Boasting traffic of 750 trains and 25,000 passengers on a typical pre-pandemic day, the city of Salzburg’s award-winning central railway station is a symbol of the revival of rail that promises to gather speed in the next few years. The beneficiary of a massive, 15-year reconstruction project that only ended in 2014, Salzburg Central has been transformed from an impressive but unsuitable monument of mid-19th century, steam-powered rail into a modern transport hub that encourages citizens to jump on a train.
A connection point for long-distance and commuter trains, the station is spread over 18 tracks serving points north and south. Covered mainly by glass roofs, the atmosphere is airy and light. Passengers can while away their time until their train departs in nearly 4,000 square metres of shopping area. And there’s plenty of space, a pre-requisite of the new era of rail. As passengers steadily return to rail travel following the pandemic, the entire rail industry is engaged in a fundamental reform that is transforming stations into people-friendly hubs, applying low-emission technologies and slashing ticket prices in a looming battle with aviation.
And hubs like Salzburg Central are pivotal to the recovery of rail. Authorities all over the world are pouring public funds into stations – many of them historic – that draw people to trains. Turkey’s transport ministry, for instance, has just called tenders for the reopening of a rail link that will take passengers into the historic European terminus of Sirkeci near the Topkapı Palace in Istanbul. Opened in 1872, it was closed in 2013 but will now have a new lease of life. Among many other examples of the revival of great stations, in Paris the long-neglected Gare du Nord, Europe’s busiest station, has finally been approved for a €587m renovation that will bring it into the 21st century. Serving 700,000 passengers a day before the pandemic, the station has been overdue for a remake, but locals, including the city, blocked the rail authorities with a series of legal actions arguing that the project would spoil the surrounding ambience by turning it into a giant shopping mall.
In truth, the Gare du Nord project embraces a fresh view of rail stations that sees them as hubs for the community as well as for transport. The renovation will provide spaces for concerts and rooftop gardens as well as for shopping and offices, along similar lines to Frankfurt and other top-rated hubs like the central stations in Leipzig, Vienna, Amsterdam, and Moscow’s Kazansky.
However, it’s a race against time to have the work done before Paris hosts the 2024 Olympics. It’s a comment on the belated change of attitude towards rail that second-placed St. Pancras in London is housed in a towering historically protected building that would have been pulled down a few years ago and replaced by apartments but for a campaign by conservationists.
Better than air
Driven by concerns about climate change, authorities in many countries are taking unprecedented measures to encourage travel by rail rather than by air. In an action that is certain to be followed by other governments, France is moving to ban flights under two hours, a step that will provide a massive boost to domestic rail travel. The ban is justified by overwhelming evidence of the ecological benefits of rail – numerous studies show that emissions from long-distance rail journeys – approximately two hours or more – are 20 times lower than the average commercial flight. The European Commission would certainly approve of the ban – it declared 2021 to be ‘year of the rail’ and is backing a wide range of projects that are designed to restore trains to their glory days of the early 1900s when the coal-fired steam locomotive, followed by diesel-fuelled trains, transformed travel all over the world. One of the most loved rail journeys of yesteryear, the night train, is making a comeback in Europe on routes between capital cities. Austrian Railways is increasing its Nightjet trips with affordable fares and a wider choice of accommodation including private cabins, while a French start-up, Midnight Trains, plans to open routes from 2024 under the slogan ‘hotel on rails.’
Next stop: hydrogen trains
A technological revolution underpins the revival of rail. Pittsburgh’s Wabtec group has rolled out a battery-electric, hybrid-powered train that reportedly slashes emissions by 11 percent. Hydrogen-powered trains that emit only warm water vapour are already being trialled with promising results – two of them have carried passengers for 180,000km in Germany. In regular operation since 2018, the hydrogen train is the 150-seat Alstom Coradia iLint. Combined, the fuel cell and batteries can power the train to a maximum speed of about 90mph for a range of up to 500 miles.
In the coming years hydrogen fuel cell trains will appear on 10 railways around the world
Zero-emission is the holy grail of rail travel. As Railway Age reported in early 2021, “based on emerging technologies in batteries, hydrogen fuel cells and renewable natural gas, zero-emission is a possibility.” In fact, it could be inevitable. The powerful US Environmental Protection Agency (EPA) and the EU have both mandated much tougher future standards for trains and locomotives. From 2025, the EPA’s tier-5 would force emissions of nitrogen oxide to almost nothing and emissions of particulate matter to absolutely nothing. This is not pie in the sky. “Already today, prototypes and many production locomotives have been manufactured that meet these requirements,” Railway Age reports. “In the coming years hydrogen fuel cell trains will appear on 10 railways around the world. Most of these have already been contracted.”
Taking all the developments into account, it looks inevitable that the major stations will welcome low or zero-emission fleets of trains within the next two to five years as more polluting technology is phased out.
But will the passengers come back in the aftermath of the pandemic? Mobility experts, who are watching developments closely, believe that this is a near certainty, though not as before. Although passenger levels have been creeping up, they remain well below pre-pandemic levels in New York, whose routes were some of the hardest-hit anywhere. The New York Metropolitan Transportation Authority estimates passenger numbers on its two commuter lines in September were down by as much as 70 percent on weekdays. If numbers stay this low, it would be a financial disaster.
But US authorities are working on allaying commuters’ fears by introducing a variety of measures that reduce congestion, such as making thoroughfares one way and managing crowds better on platforms. Many transport-watchers predict that the days of peak commuter congestion could be over as office workers pick their time to go into the city in a trend that would make rail travel more enjoyable. However, fears that commuter travel faces a long-term decline look to be wrong – British research finds that around 70 percent of people expect to return to the office.
Logical logistics
Invisible to the general public, many of the great ports of the world are rapidly adopting rail to shift goods off the wharves as a cleaner alternative to lorries. The booming Port of Valencia in Spain, for instance, sees more than 4,000 trains a year at a rate of 80 convoys a week, all transporting a wide variety of goods in and out of the country. But that’s not good enough for the port authorities. Under a policy called ‘intermodality,’ Valencia is following Rotterdam, Barcelona and other maritime hubs in switching rapidly to rail in order to slash lorry movements, especially for delivery into the hinterland.
“The railway is key in our present and future strategy because it allows us to reduce costs in the logistics chain, to improve the services we offer in the terminals, and to take loads off the roads and put them on the railways,” explained the port’s president Aurelio Martinez, citing trains as crucial in the decarbonisation route targeting zero emissions by 2030. The ports’ transition is backed by shipping giants such as France’s CMA CGM, which has adopted a fundamental strategy called ‘switch to rail.’
Faster than a jet plane
Already rapid before the pandemic, the rate of innovation in rail travel is accelerating. What’s next? Although it’s still an experimental technology, hyperloop travel at speeds of 1,200km per hour could be around the corner. A company called Nevomo in Poland has raised funds to take the first step that would carry passengers at over 400km per hour as early as 2023, slashing the travel time from Gdansk to Krakow, a distance of nearly 600kms, from the current six hours and 10 minutes to little more than 90 minutes. Based on magnetic technology applied to existing tracks, ‘magrail’ is seen by some as the future of all rail transport.
But this may not be what rail travellers want. New research suggests that commuting by rail is good for us and even improves passengers’ work ethic. A project by University College London and the rail industry has found that taking the train significantly improves a passenger’s workday, including their productivity, motivation, cognitive performance and wellbeing. Released in September just as seasonal and peak travel in Britain was on the rise, the study bodes well for rail in the long run.
Move over, millennials: Gen Z is here, and is ready to spend. Generation Z – or those born between the years of 1997 and 2012, for the uninitiated – now account for a staggering 40 percent of consumers worldwide, wielding a mighty global spending power of $200bn a year, according to research carried out by Bloomberg. And with many Gen Zers still living at home, they also influence what their parents are spending money on – to the tune of a cool $3trn per year. No wonder brands are desperate to win over this lucrative new audience.
Every generation is different to the one that came before it, with new characteristics and spending habits. Members of Gen Z are arguably among the first generation of true digital natives, having been exposed to the internet from the very moment that they were old enough to hold a smartphone. But it’s not just their ease at using digital channels that sets Gen Zers apart from generations past – they are also unique in where they choose to spend their time online. Showing far less interest in ‘traditional’ social media sites such as Facebook, members of Gen Z are much more likely to be found scrolling through 15-second videos on TikTok.
All of those 15-second clips quickly add up, however, with 20 percent of Gen Zers reporting that they spend more than five hours per day on the app, according to research carried out by Joy Ventures and getWizer. With young consumers investing so much time into TikTok, the app is fast becoming one of the most potentially lucrative marketing tools that brands have at their disposal, representing a new way to engage with a spend-happy audience.
Gen Zers are now spending more than they did pre-pandemic, with many of these purchases fuelled by online trends and viral videos. Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales – but what is the secret to achieving this coveted 15 seconds of fame?
The TikTok effect
Just four years on from its international launch, TikTok’s influence is undeniable. Even those who are unfamiliar with the app itself will have perhaps felt its impact in the offline world. If you have visited a book shop lately, you may well have seen a stack of books neatly arranged in a designated ‘as seen on TikTok’ section. Or perhaps back in March of this year, you may have found yourself suddenly unable to get your hands on any feta cheese at the local supermarket – well, blame TikTok. A viral ‘feta pasta’ recipe was said to be responsible for causing a global shortage of the popular Greek cheese, as TikTok users quickly cleaned up the dairy aisle in their rush to recreate the dish.
Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales
From feta cheese and books to eye cream and cleaning products, TikTok has the power to make everyday products ‘cool.’ While the app might be best known as the home of funny comedy skits and viral dance routines, there is also a strong consumerist element to TikTok.
Clothing hauls and in-depth product reviews regularly amass millions of views and many thousands of likes, with all of this online engagement very quickly translating into real-life sales. Indeed, 49 percent of TikTok users have confessed to purchasing a product after seeing it reviewed, promoted or advertised on the app, according to a 2021 Adweek survey on consumer behaviour. This gives TikTok users – approximately one billion of them, at the last count – an incredible spending power, and an ability to propel a business to record-breaking sales. Take trendy mochi ball company, Little Moons, for example. After going viral on TikTok, the company saw its sales shoot up by 700 percent in a single week at UK supermarket Tesco, leading its founder, Vivien Wong, to give credit to the app for helping the company to reach sales of £26m in the year to June.
Elsewhere, skincare company Peter Thomas Roth was forced to ramp up production of its eye cream after a product-testing video racked up over 50 million views, causing a surge in demand across the globe. In the fast-moving viral video world, views mean sales, and sales mean success. Simply put, brands can’t afford to dismiss TikTok as just a fad. The video-sharing app is here to stay – even toppling tech behemoth Facebook from the top of the official list of most-downloaded apps for 2020 (see Fig 1). If brands are able to successfully harness the power of TikTok, then the rewards are both plentiful and immediate.
Tapping into the Gen Z mindset
Of course, success is by no means guaranteed for brands seeking TikTok fame. For years now, companies have thrown vast sums of money at social media marketing campaigns, with rather mixed results. When it comes to social media platforms themselves, some have fared better than others – advertising has made Facebook into a trillion-dollar company, for example, while Twitter has famously struggled with monetisation. It has taken much trial and error for social media companies to get their advertising strategy right, and even today, many sites still have much to learn. In just four short years, however, TikTok has managed to establish itself as the social media marketing tool of the future.
According to research carried out by Kantar, users are less likely to perceive ads negatively on TikTok compared to other social media platforms, and find ads on the app to be more trendsetting than those featured on other sites. Significantly, 72 percent of those surveyed said that they felt that ads on TikTok were inspiring, while a further seven in 10 research participants said that they found adverts on the platform to be enjoyable to watch.
But to understand why TikTok ads are seemingly so successful, we first have to consider the app’s main user base: Generation Z.
Firstly, as digital natives, members of Gen Z are familiar with online marketing tools and tactics, and have been from an early age. As such, they are unlikely to be drawn in by ‘traditional’ social media ads, and have a low tolerance for anything that feels hackneyed, derivative or unoriginal. In many ways, Gen Z has seen it all before, and are drawn to fresh takes on advertising – such as the high-energy, informative and experimental ads that can often be found in TikTok feeds.
The second key to success is also linked to Gen Z’s unique position as true digital natives. Coming of age in the internet era, Gen Zers are used to the constant distraction that digital devices offer. It’s no secret that our smartphones are having an impact on our attention spans and our ability to concentrate. In 2015, Microsoft released a study concluding that the average human attention span has shrunk to just eight seconds – down from 12 seconds in the year 2000, making us more distracted than the famously forgetful goldfish.
Increasingly, social media companies have sought to exploit our desire for distraction, designing their feeds to be deliberately addictive to users – the ‘pull-to-refresh’ feature common on many social media apps has been compared to a casino slot machine, in the way that users will pull the metaphorical lever in hopes of a reward. The very nature of TikTok’s platform, which rolls from one short-form video straight into the next, appeals to users accustomed to distraction. In keeping ads both attention-grabbing and, more importantly, short, brands can use TikTok to successfully tap into the splintered attention spans of the permanently online.
The third, and perhaps most important, factor behind TikTok’s marketing success is the way in which ads on the platform successfully appeal to Gen Z’s desire for community and connection. As the most connected generation in history, it is perhaps unsurprising that Gen Zers place a priority on their relationships with others – both offline and online. More than any generation before them, Gen Z are hyper aware of their identity, and are keen to find a tribe with which they belong.
For Gen Zers, products and brands are another way in which they can express their identity and show their belonging to a particular community, making them particularly susceptible to TikTok trends. Viral products and TikTok-famous brands can quickly amass a cult following online – with users quick to purchase any item that will make them feel part of the trend. It doesn’t matter if that trend is cooking, cleaning or reading: the important part is that the purchase brings the user closer to a coveted sense of community.
If brands were ever in any doubt over the influence that TikTok has over consumer behaviour, the evidence is simply overwhelming: videos with the hashtag #TikTokMadeMeBuyIt now boast over 4.6 billion views and counting. For an app that is still so early in its lifespan, it has completely disrupted the world of social media marketing. It’s high time that brands sit up and pay attention to the TikTok phenomenon – well, for 15 seconds or so, at least.
It is tough being a small and medium enterprise (SME) in Africa, a continent where the SMEs sector is quite fragile. Nothing has exposed the apparent quicksand foundations of the sector more than the COVID-19 pandemic. With the crisis dragging the continent into its first economic recession in 25 years, SMEs bore the brunt with a majority sinking into oblivion. For those that have survived the pangs of the pandemic, rebuilding is bound to be torturous.
“COVID-19 had a knock-on effect for SMEs, forcing many to close or curtail operations,” says Manuel Reyes-Retana, International Finance Corporation (IFC) director for Africa. He adds that although the sector has demonstrated a zeal for resilience with many SMEs finding ways to stay in business, the damage has been substantial with a majority struggling to regain momentum.
For SMEs in Africa, the one challenge that has remained constant, and one that COVID-19 has yet again blatantly exposed, is how lack of access to finance makes the sector vulnerable. In fact, it’s been obvious that SMEs with relatively weak financial muscles have faced the most risk. Experts believe that for the sector to recover and build shock absorbers for long-term survival, adequate access to stress-free financing is paramount.
Hybrid finance is emerging as the ultimate solution in offering to achieve this. In Africa, the concept of combining debt and equity features into a single financial instrument is yet to set down roots. However, on a continent where SMEs are in desperate need of recovery and growth capital, hybrid finance has the potential to accelerate recovery of the sector and offer it a strong foundation going into the future.
“Hybrid financing is a more flexible tool for SMEs,” states Conor Savoy, senior fellow, project on prosperity and development at the Centre for Strategic and International Studies. He adds that development financial institutions (DFIs) have the ability to lead the way in creating financial instruments through which SMEs can access hybrid financing, thus giving the sector a more solid backing to pursue growth. DFIs have proved they can be an important source of equity in developing countries. Some are already investing as much as half of their portfolios in equity. “In exchange for a certain degree of ownership, equity investments provide an essential source of capital for firms without burdening them with loan repayments,” he notes.
Across emerging markets, Africa included, SMEs are the engine for economic growth, job creation and poverty alleviation. Ironically, they face significant financing gaps that stifle innovation and growth. The World Bank estimates that across emerging markets and developing economies, over 21 million SMEs constitute 45 percent of employment and 33 percent of gross domestic product (GDP). Despite their importance, they are grappling with a $4.5trn credit gap.
In Africa alone, according to the African Development Bank (AfDB), SMEs account for more than 90 percent of businesses and almost 80 percent of employment. Yet, the sector is facing a $421bn financing gap. In retrospect, this means that roughly half of small businesses on the continent cannot access the financing they need. The situation is even worse for micro enterprises, which are mostly informal.
