Financial Times UK 30Jan2020

14 ★ FINANCIAL TIMES Thursday 30 January 2020

COMPANIES

I

n early 2017 a Volkswagen executive boasted about the German carmaker’s strategy to “leapfrog” Tesla, the US electric vehicle maker. “Anything Tesla can do, we can surpass,” saidHerbert Diess, then head of the VW brand. Since this bold prediction, things have not exactly gone to plan for Mr Diess, VW or the German car industry. Econ- omists say the sector faces a “perfect storm” with deep ramifications for the eurozone economy, albeit one that could ultimately provide the seeds of a revival. In recent years VW has been caught up in a huge scandal over its installation of “defeat devices” in millions of diesel cars to cheat limits on harmful exhaust emissions. The scandal has cost VW, which owns the Audi and Por- sche brands, well above €30bn in fines, legal fees and cus- tomer compensation. Other carmakers, including BMW and Daimler, have also been fined, although they have denied wrongdoing. Meanwhile, prosecutors have brought charges against several top VW figures including Mr Diess, who became chief executive in 2018. Compounding the industry’s problems, global car sales and production have gone into reverse in recent years and US president Donald Trump continues to threaten puni- tive tariffs on imports of cars and auto parts from Europe. “It was a perfect storm for the auto industry last year, with Trump’s trade war, the diesel scandal and the emissions regulations,” said Dirk Schumacher, head of Euro- pean macro research at Natixis. Tesla, by contrast, keeps growing stronger. Last week its market capitalisation surged past $100bn, making it the second most valuable carmaker, above VW and behind Toyota. The Californian company even had the audacity to choose a site near Berlin for its first European “gigafac- tory” — a move labelled “a declaration of war” by the Frankfurter Allgemeine Zeitung newspaper. So far the big losers in this war seem to be the German carmakers. On top of spiralling legal expenses, they are facing the heavy cost of switching to electric vehicles and cutting existing models’ emissions to meet stringent EU rules. This matters both for Germany and the wider eurozone economy. High-perform- ance cars made by BMW, Porsche, Mercedes and A udi are as much a part of Ger- many’s national identity as having no speed limits on motorways. Carmaking dire c tly employs 830,000 people in Germany and supports a further 2m jobs in the wider economy, accounting for about 5 per cent of the country’s economic added value. Its problems have weighed on the German economy, which only narrowly avoided a recession last year. Economists expect this to have dragged overall eurozone growth to a six-year low of 1.2 per cent last year. The wider fear is that the carmakers’ troubles will seep into the domestic-focused services sector, which has so far been resilient. This concern was accentuated by this month’s worst-case prediction in a government-sanc- tioned report that 400,000 jobs could be lost in Germany in the next decade because of the shift to electric vehicles. However, not everyone is depressed about all this tur- moil. Kristalina Georgieva, IMF managing director, told last week’s World Economic Forum in Davos that she believed the vast sums needed to tackle the transition to a low-carbon economy “may be the silver bullet” that brings the “investment momentum” to kick-start growth. The EU’s targets for 2030 mean that between 7m and 10.5m battery-powered cars will have to be on Germany’s roads by the end of the decade — a huge jump given there were only 220,000 last August. Germany’s car industry finally seems to be waking up to the vast challenges of shifting away from the internal com- bustion engine. VW has promised to invest €60bn over five years to meet its target of selling 26m purely electric vehicles by 2029. Its first mass-market battery-powered hatchback, the ID.3, is due to go on sale this summer. The German government recently promised to spend €3.5bn on installing 1m charging points across the country while raising subsidies to encourage people to buy electric vehicles. More assistance from Berlin is expected soon. The sector has the financial firepower to tackle its problems — as shown by the more than €11bn of post-tax prof- its that VW made in the year to September. The good news for Europe’s economy is that all this investment could help lift it out of its recent doldrums.

