Lex in depth: Amazon

Proceed to checkout, review your order, click, done. Buying stuff on Amazon is easy. It is a wonder, however, that investors ever find the nerve to hit the place-your-order button for Amazon stock. That is because the online retailer’s shares are expensive – basket-bustingly so. Yet buy investors do. So what are the justifications for owning Amazon at these levels? Can its valuation possibly make sense?

Introducing Walmazon
To see the reason for owning Amazon in 2012, start by thinking about Walmart in 1991. The big-box retailer sold $44bn worth of merchandise that year, and had already changed the way Americans shop, using its sheer size to take costs out of its supply chain and pass the savings along to customers. Over the prior 10 years, Walmart’s average annual sales growth had been 34 per cent.

Similarly, Amazon’s sales reached $48bn last year, topping off a decade in which sales growth averaged 31 per cent. It too has changed the way many people in America (and to a somewhat lesser extent Europe and Japan) shop for books (paper and digital), electronics, nappies, shoes – almost everything that can be delivered in a cardboard box or stream over an internet connection.

In 1991, as it turns out, Walmart was just getting started. Since then, the company’s annual sales have grown 10-fold to $450bn. It has increased its share of US retail from less than 4 per cent to more than 10 per cent, and built a $126bn international business from scratch. And like Amazon’s today, Walmart’s shares did not look like a bargain in 1991; at the end of that year they were fetching more than 40 times earnings. Yet it is hard to argue that buyers overpaid. They have enjoyed a 500 per cent return since.

The comparison is far from perfect, of course, and it pays to consider the places where it does not fit. One need not understand the operational differences between bricks and mortar and internet retail to see the contrast. Just look at the difference in growth and profitability.

The bottom line
In 1992, Walmart’s growth, while still high, was decelerating. Amazon’s growth was as high as ever last year. It takes an ever bigger slice of a pie – internet retail – that is itself expanding at a solidly double-digit pace in the US, and is expanding into other businesses. But whereas Walmart has delivered operating margins between 6 and 8 per cent for three decades, Amazon’s margins peaked at 6 per cent in 2004, dropped several points for the following five years, and then, in 2011, dropped to around 2 per cent.

Part of the decline stems from Amazon’s practice of subsidising delivery; shipping losses have been rising and now amount to more than 5 per cent of revenue. This company will cut profits to the bone to attract customers.

Amazon bulls will object that operating margin is not the right metric. Because Amazon pays its suppliers much more slowly than it is paid by its customers, in 2011 it averaged 90 days’ worth of sales in payables (money due to be paid out) versus 16 days in receivables (money due to come in). Good inventory management also frees up cash. Over the past five years, these benefits (known as negative working capital) have accounted for almost a third of Amazon’s free cash flow.

So operating profit does not reflect the company’s cash profitability. Fair enough. Bear in mind two things, though. Free cash flow has declined alongside Amazon’s operating profits in recent years. And this working capital benefit will decline when Amazon’s growth slows. Working capital will not be a significant source of cash flow for ever.

A prime valuation
Here the bulls will interrupt again. It could be that in the coming years Amazon will deliver much higher margins than it ever has, for four reasons. First, its electronic media businesses – from ebooks to online video – are intrinsically high margin, have no associated delivery costs, and are set to keep growing. Second, margins have room to improve as the company develops its services to third-parties. Amazon receives highly profitable commissions as other retailers use the company’s internet storefront and distribution centres to move their own goods. Third, the Amazon Web Services businesses, which supplies companies with computing power and cloud storage, could generate $2.2bn in revenue this year, Citigroup estimates. Its closest pure-play competitor, Rackspace, boasts 12 per cent operating margins.

Indeed, in the first quarter of 2012, service revenues (mostly made of third-party commissions and Amazon Web Services) rose by two-thirds from the year before, and represents 15 per cent of total revenue. These fast-growing and higher margin businesses should offset another trend that hurts profitability – the shift away from high-margin media to lower-margin electronics and general merchandise. During the first quarter, in fact, gross margins (the proportion of sales left after the cost of goods sold is deducted, but before overhead costs) expanded by 110 basis points year-over-year, Amazon’s biggest-ever expansion.

Finally, bulls insist, Amazon’s lack of profitability merely reflects that the company is in the middle of an investment phase. Spending on technology and content (rights to music and video as well as research and development), marketing (as it pushes Kindle devices) and capital expenditures (18m square feet of offices and distribution and data centres were added in 2011) has expanded much faster than sales this year.
The potential leverage from reduced investment is striking. For example, if capital expenditures over the past 12 months had stayed at the level relative to sales of two years ago, free cash flow would have been almost double the reported number.

