BusinessDay 22 Jun 2017

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Thursday 22 June 2017 FT TIMES C002D5556 BUSINESS DAY A1 Liquid Telecom secures $600m for Africa push Page A3 Kim Jong UN’s regime - From feudalism to crony capitalism Page A4 In association with - FINANCIAL World Business Newspaper Saudi king promotes favoured son to crown prince in succession shake-up SIMEON KERR Saudi Arabia’s King Salman has promoted his favoured son, Mohammed bin Salman, to crown prince in a shake-up of the established succession order that clears the young royal’s path to the throne. The prince replaces Mohammed bin Nayef, his cousin, who was also removed from his post as interior minister, where he oversaw domestic security and the kingdom’s counter- terrorism policy. The move cements the elevation of Prince Mohammed, who as deputy crown prince has been the driving force behind the Gulf state’s ambitious plans to overhaul the oil-dependent economy, including the planned partial privatisation of Saudi Aramco. Speculation has swirled during the past two years that the elderly king would promote his 31-year-old son so that he could inherit the throne directly. Over that period the prince has become the public face of the Saudi leadership at home and abroad. The turnover at the top of the royal family was made by a majority decision of 31 of 34 Fed banker makes case for balance sheet cuts SAM FLEMING A senior Federal Reserve policymaker has batted aside investor concerns that US officials made an error in lifting interest rates against a backdrop of weak inflation, arguing the central bank should forge ahead with plans to reduce its balance sheet. Patrick Harker, president of the Federal Reserve Bank of Philadelphia, said he advocated policymakers “pause” on rates in the coming months while they started to pare back the bank’s asset holdings. But he stressed his business contacts were being “really pressured” by demands for wage rises given the strong members of the kingdom’s allegiance council, a royal body set up to oversee the succession, the official news agency reported. Mohammed bin Nayef was valued by the US as a close partner in counter- terrorism operations but appeared isolated at home. He pledged allegiance to the new crown prince, the news agency reported. The move risks creating splits within the ranks of the ruling al-Saud family, given private concern among some family members at the rise of the inexperienced Prince Mohammed. The shake-up also comes at a time when the Gulf is facing its biggest crisis in decades after Saudi Arabia and three Arab allies cut diplomatic ties and transport links with Qatar, alleging that the Gulf state sponsored terrorism. That decision reflected the kingdom’s increasingly interventionist foreign policy, which has been overseen by Prince Mohammed, including Riyadh’s military campaign in Yemen. The young royal has courted foreign leaders, including President Donald Trump of the US, and the world’s top executives as he has sought to lure investment to back his reform plans. jobs market, and he expected inflation should assert itself. “We need to get on with this,” he said, referring to the Fed’s plan to phase out reinvestments of the proceeds of maturing securities on its $4.5tn balance sheet. “We have been talking about it for a long time; it has been part of our plan. The economy is strong enough now where we can start to do what we have said we are going to do.” Harker’s words come as the Fed and Janet Yellen, its chair, face down criticism from investors over last week’s decision to lift rates by a quarter-point despite three successive months of soggy inflation data and recent Continues on page A2 Patrick Harker, president of the Federal Reserve Bank Scandal-hit Uber faces leadership vacuum after Kalanick forced out LESLIE HOOK Uber was facing a leadership vacuum after the departure of chief executive Travis Kalanick, a move that divided investors after it left the world’s largest private tech group with its three top executive posts vacant. Mr Kalanick, one of the founders of the ride-hailing company, was forced out by a group of investors without a successor in place after months of turmoil that have decimated the top ranks of the group. The move by the investors flies in the face of Silicon Valley’s founder-first culture, an ethos that reveres the wisdom of founders such as Steve Jobs and Mark Zuckerberg and overlooks their shortcomings. But some leading investors expressed concern that a chief executive from outside the company might not be able to maintain Uber’s rocket-like growth. “If the CEO is just a seasoned operator and not a visionary on transportation, we are never going to reach our potential,” said Bradley Tusk, an adviser to, and shareholder in, the company. “Uber should be a $500bn company in 10 years that owns transportation in the way Amazon owns retail and Apple owns personal technology,” Mr Tusk said. “A