The Economist Asia Edition - April 14, 2018

The EconomistApril 14th 2018 Business 59

2 as defensive. Although it remains a busi-
ness icon in Japan, worth $15.2bn, it has
been losing its dominance in e-commerce,
which remains its core business. In 2011 Ra-
kuten gained a whopping77% of its profits
from itsonline-shopping business. Those
profits have fallen for the past two years. Its
fintech services, such as credit cards and in-
surance, now drive returns.
The firm is struggling to compete with
two American rivals, which along with Ra-
kuten dominate the e-commerce market in
Japan. Amazon is reckoned by the Japan
External Trade Organisation to be number
one in online sales, with 20.2% market
share compared with Rakuten’s 20.1%. Ya-
hoo Japan has a share of 8.9%. Amazon can
more easily absorb the costs of a price war
and the rising expense of logistics in Japan;
Yahoo Japan is ignoring profits as it aggres-
sively builds its market share.
Rakuten has also struggled to export its
online shopping-mall model—offering a
platform for stores to sell on—to foreign
markets, something that Hiroshi Mikitani,
Rakuten’s mould-breaking founder and
boss, said a few years ago was necessary
for the company to prosper. The firm found
it hard to compete with established rivals
in mature markets, and came up against
barriers such as inadequate logistics in de-
veloping markets in Asia.
To regain lost ground in Japan, Rakuten
has recently announced tie-ups with Wal-
mart, an American retailer with which it
will launch an online grocery site, and Bic
Camera, an electronics giant, which will
list its wares on the Rakuten Ichiba site. Mr
Mikitani has also talked of creating his
own logistics chain. Products sold on Ra-
kuten are dispatched by the merchants.
Amazon delivers its own products and
many of those from third parties.
Rakuten’s move into mobile telephony
fits into this picture. It has a large number
of members, but “they are shopping
around”. A mobile subscriber base tends
to be more loyal, as people are locked into
contracts for 24 months, says Mitsunobu
Tsuruo of Citi, a bank. Nonetheless Mr Tsu-
ruo reckons Rakuten may be underesti-
mating the 600bn yen ($5.6bn) it says it
will invest to build the mobile infrastruc-
ture. It will also be hard to attract new sub-
scribers; Japan already has a mobile-
phone penetration rate of well over 100%,
and in SoftBank, NTTDoCoMo and KDDI,
it faces well-established rivals.
Rakuten has set a fairly modest aim of
attracting 15m mobile subscribers out of a
total market of over 165m, but to obtain
even that number it will have to compete
on price. Mr Mikitani has pledged to bring
down the hefty costs of mobile subscrip-
tions (the reason the government offered a
fourth licence). Rakuten’s entry into the
market may be good news for customers,
then. But it is not necessarily going to pep
up the firm itself. 7

A

LMOST all Canada’s oil and gas is land-

locked, so getting it to market requires

pipelines—lots of them. But building them

requires skills more suited to circus artists

than engineers. They must walk the finan-

cial high wire, jump through ever-chang-

ing regulatory hoops and juggle conflicting

demands from environmental groups and

numerous governments. The list of failures

is long. It includes Northern Gateway,

meant to bring Alberta crude to a port in

northwestern British Columbia; Energy

East, which would have linked Alberta to

the Atlantic coast; Pacific Northwest, to

bring gas to the west coast; and the legend-

ary Mackenzie Valley gas pipeline, first pro-

posed in 1974 and dropped in 2017 by its

last, exhausted promoter.

Another flop is likely following the an-

nouncement this week by Kinder Morgan,

one of North America’s biggest pipeline

firms, that it would freeze spending on the

Trans Mountain Expansion, a C$7.4bn

($5.9bn) plan to triple the capacity of an ex-

isting pipeline carrying fuel from Alberta

to a port near Vancouver (see map). Steve

Kean, head of Kinder Morgan, complained

on April 8th that the newish government

in British Columbia (BC) continued to put

obstacles in the way of the project, even

though it had won approvals from the pre-

vious provincial government and the fed-

eral government. Unless the governments

in Vancouver and Ottawa sort out who has

jurisdiction, and provide clarity by May

31st, the company will abandon the plan.

The chaos could be far-reaching. The

failure of the Trans Mountain Expansion

could provoke a constitutional crisis. It

would exacerbate a tit-for-tat trade war be-

tween BCand neighbouring Alberta. It

threatens to undo a carefully constructed

national climate-change plan. And it may

alienate foreign investors who are already

pulling back from Canada.

The tussle over who has jurisdiction be-

tween the federal government and the

powerful provinces goes back to Canada’s

creation in 1867 and frequently ends up in

court. Justin Trudeau, the prime minister,

insists the pipeline is in the national inter-

est. The constitution gives parliament the

power to override provincial laws and reg-

ulations in certain instances. But govern-

ments use this power sparingly. In the

1960s, when Quebec refused to allow

neighbouring Newfoundland and Labra-

dor to send electricity through Quebec and

onwards to American customers, the feder-

al government simply stood by.

Alberta’s New Democratic government

badly needs a pipeline to carry the prov-

ince’s oil to the ocean to reduce its depen-

dence on America, which buys 99% of

Canada’s oil exports. Oil firms believe ac-

cess to new markets would increase the

price of Western Canadian Select, the

country’s heavy crude, which trades at a

discount to America’s lighter West Texas

Intermediate benchmark because of high-

er transport and refining costs.

ButBC’s minority New Democratic gov-

ernment is equally determined to placate

the Greens who prop it up by honouring a

pledge to block the pipeline. As a result of

the tiff, Alberta temporarily suspended the

import ofBCwines earlier this year and is

now threatening to restrict exports of pet-

rol to the province, which the existing

Trans Mountain pipeline carries in addi-

tion to light and heavy crude.

Alberta’s agreement to a national cli-

mate-change plan that includes a carbon

tax was conditional on getting at least one

pipeline built. The Trans Mountain Expan-

sion was its best hope. The future of the

partially built Keystone Pipeline System,

which links Alberta with America, is still

uncertain. Should the Trans Mountain Ex-

pansion fail, the national climate deal may

too. Canada is already struggling to meet

its targets. Losing Alberta could loosen con-

straints on greenhouse-gas emissions from

the oil sands, which make up almost10% of

the national total.

Perhaps the biggest source of concern is

the message to foreign investors. Last week

David McKay, head ofRBC, Canada’s larg-

est bank, fretted that investment was flow-

ing out of the energy and clean-technology

sectors “in real time” because Canada was

not competitive. Tax and regulatory

changes are making America more attrac-

tive in comparison, says Philip Cross, an

economist. Kinder Morgan wants Mr Tru-

deau to sort out the mess. The company is

looking for “some kind of pre-emptive ac-

tion” that stopsBCfrom frustrating and op-

posing the project, Mr Kean told analysts.

In short, he wantsa ringmaster. 7

Pipelines in Canada

Three-ringed

circus

Ottawa

A stalled attempt to unlock Albertan oil

CANADA

COLUMBIABRITISHALBERTA

Main oil-pipeline network

UNITED

STATES

MEXICO

Vancouver

Patoka

Cushing

Trans

Mountain

Keystone

Tar sands

Source: EIA 1,000 km