Addressing the SME finance gap
Over the years, bank financing has been the traditional source of external financing for SMEs. Though to the extent banks have tried supporting SMEs, their rigidity in providing credit means that only a few qualify. Banks still cling to the mantra of SMEs being riskier than large firms. In Rwanda, for instance, a country where SMEs face a finance gap of $1.2bn, the share of total bank lending to SMEs stands at 17 percent compared to 60 percent for corporates. What makes this statistic more startling is the fact that SMEs comprise 98 percent of businesses in the country. In other countries like South Africa, Nigeria and Kenya, banks are more comfortable lending to the government, a strategy to stay away from risks associated with SMEs.
“Financial institutions will be more reluctant to provide additional credit to SMEs under the current conditions of COVID-19 given how cumbersome it will be for them to determine the extent and adequacy of collaterals, identify which borrowers are facing longer-term financial difficulties and be able to adequately cover monitoring costs,” states an AfDB report.
In effect, this means that COVID-19 has made it even more difficult for SMEs to access bank financing. Hybrid finance, however, can fill the vacuum. In the developed world, the concept has been instrumental in offering SMEs the lifeblood that has made the sector vibrant and given it the ability to withstand shocks. Instruments like subordinated loans/bonds, silent participations, participating loans, profit participation rights, convertible bonds, bonds with warrants and mezzanine finance provides SMEs with financing packaged in the form of debt and equity.
For SMEs, the packaging of products that are essentially debt with equity-like features comes with many benefits. First, the products are ideal because they allow SMEs to borrow long term and with limited or no collateral. This is because they align the profile of the debt repayments to the profit of the borrower.
Across emerging markets, Africa included, SMEs are the engine for economic growth, job creation and poverty alleviation
Second, the products include clear mentoring that is crucial in helping SMEs successfully run their businesses. For SMEs in Africa, lack of technical capacity is a key factor in the high rate of mortality. Third, and equally important, is the fact that they provide SMEs with stability. This is because the products are better suited for SMEs that have reached a high growth phase.
“We want to make this model replicable and expand it across Africa because of the products’ many benefits, which include diversified sources of funding, lower financing costs, greater flexibility compared to traditional bank loans and improved loan terms and conditions,” notes Reyes-Retana. The need to drive growth of hybrid finance aligns well to IFC’s commitment to being at the forefront of helping SMEs access financing. As of June 30, the financial institution’s committed SME finance portfolio was over $12.3bn worldwide, which represented a growth of 42 percent from financial year 2010. Of this amount, Africa’s portfolio stood at $2.6bn.
The right environment to thrive
Unlike other parts of the world, Africa is facing a herculean task in creating an enabling environment in order to attract hybrid finance. Top on the list is the need for SMEs to formalise their operations. It is near impossible for hybrid finance to flourish in an environment where businesses lack sophisticated financial records and proper governance structures. The fact that a majority of SMEs on the continent are family-owned means that the majority continue to pay lip service to accountability, transparency and governance.
“Making SMEs in Africa more formal is key in helping the sector become more sustainable,” avers Savoy. He adds that formalising the sector is critical in building a wider pool of businesses with the right capabilities to attract hybrid financing. Under the current setup, the available financing is competing for a limited number of companies. The companies become even more unattractive because other credit providers like banks, private equity and microfinance institutions among others are also courting them.
The continent must also resolve the challenge of lack of early stage financing. Hybrid finance is not really designed for startups. In essence, it means that governments and policy makers in Africa must provide financing to SMEs in their early stages and help them get to a point where they have the right structure to attract a blend of debt and equity. This is important considering the high rate of SMEs mortality. In South Africa, Africa’s second largest economy, research has shown that over 70 percent of SMEs fold within the first five to seven years of inception. In Uganda, about a third of new business startups do not go beyond one year of operation.
Another important factor is providing exit channels. Injecting capital in a business for an equity stake is undoubtedly a complex process. Exit opportunities are among the complex factors that investors must consider when assessing the viability of deals. In Africa, however, the tragedy is that the continent does not offer many suitable exit opportunities. Lack of well-developed and vibrant financial markets means that equity investors cannot take the option of an initial public offer (IPO) to exit from a business that has hit the maturity stage.
Work to be done
The state of the financial markets in Africa does not inspire confidence. According to the Absa Africa Financial Markets Index (AFMI) 2021, financial markets across the continent’s 23 top economies continue to score poorly across fundamental pillars like market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macroeconomic opportunity and enforceability of financial contracts.
“A vibrant capital market is one of the primary issues with equities,” explains Savoy. He adds that foreign investors are often reluctant to take up equity stakes in Africa’s SMEs because stock markets are relatively underdeveloped. This makes it hard to float an IPO and exit. “Deepening of the financial markets is critical because it creates opportunities for equity investors to exit,” he notes. An important aspect of making financial markets more vibrant is building the capacity of local investors, particularly retail investors, to participate in market activities. In a majority of the countries in the Absa index, foreign investors dominate about 70 percent of trading.
It is evident that it will take years before hybrid finance can take root in Africa. However, the enormous financing gap means that SMEs in the continent are in desperate need for additional financing solutions. Given the importance of the sector, it means the continent has little option but to create an environment for debt and equity instruments to thrive.
Starling Bank completed its first acquisition earlier in the summer, giving a strong indication that the fintech soon plans to offer domestic mortgages. Surprisingly though, the purchase was of buy-to-let specialist Fleet Mortgages. If Starling is planning to be the first entirely digital bank to offer mortgages and loans in the UK, why go for a more niche acquisition first – were they just dipping a toe in the water or is there more to it than that?
Starling’s recent 600 percent increased revenue report and doubling of customer numbers demonstrate how firmly it has established itself in the UK’s mainstream money consciousness. Now, it has acquired a mortgage lender and suggested moving into the mortgage lending space. If the bank’s mortgage offerings are as progressive and user-friendly as its app, they will surely see unprecedented uptake. It would also make Starling the first wholly digital mortgage lender, placing them ahead of other digital rivals Monzo and Revolut, and more in line with the traditional high street banks it seeks to better.
If the bank’s mortgage offerings are as progressive and user-friendly as its app, they will surely see unprecedented uptake
Fleet Mortgages’ customer base is professional or semi-professional buy-to-let landlords. Perhaps knowing that the BTL market has become increasingly onerous for landlords in recent years, Starling wishes to offer a simple digital product that makes life easier. Perhaps it knows that its own core customers – adults who lead digital lives – are likely to have multiple streams of income, some of which may come from property.
Whatever the reason, Starling itself has confirmed that the move is part of a wider plan at the bank to expand lending through a mix of strategic forward-flow arrangements, organic lending and targeted M&A activity.
A strategic manoeuvre
Anne Boden, CEO of Starling, said: “The acquisition of Fleet Mortgages is the start of our move into mortgages as an asset class and builds on a number of forward-flow arrangements that we’re doing with leading non-bank lenders.” Moreover, the acquisition of lending facilities and the development of its own capacity to lend on mortgages and take a share of the UK domestic mortgage market will build Starling’s balance sheet and stand it in even better stead for its much-anticipated possible IPO in the next year or two. This had once been rumoured for late 2021, but with the pandemic stalling everyone’s plans, the bank has remained steadfast in its commitment to do banking better, and Boden will not be rushed. No public date for flotation has yet been announced by the bank, but its acquisition activities and expansion of offering such as BaaS for Europe and joint accounts all suggest that the organisation is taking its time to optimise its position before it goes for any flotation.
This goes for both the disruptor tech that made it famous as well as the need for ‘traditional’ banking provisions; ‘Banking. But better,’ as the firm’s strapline goes. Starling’s IPO success will come from three things: first and foremost its tech. It has clearly positioned itself as a technology company and has built its own world-class technology from scratch. This is an incredibly complex and difficult thing to do and having developed this technology and become the market leader, it is rightly proud of its achievements as a disruptor and challenger.
Secondly, in positioning itself as a real bank, not just an app (Starling gained its banking licence in 2014), it gains legitimacy and captures the idea of a traditionally reliable business that will make money for investors. Third, it has enormous appeal to customers due not only to its ease of use and impressive technology, but also due to its ethical credentials. Banking as an industry has somewhat fallen out of favour with young investors at least, and several banks have fallen under fire in recent times due to their investing in industries that in turn fund arms production, climate breakdown, and human trafficking. Traditional funds and individual investors alike are more and more concerned with companies’ business practices and ESG credentials when investing, and Starling has aligned itself with this public mood in its ethics statement.
This should serve to increase confidence further still that any IPO when it does happen will lead to success for the bank. From its beginnings as a disruptor bank, to its slew of ‘best British bank’ awards, TV ads encouraging customers to ‘break free’ from traditional banking, and a brand new sponsorship deal with the UEFA Women’s Euros 2022, Starling is clearly resolute in its goal of ‘Banking. But better.’ A continued focus on M&A activity and optimising its position while growing its ranks of happy customers could be a winning combination. No wonder industry insiders are keen to know when they can muscle in and get a piece of the action.
Once dominated by national space agencies, private companies are revolutionising the technology-constricted space travel industry. Exciting scientific developments are funded by impressive levels of investment: in 2017, 120 venture capital funds put $3.9bn into commercial space companies. While most private aerospace companies are research-focused, a market for sending non-astronauts to space is emerging, as flights become autonomous and no longer require a trained astronaut to operate the craft. This year, the success of the first tourist spaceflights has been a breakthrough.
Whether space tourism can generate enough turnover to make a profit, considering the high costs, is a major barrier to this yet unproven market becoming sustainable. The successful development of reusable launch systems is a big step towards lowering costs enough to make it a viable market: Elon Musk, whose aerospace company SpaceX was founded with this goal in mind, has claimed that “the cost of access to space will be reduced by as much as a factor of 100.” In the next decade, the value of the space industry as a whole is expected to double, from $400bn to $800bn. According to UBS, the space tourism market alone could be worth $3bn by 2030.
New horizons
An important distinction in space tourism is between suborbital spaceflight – which usually peaks approximately 60 miles above sea level at the Kármán line (the boundary between the Earth’s atmosphere and outer space), where passengers experience a view of the Earth and a feeling of weightlessness – and orbital spaceflight, in which a spacecraft ventures beyond the Kármán line and into orbit. Jeff Bezos’ Blue Origin and the Richard Branson-founded Virgin Galactic are both developing suborbital flights.
Blue Origin sent its first crewed mission of private travellers into space in July 2021. The New Shepard rocket – named in honour of Alan Shepard, the first American astronaut to fly into space – is just over 18 metres tall (around the height of a four-storey building), consisting of a booster rocket and a 15 cubic metre pressurised crew capsule. The rocket flies up to the Kármán line and the capsule separates from the booster near the peak of ascent; the former deploys several parachutes to return safely to the Earth’s surface, while the latter undertakes a powered landing.
The flight lasts just 11 minutes and is thought to require one day of training. Blue Origin’s first paying customer was 18-year-old Oliver Daemen, replacing an anonymous buyer who purchased the seat at auction for $28m. As well as Jeff Bezos and his brother Mark, the crew was completed by trained astronaut Wally Funk, who, at 82, became the oldest person to fly to space. Her record was quickly surpassed when, in October, 90-year-old Star Trek actor William Shatner was on board Blue Origin’s second successful crewed flight. It has been reported that Blue Origin has sold almost $100m worth of tickets to tourists for future trips.
While Bezos was expected to be the first of the private space entrepreneurs to board a suborbital flight, he was beaten by Richard Branson. Virgin Galactic is primarily focused on tourism, and the Virgin brand experience is a selling point of Virgin Galactic’s offering, which prioritises photo opportunities and is advertised on luxury experience websites.
For $250,000, a Virgin Galactic space tourist can expect a 90-minute tour after three days of training. Unlike Blue Origin’s New Shepard, SpaceShipTwo – which has been specifically designed for space tourism – is a spaceplane, a class of vehicle intended to function like a fixed-wing aircraft in the Earth’s atmosphere, and like a spacecraft beyond. The spaceplane is carried by WhiteKnightTwo to an altitude of 8.5 miles, where upon release its hybrid rocket motor propels it to the Kármán line before it glides back to Earth.
Virgin Galactic also has plans to revolutionise tourism in another way: by replacing long-haul flights, which usually cruise at an altitude of around seven miles, with high-speed travel via space. UBS predicts that this form of high-speed travel could be a $20bn annual market in 10 years’ time. Virgin Galactic went public in 2019, and has a market cap of $6m. Since it was founded in 2004, Virgin Galactic has raised more than $1bn in funding.
Above and beyond
While both Blue Origin and Virgin Galactic are offering suborbital experiences, Elon Musk has his sights set higher. SpaceX became the first private company to send a spacecraft to the ISS when its unmanned Dragon One docked in 2012, and last year became the first private company to send astronauts to the ISS in Dragon Two. This spacecraft has two variations: Cargo Dragon, an update on Dragon One, and Crew Dragon, which can carry up to seven passengers. While Crew Dragon’s primary function is to transport astronauts to and from the ISS as part of Nasa’s commercial crew programme, it will also be used for space tourism.
In September 2021, SpaceX facilitated the first orbital space flight of only private citizens, in association with payment processing company Shift4. The mission was in aid of raising money for a children’s research hospital in Memphis, Tennessee. Crew members – including Shift4 CEO Jared Isaacman – had extensive training over a six-month period, including a 30-hour simulation in a full-size replica.
Crew Dragon begins its journey atop a Falcon Nine launch vehicle; the two stages of separation occur within minutes of lift off, leaving the capsule on its own in space. The capsule is 9.3 cubic metres, with reconfigurable black racing-style seats in a clean, white interior. Sleek design has been considered alongside comfort and experience as well as function: a touchscreen interface replaces the switchboard; for the September flight, the docking station was replaced with a glass dome to allow its passengers a panoramic view.
The September flight did not dock with the ISS but orbited the Earth for three days, reaching an altitude of 364 miles. During this time, the crew conducted medical tests, including monitoring blood oxygen levels, heart rate and ECG activity, for research into the effect of spaceflight on people who haven’t been carefully screened and benefitted from the extensive training required of professional astronauts.
When you’re a high-net-worth individual, it’s all about being the first, trying something new
If docking with the ISS – which resides around 250 miles from the Earth’s surface and is reached within 24 hours – Crew Dragon can perform this manoeuvre autonomously. Nasa announced that the ISS was open for private space missions in 2019: it is thought to receive $35,000 for each night a tourist spends on the ISS. In partnership with Space Adventures, SpaceX will shuttle tourists to and from the ISS in a joint venture with infrastructure developer Axiom, with each seat coming with an estimated $55m price tag. The long-term plan is for tourists to visit Axiom’s proposed private space station, planned to be completed by 2030. Earlier this year, Axiom announced it received $130m in funding, and suggested that its valuation had surpassed $1bn.
The descent from the ISS takes around two days. Once the capsule re-enters the Earth’s atmosphere, travelling at a speed of around 17,000mph, parachutes deploy to assist a safe splashdown landing in the Atlantic Ocean. SpaceX has raised more than $6bn in equity to date. It has recently been valued at $100bn.
A changing landscape
Blue Origin, Virgin Galactic and SpaceX were all founded in the years following the first space tourist flight in 2001, when entrepreneur Dennis Tito became the first private space traveller. At the time, Nasa was strongly opposed to touristic space travel, objecting to the heightened burden of care placed on crews accompanied by a non-professional. As a result, Tito flew as part of a Russian mission. Daniel Goldin, then Nasa’s administrator, criticised Tito at a government hearing in 2001, claiming that he “does not realise the effort of thousands of people, in the US and Russia, who are working to protect his safety and the safety of everyone else.” On April 28, 2001, the Soyuz TM-32 mission launched with Tito on board; two days later, they docked with the international space station. Tito spent seven days, 20 hours and four minutes in space, orbiting the Earth a total of 128 times. He reportedly paid $20m.
Though much has changed in the 20 years since Tito’s flight, the barrier to entry remains high. For now, space tourism will remain the privilege of the super-rich. A 2020 Cowen survey found that 39 percent of individuals with a net worth of about $5m were interested in Virgin Galactic’s $250,000 space trip, estimating the addressable market to be almost 2.5 million people. “When you’re a high-net-worth individual, it’s all about being the first, trying something new,” Barry Shanks, director of space travel agency RocketBreaks told World Finance.