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INSIDE BUSINESS

EUROPE

Martin

Arnold

German car sector’s

electric awakening to

jump start economy

Thewider fear is

that carmakers’ troubles will seep

into the services sector

A L I STA I R G R AY— N E W YO R K

McDonald’snew chief executive has
said the fast-food group will need to
take market share from competitors to
sustain growth as the industry battles
“prettymuted”customerfootfall.

Chris Kempczinski— who took charge
last November after his predecessor,
Steve Easterbrook, was fired for having
a relationship with a colleague — said
yesterday that McDonald’s had “broad-
based momentum” but could do more
to better serve customers.
Despite the pressures on the sector,
results yesterday underlined the
successes McDonald’s had under Mr
Easterbrook. Like-for-like sales jumped
5.9 per cent both in 2019 — the biggest
rise in at least a decade — and during the

three months to the end of December. Still, in the US, the company’s biggest market, the number of transactions at outlets open at least 13 months slipped 1.9 per cent over the past year. “We need to get to transaction growth, and that’s what everybody in the US is working toward right now,” Mr Kempc- zinski said. He said breakfast — the only time of day when industry footfall trends were improving — was a particular focus for McDonald’s. Competitors fromWendy’s toDunkin’have been rolling out new menu items. This week McDonald’s moved to strengthen its breakfast offering with the introduction of Chicken McGriddles and McChicken Biscuit. “Growth in this industry at this point is going to have to come through stealing

share — traffic in the industry is pretty muted,” Mr Kempczinski told analysts during his first results presentation since his promotion from president of McDonald’s USA. Despite the US footfall decline last year, Americans spent more on average per visit — in part because of the rollout of self-order kiosks. “People tend to have larger orders” when they use them, Mr Kempczinski said. Comparable sales in McDonald’s domestic market rose 5 per cent in 2019. In the group’s “international oper- ated” division comparable sales were up more, 6.1 per cent. Across the group, net income in the fourth quarter rose 11 per cent from a year ago to $1.57bn on reve- nues of $5.4bn. Shares were up 2.3 per cent by late morning in New York.

Food & beverage

McDonald’s targets rivals to drive sales growth

O L A F STO R B E C K— F R A N K F U RT

Deutsche Bank’s most senior executives will take home bonuses for 2019, abandoning a recent practice of waiv- ing them during unprofitable years for Germany’sbiggestlender.

Although the nine members of Deut- sche’s management board, which includeChristian Sewing, chief executive, have agreed to forgo about half of their variable pay for last year, they can still expect to receive about €13m in bonuses, according to people familiar with the matter. Deutsche will today report a net loss of about €5bn, analysts forecast, as it shoulders the cost of its most radical restructuring in decades. The overhaul, which kicked off last summer, includes

shedding 18,000 jobs, disposing of a fifth of its total assets by 2022 and suspend- ing its dividend for two years. One person familiar with the matter said that the executives on the nine- member board will accept deeper cuts than other Deutsche Bank employees, who will face a cut in their bonus pool of about 20 per cent. However, during three consecutive lossmaking years between 2015 and 2017, Deutsche’s management board did not receive any variable compensation. Last year, when the bank made a net profit of €267m, its top executives were awarded €25.8m in bonuses, people familiar with the matter said. Detlef Polaschek, Deutsche’s deputy chairman, yesterday pointed out that shareholders had approved its remu-

neration system by a large margin. As the lender met its cost-cutting target and other objectives for 2019, the management board would have been entitled to its full bonuses. “Despite this, all members of the management board have decided on their own initiative to waive their individual variable compensation,” said Mr Polaschek. Since early December, Deutsche’s shares have gained 20 per cent to a 12-month high. The decision by the board to waive half their bonuses was first reported by Handelsblatt. Deutsche declined to comment. Deutsche also extended the contracts ofJames von Moltke, chief financial officer, andStuart Lewis, chief risk officer, for a further three years, according to people familiar with the matter.

