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Here we go again? The dangers of consumer debt.
After the 2008-09 financial crisis, policymakers said they had learned important lessons and vowed to check the uncontrollable build up of debt. Regulators promised to clamp down on complex syndication tricks and banks agreed to end unscrupulous lending practices (though not all did). CEOs and risk managers, not directly linked to the financial sector, were also taught a vital lesson: to scrutinise credit default data for signs of a broader economic malaise. Three important FT articles shine light on these developments in the US, UK and China. The warning bells are ringing louder.
In the FT’s Big Read, Ben McLannahan in the US writes of ‘a seven-year boom in car loans that has strong echoes of the pre-crisis mortgage frenzy’. Intense competition among finance companies has again led to relaxed underwriting standards, this time pushing up outstanding auto loans by 70% since 2008 to a new high of $1.17tn. Total household debt is at a record, $12.7tn. Delinquencies are rising and car values are falling, thus trapping consumers with unsustainable loans, and leaving lenders scrambling to reduce their exposure.
Although car loans are still much lower than the $9tn mortgage market, the article notes that 90-day overdue debt is at its highest in six years, while ‘deep subprime’ has risen from 5.1 per cent of total subprime deals in 2010 to 32.5 per cent last year. Recovery rates for some lenders have fallen below 50 cents on the dollar. A potential bust could hurt the US economy badly.
Regulators appear to have been remiss. Auto dealers escaped Dodd-Frank constraints as the focus of concern turned to misleading advertising rather than payment affordability. Loan repayment periods now stretch out for years while contracts allow excessive high loan-to-value, and debt-to-income, ratios with obvious knock-on risks. Also like subprime mortgages, car loans have been sliced up, repackaged and syndicated so it’s hard to know who ultimately owns what debts. Big banks say the risks can be contained. Wells Fargo, for example, has reduced its exposure by 29 per cent from a year earlier. But is it too little too late?
A similar consumer debt story is emerging in the UK’s credit card market. As in the US, lenders have been fighting for customers in an era of low interest rates. But outstanding credit card debt has risen steadily since the crisis, with 64 million cards now carrying some £68bn in debt. A sluggish economy has left 8.8m people relying on credit to cover everyday household expenses, while 3.3 million borrowers pay more in interest and charges than principal over an 18-month period. The government says ‘a repayment plan backed by law will help households with serious debt get back in the black in a more manageable way’ the FT reports. It sounds like a managed default.
Finally, an in-depth FT analysis of China’s property boom considers parallels with 1980’s Japan and its ensuing ‘lost decades.’ Put simply, ‘China has halved its growth rate and doubled its debt over the past eight years.’ Overall indebtedness has risen from nearly 200 per cent of GDP in 2010 to 250 per cent today. Non-financial corporate debt-to-GDP ratio has also reached 155%, similar to 80's Japan. Classic warning signs are cropping up everywhere: in soaring costs of specialist teas, fortunes paid for art, and the cost of a 100 sq. metre Beijing apartment that is 50 times the local annual average income. A crash would severely harm the global economy: China accounts for 40 per cent of global growth, and 20% of US imports (as did Japan in the 80's). But at least China’s authorities are prepared to crack down on speculative behaviour with ‘a formidable arsenal of weaponry.’
Crisis management or poor planning?
Here's a question for corporate leaders: When is a crisis not a crisis? FT management editor, Andrew Hill, pours cold water on the crisis management culture and its consultants. True, there are genuine crises—an unheralded event such as the Fukashima nuclear accident or a response to sectoral disruption, as faced by Nokia—but ‘genuine internal crises came around about once every 15 years’ says one CEO. Corporate leaders have ‘fetishized’ crisis management, partly because of the appealing idea that a crisis always represents an opportunity – though mainly for crisis management specialist. They have ‘an interest in fostering a nervous sense of constant uncertainty,’ Hill writes, aggravated by the concept of never-ending disruption.’ Worse, some ‘managers assume they must foment a sense of crisis to get anything done.’ Too often, it’s just ‘an easy excuse for self-inflicted failures.’
