The Econmist - USA (2021-11-06)

58 Business TheEconomistNovember6th 2021

lotofangstonthepartofinvestorsthat

higherinputcostswoulderodemargins,”

says Patrick Palfrey of Credit Suisse, a

bank.“Infact,whatwehaveseenisanoth­

erspectacularquarteronbehalfofcorpo­

rationssofarinspiteofinputcostpres­

sures.”Accordingto SavitaSubramanian

and Ohsung Kwon of Bank of America

mentionsof“price”or“pricing”inAmeri­

canearnings calls—aproxymeasure for

pricingpower—increasedby 79%inthe

thirdquarterfroma yearearlier.Inthesec­

ondquarter,suchmentionswere upby

52%yearonyear.

Ifcostsspiraloutofcontrol,thepower

toraisepriceswillbecomeevermoreim­

portant. On November 2nd JPMorgan

Chase’s global purchasing­managers in­

dex,a measureofmanufacturingactivity,

showedthatinputpricesinthesectorin­

creasedinOctoberatthehighestratein

morethan 13 years.Butthepricesofmanu­

facturedgoodsandservicesalsoroseatthe

fastestpacesincerecordsbeganin2009.A

gapbetweeninputandoutputpriceinfla­

tionistypicallyinterpretedasa signthat

firmsarestrugglingtoraisepricesandthat

margins are being squeezed. That isn’t

happeningyet.

Identifyingfirmswithpricingpoweris

crucialforinvestors.Analyststendtolook

forthreethings.Thefirstisabigmark­

up—thedifferencebetweenthepriceofa

goodanditsmarginal cost—whichonly

firms with market power can get away

with.Bigandsteadyprofitmarginsarean­

othersignofpricingpower.“Ifyouarea

firmthatisdominantinyourmarket,you

aremuch moreresilient to shocks,”ex­

plainsJanEeckhout,aneconomistandthe

authorof“TheProfitParadox”,a bookpub­

lishedearlierthisyear.

Sizeisanotherfactor. Allelseequal,

bigger companies with greater market

sharehavemorepricingpowerthansmall­

erones.ArecentsurveyofAmericancfos

conductedbyDukeUniversityandtheFed­

eralReserveBanksofRichmondandAtlan­

tafoundthat85%oflargefirmsreported

passingoncost increases to customers,

comparedwith72%ofsmallfirms.

A“pricing­powerscore”forcompanies

inthes&p 1500 compiledbyubsisbased

onfourindicators:mark­up,marketshare,

andthevolatilityandskewofprofitmar­

gins.Thebankfoundthatfirmsproviding

consumerstaples,communicationservic­

esandithavethemostpricingpowerand

thatenergy,financialandmaterialscom­

panieshavetheleast(seechart1 onprevi­

ouspage).Whenubscomparedthefinan­

cialperformanceofcompanieswithstrong

andweakpricingpower,theyfoundthat

the former have delivered more profit

growth since 2010 andgenerated better

stockreturns,particularlyduringperiods

ofhighinflation(seechart2).

Firmsthatscorewellonthisindexhave

laggedinthepastyear,notesubs. Thismay

beexplainedbycyclicalfactors.Whenpro­

fitmarginsareexpanding,theargument

goes,firmswithpricingpowertendtogen­

eraterelativelylowreturns;whenmargins

areshrinking,theyproducehighreturns.

Atthemoment,profitsarestillhealthy.