Banks

Deutsche bosses abandon no-bonus policy

O RT E N C A A L I A J, JA M E S F O N TA N E L L A-
K H A N A N D E R I C P L AT T— N E W YO R K

Leslie Wexner, the billionaire behind
Victoria’s Secret ownerLBrands, is in
talks to give up his role as chief execu-
tive while the retail company weighs a
potential sale of the lingerie brand, said
people briefed about the matter.
The board of L Brands has been con-
sidering options ranging from breaking
up its retail empire to selling just Victo-
ria’s Secret, in an effort to revive the for-
tunes of the troubled group which has
suffered from falling sales.
Potential acquirers have expressed

concerns about the company’s reputa- tion due to Mr Wexner’s close associa- tion with the late financier and sex offender Jeffrey Epstein, who committed suicide last year while awaiting trial on charges of sex trafficking underage girls. Two of the people briefed added that Mr Wexner’s departure would help improve the company’s image and ease the sale of assets. Mr Wexner, who for decades was Epstein’s only known client, has expressed regret over his business dealings with the late financier and accused him of misappropriating money in a letter to members of the Wexner Founda- tion where Epstein served as a trustee. L Brands declined to comment on Tuesday about potential management changes and strategic review, which were first reported by the Wall Street

Journal. Last year L Brands became the target of activist hedge fund Barington Capital which pushed for the chairman and chief executive roles, both held by Mr Wexner, to be split and for the company to consider selling Victoria’s Secret or a public offering of its Bath & Body Works unit. In a letter to Mr Wexner in March, Barington called the Victoria’s Secret brand “tone deaf” for failing to address “women’s evolving attitudes towards beauty, diversity and inclusion”. The New York-based hedge fund also called for a boardroom shake-up to increase diversity and bring in inde- pendent directors who did not have a close relationship with the billionaire. Should he step back, Mr Wexner would be handing over the reins at a dif- ficult time for the group. Shares in L

Brands fell as much as 40 per cent after the extent of his business dealings with Epstein came to light. Shares rose 12. per cent yesterday following reports that Mr Wexner might step aside. However, several analysts covering the retail sector have expressed their doubts over the likelihood of a sale. “The company appears open to a range of possibilities,” said Oliver Chen, an analyst with Cowen. “How- ever... deal financing and/or appetite for the Victoria’s Secret asset are potential constraints against an imminent deal taking place.” A retail-focused banker who was not directly involved in the strategic review process said that the most likely buyer of any L Brands assets would be a pri- vate equity group with experience in turning around struggling retail chains.

Retail

Victoria’s Secret tycoon reviews role

Wexner considers leaving

CEO job as board weighs

sale of lingerie brand

‘Financing and/or

appetite for Victoria’s

Secret are potential

constraints against an

imminent deal’

S I M E O N K E R R— D U BA I
N I C F I L D E S— LO N D O N

Saudi Telecom Companyhas signed an
initialagreementtoacquireVodafone’s
55 per cent stake in Vodafone Egypt for
$2.4bn in the latest step to unravel the
British telecoms company’s global
empire.