Infrastructure, from specialised travel agencies such as RocketBreaks to space ports, hotels and space stations like that planned by Axiom, will also be a key part of the landscape of commercial space tourism. Businesses such as RocketBreaks could form an important part of that infrastructure: “With the large amount of different experiences on offer, the need for a specialist travel agent will be a must,” Shanks said. Though COVID-19 saw the slowest quarter for space infrastructure since 2009, last year was the largest on record for investment in infrastructure, reaching over $5bn. In the first quarter of this year, space infrastructure companies raised a combined $3.6bn (see Fig 1).
Despite numerous obstacles, from cost to safety to technological restrictions, space tourism is a sector that is set to develop rapidly over the next decade. “We are finding it’s experiences that matter,” Shanks said. “A voyage into space is a trip of a lifetime that you will never forget.”
“On March 19, 2020, as COVID-19 swept across the world, I challenged everyone at Pfizer to ‘make the impossible possible’: to develop a vaccine more quickly than anyone ever had before.” Those were the words of Albert Bourla, Chief Executive of Pfizer, as he recounted one of the greatest scientific feats in recent history in an article for Harvard Business Review earlier this year. And it worked; under Bourla’s – seemingly demanding, at times bullish – leadership, Pfizer and BioNTech produced one of the world’s most talked-about Covid vaccines in the space of just nine months, smashing the previous record of four years (the mumps vaccine in the 1960s), and slashing the average timeframe of 10 years.
Together with vaccines from the likes of Moderna, AstraZeneca, Johnson & Johnson and other pharma firms, the mRNA jab helped to dramatically reduce Covid-related hospitalisations, pull nations out of lockdown and bring economies across the world back from the brink – all while boosting the company’s profile like never before, and leading to projected sales of $34bn this year alone (on the back of an estimated three billion global doses).
At the same time, Pfizer has continued to home in on other areas of science, putting the focus on innovation and R&D by spinning off certain sectors of the business (namely Upjohn, the unit behind ‘the little blue pill,’ Viagra), and witnessing eight percent growth in operational revenue in products outside of the vaccine in 2020. So who is Bourla, how did the new CEO rally teams across the world to achieve ‘the impossible,’ and what else can we expect from his wider business strategy?
Bourla’s background
Born in Thessaloniki, Greece – a place he still refers to as the “epicentre of his life,” according to Greek Reporter – Bourla apparently didn’t set out to become a businessman. Instead he trained as a veterinarian, graduating with a PhD in reproduction biotechnology from the Aristotle University of Thessaloniki before working briefly as a vet. But in 1993, he accepted a job as Technical Director of the Animal Health division at Pfizer – reportedly as a “stopgap” while waiting for a permanent academic position to come about, according to the Financial Times.
From there, however, he quickly climbed the ranks. In 2001, he moved to New York to serve as Group Marketing Director for the US, before becoming Area President of Animal Health Europe, Africa and the Middle East in 2006. He then led the company’s off-patent portfolio, and from 2014 headed up its Global Vaccines, Oncology and Consumer Healthcare division, gaining experience that would become instrumental to his success several years later.
From 2016 to 2017 he served as Group President of Pfizer Innovative Health, overseeing R&D in consumer health care, vaccines, immunology and other sectors, and creating the Patient and Health Impact Group – focused on developing solutions for increasing patient access.
In January 2018, he was named Chief Operating Officer, and in January 2019 he became Chief Executive, winning the award for the ‘Preeminent Greek Leader’ in the global pharmaceutical industry by the US Ambassador to Greece a few months later.
Diverse experience
During those 27 years, Bourla said he gained a “patient-first mentality.” Elaborating; “Throughout my career, my focus has always been on the end users of our products, whether they are animals and their caregivers or general consumers,” he wrote in the Harvard Business Review. “I have encouraged the entire organisation to adopt the same patient-first mentality, measuring outcomes by people (or animals) served rather than drugs sold.”
He believes international experience – including positions in New York, Athens, Warsaw, Brussels, Paris and beyond – also helped to shape his outlook. “My exposure to so many cultures, my background as a scientist, and the diversity of roles I had taken on across Pfizer helped prepare me for my new responsibilities, as did my Jewish upbringing in Greece,” he wrote. “Coming from a country that’s a small player on the world stage and being a religious minority taught me to fight for what I believe is right and to never give up.”
Indeed, fighting seems to be in Bourla’s blood; he is a descendent of Thessaloniki’s few Holocaust survivors, and his mother escaped being shot by a firing squad after being captured. “I don’t want it to become folklore because, it may be inspirational or not, but she was the one who was arrested, she was sexually abused, and physically abused at 17, 18 years old,” he told the Financial Times.
That instilled a sense of resilience, according to Bourla. “‘Life is miraculous,’ she told me. ‘I was in front of a firing squad seconds before they pulled the trigger, and I survived [she said]. And look at me now. Nothing is impossible. You can do anything you want.’”
Rob Kaiser, President of Kaiser Leadership Solutions, believes those experiences have indeed helped to define his attitude today. “A history of overcoming personal hardships and a long career of varied and challenging roles helped Bourla to cultivate versatility in his leadership,” he said. “He repeatedly stepped outside his comfort zone and learnt how to do what did not come naturally.”
A ‘new Pfizer’
It’s perhaps that background that also gave Bourla a penchant for challenging the status quo. When he stepped into the CEO role in early 2019, his ambition was to create a more innovation-focused, ‘new Pfizer’ that would put R&D first. As part of that strategy, in July 2019 the company announced plans to combine Upjohn – its off-patent drugs business, behind the likes of Viagra, Lipitor and Chantix – with pharma firm Mylan to form a new spin-off company, Viatris. “With the separation of Upjohn [completed in November 2020], we created a company that was 20 percent smaller but more focused than ever on delivering first-in-class science for the benefit of patients,” Bourla said in the company’s 2020 Annual Review. “We saw the culmination of a bold, decade-long transformation of Pfizer from a large, diversified enterprise to a smaller, science-driven, innovative biopharma company.”
We did not want our decision to be driven by the need for financial returns alone. Saving lives—as many and as soon as possible—would be our top priority
That ‘new Pfizer’ would focus on “cutting-edge science” to prevent and cure serious diseases; a strategy regarded by some as risky (“clearly, it’s higher risk, higher reward,” Bourla told the Financial Times. “But if I felt that R&D was lacking, I wouldn’t have taken that bet. I’m not suicidal.”)
That higher-risk approach differed from his predecessor Ian Read, according to Kaiser. “Read was focused on a strategy of growth through acquisition,” he said. “Bourla refocused the strategy on organic growth with his expertise in drug discovery and R&D, coupled with a passion for technology.” Bourla set out plans to home in on areas such as targeted cancer and gene therapies, and to put a bigger emphasis on digital. The company took on new Chief Digital and Technology Officer, Lidia Fonseca, to lead its tech strategy, and shook up other parts of the leadership team. A new Chief Human Resources Officer was hired “to drive a culture of courage, excellence, equity and joy,” along with four new board members.
The vaccine race
And it was against this backdrop that, just a year later, the company found itself facing both one of the biggest challenges and one of the biggest opportunities in its entire history. “COVID-19 first came onto our radar screen in January 2020, when we began hearing reports of severe respiratory illness and deaths in Wuhan, China,” wrote Bourla in the Harvard Business Review. “By February it was clear that this virus would spread to many parts of the world, and we knew Pfizer would have to play a pivotal role in stopping it.”
The company had already been working with German firm BioNTech since 2018, with the aim of developing a different kind of flu jab using the smaller company’s innovative mRNA technology. No mRNA vaccine had ever been approved before, but the process is quick; to develop a Covid vaccine, BioNTech could theoretically just plug the new virus’s genetic code into the software to synthetically trigger an immune response, instead of having to spend months growing weakened or dormant forms of the virus, as with the traditional method. Researchers did exactly that, and in the space of less than two months, BioNTech had come up with 20 versions of the vaccine. But the firm needed a bigger partner – so the founders called Pfizer on March 1, and on March 16, the collaboration began.
Speeding up the pace
That month, the Pfizer team presented an 18-month plan – a timeline that would be faster than the development of any previous vaccine – but Bourla wanted it to be cut by more than half. “This will not work,” he said, as reported by the Wall Street Journal. “People are dying.” He asked for a vaccine to be ready by October the same year, with the goal of staving off a wave of winter infections. “Everyone knew it would be an enormous, perhaps unattainable, task, but we all knew it was one we were obligated to take on,” wrote Bourla. “We isolated our scientists from financial concerns and freed them from excessive bureaucracy. Our board accepted that this was a high-risk endeavour but understood the significance of success and gave us the leeway to spend as needed,” he continued. “We did not want our decision to be driven by the need for financial returns alone. Saving lives – as many and as soon as possible – would be our top priority.”
To speed things up, Pfizer decided not to use state funding (unlike rival Moderna, which was part-funded by the US and encountered a three-week delay in its own mRNA trial because of federal requests). Self-funding involved significant risk; Bourla told the board they could lose up to $2bn if they failed in their mission, according to Business Insider. And indeed it was a costly endeavour; for a start, Pfizer didn’t have any mRNA kit. The company spent $500m in March to buy and design the equipment, then another $1.4bn on giant, garage-sized machines in April.
Other decisions were taken to help accelerate the process, including running tests on animals and humans simultaneously (as approved by the US Food and Drug Administration and the German regulatory authority) and combining phase two trials (involving hundreds of subjects, and normally lasting one to three years) with phase three trials (up to thousands of people, usually over one to four years). Those decisions paid off. Roll on several months, and on November 8, 2020, during a WebEx call between Bourla and the team, the results came in; the independent committee had “highly” recommended seeking regulatory approval, with phase three trials indicating a vaccine efficacy rate of 95.6 percent. The UK became the first country in the world to authorise use, shortly followed by the US, where the first doses were administered in December – only two months after the October target initially set by Bourla. By the end of the year, Pfizer and BioNTech had released more than 45 million doses.
Demanding leadership
Throughout the process, Bourla was heavily – perhaps unusually, for his position – involved, participating in twice-weekly WebEx calls. Some have pointed to his apparent pushiness on those calls; in June 2020, he told President of Global Supply Mike McDermott that he wanted manufacturing to increase at least 10-fold, with 100 million doses by the end of the year, according to the Wall Street Journal. “Why can’t we make more and why can’t we make it sooner?” Bourla asked – to which McDermott reportedly replied, “what we’re doing already is a miracle. You’re asking for too much.”
The following month, McDermott floated the idea of reining production in to 80 million doses by the end of the year. Bourla reportedly told him to “find a way” to hit the 100 million target. McDermott did, modifying the manufacturing process to produce an extra five million more doses per week. A shortage in raw materials led to a three-week hiccup, however, causing production to be scaled back to 50 million in the end. But 50 million doses by December 2020 – less than a year after the virus was first reported – was a remarkable feat; and one that some believe wouldn’t have been achieved if it wasn’t for Bourla’s pushy, certainly forthright, attitude.
Among them is Kaiser. “Pfizer’s remarkable, record-breaking development of a COVID-19 vaccine is the result of ingenuity, agility, and a relentless CEO who pushed a global team to do more than it thought was possible,” he wrote in an article for Talent Quarterly. “It brings hope to a world desperately in need of it while offering an instructive lesson on the need for demanding leadership – and the versatility it takes to walk that fine line between pushing for more, better and faster for a noble cause, and just being pushy.” Kaiser said what made that approach successful was Bourla’s ability to balance an ability to encourage his teams to go above and beyond with “credibility, strong personal connections and a compelling mission.”
“He had earnt trust and followership and had plenty in the relational bank account to draw from,” Kaiser told World Finance. “He also led with purpose and he kept his ego in check. Literally saving the world is an incredibly powerful way to galvanise an organisation. All of these are key ingredients in crisis leadership.”
Future challenges
If those qualities drove Bourla’s success in helping to bring the world’s first Covid vaccine to market, they might just help him to overcome the next challenges facing Pfizer, too.
Bourla refocused the strategy on organic growth with his expertise in drug discovery and R&D, coupled with a passion for technology
For his job is far from over; while booster shots and continued global demand for Covid jabs are likely to keep the company’s coronavirus business going for some time, Pfizer faces several sticking points moving forward; not least losing patents and market exclusivity on medicines that represent up to $20bn in sales in the latter half of the decade. Top-selling drugs including Lipitor, Chantix and Viagra have already lost their patent protections. In March, stock was trading at roughly the same level as pre-pandemic, as investors waited to see how Pfizer delivered in areas beyond the vaccine.
But Bourla seems well aware of the need to diversify, emphasising the work done in 2020 outside of the jab. “While we invested significant time, resources and brainpower to find medical solutions to the pandemic, tens of thousands of Pfizer colleagues continued to advance equally important work across all of our therapeutic areas,” he wrote in a 2020 letter to shareholders. “We believe that science will win the battle against not only COVID-19, but many other diseases as well.”
Outside of Covid efforts, the company has said it is forecasting new revenues of $15bn by 2025. And alongside gene therapy for rare diseases, immunotherapies and targeted cancer treatments, Pfizer is expanding its vaccine business beyond the coronavirus jab. In June, the FDA approved the company’s next-generation anti-pneumonia vaccine (pneumococcal conjugate), which offers a promising new revenue stream – Pfizer’s previous pneumonia jab, Prevnar 13, brought in nearly $6bn in sales in 2020 – while marking another heroic, life-saving effort under the company’s ‘Breakthroughs that change patients’ lives’ tagline.
And Bourla has spoken about plans to develop the mRNA technology used in the Covid jab to fight other viruses too. “There is a technology that has proven dramatic impact and dramatic potential,” he told the Wall Street Journal. “We are the best positioned company right now to take it to the next step because of our size and our expertise.” He said Pfizer was ready to go it alone with the technology and was increasing its R&D in the sector, hiring at least 50 new employees to help in the mission to produce more mRNA vaccines.
Purposeful vision
How that unfolds in reality, and where the company goes from here, remains to be seen. Kaiser believes the real challenge for Bourla and the wider company will be in remaining “focused and hungry – to neither get complacent with success, nor carried away with a sense of invincibility that can lead to overreach.” But if the past year and a half is anything to go by, Bourla doesn’t look like one for complacency. His approach might have garnered criticism, but it’s hard to refute the achievements made under his leadership – a feat that acts as a testimony to the power of a purposeful vision, and one that is likely to prove inspirational to many in the years to come.
“It took a moon-shot challenge, out-of-the-box thinking, intercompany cooperation, liberation from bureaucracy, and, most of all, hard work from everyone at Pfizer and BioNTech to accomplish what we did in 2020,” Bourla wrote in Harvard Business Review. It also took relentless ambition, sheer determination and undefeatable optimism. Bourla is living proof of the power of a transformative CEO – and if 2020 is anything to go by, something tells us he isn’t quite done in making the “impossible possible” just yet.
In November, McDonald’s began rolling out its McPlant burger in the US, following its launch a month earlier in the UK. The same month, Cadbury introduced its plant bars, while in May, milk alternative Oatly surpassed all expectations with a $1.4bn debut IPO. All of these point to one thing: vegan living is now firmly the province of the mainstream, and it’s opening up a whole raft of opportunities for investors – while simultaneously rocking the food industry at its core.
A recent report by Barclays estimated the alternative meat market could be worth £100bn by 2029 – up from £10bn in 2019 – replacing 10 percent of the global meat industry. Credit Suisse went even further, suggesting its value could hit $1.4trn by 2050. More than 40 percent of consumers in the US now opt for non-dairy milk, according to research by the Plant Based Foods Association and the Good Food Institute, while one in six households choose plant-based meat. That’s led sales growth in vegan meat, dairy and eggs to outpace that of animal products for the third year running in the country.
Joining the bandwagon
It’s not only McDonald’s, Cadbury and Oatly getting in on the trend, of course; research by Mintel found that more than one in 10 meat, fish and poultry launches in the UK are now positioned as meat alternatives. Plant-based California brand Beyond Meat – which collaborated with McDonald’s on its latest vegan addition and is backed by celebrities including Bill Gates and Leonardo DiCaprio – raised $36.8m in net proceeds at its IPO in 2019, with stock prices surging 163 percent on the first day. Kellogg’s vegetarian brand MorningStar Farms is estimated to generate around $450m each year in revenue, while Danone is targeting $6bn in plant-based sales by 2025 and recently bought Earth Island – producer of vegan mayo Vegenaise – following its $12.5bn acquisition of plant-based manufacturer WhiteWave Foods in 2016. IKEA has meanwhile pledged to make half of its restaurant meals plant-based by 2025, while Nestlé has just re-introduced its Garden Gourmet range in the UK in response to growing demand. Aldi, Lidl, Tesco, Sainsbury’s, Unilever and Marks & Spencer are just a few of the other big-name brands to have added vegan sidekicks, counting among the world’s top 10 companies to be investing in the sector, according to Mintel GNPD.
