The Economy’s Weekly Recap

9/1/23 - 9/8/23

Raymond Lin

This Week’s Prominent Events

Apple Is In Jeopardy

• China is a core component of Apple’s business. China makes up about 20% of Apple’s revenue and it is where most of Apple’s iPhones are manufactured. Furthermore, it is also Apple’s fastest growing region, meaning China is both critical to Apple’s current business and future growth.

• This vital region has been put into jeopardy recently as it has emerged that the Chinese government is banning employees of the government and state owned companies from bringing iPhones into work. Due to this, Apple’s share price has dropped 6% and the company has lost over $200 billion in value.

• Although Apple’s total sales may not change too much, this open hostility from the Chinese government poses a serious concern for Apple. For a long time, Apple has been left alone and allowed to prosper in China, but it seems that China is now wishing to promote domestic brands. By banning iPhones in the government and state owned businesses, the Chinese government targets a large number of Apple’s customers and creates a stigma against Apple that could weaken sales.

• Apple’s plight is another example of the decoupling and economic conflict between the United States and China. More about the state of the economic war between them can be found in the Phi Fiscal’s “S&P Global drops ESG” newsletter from last month.

Airbnb Faces NYC Crackdowns

• NYC is starting to implement new regulations that target short term rentals like Airbnb and Vrbo. Rentals for less than 30 days are now only allowed if owners register with the city, are physically in the home when renting it, and only take 2 people at a time. This severely limits the type of rentals that Airbnb are dependent on, especially as less than 300 applicants of 3800 have been approved by the city. Violating the regulations will lead to fines of between $1,000 and $5,000 for hosts.

• Proponents say it will help the housing shortage by making possibly thousands or tens of thousands of rentals available and improving the lives of residents near these kinds of short term rentals by forcing disruptive and annoying tourists into hotels.

• Others say that it will only hurt hosts trying to make ends meet and that tourism could take a blow from these regulations.

• This regulation may only be the first to come as it could inspire or encourage other cities to follow New York’s lead. However, it seems that investors aren’t too concerned about it as Airbnb’s stock is up almost 9% in the last 5 days and 72% YTD due to Airbnb’s strong earnings and inclusion in the S&P 500.

The UAW strike

• The United Auto Workers, which represents around 150,000 workers at General Motors, Ford, and Stellantis, is prepared to strike soon if its demands are not met next week. If the automakers and the union fail to reach an agreement, the strike could last for weeks and cause billions of dollars of losses for the automakers. Beyond damage to the industry, the strike may lead to some losses for the local economies and higher vehicle prices for consumers.

• The UAW is demanding a four day work week, assurances that workers at manufacturing plants being closed still get paid, restoration of traditional pensions, union representation of battery plant workers, a 46% wage increase after 4 years, and a share of company profits.

• Although the automakers have been somewhat receptive to the demands of the UAW, they are far from matching the demands of the UAW. The automakers have offered wage increases of 14% to 16% over 4 years, including lump sum payments, and policy changes to increase the pay of new and temporary workers. However, they are still unresponsive to some other demands and are nowhere near the 40% desired by the union. We’ll have to wait and see if a compromise can be reached, or if an economically damaging strike will begin next week.

The Merger of Packaging Giants

• Two of the world’s largest packaging companies, America based WestRock and Ireland based Smurfit Kappa, are in advanced merger talks to create Smurfit WestRock, which would lead to an almost $20 billion dollar company with $34 billion in annual revenue.

• Smurfit Kappa has focused on how their global reach and combined operations will lead to strong cash flows and growth in the face of falling packaging demand post Covid.

• Precise financial details have yet to be announced, but they will be provided through an Irish scheme of arrangement, a part of the legal transactions. The merger agreement is not completed yet though, so the deal could still fall through.

• In 2018, International Paper ended their attempted $8.9 billion offer to Smurfit Kappa due to Smurfit Kappa not being committed and rejecting the approaches of International Paper.

The Return To Offices

• When the pandemic hit, working from home became a very common and viable path for many. It granted people greater freedom occupation wise and let people take care of their children. However, there has been severe pushback against working from home as many companies begin to enact return to office mandates. The rationale behind these returns often include the belief that employees are better engaged and more likely to collaborate in person.