Cheap questions
There is, however, a big problem to solve before any of these bullish scenarios can be realised. One of Amazon’s crucial advantages – low prices – is coming under pressure.

Until recently, Amazon has enjoyed the advantage that most of its customers do not pay sales tax, even if they live in one of the 45 US states that charge it, at rates of between 4 to 9 per cent. This represents a discount for Amazon customers, but it is ending. Amazon is already collecting sales tax in six states; the rest are likely to follow. A shift in what customers pay may steer some of them back to traditional retailers, crimping growth.

That said, Amazon would reap one benefit from this change. Traditionally it has put distribution centres only in states without sales tax. Freed from this constraint, the company can add to its network and increase its lead how quickly it can deliver goods. As universal same-day or next-day delivery comes closer, the range of goods it would make sense to buy from Amazon increases. Toothpaste could be ordered the morning it runs out and appear that evening.

Low prices are also coming under increasing attack from Amazon’s suppliers. Book publishers may or may not have colluded, as the US justice department alleges, when they demanded that Amazon must not discount titles below levels they set. In many of Amazon’s key product lines, from digital media to electronics to fashion, suppliers see price and value as linked, and will threaten to stop shipments if they see Amazon’s bargains as tarnishing their brands. Already, Sony and Samsung have moved towards a “universal pricing policy”, insisting that all distributors respect certain minimum prices.

A pricey piece of the future
Trying to assess the value of a company that is as complex, innovative and fast-growing as Amazon is chancy. But there are two well-defined questions that potential buyers at the current share price must answer with a confident yes. Can the company shift its sales mix, and rein in spending, enough to sustainably expand margins? And can Amazon maintain sales growth in spite of upward pressure on its prices from an eroding tax advantage and dissenting suppliers?

On the first question, there is at least one good reason for hesitation. In its low-margin core retail business, Amazon competes with relatively fragmented traditional retailers that are generally struggling to form coherent online strategies. But in higher-margin web services and electronic media, it competes with aggressive and deep-pocketed companies that have staked their futures on media and cloud services: Apple, Google and Microsoft. Even if Amazon prevails, it will be an ugly fight.

On the price question, it is hard to gauge how the demands of price and convenience balance out for the average customer on the average Amazon item. The burden of proof is squarely on those who think that upward pressure on selling prices will not hamper top-line growth.

What is more, there is a third, much less defined question relating to valuation. In fast-changing industries such as internet retail, cloud services or digital media, how much faith should be put in the dominance of the early leader? In other words, investors know Amazon is spending heavily to protect its position; but is it spending enough? Valuations must include a thick margin for error to reflect the risk of a competitor landing a big blow.

This last point must – given Amazon’s heady share price – be decisive. Consider again the Walmart of two decades ago: its seemingly unlimited potential also came at a high valuation. That potential was fulfilled in spades, and investors did well. But returns were not nearly as extraordinary as the company’s operational performance. Yes, the intervening two decades have given Walmart investors a sixfold return; but so has the S&P consumer staples index. Even the plain old S&P 500 has returned 400 per cent.

It is impossible not to admire what Amazon has achieved so far or not to feel excited about what it could achieve in the next 20 years.

But investing is not about excitement. It is about balancing risk and reward and knowing what is predictable and what is not. Wait for a reduced valuation before clicking “buy”.

Source: http://www.ft.com/intl/cms/s/0/f3a02a44-cb53-11e1-b896-00144feabdc0.html#axzz21YegAGXE

The semiconductor industry: Space invaders

LAS VEGAS is a city of fast bucks, fast food and fast marriages. It could also be the place where a long war was declared. On January 10th Paul Otellini, the boss of Intel, will address the International Consumer Electronics Show (CES), a vast gathering of gadget-makers, sellers and aficionados in Sin City. He will introduce a phalanx of products showcasing the chips the world’s largest semiconductor company most wants to hype.

Up on the stage with Mr Otellini will be not just PCs of the sort that the company has powered for decades, but also new slimline PCs known as “ultrabooks”, which are being made by the likes of Toshiba and Hewlett-Packard (HP), and even a couple of smartphones. They represent the front-line of an army of Intel-powered kit going into battle against smartphones and tablets which use processors based on designs from ARM, a British firm.