Eco-conscious consumers
The trend is being driven by a number of things – not least environmental issues, according to Sophie Moule of PI Data Metrics, which found a 77 percent increase in online searches for ‘vegan’ from 2018 to 2019. “If we analyse where the spikes are in consumer searches for vegan products, they undoubtedly align with key documentaries being released on Netflix and other streaming platforms,” she told World Finance. “Shows like Cowspiracy: The Sustainability Secret and David Attenborough’s A Life on Our Planet definitely influence people to research what they can do to reduce their impact on growing issues surrounding climate change.”
We need to change what we eat, how much we eat, and how we produce our food
Research by Mintel found that 36 percent of consumers who switched from dairy to plant-based products were indeed driven by environmental concerns, while health and animal welfare were the biggest motivations for those participating in Veganuary. The environmental impact animal rearing can have is no secret; traditional animal farming accounts for around 18 percent of greenhouse emissions and uses 70 percent of the world’s water, according to the Food and Agriculture Organisation of the United Nations (FAO), taking up 47,000sq miles of land each year. A much-quoted study by the University of Oxford declared that veganism was the “single biggest way” to reduce environmental impact and could cut an individual’s carbon footprint from food by up to 73 percent.
Meat demand
Despite this, global meat consumption has grown at an alarming rate in recent decades; according to World In Data, across the globe we now produce more than three times the quantity of meat and more than double the amount of milk compared to 50 years ago. In China, production has surged by more than 10 times, from 7.7m tonnes in 1968 to 88.1m tonnes in 2018, making the country now the world’s biggest meat producer. In the US, production has more than doubled from 20.3m to 46.8m tonnes, while in Brazil it has surged from 2.8m to 29.3m tonnes.
The 2014 documentary, Cowspiracy, explored the impact of animal agriculture on the environment
Many believe these levels are simply impossible to sustain. According to Credit Suisse, current trends combined with an exploding population – expected to hit more than 10 billion by 2050 – could see food-related emissions grow by another 46 percent by 2050, while demand for agricultural land could rise by 49 percent. “This is incompatible with the need to achieve a net-zero emission environment globally by 2050,” wrote the authors. “If we are to meet this goal, we need to change what we eat, how much we eat, and how we produce our food.”
David Yeung, Hong Kong-based co-founder and CEO of Green Monday, agrees. “There’s absolutely no doubt that plant-based is the future, because from the macro point of view, there’s just no way our current way of eating and our current way of consumption can be sustained,” he told World Finance. “So it’s only a matter of time before we shift towards that direction, whether from mainstream consumers, corporates or governments, who I believe will start to make very clear guidance.”
That guidance is starting to trickle out; the BBC recently reported on a leaked UK government research paper that had recommended people “shift dietary habits” towards a plant-based future. The Behavioural Insights Unit, who wrote the paper – which was quickly deleted after publication and highlighted as academic research rather than official policy – reportedly recommended taxing producers or retailers of high-carbon foods to encourage consumers to buy plant-based and local food in a similar way to the sugar tax introduced in 2018.
Cultural barriers
But there are several challenges to overcome before a plant-based future really does become a global phenomenon – not least in China, according to Yeung. “In Hong Kong, the readiness for a more plant-based diet is there,” he said. “But in mainland China, from both a climate change and animal welfare standpoint, the level of awareness is not the same. For many years, people did not have as much access to meat, so it’s kind of a symbol of affluence now, and it’s not immediately easy for the country to change course,” he said.
China currently consumes 28 percent of the world’s meat and half of all its pork, data from the OECD shows, with a meat market worth $86bn. Annual per capita consumption is still significantly below Europe and the US – in the US it was 102kg in 2020, compared with only 26.9kg in China the previous year – meaning there’s potential for consumption in the country to rise even more in the coming years.
China’s government has taken steps to prevent this; in 2016, the state released dietary guidelines to help halve the country’s meat intake with the aim of meeting its goal to become carbon neutral by 2060. Other green shoots are starting to appear – the country’s plant-based market is forecast to grow at 20 to 25 percent annually, according to research by the Good Food Institute, up from an estimated 6.1bn yuan (£675m) in 2018.
But shifting to a plant-based lifestyle requires more than just accessibility to vegan products – it’s about a change in deep-set mindset and culture. Research by Mintel found that in China, “consumers still perceive animal protein as a critical part of their daily diet, providing essential nutrition,” for example. That’s not a sentiment unique to China. While many tout the health benefits of a plant-based lifestyle, others point to potential deficiencies in a meat-free diet (in 2016, the German Society for Nutrition even recommended against vegan diets for children, pregnant women and adolescents).
Perhaps partly for these reasons, only 46 percent of over 65-year-olds asked in a study, Older Consumers’ Readiness to Accept Alternative, More Sustainable Protein Sources in the European Union, considered plant-based protein an acceptable alternative to meat protein (and only 12 percent considered it ‘very acceptable’). “The high acceptance to eat meat, dairy and seafood among our sample of older adults underscores the important status of animal-based protein in the habitual Western diet,” wrote the authors. A separate survey in the UK by OnePoll found that the cost and effort associated with plant-based alternatives were among the key barriers to meat-eaters going vegan – alongside simply liking meat too much, which accounted for more than half of responses.
A lab-grown future?
These obstacles suggest that worldwide veganism might still be some way off yet – but there are other sustainable alternatives coming into the limelight. Among the most talked-about of the moment is cultured meat, produced from animal cells in labs, without the need to raise and kill livestock.
Consulting firm AT Kearney estimated that by 2040, 35 percent of the $1.8trn global meat market would be grown in labs (compared to 25 percent being replaced by vegan alternatives). A report by Facts and Factors meanwhile predicted the sector could be worth $248m by 2026, up from $103m in 2020, while the Good Food Institute found the industry experienced its best investment year ever in 2020, with more than $366m in funding received. Consumers are open to the idea, according to research; in a survey published in May by the Foods journal (US and UK Consumer Adoption of Cultivated Meat: A Segmentation Study), 80 percent of respondents in the UK and US said they were either moderately or highly likely to try cultured meat.
There are several challenges to overcome before a plant-based future really does become a global phenomenon
And as with the plant-based trend, big-name companies are getting in on the game. Bloomberg recently reported that Nestlé was in talks with Israeli lab-meat startup Future Meat Technologies (FMT), which famous US meat producer Tyson Foods has already invested in – and which claims to emit 80 percent fewer greenhouse gas emissions than traditional meat production. Nestlé confirmed in a statement to Bloomberg it was indeed evaluating “innovative technologies to produce cultured meat or cultured-meat ingredients with several external partners and startups.”
FMT is far from being the only company scaling up; in February, Israeli firm Aleph Farms hit the headlines for having produced the world’s first ribeye steak through 3D bio-printing. A few months later, the company raised $100m in funding to help bring its beef to market as early as next year – marking one of the industry’s biggest financing rounds to date – with new supporters joining existing investors such as food giant Cargill.
In September, Chinese startup CellX meanwhile unveiled its lab-grown pork and said it was aiming to be producing and selling cultured meat by 2025, while in July, US firm Wildtype opened a pilot plant in San Francisco to produce cell-cultured salmon. The startup plans to open a cell-based sushi restaurant next to the plant and is currently seeking regulatory approval from the US Food and Drug Administration (FDA). Upside Foods – formerly Memphis Meats – also hopes to roll out its lab-grown produce in the US this year pending regulatory approval, and counts Bill Gates, Richard Branson and Cargill among its investors; the company raised $161m in 2020.
Ongoing obstacles
But there are still obstacles to overcome before cultured meat can come to market across the world – not least affordability, practicality and regulation, according to Green Monday’s Yeung. “Because most of these lab-grown products will require bioreactors, how fast can they scale?” he said. “How affordable would the products be? And when will these kinds of products get approved? Those are the key barriers, but I’ve no doubt that ultimately cultured meat could become one of the solutions.”
Some governments have already taken action – in December 2020, Singapore became the world’s first country to give the go-ahead on cultured meat, granting regulatory approval to cell-cultured chicken nuggets made by Californian startup Eat Just.
Private members’ club 1880 soon became the first restaurant on the planet to serve lab-grown meat. And Qatar might soon follow in Singapore’s footsteps; Eat Just is building a cultured meat factory in the country, marking the first of its kind in the Middle East, with $200m in backing by sovereign wealth fund Qatar Investment Authority (QIA). The company said in a statement it was expecting regulatory approval “very soon” and was identifying restaurants in the country where the products could be sold. There’s nothing to say other nations across the globe might not soon start to follow suit.
Impacting agriculture
For many, it’s therefore a case of when, rather than if, both lab-grown and plant-based alternatives start eating their way into the traditional meat market (see Fig 1). Impossible Foods CEO Pat Brown, for example, recently said he wanted the company’s vegan products to replace all animal farming by 2035.
But while that might well bring about huge environmental benefits, what would it mean for the conventional agriculture industry and the people within it? Transitioning to a new dietary model means uprooting one of the world’s biggest sectors from the bottom up – and that impact is not to be undermined.
Indeed the effects are already starting to be felt by farmers in the US, according to Jeri Devereaux of JD Consulting, who specialises in helping farms transition from animal to plant-based agriculture. “As more people embrace a plant-based diet, the effect is experienced in every area of farming and ranching, including the farm owners, their workers, animal truckers and meat and dairy processors,” she said.
“If farmers don’t embrace regenerative measures and diversify their agriculture production to include non-GMO food crops for humans, the reduction in consumption of meat, dairy, chicken and other animal products will absolutely affect their bottom line and their ability to meet new market demands,” she said.
“The USDA’s Economic Research Service found a 22 percent decrease in the consumption of dairy milk beverages from 2000 to 2016, and in the same time period, the consumption of plant-based milk increased by triple digits,” she added. “We are already seeing small family dairies collapsing into bankruptcy along with major producers like Dean Foods and Borden Dairy Company filing for Chapter 11.”
Transition period
The obvious solution for farmers would be to make the transition from animal to plant-based agriculture – but how easy this would be is up for debate. A research paper by the Breakthrough Institute looked at exactly that and found three groups whose livelihoods would be most at risk; those growing soy and corn for animal feed (which accounts for around 95m acres of farmland in the American Midwest, according to the USDA), contract farmers growing pork or poultry, and meatpacking plant workers.
But while the report highlighted several threats, it also found potential new opportunities; animal feed farmers could possibly switch to farming plant-based ingredients such as peas (used in meat substitutes by the likes of Beyond Meat), oats and other products, or continue producing feedstock for cultured meat, for example. Animal farmers could meanwhile still raise small numbers of livestock for cellular agriculture.
There could be several advantages to these changes, according to the report: “First, some of these crops could be more profitable. Second, production could represent a chance for farmers to diversify their income sources, in turn offering greater resilience. Third, because many leguminous crops can be incorporated into rotations with double-cropping, they could represent an additional rather than an alternative source of income.”
Several players in the industry are attempting to help farms make the transition; Cargill has invested around $100m in US pea protein producer Puris, which works with farmers in the US to get its ingredients. In Sweden, Oatly began purchasing oats from a livestock farmer in 2017 that had previously been growing them for animal feed. The company has since worked with several other animal farmers to do the same.
Farming constraints
Yet there are still likely to be significant challenges in making the change, according to Devereaux. “Because of contracts and loans on animals usually tied to production contracts, farmers cannot and should not simply leap from their current business model to new, plant-based models,” she said. Governments could play their part in helping to make the transition – for example by introducing a subsidy system that supports the switch from animal to plant-based farming. The Breakthrough Institute report points to other potential areas of focus, including “regulatory clarity” on alternative-meat products, incentives such as tax credits for rewilding unused land and programmes to support the transition such as “debt forgiveness, compensating for losses incurred, and funding re-training initiatives.”
Even then, however, there are further constraints; geographical factors limit what can actually be grown where, for example. In the US, almonds (often used for plant-based milk) can only grow in warmer regions such as Florida and Southern California, excluding farmers in other parts of the country from getting involved. Contract chicken and pig farmers meanwhile don’t necessarily have enough land to grow the relevant crops. Then there are cultural and psychological barriers. “This will require farmers and ranchers to leave an often generational way of life and an understanding of the business of agriculture,” said Devereaux. “Farmers will need to educate themselves while moving into new product areas and embracing new ideas around farming.”
A sustainable balance
Of course, it’s unlikely conventional farming is going to suddenly disappear overnight – it’s likely to be a gradual transition, and many believe that even as alternatives come to bear, there will always be a place for it. Where pressure is likely to mount, however, is on the way that agriculture is done. Research shows that regenerative agriculture – essentially crops that capture carbon in the soil – can help to limit carbon emissions, and the US is already taking action to encourage these practices. Carbon credits have been introduced under Biden, providing payment to farmers who grow carbon-capturing crops, and other initiatives are currently under discussion.
Meanwhile in the UK, the National Farmers Union has set a goal to achieve net zero carbon emissions from food production by 2040. Deputy President Stuart Roberts is quick to point out that greenhouse gas emissions from beef production in the UK are half that of the global average. “When people buy British meat and dairy they are buying sustainable, local food, often produced in areas where it is difficult to grow other foods,” he told World Finance. “The same cannot always be said for plant-based proteins. People should know that if they want to reduce their carbon footprint at the same time as continuing to enjoy meat and dairy products, they can.”
Demonising agriculture is therefore only one side of the argument; and even plant-based eating can take its environmental toll if it’s not handled carefully and sourced locally. As with everything, there’s no silver bullet to a please-everyone, perfectly sustainable future – but the answer likely lies in striking a balance between moderate, sustainable meat rearing, lab-grown alternatives and plant-based living.
Shifting to a plant-based lifestyle requires more than just accessibility to vegan products – it’s about a change in deep-set mindset and culture
That’s exactly what the EAT Lancet commission set about to do in its science-backed ‘planetary health diet,’ released in 2019 with the goal of feeding a future population of 10 billion, while simultaneously addressing climate change issues. The diet includes cutting global consumption of red meat and sugar by half, while doubling vegetables, fruit, pulses and nuts in a 2,500-calorie-a-day flexitarian model.
While that kind of model might sound like a distant dream, it might be closer than we think. With more and more consumers adopting a flexitarian lifestyle, more and more companies offering vegan options and an ever-greater awareness around both health and environmental issues, it’s not a totally unachievable target – and one we might have no option but to accept in the coming decades as the true impact of an exploding population, a rising global middle class and a current food system that’s impossible to sustain all come to bear.
After the 2020 pandemic lockdowns, 2021 introduced us to Brexit-induced food, fuel and CO2 shortages, ongoing supply chain problems and scarcity of everything from lorry drivers to Christmas turkeys. Like it or not, daily life frequently feels as though it’s coming close to standstill.
As responsible business owners, at what point should we stop mitigating for ‘disasters’ given that you cannot plan for every possible eventuality? COVID-19 has taught us that if a company’s HQ was shut down in an emergency – flooded or targeted by wrongdoers, say – staff can of course find the agility and flexibility to ‘keep calm and carry on’ in the short term. But with wave after wave of nationwide difficulties to tackle in the domestic sphere, perhaps it’s time for bosses to take business continuity planning (BCP) up yet another level.
Take an example from the US. Grim though the thought may be, before the Columbine high school massacre in 1999 it would have been unthinkable to consider that an active shooter situation might need to be covered in a school’s emergency drill procedures. Twenty years later, thanks to the proliferation of extremism of all stripes, a gun accessibility culture that is at odds with the rest of the western world, and crucially, an exponential increase in actual firearm attacks, the sad reality is that now every school in the country has a plan and a drill for if a gunman shows up. Mercifully, the possibility of armed intruders in a US school is still not likely, but it is statistically possible enough that the smart thing to do is to prepare for it. Such preparedness has been a common part of US school life for a generation in the hopes that the worst will never come to pass, but that people will know what to do if it does.
Striking the right balance
New stories about uncommon occurrences becoming possible or even probable beg the question of just how far strategy and governance now need to go to protect businesses from catastrophe. A balance needs to be struck without a doubt, but it is worth asking the question of how long work could – or should – continue as normal if fuel or power supplies take a severe hit. What are the most important aspects of your business, how can you ensure their continued delivery no matter what, and is there a scenario when that is no longer feasible? And it is not only the details of the plan that are important to consider; it is crucial to win the hearts and minds of the staff delivering that service when they might also be facing significant difficulties outside of the job if the worst comes to the worst.
Against the current political and socio-economic landscape, perhaps it is time to review that line, and approach planning for it head on. When the pandemic first struck, it was the businesses without a plan that were left panicking and whose staff were overloaded, trying to navigate lockdowns and stay safe while muddling through their work as best they could.
