The Economist - USA (2022-03-12)

52 Business TheEconomistMarch12th 2022

only thing that determinesinvestmentde­

cisions. And politiciansaresendingmixed

signals. Mr Biden has highlightedtheneed

to secure critical minerals,whiledoinglit­

tle  to  help  companies obtain them.Mr

Gelsinger,  a  special  guestofMrBiden’sat

the  state­of­the­unionaddress,lookedon

awkwardly  as  the  president said Intel

would quintuple a plannedinvestmentin

Ohio,  to  $100bn,  if  onlyCongresswould

authorise more subsidies.

Many  European  politicians likewise

pair industrial ambitionwitha propensity

to  argue  about  it.  In  Februarytheeuun­

veiled  a  plan  to  subsidisesemiconductor

manufacturing, but maynotcomeupwith

the €43bn ($47bn)to doso,sincemuchof

the money would havetocomefrommem­

ber  states  and  the  privatesector.Theyare

also  making  life  harder for American

firms—though not yethardenoughforthe

companies  to  up  sticks.To complywith

French rules for cloud­computingprovid­

ers,  for  example,  lastyearGooglesaidit

would  form  a  joint  venturewithalocal

company.  This  year  Googleagreedtopay

French publishers for publishingsnippets

of  news.  Amazon  andWalmartaresofar

sticking it out in India’se­commercemar­

ket,  despite  continuedlawsuits,shifting

regulations and no profits.

China shows just howdelicatethisbal­

ancing act can get. Somecompaniesman­

age it skilfully. Take Honeywell,anAmeri­

can  conglomerate  witha sprawlingbusi­

ness in China. It continuestoproduceand

sell avionics to Chinesecustomers,points

out Mr Black, even thoughaviationisa sec­

tor  in  which  China  planstopromotedo­

mestic  champions  andbecomeself­reli­

ant.  Specialising  in  complextechnology

that  serves  China’s  broader goals helps:

Honeywell  provides  navigation systems

for the comac c919, a narrow­bodyjetliner

that China hopes will competeagainstthe

Airbus a320 and the Boeing737.

Businesses  less  adroitatthehigh­wire

become  contortionistsinstead.InRussia

most American tech firmshavebeatenon­

ly a partial retreat. To abidebyChinesecyb­

er­security  laws,  Applestoresandshares

iPhone  users’  data  with a state­backed

company. Since 2018 Americanfirmshave

all  but  stopped  challenging patent in­

fringement in Chinesecourts,accordingto

cases tracked by Rouse,a consultancyspe­

cialising  in  intellectualproperty.Thatis

not  because  infringement has stopped,

reckons  Doug  Clark of Rouse. Rather,

heightened tension mayhavemadeAmer­

ican  firms  wary  of  retaliation.InChina,

says Jue Wang of Bain,anotherconsultan­

cy, firms are mapping outwaystorespond

to geopolitical risks orintensifiedsupport

for state champions. Asthe1990sdreamof

a single integrated globalmarketshatters,

firms  in  America,  and everywhere else,

face a brutal adjustment.n

Theairline-industrialcomplex

Flightrisk

A

s vladimirputin’stroopscontinued

tolaywastetoUkraineonMarch5th,

Russia’s president surrounded himself

with bouquet­wielding young women

training as cabincrew for Aeroflot, the

state­controlled airline. Aviationis vital

forconnectingthevastcountry.Theunea­

sygrinsonthefacesoftheladiestowhom

heexplainedthatWesternsanctionswere

anactofwarhintedthattheyunderstood

theimplicationsfortheirlong­termcareer

prospects.ThesamedaythatMrPutinmet

itstrainees,Aeroflotsuspendedallitsin­

ternationalflights.Bythenthecarrierhad

fewplacestofly.Britainwasthefirsttoban

Russianplanesinreactiontotheinvasion

ofUkraine.Theyarenowalsobarredfrom

skiesaboveAmerica,Canada,theeuand

several other places. Western carriers,

meanwhile,arenolongerwelcomeinRus­

siaairspace.