Intel and ARM, pretty much as different in size and approach as competitors can be, have carved up most of the world of microprocessors—the most lucrative bit of the $313 billion global semiconductor market—between them. Each has a well defined patch in which it is pre-eminent. Intel bestrides the market for the microprocessors at the heart of PCs and servers like a colossus; ARM’s legions hold sway in the wide open spaces of the mobile market, having expanded without hindrance from their home turf in mobile phones to the booming world of tablets. Neither side has shown the stomach for more than the occasional raid into the other’s domain.

The wares on show at CES provide the clearest indication yet that Intel is escalating hostilities. It is trying to break into the rapidly growing smartphone market (it already makes chips for some tablets). ARM, meanwhile, has set its sights on the server business, where its low-energy chips should appeal to customers worried about high electricity bills. And more of its processors are likely to find their way into PCs in the coming years too.

The battle is not just about dividing up territories already occupied; it is also about finding new lands to conquer. Both firms are keen to stake claims on the largely uncolonised and still somewhat notional terrain known as the “internet of things”: the myriad processors in industrial machinery, consumer goods and infrastructure, ever more of which will communicate with each other and with distant computers. Cisco, a giant American maker of networking gear, estimates that by 2015 there may be almost 15 billion internet-connected devices, up from 7.5 billion in 2010. Whereas the market for more phones and other personal computing devices is limited by the number of persons the planet has to offer, things, being more numerous than people, provide a lot more long-term room for growth.

Intel, founded in Silicon Valley in 1968, is responsible for many of the advances that have made today’s semiconductors possible. It employs almost 100,000 people and mints money. In the first nine months of last year, the company generated $40.1 billion in revenue and $13.2 billion in pre-tax profit. Admittedly, in December it cut its revenue forecast for the fourth quarter of 2011 by 7%, to $13.4 billion-14 billion, because floods in Thailand had disrupted the production of hard-disk drives and hence demand for its chips. But that was a hiccup; Intel has no real rival in the market for chips that power PCs and servers. Advanced Micro Devices (AMD), the distant second in both, has been struggling. It replaced its chief executive in August after a seven-month search and laid off 1,400 workers in November.

Empire and foundry-nation

Intel’s business has been inextricably entwined with the steady fall in the cost of processing-power known as Moore’s Law, which is named after one of the company’s founders. Ever better chips mean ever increasing sales, which mean ever more money with which to build ever better factories for ever better chips.

The firm’s top brass attributes much of the company’s success in harnessing this virtuous circle to the fact that it both designs and makes its chips, with ten chip factories (“fabs” in industry argot) operating and two more under construction. Brian Krzanich, Intel’s manufacturing head, says this means it can bring chips to market faster and with fewer faults than rivals who use external firms, known as “foundries”, to make their chips. This helps explain why it dominates the market for high-performance processors in PCs and servers.

ARM’s chips are, by contrast, designed to economise on energy rather than to maximise processing power. And it makes none itself, instead selling licences for its semiconductor designs or its “architecture” (a recipe from which licensees make their own designs). Licensees pay a fee and a royalty of 1-2% per chip.

In essence, ARM provides a development base on which others build. The costs are shared, as are the resulting revenues and profits. ARM expects to recoup a chip’s development costs from the sale of the first ten licences. Royalties, which flow later, make up just over half its revenues.

Next to Intel’s leviathan, ARM is a shrimp. It employs just 2,000 people. It reported revenues in the first nine months of last year of £354m, or $568m, on which it made a pre-tax profit of £107.3m (see table). But it lies at the heart of a huge “ecosystem” of companies: a federation, perhaps, as opposed to Intel’s integrated empire. It has 270-odd licensees with 830 licences. Between them they shifted perhaps 8 billion ARM-based semiconductors in 2011, half of them in mobile phones and mobile computers, the other half embedded in consumer items and elsewhere. According to IDC, a research firm, the market for PC-powering chips that use Intel’s x86 processor architecture, which Intel dominates, was about 400m last year.

The ARM federation comprises not only chipmakers but also designers of chipmaking tools, devicemakers and software companies. ARM uses collective insights to design chips it thinks its partners will need; and they in turn shape their products with ARM’s processors in mind.

The dead past

There are intense rivalries within the federation, for example between NVIDIA and Qualcomm, leading makers of graphics chips. And the dividing line between federation and empire is not always clear. Design-tool firms such as Cadence Design Systems and Synopsys work with both ARM and Intel. So do Microsoft, HP, Apple and others. Intel itself is an ARM licensee. But that is for the most part because those businesses straddle the divide, not because the divide is not there.