When the pandemic first struck, it was the businesses without a plan that were left panicking and whose staff were overloaded
Of course, a contract is a contract and we can all be flexible and adapt, changing our lives short term to overcome business road bumps, but what if the country is headed for food shortages or power cuts that last for months on end? Disaster recovery and business continuity are linked, but they are not one and the same. I’d wager that if things really get ugly, not many people would place their employer’s strategic or financial objectives over basic household survival.
Most boardrooms can be crudely divided into ‘hawks’ and ‘doves’; those who take risk with a pinch of salt, and those who are more cautious. But like gas masks being carried in WWII, earthquake and tsunami drills in Pacific countries, or fire drills the world over, with any insurance policy, you prepare for the worst and hope for the best. Office workers being issued laptops rather than desktops as standard to enable working from home in any scenario does not seem overkill by comparison.
Back on UK soil, it certainly feels like the needle is moving in the more extreme direction all the time. Against a backdrop of COVID-19, Brexit and climate disaster, perhaps levelling up what we consider the worst-case scenario is not as paranoid as it may seem. It’s one thing having your server backed up and work-from-home policies sorted, but what use is that BCP if someone simply turns off the nation’s lights?
In January 2009, as the world was reeling from a financial meltdown of near unfathomable proportions, a new currency was born. A decentralised digital currency for the post-crisis age, bitcoin promised an alternative to the mainstream financial system for those who found themselves suddenly suspicious of the traditional banking institutions of decades past. From its earliest days of trading, bitcoin had its fervent supporters. While some dismissed it as an underground fad, others believed that bitcoin was truly the future of money, and imagined a utopia where crypto replaced cash. These voices have only grown stronger over the course of the last decade, as bitcoin has enjoyed a meteoric rise, moving rapidly from the financial margins into the mainstream.
Now a $2trn industry (see Fig 1), cryptocurrency is no longer an underground phenomenon. In September of this year, El Salvador made history by becoming the first country in the world to adopt bitcoin as legal tender. On the other side of the Atlantic, Ukraine is said to be hot on its heels, with plans to adopt bitcoin as legal tender, according to reports. For early proponents of bitcoin, this feels like a landmark moment, confirming what they always believed to be true: that the future of currency is crypto.
However, while bitcoin has its supporters, it is not without its sceptics. Many economists view cryptocurrencies with suspicion, with regulators in both Europe and the US issuing warnings on the dangers of trading with crypto. Its highly volatile nature means that El Salvador’s bitcoin experiment is something of a gamble – and we are yet to see whether it will pay off. But with one country paving the way with crypto, others may soon follow suit. For better or for worse, El Salvador could be the start of a digital currency domino effect.
Brave new world
Big problems often require radical solutions. El Salvador has long been plagued with a number of very particular economic woes: a small, central American country of just 6.5 million citizens, the nation’s economy is heavily reliant on remittances – money sent home from the two million Salvadorans who are currently living and working abroad. With expatriated Salvadorans sending more than $4bn back to their home country every year, remittances make up one fifth of El Salvador’s total GDP. Within El Salvador itself, meanwhile, two-thirds of citizens work within the informal economy, and 70 percent do not have bank accounts.
A desire to tackle this unique set of economic circumstances seems to have driven El Salvador’s decision to embrace cryptocurrency. President Nayib Bukele – who at the age of 40 is often described as Latin America’s first millennial President – has championed crypto as a path to both financial inclusion and independence for Salvadoran citizens. It is his hope that the move could save Salvadorans up to $400m a year in transaction costs on remittances, while giving access to financial services to those who are currently unbanked.
“In El Salvador, we are trying to start the design of a country for the future,” Bukele said in a video message broadcast to the Bitcoin 2021 conference in June of this year, where he first announced his plans to formally adopt the cryptocurrency as legal tender. “In the short term, this will generate jobs and help to provide financial inclusion to thousands outside the formal economy. In the medium and long term, we hope that this decision can help us push humanity at least a tiny bit into the right direction.”
Legal tender
Following the announcement of Bukele’s crypto-vision for El Salvador in June, a bitcoin bill was passed, requiring all Salvadorian businesses to accept payment in bitcoin as well as the US dollar – the nation’s existing legal tender – effective from September 7. To mark the launch of the nation’s new bitcoin era, all Salvadoran citizens were gifted a digital wallet called Chivo (Spanish slang for ‘cool’), with $30 of credit pre-loaded for each user to spend.
While this may all sound very promising, the reality proved to be rather more challenging than perhaps anticipated. The country’s landmark bitcoin adoption day was beset by technical difficulties – the Chivo digital wallet was forced offline for hours after government servers were overwhelmed by an influx of sign-ups, and President Bukele took to social media to complain that app stores on Apple and Huawei devices were not yet hosting the government-backed app. Elsewhere, it was reported that ATMs were running out of money, as citizens rushed to convert their $30 bitcoin holdings into cash. In the capital city, more than 1,000 people took to the streets in protest of the bitcoin adoption, setting off fireworks and burning a tyre in front of the Supreme Court building in an impassioned display of opposition to the law change.
“Like all innovations, El Salvador’s bitcoin process has a learning curve,” Bukele said in a tweet, reflecting on the rollout. “Not everything will be achieved in a day, or in a month.”
While there may have indeed been noble intentions behind El Salvador’s bitcoin experiment, it’s clear that creating a crypto-utopia is going to be a very hard task for tech-savvy Bukele to pull off. Opinion polls show that the overwhelming majority of Salvadorans remain unsure as to how bitcoin actually works, while the currency’s extreme volatility is yet another source of anxiety for many. At a time when pandemic-related economic uncertainty remains rife, it is understandable that bitcoin feels like too large of a gamble for some sceptics. And yet, despite the many teething troubles that El Salvador has encountered, it looks like a number of other countries are now looking to follow in its digital footsteps.
Nayib Bukele, President of El Salvador, the first country in the world to adopt bitcoin as legal tender
The path to financial freedom?
El Salvador is one of a growing number of developing economies that have been gravitating towards cryptocurrencies. In Mexico, Cuba and Venezuela crypto transactions are fast becoming a part of daily life, allowing for fast, cheap and reliable cross-border transactions in countries that also rely heavily on remittances. Just one day after El Salvador officially adopted bitcoin as legal tender, Panama introduced a draft bill that aims to recognise bitcoin as an alternative payment method – suggesting that the cryptocurrency domino effect may already be underway.
The phenomenon isn’t unique to Latin America, either. In developing economies across the globe, crypto appears to be gaining mainstream appeal. Each year, leading blockchain data company Chainanalysis publishes its Global Cryptocurrency Adoption Index, listing the world’s top 20 countries for crypto adoption (see Fig 2). In the 2021 ranking, 19 of the 20 countries listed are emerging and frontier markets, reflecting a surge in usage in developing markets. From South-East Asia to Sub-Saharan Africa, cryptocurrencies are gaining a significant foothold – and are quietly filling gaps in the market that traditional financial services were never able to penetrate.
It should perhaps be unsurprising that crypto has enjoyed such success in the developing world. After all, many developing countries were also early adopters of mobile payments, with citizens both urban and rural leapfrogging traditional financial products and moving straight into the world of remote, cashless payments. The best-known success story is Kenya’s M-Pesa, a mobile-money platform that has recently hit 50 million users across Africa, and that has been credited with expanding financial inclusion across the continent by enabling payments and transfers among the traditionally unbanked. While it goes without saying that cryptocurrency is an entirely different world to that of mobile payments, the early success of such technologies may have paved the way for the digital currencies of today.
Developing nations
As is the case with El Salvador, crypto’s potential to enable cheap cross-border transactions is central to its appeal in developing nations around the world. Migrant remittances are a significant source of income for low- and middle-income countries, totalling approximately $554bn worldwide at the end of 2019, according to the International Organisation for Migration. That said, sending money back home can be a slow, complex and above all, costly exercise for many migrants living abroad. The UN estimates that currency conversions and fees on international transfers eat up approximately seven percent of the total amount sent through remittances every year – a considerable percentage of what is a crucial source of income for some of the world’s most economically vulnerable people.
The Salvadoran government is currently exploring options to mine bitcoin using geothermal power
In areas of instability, conflict or hyperinflation, meanwhile, crypto is proving to be something of a safety net to many. In Afghanistan, cash all but dried up following the Taliban takeover in September, forcing banks to close and seeing citizens struggle to purchase food and other basic necessities. A freezing of foreign aid has aggravated the unfolding humanitarian crisis in the country, while money transfer services MoneyGram and Western Union temporarily halted services in Afghanistan in the weeks following the US military’s withdrawal – cutting off many Afghans from a critical source of income in a desperate time of need. For those seeking an urgent solution to the nation’s cash crisis, crypto has offered a much-needed lifeline, with the conflict-ridden country seeing a surge in cryptocurrency usage among its citizens in 2021. Indeed, in Chainanalysis’ Global Cryptocurrency Adoption Index, Afghanistan now ranks seventh in the world for peer-to-peer crypto transactions. Last year, however, it didn’t even appear on the list.
In a similar vein, Libya, Palestine and Syria are all near the top in global online searches for bitcoin and other forms of cryptocurrency, while downloads of bitcoin wallet BlueWallet grew by 1,781 percent in Lebanon in 2020, as the country continues to grapple with an ongoing financial meltdown. In times of conflict and crisis, it would seem crypto offers a way to circumvent broken systems and to provide some financial protection to those in real need.
No safe bet
Cryptocurrency is far from being the perfect cure to the world’s many financial ills. It has, undoubtedly, been a useful – and at times, necessary – tool for some of the world’s most vulnerable citizens. But it is not without its flaws.
In more developed economies, there remains a more sceptical outlook on crypto, both among economists and the wider population alike. Indeed, in the US and Europe, cryptocurrency payments are far from being an everyday occurrence for most citizens. The world of crypto remains something of a niche subculture, largely dominated by semi-professional traders and blockchain aficionados. There is also a significant gender imbalance among traders, too – in the US, 76 percent of current crypto holders are men.
The main criticism of crypto, however, is that it is notoriously volatile in price. Thought to be 10 times more volatile than most major currencies, the market value of cryptocurrencies such as bitcoin can fluctuate by hundreds of dollars in a single day, making crypto a high-risk investment for many. Regulators have repeatedly warned about the dangers of investing and trading in cryptocurrency, citing this unpredictable and extreme volatility as one of their most pressing concerns. Price fluctuation not only puts people’s personal finances at risk, experts warn, but could potentially threaten financial stability across multiple different markets. In October, Bank of England Deputy Governor Sir John Cunliffe called for urgent cryptocurrency regulation, citing financial stability concerns. In a speech given at Sibos, an annual banking conference, he compared the current crypto boom to the rocketing value of US subprime mortgages before the catastrophic 2008 global financial crash. Without rapid intervention, he argued, a potential crypto crash could plunge the global economy back into another 2008-level crisis.
“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice,” he said. “They have to think very carefully about what could happen and whether they, or other regulatory authorities, need to act.”
In 2021 alone, cryptocurrencies have surged by around 200 percent to an estimated value of $2.3trn – up from $800bn in 2020. As Cunliffe noted in his speech, subprime mortgages were valued at around $1.2trn in 2008, and triggered a global financial meltdown of unprecedented proportions when borrowers began defaulting on loans. With the fallout from the 2008 crash still fresh in economists’ minds, it is hardly surprising that regulators are setting alarm bells ringing when it comes to crypto’s seemingly unstoppable growth (see Fig 3).
Environmental issues
And crypto’s inherently volatile nature isn’t the only cause for concern. There is also growing unease among sceptics and aficionados alike over bitcoin’s environmental impact. Bitcoin mining – the process through which ‘new’ bitcoins are created – is incredibly energy intensive. In order to be awarded a new bitcoin, ‘miners’ must use their computers to solve a series of incredibly complex puzzles. Whoever solves the puzzle first is awarded a new coin to their computer.
However, solving the problems requires the use of incredibly powerful specialised computers, which then need to run at full capacity, burning through an extraordinary amount of energy during each mining operation. As a result of this energy intensive process, the Cambridge Centre for Alternative Finance estimates that a single bitcoin transaction has the same carbon footprint as 680,000 Visa transactions. Already, this considerable carbon consumption is beginning to damage bitcoin’s reputation on the global stage. In May, Tesla CEO and long-standing crypto advocate Elon Musk announced that his electric car company would no longer be accepting bitcoin for car purchases, due to pressing concerns over the currency’s environmental impact.
“When there’s confirmation of reasonable (~50 percent) clean energy usage by miners with positive future trend, Tesla will resume allowing bitcoin transactions,” Musk said in a tweet, clarifying his position. Environmental concerns also played a role in the World Bank’s decision to decline a request from El Salvador to assist with implementing bitcoin as legal tender. The central American nation approached the World Bank earlier this year, seeking technical assistance with its plans to formally adopt bitcoin as an alternative national currency. “While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings,” a World Bank spokesperson told Reuters in July.
If crypto continues on its current upwards trajectory, the inconvenient truths surrounding its environmental impact and its inherent volatility will surely become increasingly difficult to ignore.
An undefined future
Like all modern innovations and technological advances, the world of cryptocurrency is a fast-moving one. In little over a decade, crypto has gone from a niche, abstract idea to a $2trn industry. Bitcoin’s introduction as legal tender in El Salvador marks a pivotal moment in the history of cryptocurrency, but the journey certainly isn’t over yet. In many ways, it feels like this could just be the beginning, as countries around the world look to potentially follow El Salvador’s lead. No matter the outcome of the Salvadoran bitcoin experiment, one thing is for certain – governments across the globe will be watching closely, and taking notes.
Less than one month on from the Bitcoin Law coming into effect in El Salvador, more people are said to have a Chivo bitcoin wallet than a traditional bank account. According to President Bukele, three million Salvadorans are now using Chivo – almost half of the country’s total population. By contrast, only a third of Salvadoran citizens are believed to have a bank account. It’s amongst these unbanked citizens that bitcoin is likely to be having the greatest impact. For those with access to a smartphone but not to a bank, payments, deposits and money transfers are now available to them at the touch of a button. While financial inclusion may have previously been a real economic hurdle for El Salvador, now digital literacy is perhaps the most pressing challenge, as the Bitcoin Law means little if citizens don’t fully understand the financial options available to them.
In developing economies across the globe, crypto appears to be gaining mainstream appeal
Despite the initial glitches and setbacks, El Salvador’s bitcoin gamble has already achieved some undeniably impressive results. As of October, 30 bitcoin ATM machines have been installed in major cities in the US, including Los Angeles, Houston and Chicago, in the hopes that Salvadoran expats will use Chivo to send money back home. The plan appears to be working – in a tweet posted on October 16, President Bukele told his followers: “today, we received 24,076 remittances, adding up to $3,069,761.05 (in one day).”
When it comes to the environmental aspect of bitcoin, too, the country also appears to be making some progress. Aware of the growing concerns surrounding the cryptocurrency’s carbon footprint, the Salvadoran government is currently exploring options to mine bitcoin using geothermal power. A pilot project has been set up at a geothermal power station near El Salvador’s Tecapa volcano, where 300 state-of-the-art mining computers are currently being powered by electricity generated from the volcano’s high-pressure steam. In El Salvador, where geothermal electricity already accounts for a quarter of domestic energy production, volcano-powered mining could be the solution to bitcoin’s dirty problem.
The world watches on
It is still far too early in El Salvador’s bitcoin journey to draw any firm conclusions on its success or lack thereof. But it certainly seems likely that the country’s bold experiment will fuel a new flurry of activity in the world of digital currencies. Most of the world’s central banks are already looking to create their own versions of digital currencies, with the Bank of England announcing in April that it is exploring the possibility of launching a new form of digital money to exist alongside cash and bank deposits. According to a report by PwC, 60 governments around the world are currently working on some form of Central Bank Digital Currency (CBDC), with 88 percent of those under construction said to be based on blockchain – the same technology that powers bitcoin. With so many CBDCs being tested, the question is not if they will be introduced, but when.
As for whether any countries will be as bold as El Salvador in adopting any form of cryptocurrency as legal tender, that remains to be seen. For now, the future of crypto remains as unpredictable as its market value.
It’s over a decade since Steve Jobs made what would be one of his most quoted comments about good business: “great things are never done by one person; they are done by a team of people.”
This observation was true before the Apple CEO gave his take on the value of people. Across 30 years of working at major web companies from Lycos to Google, in addition to co-founding my own technology company, I’ve seen that success almost always comes down to having the right talent. During recent challenging times, this has proved especially relevant.