seasoned operator alone isn’t going to achieve this.” Mr Kalanick, who has seen Uber buffeted by accusations of sexism and come under personal attack for his aggressive behaviour, said he had decided to step aside “at this difficult moment in my personal life”. Mr Kalanick’s mother died last month in a boating accident. “I love Uber more than anything in the world,” he said. “I have accepted the investors’ request to step aside so that Uber can go back to building rather than be distracted with another fight.” The task now facing Uber’s board will be to hire a new chief who can right the ship at the $62.5bn company, as well as other executives, including a chief financial officer, chief operating officer, and general counsel. Uber has seen nearly a dozen top-level departures in 2017. The board has been considering executives from big, mature companies such as GE or other industrial titans for the roles, according to one investor. “I think this is a disaster,” said a different investor, pointing out that when Apple fired Jobs, it floundered until he returned. “The board better know what they’re doing because the success of the company from this point on is completely their responsibility.” Kalanick’s judgment and leadership have increasingly been questioned by investors after a series of setbacks this year, including a lawsuit over self-driving car technology and a software program that was used to mislead regulators. An investigation into more than 200 cases of harassment resulted in 20 people being fired this month.
Thursday 22 June 2017 A2 BUSINESS DAY C002D5556 FT Fed banker makes case... NATIONAL NEWS China’s stock market is given a test, not a pass To listen to the stockbrokers, it is a “pivotal moment”, a “major step forward” that will “bring Chinese equities into mainstream investment”. MSCI, the index provider, has decided to include mainland Chinese shares in its main global and emerging market benchmarks. The talk of a watershed is misguided, however. This is a test Continued from page A3 tepid gross domestic product growth. Market-implied inflation expectations have drooped since the Fed meeting, and some traders are betting the central bank will have to soft-pedal its tightening process. The Philadelphia Fed president is a rate-setter on the Federal Open Market Committee this year, and he has been at the hawkish end of the policy spectrum in arguing for rate rises. He acknowledged the central bank’s policy forecasts were “a little more aggressive” than what the market had priced, stressing that “if in fact inflation is softening, then I would revise my stance of policy”. There may “possibly” be one more rate increase this year, according to Mr Harker’s forecast, following on from the rises in March and June. One scenario would see the Fed starting to phase out reinvestments before it went ahead with another rate rise, he suggested. “It is prudent for us to pause on the next rate increase; at some point, and I would assume it is this year, cease reinvestment; and see how the markets react. We can take our time to do this. We don’t have to be in a rush.” Mr Harker was speaking in his office after visiting the Philadelphia Shipyard, which has been using an apprenticeship programme to bolster the supply of skilled workers. The central banker said that there was “very little slack” left in the jobs market and that the so-called Phillips Curve, which relates low joblessness to inflation, would kick in. “There is a rate [of unemployment] below which you are going to start to see a significant acceleration of wages,” he said. “You look at this labour market and you do have to question when we are going to start to see some increases in inflation. We know from history that when that happens it happens pretty quickly.” for Chinese stock markets, not a certification that they have met global standards or that future integration is assured, or even likely. Consider the extreme caution with which MSCI has decided to represent mainland stocks in its indices. The Shanghai and Shenzhen markets together make up the second-largest equity market in the world by capitalisation, at some Jeff Bezos, Amazon’s founder $7tn. Yet the shares in just 222 largecap companies will be included by MSCI. All of them are already part of the so-called stock connect scheme, which allows global investors to buy and sell A-shares in freely tradable Hong Kong dollars. This solves (for now) the problem of China’s tight currency and capital controls. When the indices are updated in about a year’s time, the mainland In association with companies will be included in the index at only 5 per cent of the weight of their full market values. The shares will therefore represent less than 1 per cent of the MSCI’s emerging markets index, and 0.1 per cent of its world index. The 1.2 per cent rise in the mainland indices after the MSCI announcement reflected both the fact that the change was expected and