ARM’s impressive position in the mobile-device market was born out of what seemed at the time like a string of failures. In the 1980s, when the trend in chip design was to make the hardware on processors capable of ever more varied and subtle types of calculation, Acorn, a then-marginal and now-defunct British computer-maker, had a niche in designing chips good at carrying out only a few types of calculation, but which did so very quickly. This reduced-instruction-set computing (RISC) approach requires software that can make up for the limitations of the chips, but uses less power than other approaches.

In 1990 Apple, struggling itself, needed a chip for its Newton, a personal digital assistant that was to restore the company’s fortunes. It liked Acorn’s chip designs: the two formed Advanced RISC Machines as a joint venture with a chipmaker. The Newton was a flop, and Acorn was wound up in 1999—the year that ARM floated. Apple, which today has a cash pile of $81 billion, sold its 43% stake because it needed the money.

When the mobile-phone market took off, ARM’s parsimonious processors were ideal for products in which battery life is at a premium and high-power chips and the fans that cool them are therefore not an option. Today more than 95% of the world’s mobile phones contain an ARM-based chip. Tudor Brown, ARM’s president and one of its founders, adds that the shift to “systems on a chip”—single bits of silicon that package together not just one or more central-processing cores but also graphics processors and other accoutrements—also helped ARM. Its stripped-down processing cores play well with others.

As mobile phones have become cleverer as well as commoner, ARM has gained again. Cleverer phones use more and pricier processors. The average number of ARM-based chips in a phone went up from 1.5 in 2006 to 2.5 in 2010. NVIDIA’s new Tegra 3 system on a chip for smartphones and tablets contains five ARM cores as well as NVIDIA’s own graphics-processing unit. And more, dearer cores mean more royalties. A smartphone can in the best case bring the company eight times as much in royalties as a basic phone, a tablet computer 11 times as much. This shift is far from over (see chart).

There is no such growth in the market for new PCs, which increasingly depends on the replacement of old computers by new ones with better, but not more numerous, processors, and makes up ever less of the total market for microprocessors. No wonder Intel is desperate for new territory, and willing to fight for it.

It is bringing two powerful siege engines to the field. One is its low-power Atom line of chips. The latest of these, code-named Medfield, is already in production and will almost certainly feature in the phones Mr Otellini shows off at CES. A study by Jefferies, an investment bank, says that Medfield is on a par with several popular ARM chips when it comes to processing bang for the energy buck. And Intel is working with Google to ensure that the search firm’s Android mobile operating system runs smoothly on Atom chips.

The company does not intend to stop there. The width of the circuitry on a Medfield chip is a mere 32 nanometres (nm), or millionths of a millimetre. Using a three-dimensional chip design Intel plans to shrink that even further over the next couple of years, to 22nm and then 14nm, and sell chips that beat the competition on both energy-efficiency and performance.

The wedge

The other thing Intel is counting on to help it succeed is new leadership. In December it put Mike Bell and Hermann Eul in charge of a streamlined internal unit focused on cracking the mobile-device market. Mr Bell, who joined Intel in July 2010 after working at Palm and Apple, says the firm has hired more people with a telecoms background and assembled a team to develop software to help phonemakers get the most out of its chips. Intel has also acquired businesses such as the wireless operation of Germany’s Infineon Technologies to help with systems-on-chips. Mr Bell is confident that combining all this with the company’s manufacturing might will make it a force to be reckoned with. “We can move this army en masse over to our mobile effort,” he says.

But even if the chips prove effective, Intel will be hard put to build a phone business out from its beachhead. Getting processors on a technical par with ARM’s, says Michael Rayfield of NVIDIA, is “the easier of the two hurdles. The software hurdle is staggering.” Firms that have invested in ARM’s silicon-and-software combination will be reluctant to give Intel’s chips a chance until they are sure they can handle all kinds of software applications as smoothly as ARM’s. Intel will also struggle to match the extensive and deep relationships its rivals have in the phone arena. The complex reciprocal relationships that make up ARM’s ecosystem, says Mr Brown, the company’s president, are “probably our biggest barrier to entry”.

The fragmented mobile-device market also requires lots of different system-on-chip configurations, which Intel will find a challenge to match. And makers of tablets and smartphones may be reluctant to commit themselves to an architecture dominated by a single company that makes its own processors. “With ARM, when you are tired of Qualcomm you can go to NVIDIA or another company,” says Linley Gwennap, the boss of the Linley Group, a research firm. “But in Intel’s case, there’s nobody else on its team.”