Rapidly shifting market trends, ongoing uncertainty, and financial strain in almost every sector have underscored the huge importance of strong teams for keeping businesses on track. While there’s no bullet-proof formula for leaders to perfect their people foundation, there are some key steps they can follow to build and nurture collective power.
Hire people better than yourself
While we’ve all heard the advice that a leader shouldn’t be the smartest person in the room, there is often too little focus on what’s required to avoid that scenario: humble hiring.
The CEO might be the driving force behind steering overall business direction, but that doesn’t mean they must have the highest level of skill, experience, and knowledge in every area.
Striving to be the ultimate authority creates undue personal pressure, in addition to limiting your opportunities for learning and enrichment. From the business perspective, the company will also miss multiple benefits that come with creating a talented team.
Seeking out individuals who are highly skilled in their field will ensure they can produce the best results for the organisation: in our industry that would range from keeping product development in tune with changing demand, to delivering advertising campaigns that maximise sales. Bringing specialists together also helps foster a climate of innovation, where workers inspire each other to explore fresh ideas, try different approaches, and continually raise their ambitions.
Moreover, doing so means you can confidently delegate work to those who will do a better job. As well as saving crucial time to focus on smarter strategic decisions, this shows one of the core qualities employees want to see from leaders — trust in their capabilities.
In short, actively recruiting people with skills that surpass, and expand on, your own is crucial to achieve greater collective intelligence, productivity, and growth.
Don’t expect others to do something you won’t
Of course, many duties do still fall with leaders. At the basic level, establishing clear goals and responsibilities is important to sustain unified progress and offer a sense of purpose: another vital factor for workforce happiness. But it’s crucial not to let heavy focus on targets distract from the most vital part of being a leader: motivating your team through action.
Bringing together an exceptional group of people is a good start, but unleashing their full potential takes consistent work and guidance. In particular, leaders must play their part by embodying the behaviours and cultural attitude they want to cultivate.
For instance, simple steps such as responding positively to suggestions can be a powerful demonstration of your appreciation for collaborative thinking. This can encourage creative contribution and cement it within the business DNA; allowing for a horizontal structure that offers equal opportunity to influence company evolution.
During a company meeting, for example, our project manager proposed the idea of developing our own ‘sandbox,’ a technology tool that allows for the testing of solutions for privacy-compliant online advertising. The discussion generated a lot of enthusiasm in the team and, as a result, we have now developed SWAN (Storage With Access Negotiation) and presented it to The World Wide Web Consortium (W3C).
Similarly, stimulating a spirit of ongoing evolution also has to start at the top, with leaders embracing and adapting to change. The past 18 months, for example, have highlighted the need for me to alter my own view on remote working. Having previously leaned strongly towards the easy accessibility and information flow of physical offices, the pandemic has taught me to recognise the advantages that logging in from home offers for our people.
Throughout my career, I’ve been lucky to work with many people; all of whom have proved that the individual skills everyone brings to the table are equally invaluable. That’s why the final takeaway I would offer for any leader is this: aim to find and nurture the best talent you can – and leave your ego at the door.
From finance to fashion, few industries have escaped the extraordinary digital transformation that has come knocking at the door of business these past 20 months. Against a backdrop of rapidly evolving consumer expectations, the pandemic has served to catalyse and amplify many of the existing trends that were already ramping up prior to the lockdowns. From demands for greater corporate accountability, responsibility and transparency, to an increasing appetite for sustainable, renewable and socially responsible products (physical or otherwise), younger generations have been driving a deep and inescapable sea-change towards more ethical and regenerative ways of working and consuming.
In the finance sector alone, 2019 saw the UK’s Financial Conduct Authority take proactive steps to prevent ‘greenwashing’, challenging firms making misleading claims over sustainable investments. And with the Bank of England receiving a government mandate to buy ‘green’ bonds earlier this year, it seems unlikely that we’ll be returning to business as usual any time soon. So much the better. As we navigate the aftershocks of the UK’s estrangement from our European counterparts, we seem nevertheless to be taking a page out of the continental handbook, and heeding the European Commission’s advice that advisers ‘take sustainability risks into account in the selection process of the financial product presented to investors before providing advice, regardless of the sustainability preferences of the investors.’
What’s fascinating from a consumer standpoint, is the rapidity with which this approach seems to have manifested practical changes in service. I can attest from personal experience, that where once I would have been viewed askance when raising ethical concerns to my financial advisers, I’m now inundated by so many options that it’s as though I’ve landed in an entirely different epoch. The change has been swift and remarkable, and it’s a pivot which has already materialised in a boom of green, digital-first banking products. And with fintech services such as Good Money and TreeCard already disrupting the sector (and attracting huge swathes of Millennials and Gen Z in the process), this is a trend we can expect to see a lot more of – especially when you consider that consumers born between 1981 and 2012 will make up a full 72 percent of the workforce by the year 2029.
So where does that leave us? Well, one thing is clear. If the finance sector (or any other, for that matter) is serious about ensuring its long-term resilience and prosperity, it’s going to have to dance to an altogether different tune. From offering ethical investment and banking services, to integrating ESG into one’s business strategy, the future will belong to those organisations brave enough to harness and lead the change towards a better, more sustainable world.
Inflation is starting to cast a shadow across developed economies as they emerge from the COVID-19 pandemic. It has jolted central bankers and policymakers out of their comfort zone with the totemic two percent target suddenly slipping away from them. Since the global financial crisis, gentle inflation has been seen as the friend of stable, growing economies. Now, it is looking to break the shackles central banks thought they had firmly affixed to it.
Some economists and analysts see higher inflation as a benign influence in economies with high levels of debt but that ignores its corrosive effect on savings and those on fixed incomes, such as pensions. Others are warning of the threat of stagflation, and a return of the economic blight of the 1970s, when a grim combination of low growth and inflation rates of 20 percent crippled the UK and other western economies. The two percent inflation target adopted by the Federal Reserve, Bank of England, European Central Bank and others emerged out of that era of high inflation and was then cemented into policy in the wake of the 2009 global financial crisis.
“It was a bit of an accident,” says David Morrison, senior market analyst at UK-regulated online trading platform Trade Nation. “It came in when we were coming off the back of very high inflation in the late 1980s when inflation was still in double figures. It started with the New Zealand central bank and by the mid-90s most central banks were moving towards it, although the Federal Reserve didn’t officially embrace it until 2012.”
A delicate balance
According to the OECD, normally cautious in its inflation forecasts, the US and the UK are unlikely to see inflation fall back to that two percent target until well into 2023, although it predicts other economies might withstand inflationary pressures better (see Fig 1).
This will mean a constant stream of headlines about inflation exceeding the two percent target, but most economists believe central banks will live with those rather than change the target. It is a delicate balancing act. Raising the target would not be without its benefits, but the risks outweigh those, says Martin Beck, senior economic adviser to the EY Item Club.
“A higher inflation target, if achieved, would imply nominal interest rates being higher than otherwise. This would give central banks more room to cut rates when a shock hits. So there’s certainly some theoretical benefits from raising the inflation target. The problem is how it could be achieved. Most major central banks have undershot their targets over the last decade and the risk is that loosening policy sufficiently to achieve the higher target would cause inflation to overshoot and spiral upwards.”
Inflation is not just about numbers, debate over a few percentage points and the likely impact on interest rates. It is also about expectations, and that is a danger gnawing away at policymakers, says Beck. “A higher inflation target would also increase the chances that the public would start to pay more attention to inflation, and so it would bear more on pay demands.
One of the triggers for rising inflation in the 1960s and 1970s was the fading of ‘money illusion.’ As inflation began to creep up, workers became more aware that growth in pay was being eroded by rising prices and sought to offset that with larger pay demands.”
“Expectations are everything. Going out to deliberately push inflation up by raising the two percent target is an extremely dangerous thing to do. It can easily get out of control,” says Morrison.
Tempering trust
Keeping a lid on people’s expectations – and fears – about rising prices is one of the reasons why central bankers and politicians keep stressing their belief that the current inflationary pressures are only transitory. This was the theme adopted by the Governor of the Bank of England, Andrew Bailey, in his pre-budget letter to the Chancellor of the Exchequer, Rishi Sunak, in which he blamed the exceptional volatility of post-Covid economic activity on the hikes in energy and fuel prices and supply chain strains pushing up transport costs.
Bailey is also cautious about being manoeuvred into a situation where the bank raises interest rates but inflation does not respond. This is a seminal moment for central banks and one of the central tenets of monetary policy in the 21st century. If they raise interest rates and the impact they have on demand is minimal, people will start to lose faith in their ability to control inflation. This concern is very real, says Kieran Cleere, head of sales trading for the market risk solutions team at Silicon Valley Bank.
According to the OECD the US and the UK are unlikely to see inflation fall back to that two percent target until well into 2023
“At its core the monetary policy lever is a demand tool. Central banks will be asking themselves the very same questions as the markets at large: what has been the catalyst for the broad-based price increases? Where supply bottlenecks are driving prices not only is increasing rates unlikely to have a material impact but, on the contrary, it risks throttling a nascent, if faltering, recovery. If supply constraints are driving prices the question has to be whether the monetary Aladdins are the right people to put the fiscal genie back in the bottle?”
The alternatives for the central banks are to talk tough, hoping that they are not called into action before they can be effective. “History tells us that inflationary expectations and central bank credibility are the key to inflation dynamics”, says Vladimir Potapov, CEO of VTB Capital Investments.
He believes that talk alone might not be enough and that central banks might have to take the plunge and raise interest rates. “The famous economist John Cochrane says that fighting inflation is like deterring an enemy. If you just say you have the tools that’s not very scary. If you tell the enemy what the tools are, show that they all are in shiny working order, and demonstrate that you have the will to use them no matter the pain inflicted on yourself, deterrence is much more likely.
So, central banks should demonstrate that they are ready to act and we believe that is what most central banks are doing right now.” Emerging market central banks are already starting to move in this direction with Singapore announcing its first serious tightening of monetary policy for over three years in mid-October. The major central banks are now expected to follow with incremental increases over the next few months.
Most believe significant moves by the major central banks are unlikely, partially because the pressure on prices is being driven by supply factors and partially because the impact on households and businesses of any precipitous rise in interest rates could be detrimental. This is very much the view of the EY Item Club, says Beck. “Higher interest rates would do nothing to resolve supply problems or bring energy prices down but would add to the pressure on household finances from higher prices and welfare cuts.”
He doubts the Bank’s Monetary Policy Committee (MPC) would want to risk damaging the recovery by raising rates too far, too soon. Inflation may be looking as if it has few friends but those holding large amounts of debt – governments, businesses and households – have often benefited from the diminution of their debt burden in real terms in the past, especially if they can cope with the burden of the higher interest payments that usually accompany higher inflation.
Inflation acceptance
Cleere thinks governments will be quietly relaxed about modestly higher levels of inflation, calling their response nuanced. “Going forward the servicing and paying down of debt burdens will be front and centre of treasury minds around the globe as economies re-establish a normality. Given the scale of stimulus provided, tax increases alone cannot rein in debt without fear of crushing economic activity. For this reason, a tacit approval of inflation is going to inform part of any future approach to deleveraging nations.”
Indebted businesses might not be so sanguine if their interest payments start to rise, warns Morrison: “Even in the junk bond market, spreads have come right down and poor business have been able to borrow the money. Once those spreads start widening then we are heading for trouble.” Failing businesses would do nothing to ease the supply side pressures, many of which are global, but would be a serious drag on economic growth. This is a gloomy prospect but one canvassed as a very real threat by several leading economists, including Professor Nouriel Roubini from the Stern School of Business at New York University. In a recent article (in The Guardian) he dismissed the role of inflation in reducing debt as holding more dangers than potential benefits.
“As a variety of persistent negative supply shocks hit the global economy, we may end up with far worse than mild stagflation or overheating: a full stagflation with much lower growth and higher inflation. The temptation to reduce the real value of large nominal fixed-rate debt ratios would lead central banks to accommodate inflation, rather than fight it and risk an economic and market crash.
“But today’s debt ratios (both private and public) are substantially higher than they were in the stagflationary 1970s. Public and private agents with too much debt and much lower income will face insolvency once inflation risk premia push real interest rates higher, setting the stage for stagflationary debt crises.” For most of this century inflation sat benignly on the economic sidelines clutching its two percent target. It looked to be everyone’s friend. It is rapidly losing those friends as it casts aside its former constraints.
It’s hard to ignore the current zeitgeist for app-based money management and digital investing. But when it comes to saving for retirement, the greatest challenge for fintechs is still educating and engaging young adults facing an uncertain future. The wave of digitalisation that has swept the financial market over the past 10 years has led people of all ages to get more actively involved in their personal finances. But there persists a well-established impression that pensions are by comparison stuffy, boring, complicated, and not relevant for younger people. Romi Savova founded PensionBee in 2014 with a desire to make pensions simple and help customers to locate, consolidate, and manage their investments. PensionBee has certainly tapped into the current trend for managing money and investments digitally and via apps, and the company is passionate about engaging with and educating their customers. Having set out to solve a problem, Savova herself remains actively involved in responding to users’ needs, and with a potential savings crisis on the horizon when today’s young adults retire, a savvy young business owner on the side of millennials will surely help to bring attention to the issue.
There’s something very motivating about having a holistic view of your finances and seeing your savings grow over time
Primarily, that issue seems to be that pensions still scare people off with an intimidatingly complex reputation, and Savova agrees. “Pensions are often thought of as complicated and difficult to manage, and many people associate their pensions with filling out paperwork piled in a scary drawer. PensionBee’s mission is to make pensions simple. We do that by enabling consumers to interact with their savings through a unique combination of smart technology and dedicated customer service.”
So far, so user-friendly. But rather than training and working in one specialism for one’s entire working life, it is the norm these days to have a portfolio career, moving to new jobs and even completely different industries several times over. It is rare for people to retire at 60 when they may live beyond 85 (see Fig 1). The department for work and pensions predicts that the average worker will have 11 different jobs during their career, with each workplace – since 2012 – now automatically enrolling eligible staff into a pension scheme (see Fig 2). “Pension consolidation is one of the most popular reasons savers choose PensionBee,” Savova tells World Finance. “People are busy, and their time is valuable so they want to sort out their finances quickly and simply so they can confidently get on with their lives. The days of taking time off work to fill out lengthy paper forms and spending hours on the phone to legacy providers are long gone. Now these tasks can be done in a few clicks from an app on your mobile while you’re travelling to work or sitting on the sofa.
“For younger savers in particular, there’s something very motivating about having a holistic view of your finances and seeing your savings grow over time – thanks to a combination of compound interest, personal and employer contributions and perhaps even investment growth. Having full visibility from an early age can help savers achieve their goals faster and ultimately get the retirement they want.”
Embracing the hive mind early
Here, Savova touches on a vital point. It is only in the past few years that financial education around savings, loans, pensions, and mortgages has made it onto the UK school curriculum. That means that, unless it was specifically chosen by or for them, young adults in their 20s and 30s today had no guaranteed financial education. The impact of a financial education cannot be overestimated, and a quick look at some statistics about the amount of money sitting in ‘lost’ pensions in the UK alone is jaw-dropping. Thinking about its customers and the pension market at large, we ask Savova if our collective ignorance is obvious to her expert eye, and can anything more be done?
She explains that her company exists to solve a real problem facing millions of people in the UK. “The pensions landscape is too complex, it’s still too difficult to get basic information on how much you’re paying in fees, where your money is invested or even what your current balance is. Despite this poor experience, consumers are often reluctant to make changes for fear of doing the wrong thing. As a result, many savers risk missing out on better pension plans that could help them look forward to a happy retirement.
Many savers risk missing out on better pension plans that could help them look forward to a happy retirement
“We’ve created a product that seeks to give people pension confidence and a sense of optimism about their future, as they know they are saving regularly for the retirement they expect and deserve. Confidence and optimism aren’t emotions that most people feel about their pensions right now, and that’s because the market is not currently set up to serve savers in the ways that they need and expect. We see evidence of that across the UK in the lack of engagement, low contribution rates and the estimated 20 million pension pots left behind when people have changed jobs.
“One of the most common questions we’re asked is how much to save for retirement. And of course, the answer is the earlier you start the better.” The global average is estimated at 78 percent of current income for a comfortable lifestyle (see Fig 3).
Savova continues; “Over time, the compound interest savers can earn on their savings could have a significant impact on their pension pot by the time they decide to retire. If only those working today had been taught this when they were at school, we might not be in the midst of a savings crisis where many retirees face the very real risk of a shortfall in later life.”