Whether James Quincey, the British born 51-year-old new CEO of Coca-Cola, turns to crisis mode will be an interesting test case, given the challenges the company faces. According to the FT’s Monday Interview, these include: refocusing on its core function of developing and marketing drinks rather than distribution; consumer pressure for greater variety and nutrition; regulator pressure to tax sugary drinks (which represent three quarters of Coca-Cola’s sales volume); and falling sales as a consequence of less thirst-inducing online shopping.
Perhaps most challenging is repositioning a brand that for decades has been a byword for US-led globalisation. Once a brand leader, Coca-Cola has slipped to 27th over the past decade, according to BrandFinance rankings, and its share price has underperformed that of its rival PepsiCo. ‘A brand has to stand for something’ says Quincey. But the backlash against its Super bowl ad suggests that not everyone agrees with the company’s message of inclusivity and diversity. Like many other big companies, Coca-Cola was also caught in a political cross-fire during the presidential election. On the one side, there are important policy areas, such as an anti-obesity drive, where government relations is vital; on the other side, many anti-Trump consumers want the company to distance itself from the new administration.
WannaCry havoc and let slip a cyber war
An estimated 1.3m systems remain vulnerable to the recent WannaCry ransomware attack, though the dangers may be receding for now. The world’s most powerful governments, intelligence services and some smart cyber freelancers are on the case of what is probably an organised crime group. Its ransom demands have so far netted a mere $40,000-worth of bitcoins --so perhaps not the most impressive risk-return KPI -- though that could yet change. Future attacks may be more discrete and targeted, and equally dangerous, and leave companies to fend for themselves.
Indeed, there were almost 200 high-level cyber attacks in the UK in the last quarter of 2016 alone, and many more in the US and EU, most of which did not hit news headlines. In some cases, organisations are known to have quietly paid large ransom sums to recover their files. They could have reduced the risks with some basic precautions. In an FT opinion piece, Keren Elezari, of Tel Aviv University Interdisciplinary Cyber Research Center, advises companies to update legacy software, install end-point security measures, and, crucially, educate users about the risk of opening email attachments, clicking links or running unauthorised applications.
FT|IE Corporate Learning Alliance’s Cyber security programmes have also strongly warned about employee carelessness. ‘Cybersecurity is not about making machines work better. It is about preventing people…doing mindless things with computers, wittingly or otherwise.’ That means viewing staff as a ‘first line of defence’ rather than ‘the weakest link.’ Companies that remain complacent may soon find it harder to get insurance, and could suffer significant legal and reputational damage. At least they will have Maija Palmer’s cybercrime survival guide to help them through the worst of it.
France’s last-chance Salon
The election of independent centrist Emmanuel Macron as President of France will have come as a relief to companies across Europe. But ominous clouds remain on investor horizons. Gideon Rachman, the FT’s chief foreign affairs commentator, reports that the new president faces a monumental challenge: re-invigorating both the French economy and the European project. At home, he must deal with unaffordable public sector spending (at 56% of GDP) and an over-regulated private sector, including the 35-hour working week. Strikes and street protests are sure to follow any serious reform attempts. Moreover, his new, ‘En Marche!’ party is unlikely to get the parliamentary majority he will need to push through serious change and face down demonstrators, forcing him to assemble a broad coalition, possibly headed by a centre-right prime minister.
Success in domestic economic reform would help President Macron persuade Germany’s Chancellor Angela Merkel to loosen austerity and relieve some of Europe’s populist tensions. But failure could have severe consequences for business and wider European economies. Macron’s election could represent the European establishment’s last stand against resurgent nationalism, populism and protectionism.
Rachman is right to see profound risks to free-market democracy. As the FT’s election analysis reveals (in some very useful charts), Le Pen’s second round boost came mainly from conservative Fillon supporters (effectively allowing Le Pen to break through into the political mainstream), and from ‘far left’ supporters of socialist Mélenchon. Thus a staggering 43% of French voters have supported the political extremes, and more than one third rallied to the far right.
The French vote is no anomaly. A breakdown of voters by education (a proxy for a range of beliefs and circumstances) reveals that Macron attracted 84% of most educated voters, with similar support among those with higher income and social class. This mirrors the breakdown of voting patterns in the recent UK Brexit vote, the Netherlands’ referendum and the US presidential election, suggesting that the same anti-establishment, anti-globalisation sentiment is spreading across western economies.
More fascinating insights into how globalisation is dividing France can be found in this this review of geographer Christophe Guilluy's new book The Twilight of the French Elite (untranslated).