• Some recent prominent examples of the return to offices include…

  • Amazon requiring corporate employees to come in 3 days a week.

  • Meta also forcing workers to come into offices 3 days a week or risk losing their jobs.

  • Ironically, Zoom requiring employees living within 50 miles of an office to come in at least twice a week.

• JP Morgan, Google, and Apple are examples of other companies with return to office mandates, although they enacted them in 2020, 2021, and 2022 respectively.

• Employees have pushed back against these mandates, such as half of Grindr’s staff leaving after remote work policies were ended, but they have largely been unsuccessful in the face of steadfast senior management.

Future Events

The Enormous Cost of Invasive Species

• One often hears about the danger that invasive species pose to ecosystems, but it is not too often that one ponders the larger economic impact its devastating ecological effect may have.

• Recently though, the Intergovernmental Platform on Biodiversity and Ecosystem Services, which is part of the UN, has reported that invasive species cost at least $423 billion annually. The costs have grown for decades, with it quadrupling every decade since 1970. The coordinating lead author Martin Nuñez added that the number is actually a gross understatement because of the effect on human health due to invasive species like mosquitos carrying malaria.

• The report also revealed a number of other serious invasive species related consequences. 60% of extinctions have been caused by invasive species. Aspects of ecosystems like rain pattern regulation, purification of drinking water, and maintenance of fisheries are put into jeopardy by invasive species replacing and eviscerating native ones.

• All of these devastating effects have largely been the result of human expansion and interconnectedness since invasive species often get spread by human endeavors like shipping and travel. Although these invasive species can sometimes be eradicated or made less severe, they are often extremely costly to combat or irreversible. It can be done, but the best way to fight invasive species is to prevent the spreading of it in the first place.

• Although it is not binding and has no real method of enforcement, almost 200 countries agreed to the COP15 framework. This framework has a number of key tenets related to combating extinction and the ecosystems of the world, one of which is the planned halving of the spread of invasive species by 2030. One can only hope governments take the issue seriously and combat this blemish on the global economy and ecosystem.

Chinese Counter Investment

• As the economic war between the US and China has gotten worse, both sides have begun to invest into critical national infrastructure and target each other’s.

• In recent years, the US has started focusing on domestic manufacturing of renewable energy infrastructure and semiconductors. The US has banned companies like Huawei and restricted China’s access to Nvidia’s products.

• In response, China has seemingly started to engage in a tit for tat strategy. It has launched a $40 billion state backed investment fund to raise money for its domestic semiconductor sector, seemingly to match the $53 billion US CHIPS act. It will help bolster and subsidize China’s burgeoning semiconductor industry as it catches up with its American and Taiwanese counterparts.

• Additionally, as mentioned earlier in this week’s newsletter, China has begun to target Apple. China’s restrictions are nowhere near a total ban, but it is a demonstration of hostility and a willingness to attack Apple. It will also help grow domestic smartphone companies and further decouple from the US.

Amazon’s Antitrust Suit

• Lina Khan, the youngest FTC chair ever, originally became prominent due to a Yale Law Journal article she wrote called “Amazon’s Antitrust Paradox”. In it, she argued that modern usage of antitrust laws has failed to combat how tech giants like Amazon dominate their industries.

• Now, it seems she might have a chance to seriously challenge those tech giants. After a “last rites” meeting with Amazon, a meeting where a company voices its case to the FTC before it votes on whether to file a lawsuit, failed last month because Amazon offered no concessions, the FTC is planning to file its antitrust lawsuit against Amazon later this month.

• The lawsuit will target a number of Amazon’s business practices and seems to suggest that Amazon needs to make “structural remedies”, which could entail breaking up the company.

• While this may be a seminal moment for Khan if it succeeds, several of the FTC’s recent antitrust lawsuits have failed recently. Some examples are Microsoft’s acquisition of Activision Blizzard and Intercontinental Exchange’s acquisition of Black Knight. The acquirers made some concessions, but they were token ones and the acquisitions went through largely untouched.

Weekly Question

What company exited Chapter 11 Bankruptcy this week?

• A: Bed Bath & Beyond

• B: Escada America

• C: Party City

• D: JCPenny

Answer: C. Party City. Most of their $1 billion debt has been canceled and Party City has closed a number of its locations. The CEO has said Party City has cut costs and optimized its store portfolio.