Environmental concerns
Another common worry, particularly among those new to investing, is around having their money fund industries they may not agree with, such as fossil fuels. Even if pension issues are considered to affect the older population disproportionately, environmental issues face the younger among us far more. While it could be argued that younger generations have more pressing financial problems than their parents or grandparents before them (it is widely believed that millennials are the first generation ever to be materially worse off than their parents), it is also the case that theirs is an active and engaged generation who have no problem challenging authority and have multiple ways to do that from their smartphones. Just as young activists can tweet directly to world leaders, could there be untold collective power in our pockets in the literally trillions of pounds in our pension pots?
Campaigns like Pension Awareness Week encourage us to take a moment to educate ourselves about what pensions are, what they can do, and why it’s important to invest as much as you can as early as you can. Even a one percent increase in contributions can, with the power of compounding, add up to significantly more in a final pension pot at the end of one’s career. According to the Make My Money Matter campaign, spearheaded by film maker and co-founder of Comic Relief, Richard Curtis, “greening your pension is 21 times more powerful at cutting your carbon than giving up flying, going veggie and switching energy provider, combined!”
Romi Savova, Founder of PensionBee
Being a millennial herself, Savova is no stranger to environmental and social crises, and this also taps into the drive she feels to educate and engage her customers. We talk a little about the gathering momentum for using investments for good, and ESG as an indicator of IPO success. Could it be that having a choice about where our money goes is the hook for young people to engage more with their pensions? She thinks so.
“We’ve seen from our own customer base that younger savers are more likely to be invested in one of our responsible plans. Increasingly the younger generations are voting with their feet and choosing the companies and products that align with their values.
“Our fossil fuel free plan was created in 2020 in direct response to customer feedback, which highlighted a growing divide, with some customers wanting to engage with oil companies and others no longer believing in the effectiveness of engagement, instead desiring a product that excluded oil from the outset. The plan excludes firms with proven or probable reserves of oil, gas or coal; tobacco companies; manufacturers of controversial weapons and persistent violators of the UN Global Compact.
We’ve found a way to connect with a generation that has long been forgotten by the legacy providers
“At PensionBee, we believe that sustainable business practices have a positive impact on long-term pension returns. Therefore we consider it important to regularly seek our customers’ views on how their pension, and the companies it invests in, should evolve in a changing world. In our most recent survey, the majority of savers invested in the fossil fuel free plan told us that they are happy with the current exclusion policy, but a significant proportion told us they wanted to also exclude companies that provide associated services to the major oil producers and also banks who finance fossil fuel exploration. As a direct result the plan has now broadened its exclusion criteria to remove companies that provide associated services to the fossil fuel industry.”
It is refreshing to find that the firm’s customer response policy is more meaningful than a token fund, and PensionBee is also listening to a minority within this customer group that want to move more quickly still: “We’re committed to finding a new plan that goes even further in its exclusionary policy, with a focus on positive impact. Even though this new plan is likely to come at a higher cost and reduced diversification, given the emerging nature of this segment in the economy, there’s a growing appetite for a plan of this type. A change is definitely underway and it’s young people who appear to be leading the charge!”
Pension activism
Here, we seem to find the paradox. Young people care about everything. There has never been such passion and drive around veganism, social issues such as Black Lives Matter, averting the climate emergency and corporate social responsibility. With an increased awareness of where our money goes and putting investment back into local economies and towards good causes, comes a surge in the proliferation of ethical funds and pension investments. Combine tech-savviness with the moral imperative for this generation to do better, and rather than a bleak situation, we could be at a perfect tipping point, a new age of pension investing that not only benefits the individuals who are taking control of their own futures, but that also contributes to a less gloomy future for the planet as people quite literally take matters into their own hands.
A rally in defence of fair pensions in Madrid, Spain
Any shrewd entrepreneur knows that there is opportunity in solving problems of inconvenience or effort, and PensionBee takes this premise and creates an easy to use and understand platform that could end up changing customers’ behaviour, such that they end up with a pension that is much more fruitful than it would have been otherwise. In terms of strategy, I wonder whether PensionBee consciously positions itself as a ‘challenger’ in the world of pensions as Starling, Monzo et al have with retail banking. Savova is direct in acknowledging that since it was founded in 2014, PensionBee has been a challenger in an industry ripe for disruption.
“We’re constantly innovating and setting new standards of transparency in a sector that hasn’t changed or adapted with advances in technology and consumer behaviour in decades. We’ve found a way to connect with a generation that has long been forgotten by the legacy providers, and are passionate about campaigning on behalf of savers to improve standards across the industry, whether that be around exit fees or consumer switch guarantees.
“Being on the right side of change, particularly in financial services, is very motivating. Over the years we’ve learned that as long as you have the consumer on your side and are doing the right thing, you can take on huge battles and win. “We aim to be the best universal online pension provider, and in the past 12 months have released several innovative new product features that set us apart, including deeper open banking integrations, so our customers can manage their pension in some of the UK’s most popular money management apps, and creating a pension product for the self-employed, a group who have historically been underserved by the pensions industry.”
I wonder if there is a typical PensionBee customer, and if the company’s metrics show any gender or generational bias. I assume young adults make up the majority of the customer base and I am right, with those in their 30s and 40s making up the majority. Interestingly, around 20 percent of its customer base is self-employed; a significant proportion of whom will be classic portfolio careerists. The gender split is around 3:1 in favour of men, but Savova assures me they are putting plans in place to significantly increase the number of women signing up to PensionBee next year.
“The needs of our customers vary and we’re here to help them look after their pensions throughout their savings journey, from sign up to drawdown. PensionBee’s vision is to live in a world where everyone can look forward to a happy retirement in the form of financial freedom, good health and social inclusion. Educating people about the benefits of saving for later life is vital to achieving this.
“Saving for retirement is a marathon, not a sprint. It can be overwhelming to think about how much a saver will need to put aside to be able to afford the lifestyle they’d like in retirement; however, it’s important to set realistic goals, whatever their age, and use a pension calculator to ensure they stay on track. Apps like PensionBee’s increase consumer engagement with pensions and help savers feel a sense of control and ownership over what’s happening to their money. By feeling in control, we hope that savers will consider what retirement could look like for them so that they make appropriate contributions and better plan for later life.”
Gathering the nectar
I attempt to follow the process and try it for myself. PensionBee shouts loudly about helping you trace your old pensions, but in the early stages of signing up with them it becomes apparent that they can only trace what you can provide. This is reasonable, but unless you have a list of previous employers and their associated pension providers next to you when opening your PensionBee account, you will still likely find yourself trawling through emails and paperwork attempting to dig out the name of your previous providers. The UK government has a pension tracing website that may be able to assist with this.
It is also worth bearing in mind that pensions held from civil service, the NHS, teaching positions or other public sector jobs like local government are not possible to transfer into a PensionBee scheme, or any other for that matter. The reason for this is twofold. The first is simply that the government does not allow such pensions to be moved anywhere other than its own scheme, probably because it is in everyone’s interest to not risk billions of pounds being moved out of government control and potentially into high-risk portfolios or poorly managed funds, or simply being forgotten about. The government invests and manages these pension funds itself, and returns are then used to raise capital for government aims.
The second reason (and perhaps a tonic to the above) is that civil service pensions are roundly considered to have excellent terms and no adviser would suggest you’d get a better deal elsewhere anyway. The upside to that is that people with such pensions can continue to benefit from them; the downside is that it means that no app or pension system will be a ‘one stop shop’ for you. PensionBee and its ilk plainly offer the most benefit and convenience to those who have had several previous jobs in the commercial sector. It will appeal most strongly to those who have a standard portfolio career rather than those in state positions.
Empowerment through taking control
Apps like PensionBee take the hard work out of tracing your own pensions from days gone by and enable you to start saving easily if you haven’t already, split into one of eight funds. No endless options to scroll through, no paperwork. Yes, for the more experienced investor there isn’t much to challenge you or lots to compare and contrast, but the financial imperative is for people today to take care of themselves (and the planet) in a way that has not taken this shape before. Gone are the days of a once-a-year letter from a pension provider you didn’t know you had, telling you how a set of investments you don’t understand have performed. Gone are the days of working for the same employer for 50 years in the hope of having a vaguely comfortable retirement.
Gone are the days of working for the same employer for 50 years in the hope of having a vaguely comfortable retirement
So many elements are at play here: portfolio careers where people switch jobs every five years or so. The willingness of young adults to look corporations in the eye and ask where their money is going. The proliferation of fintech startups that bring ease, speed, and dare I say it, fun, into making investments and watching your savings grow. The fact is that more and more people are aware that the future does not look good, either in terms of relying on the state pension alone or when considering the direction the world is headed.
Savova certainly seems to understand this duality. On the one hand is the need for digital money management and making finances easy and relevant to everyone, but especially younger adults. On the other is a global imperative to put a stop to climate change and impending doom. The paradox is that something historically thought of as boring, irrelevant, and moreover a long way off, could be crucial in tackling the ecological disaster that may once have been far away, but has now very much come knocking. We may not be especially motivated to riffle through financial paperwork for a retirement that is decades away, but Romi Savova says it doesn’t have to be that way, and for a small amount of effort, we could all take practical steps towards a significantly improved retirement pot and, with a bit of luck, a sustainable world in which to enjoy it.
During her time as Chancellor of Germany, Angela Merkel has shaped the country into one of the most highly reputed nations in Europe. Now, in 2021, she has stepped down from her role, and Germany has been left waiting for the formation of a new government, following an inconclusive election in September. The Social Democratic Party (SPD) emerged as the strongest option in the election and, along with the Greens and the Free Democrats, have opened formal coalition talks, with Olaf Scholz, Annalena Baerbock and Armin Laschet all looking like the frontrunners for the coveted role of Chancellor.
However, all the parties accept that the situation is complex, and it will take time to come to a satisfactory resolution to form this new government. In the meantime, Merkel and her government will remain as caretakers of Germany until a decision is made.
The rise of Merkel
Merkel was born in 1954, and for the first 35 years of her life, she lived in Soviet-controlled East Germany. Here, she worked at a state-run research centre as a research scientist, until the fall of the Berlin Wall in 1989. The historic shift that the fall of the wall brought about led to Merkel abandoning the scientific work she had been carrying out, and instead she turned her hand to what would become a lifelong interest in politics. Merkel was first elected Chancellor of Germany in 2005, becoming the first woman, and the first East German, to hold the nation’s highest elective office. She has held this position for so long in fact that she has become Germany’s second longest-serving leader of the modern era, after her former mentor, Helmut Kohl, who was also chancellor for 16 years.
During Merkel’s time as Chancellor, she has achieved a great deal, but the aspects she will be remembered for most by her country, and the world more widely, are her commitment to emissions cuts, and arguably even more so than this, her actions with regard to the refugee crisis. Merkel’s decision to allow over one million refugees to enter Germany in 2015 and 2016 is how many supporters and critics will define her legacy. Her support of migration earned her praise by her supporters, and those more left-leaning in Germany. However, these actions were criticised by the far right, who were concerned Merkel represented an open-border immigration policy that had gone disastrously wrong.
To find someone who possesses both her stability and strength, someone who can unite all of Germany and the EU, will be a challenge
What no one can argue with though is Merkel’s popularity over the years, having affectionately been referred to as ‘Mutti,’ meaning ‘mother’ in German. While initially used as a patronising term by her critics, it has since been rebranded as a term of endearment. While other world leaders have come and gone, Merkel has remained, a figure of stability in Germany, avoiding scandal in a way her predecessors and many other European politicians have not. Merkel has led Germany through a global financial crisis, the Eurozone debt crisis, the immigration crisis, and most recently, the pandemic. Her unwavering statement of “we will manage” when faced with an escalating immigration crisis neatly encapsulates the spirit with which she has carried the German nation through tough times. Therefore, to find someone who possesses both her stability and strength, someone who can unite all of Germany and the EU, will be a challenge.
New directions
Germany’s newly elected parliament held its first meeting on October 26 of this year, following the September election. The German President, Frank-Walter Steinmeier, formally dismissed Merkel and her Cabinet. However, they will remain in a supervisory position until a new government officially takes office. The SPD candidate for chancellor and the former vice-chancellor under Merkel’s fourth government, Olaf Scholz, is one of the leaders tipped to replace Merkel. Scholz has previously served as the finance and interior minister for Germany, and is one of the longest-serving members of parliament.
However, although his experience as finance minister does benefit him, his critics have also thrown accusations his way regarding two big financial scandals, aiming to cast doubt on his suitability as a candidate for chancellor. But in terms of popularity, he’s a runaway leader in the polls; it was revealed in at least one survey that if the German people were voting for their next chancellor, Scholz would be the one they would choose to elect.
For some of the German population, and more widely, other world leaders, Merkel is leaving her final term as a chancellor on something of a high, with unemployment in the country down by six percent, which is half of what it was when she first became chancellor in 2005.
In addition, Merkel’s government’s economic policies have helped Europe’s largest economy recover, twice. However, for some German economists, Merkel’s fourth term as chancellor has been viewed as a time of slippage in the country’s competitive drive, with widespread agreement that Germany’s physical and digital infrastructure is now backward. Therefore, in the lead-up to the election, promises from other parties included these specifics as areas they would focus on, should they come to power, as well as promising to look at tax and pension reforms.
The view of a post-Merkel Germany
Germany has always held a certain weight in European policymaking. Therefore, the next chancellor will not just be responsible for leading Germany through crises, but also the whole of Europe. The predicted coalition is likely to be more in favour of EU integration than Germany previously has been, and there is even more reason that the next chancellor will have to take charge on many issues arising within Europe. One of the tasks awaiting the next chancellor is the need to update The Banking Union, which was first introduced in the wake of the debt crisis. However, this could cause controversy within Germany due to many of the population having concerns that updating this union will lead to them paying massive bills in order to support euro nations that are less financially conservative. In addition, the eurozone is also due to update its debt and fiscal rules in 2022, another matter at hand that the new chancellor will have to decide their stance on. One final economic issue that will soon need to be tackled is whether the recovery fund, initially meant as a one-off measure to fund the EU’s recovery from the pandemic, should become a permanent feature within the EU.
This fund would require the backing of the new chancellor, and the position that they take on this is crucial, as the other member states look to Germany for leadership. Will a post-Merkel Germany continue to lead Europe? It remains to be seen whether the new coalition government aligns Germany closer to or further away from the EU.
Merkel’s legacy
When Merkel announced her departure from German politics, it was widely acknowledged what a significant impact this would have not just on Germany, but Europe too. Her ability to remain in power for so long as chancellor is the reason why she has become a symbol of political stability. However, her ability to ward off political opponents over the years is partly what has led to the current situation, where there isn’t a clear heir to take the reins.
The legacy Merkel will be leaving behind can be summed up as a continuing defence of the liberal world order, a title allocated to her as a result of her consistent support of refugees, as well as her support of the laws that seek to address the climate crisis.
Her policies over the years have contributed to her shifting the Christian Democrats party significantly to the centre. However, this has resulted in a rise of the far right populist group, Alternative for Germany (AfD), who now hold 92 seats in Germany’s parliament, having not previously won seats in the Bundestag prior to 2017. Merkel will remain in a caretaker role until the new government is officially in place, which might not be until Christmas.
After the new chancellor has been appointed, she will be able to completely step back, and will be granted an initial transitional allowance of half her pay, after which time she will be entitled to a pension, from her work as chancellor, government minister, and member of the Bundestag.
The next chancellor faces the significant challenge of running a country that has come to be relied upon as one of the world’s great economic leaders. Other countries, particularly within the EU, will look to Germany for guidance and to help Europe recover from the continued economic fallout from the pandemic. For many, Merkel’s departure represents the end of an era. For the first time in over a decade and a half, Germany must manage without its mother.
When Jack Ma, the founder of Chinese e-commerce powerhouse Alibaba, gave a speech in Shanghai in October 2020, he didn’t suspect that it would mark the beginning of his demise. Addressing an audience of corporate and government elites, Ma openly criticised the Chinese government for its handling of the economy. “Outdated supervision” of financial regulation, he claimed, was stifling innovation, while China’s financial regulators resembled an “old people’s club.” To add insult to injury, he called for change, criticising the government’s meddling with private corporations. “The game in the future is about innovation, not just regulatory skills,” he warned.
As it turned out, regulators had little patience for innovators like Ma. The speech would be his last public appearance for several months. The plucky entrepreneur even failed to appear in the final episode of his own talent show, ‘Africa’s Business Heroes,’ which supports aspiring African entrepreneurs. More ominously, his account on Twitter, the altar from where even Chinese entrepreneurs feel free to preach to an audience hungry for their wise words, went silent. Ma’s last tweet to his 655k followers was posted on October 10, 2020, a reminder of his precipitous fall from grace.