Birth of a notion

While Intel is mustering its forces to attack the mobile-device business, it also faces an assault on its own redoubts. For years the firm has had an iron grip on the PC arena thanks to Microsoft’s decision to design successive versions of its Windows operating system specifically to run on the x86 architecture. But last year Microsoft said that the next version of Windows, which it wants to look and feel the same on mobile devices as on desktops, will work with ARM chips too—one of a number of cracks in the “Wintel alliance”. This could encourage more firms in the ARM federation to try their luck in the PC market, though Intel’s extensive product lines and deep relationships with PC makers make it very difficult to beat.

ARM itself spies a bigger opportunity in another of Intel’s dominions: servers. The server market is hitching a ride on the spread of smartphones, tablets and other devices. The more data is sent to and from the cloud by them, the more social sites they need endlessly to update, the more servers are required. And the data farms in which these servers sit have a prodigious thirst for electricity, a problem that ARM’s chips were created to solve.

In November HP announced a project ambitiously named Moonshot to develop servers using ARM-architecture chips made by Calxeda, a Texan company of which ARM owns 25%. The chips are less powerful than their Intel equivalents. But they are less thirsty and need less cooling, so whereas a standard rack (a man-high cabinet with about a cubic metre of volume) in a data centre can only house a few hundred Intel server chips, Calxeda thinks it can cram in almost 3,000. With 100 racks in a hall, “you’re talking megawatts” with normal servers, says David Chalmers of HP. Moonshot is designed to use a tenth of the power of current server systems and cost 60% less.

Moonshot and other low-energy servers could appeal to, say, social media companies and other web-based firms which do not need to carry out very complicated processing—which benefits from the architectures of more complex chips—or to do it very fast. But Reuben Miller of IDC thinks this segment is likely to be no more than 10-12% of the overall server market by 2015. And ARM’s share of even that smallish slice may be modest to begin with. Just as phonemakers are used to things working in an ARM-ish way, most server software is written for Intel’s chips, and reaps the benefits of its 64-bit architecture, which makes accessing lots of memory, among other things, much easier. ARM’s architecture uses a 32-bit standard, and though the company recently unveiled a 64-bit version, no chips making use of it are yet available. Until they are, says Warren East, the firm’s chief executive, “we can’t even address probably 75% of the server market.”

Meanwhile Intel isn’t standing still: its investment in more energy-efficient processors, such as those of the Atom line, can reap benefits in servers as it does elsewhere. HP’s Mr Chalmers, happy to work with both sides if it gets his clients the servers they need, expects to announce servers based on Atom chips and something similar from AMD this year.

Each side, then, seems to have defences against the incursions of the other. But that does not mean the war will end in stalemate. Intel is more vulnerable than it looks, for several reasons. One is that despite demand from emerging markets such as China, the PC market is unlikely to grow anywhere near as fast as it has done in the past. Intel’s aggressive promotion of ultrabooks seems like a somewhat desperate attempt to inject excitement into a category that has lost momentum.

What is more, the well-fortified world of Wintel provided the PC market with relatively juicy margins. In smartphones and tablets Intel will find itself in a much more brutal competitive environment in which the advantages of its integrated approach to design and manufacturing may well be outweighed by those of agile competitors used to servicing a wide range of companies with lots of different products.

The chips, like dust

Another big test for Intel will be the small but fast-growing market for embedded chips—the sensors and microcontrollers which will, as they become able to talk to each other, make up the “internet of things”. Renesas Electronics, a Japanese company, holds the largest fief in this fragmented terrain. ARM also has a worthwhile chunk of it. But it is a lawless and fragmented territory, largely served by in-house designs and software that both Intel and ARM see as ripe for replacement.

In 2009 Intel splashed out $884m on Wind River, a firm that specialises in software for things that you might not expect to need any, in order to give its efforts in the embedded-chip market a fillip. It has since been able to ink deals with car companies, makers of digital signage and other firms that put chips into their various wares. The company says that annual revenues from embedded-chip sales are now running at $1.5 billion, and it expects these to grow by 25% in each of the next three years.

