58 Business The EconomistNovember 30th 2019
2 Nobody expects Tiffany watches to be sold
in Louis Vuitton stores, for example.
But analysts think brands can do better
within a conglomerate. Take Tiffany. Its
shareholders had pestered management to
improve margins and raise sales fast, un-
duly hurrying its turnaround efforts. lvmh
says it will give Tiffany time and money, for
example to renovate stores and push up-
market. It did something similar with Bul-
gari, an Italian jeweller. Mr Arnault this
week said profits there had risen five-fold
since lvmhtook it over in 2011. The group
does not disclose how each brand is doing
(its annual report contains more pictures
of jewel-laden models than financial mi-
nutiae), easing the pressure on creative
types to meet quarterly targets.
Scale has more mundane advantages,
too. Conglomerates have more clout when
negotiating, for example, with landlords of
new malls in China. They can browbeat
magazines for better advertising rates. Hef-
ty costs associated with building e-com-
merce sites can be shared.
Such advantages suggest more consoli-
dation. But there are limits for lvmhand
others. One is supply. The timeless brands
that conglomerates crave by definition
need a long history, and these are relatively
few. Those that remain independent, such
as Chanel or Rolex, preserve that status
fiercely. Mr Arnault has got round this by
subtly expanding the scope of luxury, for
example by branching out into hotels.
Another limit, which is particular to
lvmh, is whether any group can handle so
many different businesses. In other indus-
tries, conglomerates are regarded as un-
wieldy and have fallen out of fashion. Ker-
ing slimmed down by spinning off Puma, a
sportswear brand, last year. So far the mood
is for building empires, not dismantling
them. Some wonder if Richemont and Ker-
ing might merge to boost their prospects.
lvmh is not without challenges. The
luxury sector’s future is uncertain. Growth
in China will not last for ever, especially if
trade tensions continue. Even Dom Périg-
non drinkers feel the impact of recessions.Marketinghashadtoevolvetoattractmil-
lennials who care aboutInstagram and
sustainability.Moreshoppingishappen-
ingonline,wheremastodonslikeAmazon
andAlibabalurk.
Perhaps half the firm’s profits come
froma singlebrand,LouisVuitton.MrAr-
naulthasmadeitclearthatlvmhisa fam-
ilyfirmandthatoneofhischildren(fourof
whomworkinthebusiness)willtakeover.
At70,heremainsfirmlyincharge.Butas
timepasses,thequestionofwhetherhis
heirshaveinheritedhistalentforflogging
objectsofdesirewillcomeintofocus.
Andcanluxurycontinuetoselltoever
morepeopleyetretainitscachet?Sofarit
has.ButtheindustryMrArnaulthelped
createisyoung,despitethetimelessquali-
tyit seekstoexude.It hasthrivedbyspend-
ingextravagantlytogetpeopletobuybeau-
tifulforeignthingstheydonotneed.Itis
the archetypal business model of the
times.Butwhatif timeschange?^7Expensive tastesSource:Bloomberg *YeartoJanuary 2019LVMH,revenuebysegment,€bn010203040502000 02 04 06 08 10 12 14 16 18Fashion& leather
Retail
Perfume& cosmetics
Wine& spirits
Watches& jewellery
Tiffany*“G
enuinely frightened”by Huawei.
That was the verdict of Wilbur Ross,
America’s commerce secretary, delivered
recently to an audience of diplomats. The
Chinese tech giant is the world’s biggest
supplier of mobile-network equipment.
American officials worry that it could use
that position for electronic spying or sabo-
tage on behalf of Beijing.
With that in mind, in May Mr Ross’s de-
partment placed Huawei on the “entity
list”, restricting the ability of American
firms to do business with it. Many analysts
expected the results to be painful. Huawei
spends more than $10bn a year on buying
software, processors and the like from
American firms. So far, though, the pain
has failed to materialise. Sales of Huawei’s
smartphones, which can no longer ship
with Google’s popular apps, have flatlined
outside China. But on the whole, the firm
seems in robust health. On October 16th it
announced revenues of 611bn yuan ($89bn)
for the first nine months of 2019, up by 24%
year-on-year. It said it had signed over 60
contracts to install zippy 5gphone net-
works around the world.
Two things explain that resilience. The
first is that enforcement has been less
fierce than feared. On the same day that Mr
Ross was describing his fears, his depart-
ment issued its first set of licences permit-
ting some American companies to restartsales to Huawei. Among the licensees was
Microsoft, whose Windows operating sys-
tem is used in Huawei’s laptops.
The second is that the law has proven
more porous than expected. When Huawei
was first placed on the entity list, it led to
corporate panic. Lawyers at American tech
firms dived into obscure branches of ex-
port law that their firms had never before
had to consider. A leaked internal memo
from Arm, a chip-design company based in
Britain but with a big presence in America,
created the perception that its licensing of
crucial chip designs to Huawei had com-
pletely ceased. Yet after the dust had set-
tled, many of the tech firms concluded that
the international nature of their supply
chains would allow them to carry on serv-
ing Huawei even without a special licence
of the sort awarded to Microsoft.
Nvidia, a chipmaking company based
in Santa Clara, California, offers an exam-
ple. The firm designs graphics processing
units (gpus). These chips specialise in the
sorts of mathematics required to draw
whizzy graphics for modern video-games.
A stroke of serendipity means they are also
well-suited to artificial-intelligence work.
But Nvidia does not physically make any-
thing in America. Instead it sends its de-
signs, which are not themselves subject to
the export controls, to the Taiwan Semi-
conductor Manufacturing Company,
which undertakes the expensive, high-tech
process of manufacturing the silicon. Un-
der the law, that leaves Nvidia free to sell
the resulting chips to Huawei.
Many other American companies share
this offshore-manufacturing structure. It
exists because Western technology firms
have largely outsourced manufacturing
and assembly to countries such as Taiwan,
which have built up large, specialised in-
dustries around the task. Only the highest-
margin design work is still undertaken at
home. For Huawei, this counts as a happy
accident. For American security hawks, it
is infuriating.
The status quo may not last. The Depart-
ment of Commerce is drawing up two lists
of technologies, one “foundational” and
one “emerging”, whose export will be sub-
ject to much more severe restrictions than
those imposed by the entity list. Depend-
ing on how strictly the lists are drawn, the
new rules could do serious damage.
In the meantime, though, the main ef-
fect of the sanctions seems to have been to
accelerate Huawei’s push towards techno-
logical independence from America. Anal-
ysis of its phones by ubs, a bank, shows
they now contain fewer American-sourced
components (some appear to contain none
at all). The firm has said that similar efforts
are being made across the company. Hua-
wei is still not immune to determined
American action. But it is less vulnerable
than it was. 7SHANGHAI
America’s technology blacklist has
proven porousHuawei