The fall of tech barons
Ma’s disappearance from the public eye was not an isolated incident. In November 2020, the much anticipated $37bn IPO of Ant Group, Alibaba’s sister company offering financial services, was cancelled over a “significant change” in regulation. As it would emerge, just a week after his controversial speech, Ma had met with Chinese regulators. Following the meeting, officials issued stricter rules for micro-lending companies, forcing Ant to overhaul its business. Another reason why Alibaba was targeted by authorities was its growing influence in the financial services market, including consumer credit, which surprised Chinese authorities. “In the case of Ant, Alibaba’s finance subsidiary, regulators were increasingly under the impression that they were losing out on oversight of financial flows within China. Alipay and WeChat were taking a near 100 percent market share in the space of payment services providers, so the Chinese government now wants to take back control,” said Kai von Carnap, an analyst at the Berlin-based think tank Mercator Institute for China Studies (MERICS). Last April, Alibaba received a fine of $2.8bn for monopoly abuses; by October 2021, its stock market value had nearly halved compared to the previous year. Although the crackdown would probably have happened anyway, Ma’s caustic words made things worse for him, said von Carnap. “Criticising them {regulators} in their faces lit the fuse that made them prove they were serious about institutional changes.”
Companies must be regulated more tightly and also play their part in creating a more ‘equal’ society
Alibaba is the most prominent victim of a silent war the Chinese state has been waging against its own soldiers in the economic war with the West: Chinese tech corporations. Another tech powerhouse, DiDi Chuxing, China’s dominant ride-hailing company, is under investigation for data security breaches. Analysts believe that the firm drew the ire of the government by listing on the New York Stock Exchange last June, before the Cyberspace Administration of China (CAC) had completed its data security review. Last August, Chinese authorities introduced regulation forbidding teenagers from playing video games for more than three hours a week, a measure that has hit the country’s $45bn video gaming industry; no new games have been approved by China’s gaming regulator since August. Tencent Holdings, a gaming behemoth, had lost around a third of its value by November, while its music branch was forbidden from signing exclusive deals.
Jack Ma, Founder of Alibaba
At first glance, the clampdown could be interpreted as China-style antitrust action against digital powerhouses that had long overplayed their hand. “In Beijing’s eyes, more regulation on big tech is good for the country’s tech development, because small players will have more room to innovate,” said Linghao Bao, an analyst at Beijing-based consultancy Trivium China. For many years, big tech companies were allowed to skip regulatory oversight in order to grow exponentially, a goal the Chinese government saw as compatible with its own growth goals. These days are now over. “One common driver behind all these cases is that these companies offended regulators or pursued regulatory arbitrage and angered some major decision makers,” said Xiaomeng Lu, Director in Eurasia Group’s geo-technology practice, adding that Alibaba and Ant were punished for their aggressive ‘choose one from two’ strategy, which prevented affiliate merchants from collaborating with other platforms.
However, the clampdown goes far beyond what would be perceived as antitrust action in the West. Last summer, the Supreme Court outlawed the ‘996’ overtime policy that allows tech companies to employ people from 9am to 9pm, six days a week. In July, China wiped out the country’s $100bn edtech industry overnight by introducing new regulation forbidding companies from providing pupils with core tutoring services and banning IPOs and foreign investment into such firms.
The state takes over
Data, singled out last year as a major production asset, lies at the centre of China’s push to tighten its grip on the tech sector. The government already collects huge volumes of data through its social credit system, monitoring citizens via a network of algorithm-powered surveillance systems. It now wants access to data held by private companies, as evidenced by new regulations introduced earlier this year. One of them, the Personal Information Protection Law, requires firms to seek approval from state regulators to move data out of China. Another piece of legislation, the Data Security Law, focuses on the protection of ‘core data’ that affect national security. “There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security. This is partly a result of the Snowden revelations, which were a big wake-up call for Beijing,” said Rebecca Arcesati, an analyst at MERICS, specialising in China’s digital and data policies. Companies that don’t comply with the new rules will face severe penalties. “The question is, how can global companies, such as Chinese wireless equipment vendors and digital platforms, guarantee that the data they collect overseas will not be shared with the Chinese state? China’s emerging data governance regime is making the answer clearer: they can’t,” Arcesati warned.
China has launched a campaign to achieve tech supremacy in key areas its government perceives as crucial for the country’s future
Foreign companies operating in China may find the new rules too strict or ambiguous, particularly those operating data centres. “For very profitable firms, such as Tesla, this {compliance burden} may not be a big deal. For smaller players that can’t afford the extra cost, this will add to their operational and financial stress operating in China,” Xiaomeng Lu said. Many of them already take a conservative approach to data compliance, due to a lack of understanding of local regulation. There is a risk that tighter regulation could put these firms at a disadvantage compared to Chinese competitors by making it more difficult for them to transfer data from China to other markets, Arcesati said, adding that there might be more pressure on companies to create China-specific solutions that will be incompatible with global ones. Last October, LinkedIn became the latest foreign social media platform to leave the country, citing a “significantly more challenging operating environment,” interpreted as a covert reference to censorship.
In November, Epic Games, a US company partly owned by Tencent, stopped accepting China-based registrations for Fortnite, a popular video game. “Investors did not take regulatory risk seriously when it came to China. They assumed it was a free for all, and so long as the economy grew the Party didn’t care who was getting rich and how,” said Shehzad Qazi, Managing Director at China Beige Book International, an independent provider of data on the Chinese economy, adding: “This turned out to be very naive and short-sighted. China remains very investable, but smart money will now seriously price in regulatory and broader political risk.”
The long arm of the Chinese state has also reached corporate board rooms. Large firms have long been required to run ‘party committees’ bringing together executives and party officials to discuss how corporate strategies align with state policies. The government is now pushing for direct board representation through the ‘golden share’ rule, which allows government agencies to take board seats with stakes of just one percent.
Earlier this year, a government fund purchased such a stake in ByteDance, the company behind the social media platform TikTok, along with a board seat. “The impact of golden share on companies is still quite limited at this point. The new board member of ByteDance is merely a former mid-level propaganda official,” Trivium’s Bao said. “This person is unlikely to meddle with corporate decisions at ByteDance.” However, some analysts note the novelty and far-reaching consequences of the measure. “You could interpret that as a more public and direct form of influence at these companies,” von Carnap from MERICS said.
Chinese tech companies have also been victims of increasing tension between the US and China. A series of delistings from US exchanges of several Chinese firms, overall worth over $2trn until mid-2021, will consolidate the ongoing decoupling of the two economies. Many Chinese companies, including Alibaba, are instead opting for a second listing in Hong Kong. NASDAQ Golden Dragon China Index, which tracks New York listed firms, had lost by November a third of its value since the beginning of the year. New rules issued by China’s cyberspace watchdog will make it harder for firms to list outside of China, while newly introduced US regulation also makes delisting easier for non-compliant foreign firms, following a scandal involving Luckin Coffee, a US-listed firm caught lying about its sales numbers. “In the past decades, overseas listings and the dependence on foreign financial centres was a pragmatic alternative for Chinese companies, given the recognised institutional barriers in China’s financial system,” said Max Zenglein, chief economist at MERICS and expert on China’s macroeconomic development, adding: “This trend {reshoring} was inevitably going to happen. An aspiring economic superpower wants its companies to list at home, not abroad.”
China has launched a campaign to achieve tech supremacy in key areas its government perceives as crucial for the country’s future, from AI to space technology. Surprisingly, the crackdown on consumer-orientated big tech chimes with that policy, according to Eurasia’s Xiaomeng Lu: “From Beijing’s perspective, knocking back on these platforms’ troublesome practices is well-aligned with its goal of tech supremacy – the government wants to steer companies towards ‘hard technology’ investment in semiconductors, AI and quantum computing, and move away from what they view as ‘low-end’ competition.” However, some think that the policy may backfire: “In the real world it is hard to separate online platforms from hi-tech manufacturing, so the crackdown will probably hurt the overall technology push,” said David Dollar, a former US Treasury emissary to China and senior fellow at the Brookings Institution’s John L. Thornton China Centre.
Prosperity for all
The purge of tech companies is symptomatic of a broader shift in the Chinese economy. Last August, the party’s financial and economic affairs committee declared that it was necessary to “regulate excessively high incomes” to ensure “common prosperity for all,” a term that has become a synonym for China’s new economic dogma, putting emphasis on fair distribution of wealth. In a speech made the same month, the country’s leader, Xi Jinping, delineated the basic tenets of the “common prosperity” policy, explaining that equality would become a priority by “rationally adjusting” excessive incomes. The timing of the speech, amid the crackdown on internet giants, sent the message that the era of “growth-at-all-costs” expansion for digital behemoths was over.
For many years, big tech companies were allowed to skip regulatory oversight in order to grow exponentially
Although the Chinese government hasn’t fleshed out the details of the new policy, it is expected that large corporations will face higher taxation, pressure to make donations and strong antitrust action. Many Chinese corporations and entrepreneurs rushed to embrace the doctrine, donating billions for the common good. Alibaba has pledged to donate $15.5bn to help reduce poverty. But the damage has been enormous, wiping out over $1.5trn of stock market value from China’s biggest tech groups by mid-2021. “Chinese entrepreneurs have benefited greatly {from China’s growth}, but in the wake of their success several societal problems have been created,” said Shehzad Qazi from China Beige Book International, adding: “Now these companies must be regulated more tightly and also play their part in creating a more ‘equal’ society.”
A key part of the new policy is expected to be higher spending on healthcare and social security, a radical shift for a country that, although nominally Communist, lacks a Western-style welfare state. “China has very little redistribution through its taxes and expenditures, so policies such as a property tax and unification of rural and urban social services could help develop the middle class,” Dollar said, adding: “This would enable China to move away from its over-reliance on investment and develop a more sustainable growth path.” The drift towards a more egalitarian economic policy marks the abandonment of market reforms introduced in the ’70s by Deng Xiaoping that encouraged profit-making, encapsulated by the motto “Making money and getting rich is glorious.” Tech corporations, the poster children of China’s economic miracle, may be the first, but not last, victims of a return to purist Communist dogma. “Since 2013, there has been a systematic reversal by the Party to the extent that private profits are no longer morally justified and getting super-rich is morally wrong, paving the ground for the recent introduction of the ‘common prosperity’ policy” said Zhiwu Chen, who teaches finance at Hong Kong University.
There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security
However, many question the efficacy of the policy. “China’s leaders seem prepared to accept a marked short-term slowdown in growth as a price for greater financial stability over the long-term,” said Eswar Prasad, an expert on Chinese trade and financial policies who teaches at Cornell University, adding: “The government’s moves to simultaneously increase state control of the economy and the lack of clarity about its intentions towards private enterprise could intensify volatility and act as a drag on growth in the long-term.” Tighter control may lead to lower profits, added Chen: “The common prosperity policy is cutting private incentives to invest and start businesses, which will slow down economic growth and hurt the housing market down the road.”
Evergrande housing complex
A real estate crisis
A crucial part of the new economic policy is reining in debt-fuelled property investment and speculation. Currently, real estate accounts for around 30 percent of the country’s economy, which the government aims to bring closer to single-digit numbers.
In 2021, China had 65 million empty homes, many concentrated in ‘ghost towns’; the country’s imminent demographic crisis, with senior citizens projected to account for 40 percent of the population by 2050, means that many of these houses will remain empty forever. Logan Wright, Director at Rhodium Group, a research provider, expects the property sector’s underperformance to continue well into 2022, affecting the country’s growth rates.
The sector’s crisis came to the fore last September when Evergrande, one of the country’s largest property developers, missed a series of bond coupon payments. The company, burdened with more than $300bn of liabilities, has become a symbol of an economic model the government is now rejecting, after decades of unchecked growth. Investors hoped that the central bank would bail out Evergrande, fearing a spillover across the real estate sector. However, government officials publicly criticised the company for poor management and excessive risk-taking, marking the shift in the way large corporations are treated by the state. Regulators have introduced measures to tackle property speculation. The most important one is a planned property tax, expected to deflate the real estate sector. “They are now addressing the real elephant in the room by going after highly leveraged real estate developers. The concern over financial risk trumps their concern over lower economic growth,” said Zenglein from MERICS, adding: “The Evergrande fallout is the result of deliberate measures taken by regulators to rein in risky business practices and it sends a powerful message.
Evergrande’s crisis did not come as a surprise, allowing the government to prepare and take necessary steps to contain the situation if necessary.” The firm’s size and links to other developers have raised concerns over a property price collapse that could lead to a financial crisis. Markets may be temporarily over-reacting, said Prasad from Cornell University, but the danger will persist: “Fears that a bankruptcy filing might signal a broader unravelling of the Chinese financial system could precipitate capital outflows, put downward pressure on the currency, and cause at least temporary turmoil in foreign exchange markets.” More companies may also follow a similar path, according to Zhiwu Chen from Hong Kong University, clipping China’s economic prospects. “While official interventions will prevent large-scale crises from happening, the costs from past excessive debt-fuelled investing and business expansion in China will be gradually spread across Japanese-style ‘lost decades,’ with the negative consequences manifested gradually, instead of a crisis.”
Revolution 2.0
To explain China’s authoritarian drift, many scholars turn to a dark page of the country’s history: the Cultural Revolution, an upheaval that cost the lives of an estimated 1.5 million people from 1966 to 1976. In an attempt to consolidate his power within the Communist party and avert criticism over economic mishaps, Mao Zedong unleashed a violent youth movement that paused the country’s economic and technological development. Many scientists were arrested, imprisoned or executed. Universities stayed closed for several years and entrance exams were cancelled.
Xi Jinping, President of China
However, basic education expanded, particularly in the countryside, with the proportion of children who had completed primary education doubling within a few years. Analysts point to the legacy of this tumultuous period as a lodestar guiding the current leader of the country, Xi Jinping. Like Mao, Xi sees himself as a modern helmsman turning the ship of Chinese society to the familiar waters of egalitarianism, making the wellbeing of the great unwashed living in the countryside the state’s priority, following decades of unbridled economic growth.
In government affairs, Xi is also borrowing a page from Mao’s little red book. Defying the unwritten rule that requires the country’s leadership to pass the torch to a new generation every decade, he is preparing to renew his Presidency for a third five-year term next year, after abolishing the two-term limit and purging hostile party officials. In a bid to win the hearts and minds of low-rank party members, he often presents himself as an empathetic leader focused on the problems of ordinary citizens, such as unaffordable housing. “The rich and the poor in some countries are polarised with the collapse of the middle class leading to social disintegration, political polarisation and rampant populism – the lessons are profound!” Xi said in his speech last August.
However, the parallels with Mao end there. “Xi has some stylistic similarities with Mao, and his authority within the party appears to be strong relative to Xi’s predecessors, but he does not dominate the Party anywhere near the extent that Mao did,” said Andrew Walder, an expert on Chinese history at Stanford University. Unlike Mao, a radical Marxist who according to Walder opposed the idea that the Communist party’s main task was to bring economic growth, Xi believes that a large private sector is essential for economic development, but only under the tight control of the Communist party. “Xi is essentially a nationalist who deploys Marxist and Maoist symbolism, which is primarily an exercise in nostalgia about the Party’s former revolutionary past. Mao was a radical who was anti-bureaucratic. Xi simply wants to tighten up the Party’s bureaucratic control to ensure that it continues in power,” said Walder.
Despite Xi’s ambitions, China may have reached a point where economic development requires less, rather than more, state control. Even before the pandemic, growth rates were hovering around six percent (see Fig 1) and are expected to drop further, a major downgrade from the double-digit rates of past decades. The clampdown on fast-growing tech companies has also taken its toll.
In the third quarter of the year, (see Fig 2) China’s growth slipped to an underwhelming 4.9 percent, with lockdowns and a problematic vaccination campaign threatening recovery. Private debt is also rising, a sign that China now faces the problems of a mature, middle-income economy.
China’s ratio of household debt to disposable income reached a record high of 130.9 percent in 2020. So far, the country’s response to these challenges has been a mix of aggressive nationalism abroad and tighter control at home. However, aiming for a combination of economic growth and national assertion, China may get neither. “Everything nowadays has become a matter of national security, because of Xi Jinping’s all-encompassing definition of what constitutes national security,” said Arcesati from MERICS, adding: “That balance will be difficult to strike.”
But in 1993, he accepted a job as Technical Director of the Animal Health division at Pfizer – reportedly as a “stopgap” while waiting for a permanent academic position to come about, according to the Financial Times.
A research paper by the Breakthrough Institute looked at exactly that and found three groups whose livelihoods would be most at risk; those growing soy and corn for animal feed (which accounts for around 95m acres of farmland in the American Midwest, according to the USDA), contract farmers growing pork or poultry, and meatpacking plant workers.