Is it time to invest in labour-saving technology?
Labour shortages, technology and government policy intersect in these FT articles on the post-Brexit demand for skilled workers. The FT’s employment correspondent, Sarah O’ Conner, writes that (despite the hopes of many Brexiters) expected staff shortages may not raise wages, as employers look to labour-saving technology where possible to fill the gap.
The FT reports here how a Lincolnshire farm in the UK is using a new generation of robots for rudimentary tasks such as transporting strawberries and weeding. Though it may take a decade or two before robots can pick strawberries faster than a skilled human picker, the cost-benefit calculation appears to be moving in favour of the machines. The question for companies is whether post-Brexit, there will be a fundamental change in the wage structure of their industry before deciding to undertake major strategic investments in technology.
There is precedent. In the 1960's, when the U.S. government sought to placate American workers by restricting immigrant labour from Mexico, farmers changed production techniques and invested in machines, thereby keeping wages low. The technology they adopted already existed, but it was the labour restrictions that had helped make the investment cost-effective. In Japan, where jobs outnumber applicants in many sectors, wage growth remains weak as companies turn increasingly to robots.
O’Connor notes an alarming statistic that employers might bear in mind as they calculate their future wage bill: ‘the average worker in Britain will earn no more in 2021 than he or she did in 2008.’ adding that this is ‘the worst period for pay in more than 70 years and forecasts say the end is barely in sight.’
It’s harder to imagine robots taking over in service sectors. In this case, government policy matters more. Michael Skapinker, FT columnist and executive editor at the FT-IE Corporate Learning Alliance, writes, that issuing so-called barista visas—a two-year post-Brexit visa for young non-UK EU workers—is an ‘astonishingly complacent idea’ which will not solve the imminent staffing and skills crisis facing Britain’s hotels and restaurants.
Predictive text: do CEO letters glimpse the writer's fate?
HR analytics may be a relatively new field, but data-crunching software in the quest to predict, for example, CEO longevity has made some headway, as this FT article by FT technology writer Jonathan Margolis reveals.
Dr Qingan Huang of University of East London’s School of Business and Law claims a 73% success rate in predicting CEO departures, based on his analysis of shareholder letters in some 600 FTSE listed companies in 2002-08. Using Linguistic Inquiry Word Count software, he matches the use of future-focussed and negative words and phrases to eventual outcomes, such as dismissal or voluntary departures Whether or not the methodology is sufficiently robust, one cannot ignore the trend for using ‘scientific method to assess, exploit and perhaps ultimately engineer emotion for commercial benefit’, Margolis writes.
This extends to emotion-tracking technologies, voice analysis and bio-sensors. Just as retailers map out customer lifestyles from their purchases, HR departments are now trying to determine when an employee might quit from observing patterns of sick days. But as FT|IE corporate learning alliance recently argued: ‘Assuming it was possible to predict when a key employee might leave… why would such information be so useful? Wouldn’t resources be better spent reducing the organisation’s dependence on specific individuals?’
The backroom Svengalis of Brexit negotiations
Who really matters in the Brexit negotiations, what do they believe in, and how effective are they? These are vital question to consider when advising corporate clients on potential Brexit outcomes. And there are few better insight than this in-depth FT profile of two éminence grises, Martin Selmayr, Chief of Staff to European Commission President Jean-Claude Juncker, and Nick Timothy, principal adviser to British Prime Minister, Theresa May. Both are seen as political insiders who don’t quite fit in to their respective establishments, and share a fearsome reputation for political intelligence and ruthlessness.
Selmayr says that it would be ‘foolish’ to view Brexit as a good thing for Europe, but sees the ‘tragedy’ as a ‘jolt that will re-energise his cherished European project’. A ‘master of detail’ who ‘pays no attention to rank or protocol’ and with a prodigious work rate, he ‘is confident Britain will pay a price for leaving,’writes the FT.
But while Selmayr may be seen as a political ‘dark force’ possessing ‘mystical powers’ he may soon meet his match. Timothy despises Brussels ‘remote elitism that has failed to deliver for the people.’ Although he sees Brexit as a ‘chance to grab back sovereignty and remodel his country in favour of working people,’ he is no classic ‘Little Englander’. If Selmayr wants to use Brexit to push on with the European project, Timothy sees it as accelerating the need to make Britain globally competitive. Yet Timothy is not ‘remotely attracted by the idea of Britain crashing out of the EU without a deal’ in pursuit of some ‘kind of libertarian paradise’. Indeed, he may turn out to be surprisingly pragmatic, the FT argues. Perhaps they have more in common than they think.