Yet ARM’s flexible business model, allowing for lots of different chips for different applications, and its happiness in lower-margin businesses, may well give its federation an edge in this business too. Its long experience of producing low-energy chips should be another advantage. Tiny embedded processors “will not use huge amounts of processing power, but power consumption will become more and more critical,” says Ganesh Ramamoorthy of Gartner, a research and consulting firm. ARM already makes a quarter of its revenue from embedded chips. And for the newer embedded processors in what the company calls the Cortex-M family, nine-tenths of the licences so far sold have yet to lead to products, and thus royalties. Having your own fabs can be handy. But when it comes to invading virgin territory quickly, having lots of allies to help you is absolutely fabulous.

Source: http://www.economist.com/node/21542402

Don’t expect economic boost from cash-rich companies

Growth in the developed world will continue in 2012 to be hostage to the deleveraging process that is required to address the huge debts that piled up during the credit bubble. Yet the pattern is distributed unevenly across economies. In the US non-financial corporate sector, to take a striking case in point, the balance sheet recession has long been over. Profit margins are at record levels thanks to savage labour shedding and companies are awash with cash.

A similar accumulation of cash has occurred in Europe, though without comparable shrinkage in the workforce. Bin Jiang and Tim Koller of McKinsey estimate that European and US companies hold about $2tn of surplus cash, defined as the amount outstanding over and above operating cash, which is deemed to be two per cent of revenue. The question is how these cash balances will be deployed.

Ideally, companies should be investing, which would have the benign effect in current account deficit countries such as the UK and US of helping to rebalance the economy away from domestic consumption and public spending, and to jog them out of the habit of underinvesting relative to Germany, France and Japan. Yet this seems unlikely to happen. The effect of the recent credit bubble has been to bring forward many corporate spending decisions. This bunching of investment has been further exacerbated by the Obama administration’s investment tax breaks, now coming to an end. So it is a racing certainty that investment will fall sharply in the first half of the year in the US.

In Europe, meantime, the troubles of the eurozone banking system mean that a strong precautionary motive is at work. Many industrialists are hanging on to cash that earns very little interest because they fear that banks may be unable to finance their working capital requirements. The likelihood of recession in the eurozone likewise damps animal spirits.

Historically, profit margins have tended to revert to the mean, so excess cash may anyway dwindle. I suspect, too, that the English-speaking countries may be moving to a new, low-investment paradigm and not merely because, as in the case of the UK, they have a service sector bias. The practice of rewarding executives increasingly with equity is imposing a far greater focus on short-term measures of performance. Academic evidence in the US has, for example, shown that a high proportion of chief financial officers admits to a willingness to sacrifice economic value to meet short-term earnings targets. The current record profit margins and exceptionally high unemployment reflect that ruthless focus.

The capital market culture of these countries also has a strong emphasis on merger and acquisition activity which, from a managerial perspective, substitutes the thrill of the chase for the hard slog of managing operating businesses and investing in fixed capital. Business becomes transactional at the expense of relationships and performance is seen in narrowly financial terms. Far too many of the deals fail in economic terms, partly because stock options and rewards for failure give managers a huge incentive to bet the ranch.

That brings us to the most likely outlet for all that corporate cash. Much of it will go into share buy-backs, which are relatively painless for managers since, unlike dividends, they entail no continuing commitment to pay. Part of this activity will be arbitrage because corporate bond yields for many companies are now below the yields on equity.

This carries an interesting echo of the Japanese experience in the bubble of the 1980s. As the stock market soared, big corporations turned increasingly to financial engineering, using leverage to boost short-term earnings through speculation. That all ended in tears and a painful deleveraging process.

Charles Kindleberger, the economic historian, speculated that a shift in emphasis from production to consumption and a preoccupation with financial manipulation might be symptoms of national decline. That is hard to prove. Financial sophistication is arguably a natural accompaniment of advanced forms of capitalism.

Moreover, it is a mistake to consider investment as inherently virtuous. Japanese corporations have over-invested for decades and consequently shown poor returns on capital. Much the same is now happening in China, where investment is running at close to half gross domestic product. This is hugely wasteful and causes big distortions in global as well as domestic markets.

Yet it remains the case that the increasingly financial focus of anglophone business is not doing much for the ultimate shareholders, who are chiefly pension beneficiaries. The supposed alignment between the interests of managers and beneficiaries on the basis of stock options and other equity incentives is a fiction. Perhaps the poor equity returns of the past decade partly reflect that fact.

Source: http://www.ft.com/intl/cms/s/0/d7ff64c2-361f-11e1-9f98-00144feabdc0.html#axzz1iUVbDoKd