Fornow, demand isrobustandcon­

sumersseemrelativelyinsensitivetoprice

changes. But companies are planning

morepriceincreases.AsurveybyAmeri­

ca’s National Federationof Independent

Business, atrade group, found thatthe

margin of small­business owners plan­

ning to raise prices in the next three

monthsoverthoseplanningtolowerthem

grewto46%,thebiggestgapsinceOctober

1979. Thisisaconcernforsomecentral
      bankerssuchasJamesBullard,president
      oftheFederalReserveBankofStLouis.In
      Octoberhenotedthatforyearscompanies
      haveworriedthatif theyraisedprices,they
      wouldlose marketshare. “That may be
      breakingdown,”hesays.n

Price discovery

Market returns of strong pricing power

S&P 1500 companies relative to weak ones

Jan 2010-Apr 2021, %

Source:UBS

2

*Six-month annualised

12

9

6

3

0

-3

US, inflation rate*, %

<0 0-1 1-2 2-3 >3

Over 12 months

Over months

Over 3 months

0.090.02

0.0

AmericanbasketballandChina

The audacity of hoops

E

neskanter’s campaignagainstChi­

na’s  Communist  Party  has  been  unre­

lenting.  The  basketball  star  has  recently

walked  into  professional  games  sporting

custom shoes that read “Free Tibet”, a slo­

gan that has long raised hackles in Beijing.

He  has  invited  the  co­founder  of  Nike,  a

sportswear  firm,  to  visit  “slave  labour

camps” in China’s north­west (Nike says it

does not source products from the region).

On November 2nd Mr Kanter, who plays for

the  Boston  Celtics,  posted  a  message  for

China’s  president  on  Twitter:  “Ruthless

Dictator  XI  JINPING...hear  me  loud  and

clear: Hong Kong will be FREE!”. 

The slam­dunk on China, America’s Na­

tional  Basketball  Association  (nba)  and

clothing  brands  such  as  Nike  has  the  po­

tential  to  do  extraordinary  damage.  Ten­

cent, the Chinese internet giant contracted

to stream nbagames, has already blocked

the  Celtics.  The  league  relies  heavily  on

Chinese  sponsors  and  has  already  had  a

taste of what cancellation means. The air­

ing of nbagames was halted for more than

a  year  in  China  starting  in  October  2019

after  the  general  manager  of  the  Houston

Rockets  voiced  support  for  anti­govern­

ment protesters in Hong Kong. The embar­

go  was  painful.  Nearly  all  Chinese  cor­

porate  partners  cancelled  or  suspended

their  arrangements  at  the  time.  The

league’s commissioner estimated as much

as $400m in lost revenue. It has projected

income of $10bn for the current season.

MrKanterhas  also  brought  more  un­

wanted  attention  to  clothing  brands

caught in a controversy over sourcing cot­

ton  from  China’s  Xinjiang  region,  home­

land  of  the  Uyghurs  and  where  human­

rights  groups  say  forced  labour  is  com­

mon.  Multinationals  are  being  forced  to

take a side on free­speech issues, says Ba­

diucao, the Chinese artist who designed Mr

Kanter’s  evocative  shoes  (he  goes  by  a

pseudonym). Some are doing just that. Ya­

hoo,  an  American  internet  giant,  said  on

November  2nd  that  it  would  pull  out  of

China,  citing  challenging  business  condi­

tions.  Weeks  earlier  LinkedIn,  a  profes­

sional­networking  group,  announced  it

would  shut  down  its  main  China  opera­

tions  after  it  was  forced  to  comply  with

increasingly tough censorship rules.

The nbais wildly popular in China. Ma­

ny  fans  disavowed  the  league  in  2019  but

were eager to resume watching it last year.

Communist  Party  authorities  must  bal­

ance the popularity of the sport with their

instinct to punish critics, says David Bach

of  the  Institute  for  Management  Develop­

ment,  a  Swiss  business  school.  Instead  of

stirring up sentiment against the nba and

announcing an all­out ban on broadcasts,

as  in  2019,  so  far  only  Celtics  games  have

been  blocked.  The  nba has  neither  criti­

cised Mr Kanter nor affirmed his rights to

such  speech.  The  stand­off  amountstoa

form  of  bargaining  between  thenbaand

the Communist Party, says Mr Bach.n

H ONG KONG

Player protests put a lucrative foreign market at risk