Brexit advice to companies: don’t panic!
FT business writer Emma Jacob identifies staff anxieties around Brexit uncertainty. This is particularly pertinent to highly-qualified EU professionals, many of whom are now asking whether they will eventually have to leave the UK, or if they will be first in line for redundancy. Many UK citizens, especially those in the finance sector and with young families, worry that their jobs might move onshore. One organisational psychologist notes how rumours ‘can stoke fears about relocation and restructuring, impact employee commitment and engagement at work and reduce productivity.’ It can also create unhealthy competition within a company.
Unfortunately, too few companies are prepared when it comes to helping and reassuring their unsettled staff. Echoing FT|IE Corporate Learning Alliance’s advice to its clients, the article notes how companies can do a lot to re-assure their EU27 staff. Most importantly, communication ‘is a business imperative’. Even if the outcome of Brexit negotiations is unpredictable, companies can at the very least show willing and help affected staff with the UK’s 85-page residency application form, for example.
Communication is a two-way street: it’s equally vital that employees are encouraged to ask questions. Many will follow the news and react poorly or misinterpret the twists and turns of negotiations, without bringing up the issues with their bosses. Managers need to know what's on their staff's minds. ‘People panic when managers act like they don’t understand’ so the company message, from the CEO to HR directors and line managers, must be consistent and comprehensive.
Clashing cultures in cross-border business
In this FT article, How to bring cross cultural teams together, FT writer Alica Clegg considers how companies attempt to integrate staff following a foreign acquisition. Studies show that up to 70 per cent of merger deals fail, a third of these failures can be attributed to culture clashes. She notes that ‘for deals that mix businesses from advanced and emerging markets, the statistics may be worse.’
Cultural misunderstandings encompass a vast array of issues, for example: the pace at which business is conducted; attitudes to performance related pay; how explicit one can be when giving (or disagreeing with) instructions; feelings about disability, gender and LGBT rights, and much more. The acquired staff will inevitably worry about job security or if they are safe, then whether the new owner properly understands its acquired customers. Some companies sensibly retain and build on the local leadership. Others deploy staff who have lived and worked in both countries and speak the local language as link points between headquarters and local management (though such executives can misunderstand both host and home cultures).
‘Culture clashes involving French companies have scuppered, at least in part, high-profile mergers,’ writes the FT’s Harriet Agnew in a book review looking at perceptions of cultural insularity at the top of France’s leading companies. The book offers lessons in ‘what happens when corporate cultures collide.’ More than three-quarters of CAC40 chiefs attended four French schools ‘–the elite training institutions that groom the country’s business leaders and civil servants’ while executives outside the 'network' castigate French management for being centralised, hierarchical and rigid.
‘We won, you lost’: FT impressions of Donald Trump
As corporate learning experts often insist, there’s always something more to be learned from a face-to-face meeting. And following his interview with US President Donald Trump, FT editor Lionel Barber gives his impressions of the US leader and his team, and what clues to his personality might help us understand his policy outlook. A twitter addict, Mr Trump nevertheless sees the FT as an important channel to the international business community. He was ‘alert, attentive and far removed from the cartoon character depicted on social media and television,’ reports Mr Barber. The President’s gruff manner and outrageous statements may be opening gambits in negotiations -- part of a ‘price discovery’ process. Indeed, there are ‘tentative signs that there is more method in the madness than critics suspect.’
Mr Trump’s White House resembles a medieval court as factions and family vie for influence over an irascible Emperor. As FT’s US Washington columnist Ed Luce notes here, many so-called Third World diplomats say ‘how familiar they find Mr Trump’s Washington. Access to the president’s bloodline is the priority.’
Mr Trump sees himself as a populist in the mould of Andrew Jackson, despite being the first president with no government experience, and aides present him as the fearless outsider who crushed two political dynasties. But it remains to be seen whether personal charisma and a surging stock market will be enough to succeed in the face of a system of checks and balances and conflicts of interests allegations.