Vodafone has sold out of, or merged
with, rivals in a number of countries,
including India and New Zealand, in
recent years to focus on expanding its
European footprint.
The sale of Egypt, which follows the
disposal of its Qatari business in 2018,
means the group will be split between its
European operations and its sub-Saha-
ran African arm under the Vodacom
banner.
The prospective deal, which values
Vodafone Egypt at $4.4bn, comes as
Riyadh-listed STC seeks to grow region-
ally.
“The transaction, which is still subject
to detailed due diligence, confirms STC’s
eagerness to maintain a leadership posi-
tion not only in the KSA, but also in the
wider region,” saidNasser al-Nasser,
chief executive.
The state-controlled telecommunica-
tions group, which is 70 per cent owned
by the government’sPublic Investment
Fundand is listed on Riyadh’s Tadawul
exchange, has previously said it can play
a key role in reducing the kingdom’s
dependence on oil by driving digital rev-
enue growth.
The PIF, Crown Prince Mohammed
bin Salman’s main investment vehicle,
is expected to become more active in
local and global deals as it receives
almost $30bn from last month’s initial
public offering of oil companySaudi
Aramco. STC also operates in Kuwait,
Bahrain and Malaysia.
Gulf states, especially Saudi Arabia
and the United Arab Emirates, have
been seeking to boost investment flows
into Egypt to bolster their ally, President
Abdel Fattah al-Sisi.
Vodafone Egypt is the largest tele-
coms operator in Egypt by market
share, and the UK telecoms group was
the country’s largest foreign investor.
Egypt has been a growth engine for
Vodafone in the past but the local com-
pany also became a lightning rod for
criticism by activist groups during the
Arab Spring in 2011 after its network
was used to send text messages telling
Egyptians to “confront the traitors and
criminals” on behalf of the government.
See Lex

Telecoms

Vodafone

lines up Saudi

takeover of

Egypt unit

H A R RY D E M P S E Y

The world’s biggest mining companies are failing to meet the goals of the Paris climate accord and need to consider more aggressive action to reduce greenhousegasemissions.

In a report published yesterday, con- sultant McKinsey said the mining industry was taking insufficient action and putting underwhelming plans in place to tackle global warming, risking a backlash from investors and society. “Action on climate change is growing in the mining industry, as companies review commodity portfolios, set targets and engage stakeholders,” McKin- sey said. “Yet these actions are too modest to reach the 1.5 to 2 degrees Celsius scenario and may not be keeping up with society’s expectations.” The biggest mining groups said they were committed to aligning their business models with the Paris climate agreement.BHP,Anglo Americanand Rio Tintoall signed the Paris Pledge for Action, a commitment to implement the accord, whileGlencoresaid it would

adopt a strategy “consistent” with Paris. However, McKinsey said their specific targets suggested otherwise. Mining groups have only just begun to set targets that range between a zero and 30 per cent reduction in greenhouse gas emissions by 2030, falling well short of the level required under the Paris accord, the report said. To limit a rise in global temperatures to 2C, greenhouse gas emissions need to be reduced from 2010 levels by between 41 and 72 per cent by 2050 and more than 78 per cent to cap the rise at 1.5C, according to the UN Intergovernmental Panel on Climate Change. The report comes a week before the industry gathers for the annual Mining Indaba conference in South Africa, where climate change is likely to be the major topic of discussion. The range of targets set by mining companies has yet to include “scope 3” emissions — those released even after their products have been sold. BHP, the world’s largest mining group, andVale, the world’s biggest iron ore producer, have made public commitments to set

targets to reduce their customers’ carbon emissions but h ave yet to release firm figures. “Any serious effort to implement Paris Agreement goals would require a major contribution from the entire value chain,” the report said. “Mining companies’ published emission targets tend to be more modest than that, setting low targets, not setting targets beyond the early 2020s or focus- ingon emission intensity rather than absolute numbers.” The majority of the mining industry’s on-site emissions, which are as much as 5.1 gigatonnes of CO2 equivalent a year, come from methane released during coal mining, while power consumption is the second-biggest contributor. As other sectors reduce their carbon emissions and introduce low-carbon technologies such as wind turbines and electric vehicles, mining companies should diversify their portfolios to meet the demand for metals underpinning those technologies, despite being unable to replace revenue from coal and iron ore, the report added.

Basic resources

Heat on miners to set bolder emissions targets

A smelter plant at Anglo American’s Unki mine in Zimbabwe. The world’s largest mining groups have been urged to factor in their full value chains when setting goals to reduce global warming Philimon Bulawayo/Reuters

JANUARY 30 2020 Section:Companies Time: 29/1/2020 - 19: 29 User: jon.wright Page Name: CONEWS1, Part,Page,Edition: LON, 14 , 1