tokyo in the spring of 2013.

Mr Saikawa, who claimed he was short of cash, proposed that he would repay the loans Nissan shouldered on a monthly basis, but the company ultimately did not help buy the chief executive’s house.

According to Mr Kelly, Mr Saikawa eventually purchased his new home by profits he made from moving back the execution date of his stock appreciation rights, which was originally set as May 14 2013, by one week during which Nissan shares rose 10 per cent. As a result, Mr Saikawa is estimated to have reaped additional gains of ¥47m ($434,000).

“He cared so much about his own compensation,” Mr Kelly said of Mr Saikawa, recalling that the Nissan boss resented not being part of the package for foreign executives which was set higher than the pay for Japanese executives. 

Nissan declined to comment on Mr Kelly’s comments and declined to make Mr Saikawa available for an interview.

Barrons weekend summary: Positive cover story on JPM; cautious feature on Apple, Amazon, Facebook & Alphabet

* Cover story: Positive on JPM: Under chief Jamie Dimon, the bank “has become the world’s top bank, with the industry’s deepest management talent and highest returns,” and its strengths are underappreciated, especially in consumer banking and wealth management, two resilient areas; The bank is expected to boost its quarterly payout to about 90 cents, after the Federal Reserve releases the results of its annual stress tests for major banks later this month.

* Tech Trader: Cautious on AAPL, AMZN, FB, GOOGL: Reports that the Department of Justice and the Federal Trade Commission have divvied up the tech giants for investigations has sparked concern because it’s unclear what “bad deeds” will be investigated, or whether existing antitrust law can address them.

* Trader: The Fed’s move toward easier monetary policy could give stocks a boost, but such shifts take about six months to work through the system, so we won’t know for sure until Q3 earnings season—and there could be more frightening moments between now and then; Cautious on UBER: Though the stock has rallied after what looked like a disastrous IPO, investors “should think twice before hitching a ride on Uber’s volatile stock”; Cautious on JCP: A new management team has been trying to carry out a turnaround, but it isn’t happening quickly—Penney’s bond spreads are notably wide, even for a junk-rated company, and the stock isn’t doing well either.

* Interview: Owen Bennett, who covers tobacco and cannabis stocks at Jefferies Financial Group, likes APHA and Green Organic Dutchman, but is cautious on CRON. Profile: David Green, manager of Hotchkis & Wiley Value Opportunities fund, invests in stocks of any size, bonds of any credit quality, preferred stock, and merger arbitrage, yet is also concentrated, with 40 to 75 securities (top 10 holdings: GE, MSFT, WFC, General Electric 5% Perpetual Bond, AIG, SRG, UHAL, GS, MS, BAC).

* Features: 1) Modern monetary theory has heavily influenced the Green New Deal and other recent Democratic proposals that have drawn criticism from Republicans, but the theory “is actually grounded in old and uncontroversial economic ideas, and its appeal is neither ideological nor partisan”; 2) Cautious on AAPL, AMZN, FB, GOOGL: News of government regulation shouldn’t cause investors to be impetuous—stock price volatility is a chance to step back and analyze each company on its own merits and determine whether regulatory action would materially affect the companies’ economic business models; 3) If the markets are right, interest rates could fall by three-quarters of a point over the next year, which would have wide-ranging consequences for stocks, bonds, and savings vehicles like money-market funds.

* Advisor Guide: 1) Stephanie Stiefel of Neuberger Berman, who oversees $2.59B as managing director and head of client development for the Strauss Group within the firm’s private wealth management division, talks about how she helps clients build and protect wealth in uncertain times; 2) Kimberlee Orth, founder of Orth Financial Group, says taking the time to deeply understand a client’s needs, motivations, goals, and fears sets the best advisors apart from the rest, especially in the age of the robo advisor and low-cost fintech services; 3) Valerie Houts, a managing director at Merrill Lynch’s Venture Services Group, talks about the scope of her business and how she oversees one of the largest advisory practices focused on venture-capital and private-equity investors.

* European Trader: Positive on British Land: The company and its peer, Land Securities, have been overexposed to struggling retail sites and hurt by Brexit uncertainty, but an upcoming planning decision in London could transform British Land and send shares back up.

* Emerging Markets: Positive on BABA, Tencent: Donald Trump’s trade war with China sent shares of the tech giants down, spelling a buying opportunity for investors—both companies have strong bull cases, and derive nearly all their income domestically, with Chinese economic growth a macro driver.

* Commodities: “Gold has moved higher for the year, after stalling just below the $1,300-an-ounce mark for weeks. All the factors for the metal to rally to record levels might finally be falling into place.”

* Streetwise: Back at the end of 2006, the Fed had room for five percentage points of cuts during the dire recession that followed, says columnist Jack Hough, who adds that while there’s no reason to expect the next downturn to be as severe as the last one, it could be a stubborn one if the Fed lacks the firepower to fight it.-