its ultimately modest size. Amazon goes back to the future of food JOHN GAPPER Just when we thought we understood Amazon, it surprises us. We are used to observing an online retailer that cuts prices relentlessly to undermine brick and mortar stores. It has now decided to buy Whole Foods Market, a premium chain for Americans who can afford fancy cheese and fish. If it wanted to turn physical, the Amazon of our imagination might have followed Aldi, the private German retailer, by investing $5bn to expand its US discount stores, or have directly taken on Walmart’s 3,500 grocery and hardware Supercentres. Jeff Bezos, Amazon’s founder, is instead entering the top end of the grocery market by offering $13.7bn for Whole Foods. This suggests either that Mr Bezos has lost his bearings or that many people think about Amazon in the wrong way. In fact, it is not so much an online discounter as a vast convenience store. Making things easier, either by cutting prices or by delivering goods simply, is his master plan. The Whole Foods deal brings to mind not Walmart, Aldi, or Kroger, the largest traditional US supermarket, but a company that predated them: the Great Atlantic and Pacific Tea Company. A & P was a precursor of US supermarkets and the way that it combined efficient technology with high street grocery outlets provides clues to Bezos’s thinking. Before A & P, Americans shopped at small-town stores that were “often run in a haphazard manner” and purchased their supplies from “a byzantine collection of jobbers and middle men that was rife with corruption”, according to Paul Ellickson, an economics professor at Rochester university. Like an early 20th-century Amazon, A & P cut through all of that. In 1913, it opened “economy stores” on high streets, supplying them through its own network of warehouses and delivery trucks. It offered its own private label brands, which were fresher and less likely to be out of stock. A & P expanded to 16,000 stores in 1930 as economies of scale allowed it to undercut independents. It eventually became a victim of its own success. Smaller operators lobbied for it to be curtailed and price discrimination was banned by the 1936 Robinson- Patman Act to stamp out discounting. It went into decline, replaced by large supermarkets built by Kroger and Safeway in warehouse districts and away from high streets. But the combination of Amazon and Whole Foods suggests that history is starting to repeat itself. The supermarket itself has reached an apotheosis in huge suburban stores run by Walmart, as well as Carrefour and Tesco in Europe, and many shoppers are looking for alternatives. Amazon’s Whole Foods deal is an experiment rather than the solution, but it is intriguing. The supermarket’s strength is becoming its vulnerability in an age when technology is changing the rules of retailing. It reduces costs and prices by grouping together many kinds of goods in one place, from tins of beans to fresh fish and meat, and persuading shoppers to bear the cost of final delivery. Yes, there is already representation of the Chinese economy elsewhere in the emerging market index; Chinese companies listed in Hong Kong or the US represent more than a quarter of it. These companies, however, meet certain standards of disclosure, governance, and ownership structure. This is not to say that the US or Hong Kong markets are perfect. Fury over Norway’s record oil offering RICHARD MILNE Norway has infuriated environmental groups by opening up a record number of Arctic blocks for oil exploration. Norway’s oil ministry is offering 93 blocks in the Barents Sea, located entirely in the Arctic Circle, with applications by companies expected by the end of November. The move to open up new areas in the Arctic - including parts that were until recently covered in ice, as well as blocks close to an important nesting site for birds - was met with dismay by environmentalists. “It’s just a perfect example of the dichotomy of Norway as a leading environment nation. We are telling everybody else what to do. But for us, it’s not even business as usual; it’s escalating business as usual,” Nina Jensen, Norway head of the wildlife charity WWF, told the Financial Times. Oil companies are optimistic about the prospects in the Barents Sea. Several chief executives have told the FT they think it will be the world’s next big oil region in the world. Norwegian officials estimate about 18bn barrels of oil equivalent could be found in the Barents Sea, from the northern part of mainland Norway up to the Svalbard archipelago and beyond to the border with Russia. Norway’s centre-right government talked about a “ green shift” in its economy after oil prices fell in 2014. But they are now pushing ahead with plans to open up new areas including about 20 blocks close to Bear Island, an uninhabited outcrop midway between mainland Norway and Spitsbergen. 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