Anti-aircraftwarfare

Thedirectimpactonnon­Russianairlines

is“nobigdeal”,saysKeithMcMullanof

AviationStrategy,a consultancy.Flightsto

MrPutin’srealmarea sliverofbusinessfor

theworld’slargeairlinegroups.Theclo­

sure of Russianairspace isan inconve­

nienceforEuropeanonesservingnorth­

eastAsia,whichwillhavetodivertflights

tomoresoutherlyroutes,addinguptotwo

hourstoflyingtimetoBeijing.Butwith

Chinastillinlockdownsuchflightsarenot

asnumerousasbefore.Itistheknock­on

effectsofRussia’sinvasionthatinvestors

in the global airline­industrial complex

worry about.Ratherthancontinuetheir

reboundascovidcloudsclear,airlines,air­

portoperators,travelwebsites,planemak­

ers, othersuppliers and aircraftlessors

havelostnearly$120bnincombinedmar­

ketvaluesofarthisyear(seechart).

The most immediate problem is the

surgeinoilprices(seeFinance&econom­

icssection).Thecostofcrude,alreadynear

a 14­yearhigh,surgedagainonMarch8th

afterAmericaannounceda banonimports

fromRussia,theworld’sthird­biggestpro­

ducer.iata, anindustrybody,forecastin

October that airlines’ fuel bill in 2022

wouldhit$132bn, accountingfor nearly

20%ofoperatingexpenses,witha barrelof

Brentat$67.Itnowcostsnearlytwiceas

much.Airlineshareshavelostaround15%

oftheirvalueinthepasttwoweeks.Those

carriersthatdonothedgefuelcostswere

hithardest;somehavealreadyaddedsur­

chargesontickets.

OtherWesternmeasureswillalsotakea

toll.AmericaandtheeuhavetargetedRus­

sianaviationbybanningthesaleorpur­

chaseofplanesandparts,financingand

technicalassistance.Britainjoinedinon

March9th.Russiaisnota hugemarketfor

theworld’splanemakingduopolyofAir­

busandBoeing.Only 62 jetsoutofthetheir

combinedorderbookof12,000aredes­

tinedforthecountry.Butevena relatively

smallknockisunwelcomeastheindustry

triestoliftitselfupaftertwoyearsofco­

vid­19upheaval.

Moreover, theplanemakers may,like

otherWesternbusinesses,feeltheneedto

distancethemselvesfromRussiainother

ways.Boeinghasalreadyendeda contract

toacquireRussiantitaniumforitsplanes;

findingalternativesuppliesmaybea pro­

blemgiventhatRussiaisthemetal’sthird­

biggestproducer.Russia’sbigroleinother

commoditiesmarkets,fromnickeltopal­

ladium,mayalsoripplethroughaerospace

supplychains.

AnothercollateralvictimofRussia’sag­

gression,andtheWest’sresponsetoit,is

theaircraft­leasingindustry.Aroundhalf

ofRussia’sfleetisownedbynon­Russian

lessors.Those 500 orsoplanesarevalued

atsome$10bn,accordingtoiba, a consul­

tancy.TocomplywithWesternsanctions,

suchleasesmustbeterminatedbyMarch

28th.Afterthat,intheory,Russianairlines

mustreturnthejetstotheirowners.Re­

possessionis,however,madeconsiderably

harderbytheclosureofRussianairspace

andthedifficultyofgettingtherepomen

into Russia.The factthatnoplanesare

leavingthecountryhintsata possibilityof

expropriation.

Aswithplanemakers,thelessors’busi­

nesswithRussiaisnothuge.AerCap,the

world’sbiggestsuchfirmwiththehighest

exposuretoRussia,leases5%ofitsfleetby

valuetoRussiancarriers.AndalthoughMr

Putinmayforcestate­runAeroflottodeny

Westernlessorstheirplanes,privatecarri­

ers maypreferto handtheirsback, lest

theybefrozenoutofaircraftfinancingfor

SanctionswillhurtWesternaviation

firms.TheywilldevastateAeroflot

Bear in mind

Worldwide commercial aviation

Selected sectors, market capitalisation, $trn

Sources:Bloomberg;TheEconomist *March th

1.5

1.2

0.9

0.6

0.3

0

22*20191817162015

Aircraft

lessors

Travel websites

Airport

infrastructure

Airlines

Aircraft

suppliers

Planemakers