* NYT (Saturday): Donald Trump backed off his plan to impose tariffs on all Mexican goods and announced via Twitter on Friday night that the United States had reached an agreement with Mexico to reduce the flow of migrants to the southwestern border; A sharp decline in the pace of hiring in May, especially in sectors dependent on trade, suggests that the president’s tariffs are starting to bite, a situation that could pose a challenge as he seeks re-election; The Trump administration’s move to bypass Congress on arms sales to Saudi Arabia and allow bomb parts to be built there has raised concerns the Saudis could gain access to technology that would let them produce their own versions of American precision-guided bombs; The overuse of antibiotics in livestock has given rise to drug-resistant germs, and while drugmakers say they want to be part of the solution, a recent campaign urged farmers to administer the drugs to healthy animals daily; Trump and his aides have sent a range of conflicting messages to Iran in recent weeks, ordering more troops to the Middle East and a carrier to the Arabian Sea as military threats even while declaring that Washington is seeking new negotiations, not war; Michael Bloomberg, the former mayor of New York City, plans to donate $500M to a new campaign to close every coal-fired power plant in the United States and halt the growth of natural gas; New state-based accounts that let disabled people work and save money without risking the loss of government aid are slowly catching on, but advocates say millions more people with disabilities could be taking advantage of the accounts; (Sunday): The deal to avert tariffs that Trump announced with great fanfare Friday consists largely of actions Mexico had already promised to take in prior discussions with the U.S. over the past several months; Trump is increasingly blurring the line between national and economic security, enabling him to harness powerful tools meant to punish the world’s worst global actors and use them against trading partners such as Mexico, Japan, China and Europe; +/- MSFT, DELL, Samsung: Beijing warned these and other tech giants they could face dire consequences if they cooperate with the Trump administration’s ban on sales of key American technology to Chinese companies; A new CNN/Des Moines Register poll found that former vice president Joe Biden retains a lead among likely Iowa caucus-goers, but that he and senator Bernie Sanders have lost ground while rival presidential candidates Elizabeth Warren and Pete Buttigieg have made clear gains.

* WSJ (Weekend): Hiring slowed in May—the U.S. added 75,000 jobs—signaling companies are taking a more cautious approach at a time of slower global growth and trade tensions, adding further to concerns of a slowdown in the U.S. economic expansion; +/- UBER: Ride-hailing company’s operating and marketing chiefs are both leaving less than a month after its disappointing initial public offering, as chief executive Dara Khosrowshahi says he wants more direct control; “Muted inflation and slowing job growth have continued to push yields on U.S. Treasurys lower, leading to the possibility that the 10-year rate will dip below 2% for the first time in more than two years”; The National Aeronautics and Space Administration is opening the door for space tourists to visit the international space station, a concept that has been under discussion for several years; Local governments are facing a growing threat of cyberattacks and escalating ransom demands, with the latest being an attack in Baltimore that has crippled thousands of computers for a month; Russian president Vladimir Putin accused the Trump administration of using tariffs and sanctions to maintain dominance of the global economy, while highlighting the Kremlin’s increasingly warm ties with China; The Pentagon told Turkey it will cut off Turkish military pilots from training and halt Turkish purchases of the F-35 fighter jet if the country proceeds with plans to buy a Russian antiaircraft system; To supplement their cash flow, the companies behind the fracking boom are turning to asset sales, drilling partnerships, and alternative financing schemes, which often come with higher interest rates or other downsides; +/- F, FCAU, GM: Story says a combination between Fiat and either GM or Ford would offer domination of the lucrative pickups-and-SUV business, deliver more pricing power, lower costs, and provide cash to fund moonshot ideas; + CBOE: Firm plans to take steps to slow high-frequency trading by introducing a split-second delay to one of its stock exchanges, according to a new regulatory filing; +/- GE: JPM research analyst Stephen Tusa has had an uncanny knack for uncovering deep problems at the company before they become public, and has cut his price target on shares 10 times over a two-year period; H.O.T.S.: The economic expansion may linger on, but a debt-fueled crisis could still explode down the road; Elliott Management has taken on a tough task buying BKS as an early foray into takeovers; May’s employment report wasn’t good, and jobs figures for the previous two months were revised down by a combined 75,000 positions—putting the Fed in an uncomfortable bind.

* FT (Weekend): Google warned the White House that a move to ban Huawei in the U.S. risks compromising national security because not allowing it to upgrade Android on the Chinese company’s phones would prompt Huawei to develop its own version of the software, which would be susceptible to hacking; Censors at Chinese social media companies WeChat and Weibo appear to have taken aim at independent financial bloggers, part of Beijing’s efforts to use propaganda to garner public support for its trade war with the U.S.; Big Read story says the potential downfall of fund manager Neil Woodford has highlighted the risks of placing too much faith in the skills of a star stockpicker—and has dealt a blow to the arguments in favor of active fund managers; Lex Column: BYND is comparing itself to innovators such as NFLX, AMZN, and TSLA, but though its potential is vast, a lot has to go right to justify its share price; Tech investment is increasingly fraught with dilemmas—no more so than in facial recognition; Should Elliott Management succeed in turning BKS into a viable rival to AMZN, it will be a formidable achievement; Comment: China and the U.S. are too intertwined to keep up the trade war, says George Magnus, who adds that “There is still time to appeal to economic reason, despite claims of decoupling by self-serving interests.”

* NY POST (Saturday): +/- MDP: Media giant, under pressure to find cost savings after its acquisition of Time Inc., quietly fired about 60 employees, or about one percent of its magazine division workforce; The disappointing employment report from the Labor Department Friday actually triggered optimism on Wall Street, with traders betting lousy jobs data will prompt the Fed to lower rates; (Sunday): New York state residents send more money to Washington and receive less in federal programs, according to a new report from the Rockefeller Institute of Government and the state officials who certified the data; Starting with Colorado, 37 states have passed legislation allowing adult consumption of marijuana for medical and/or recreational purposes—for 2018, revenue from both in the U.S. was pegged at between $8.6B and $10B; +/- GOOGL: YouTube’s crackdown on white supremacy and hate speech has ensnared history teachers trying to upload archival footage of Nazi dictator Adolph Hitler.