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Activist investors go after a German industrial icon

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FEW industrial scenes offer the drama of a steelworks in full flow. Perched high in a cabin, a technician guides a bucket the size of a house to send 250 tons of lava-like molten metal into a vast crucible. As a roar echoes across a gargantuan hall, a pile of scrap slides into the mixture. Plumes of illuminated smoke rise. Sparks like giant fireflies tumble down. ThyssenKrupp’s steelmaking plant in Duisburg makes 30,000 tons of the metal daily.

The firm itself is going through an industrial drama, after years of ailing. Its boss, Heinrich Hiesinger, was seen as its saviour after arriving from Siemens late in 2010. But swiftness is not his forte: a colleague says he talks of “diligence before speed”. He did rid the firm of loss-making steel plants, such as assets in the Americas that cost €8bn ($9.3bn) in write-downs. Yet he has not reformed a top-heavy company.

Several bits of the group—a hotch-potch that includes submarine-, ship- and lift-building, auto supplies and a unit for constructing entire factories—underperform their peers. Notwithstanding some bright areas, such as lifts (see chart), overall operating margins are just 3.5%, after years of failed promises by managers to match the market average for European peers of 7%. All divisions are guided by a powerful head office in Essen that is said to guzzle an extraordinary 30% of total profits. ThyssenKrupp’s share price badly lags behind Germany’s largest listed firms. Meanwhile, Siemens, Bayer and others have broken off subsidiary units and simplified structures. This “is the last man standing” says an observer, asking what makers of lifts and submarines have in common.

Two big changes loom, as activist investors demand reform. One is the end of steel, which provides two-fifths of revenues. The firm has agreed with Tata, an Indian maker, to bundle their European steel assets into a joint venture. The idea is to reduce steelmaking capacity and for ThyssenKrupp to pass on pension liabilities. Yet the Tata deal, announced in September, has dragged. ThyssenKrupp partly blames months of delays on Brexit (Tata faces uncertainty over its operations in Port Talbot, in Wales) and on a new boss at Tata. A signing ceremony is due this month.

The second, bigger question is how to revive the firm’s industrial activities. Mr Hiesinger says he has bright ideas for change, but will not spill them until the deal with Tata is signed. He talks up the activities of high-end engineering units, notably the lift business. Yet analysts say even the better-performing units suffer under a heavy superstructure. As a stand-alone firm, liftmaking, which is far more profitable than the firm’s other divisions, could be worth more than the entire conglomerate’s market capitalisation of €14.5bn, argues one observer. Managers still trot out 20th-century-style defences of conglomerates. They say units can share bright ideas and technology, citing a nifty idea for a horizontal motorised lift that came from the railways team. Yet more autonomous units, or outright independent firms, would be most open to innovation.

Cevian, an activist shareholder of long standing which owns 18% of ThyssenKrupp, is demanding “fundamental reorganisation” of industrial activities, scrapping Mr Hiesinger’s centralised structure. Cevian is relatively friendly to managers; a sharper spur to action is Elliott, the world’s largest activist hedge fund, which has just bought a stake. Both may have some quiet support from unions and from the Krupp family foundation, in Essen, which has the dominant stake. ThyssenKrupp’s shares leapt after news of Elliott’s arrival: the hope is for big changes this summer.

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Japan still has great influence on global financial markets

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IT IS the summer of 1979 and Harry “Rabbit” Angstrom, the everyman-hero of John Updike’s series of novels, is running a car showroom in Brewer, Pennsylvania. There is a pervasive mood of decline. Local textile mills have closed. Gas prices are soaring. No one wants the traded-in, Detroit-made cars clogging the lot. Yet Rabbit is serene. His is a Toyota franchise. So his cars have the best mileage and lowest servicing costs. When you buy one, he tells his customers, you are turning your dollars into yen.

“Rabbit is Rich” evokes the time when America was first unnerved by the rise of a rival economic power. Japan had taken leadership from America in a succession of industries, including textiles, consumer electronics and steel. It was threatening to topple the car industry, too. Today Japan’s economic position is much reduced. It has lost its place as the world’s second-largest economy (and primary target of American trade hawks) to China. Yet in one regard, its sway still holds.

This week the board of the Bank of Japan (BoJ) voted to leave its monetary policy broadly unchanged. But leading up to its policy meeting, rumours that it might make a substantial change caused a few jitters in global bond markets. The anxiety was justified. A sudden change of tack by the BoJ would be felt far beyond Japan’s shores.

One reason is that Japan’s influence on global asset markets has kept growing as decades of the country’s surplus savings have piled up. Japan’s net foreign assets—what its residents own abroad minus what they owe to foreigners—have risen to around $3trn, or 60% of the country’s annual GDP (see top chart).

But it is also a consequence of very loose monetary policy. The BoJ has deployed an arsenal of special measures to battle Japan’s persistently low inflation. Its benchmark interest rate is negative (-0.1%). It is committed to purchasing ¥80trn ($715bn) of government bonds each year with the aim of keeping Japan’s ten-year bond yield around zero. And it is buying baskets of Japan’s leading stocks to the tune of ¥6trn a year.

Tokyo storm warning

These measures, once unorthodox but now familiar, have pushed Japan’s banks, insurance firms and ordinary savers into buying foreign stocks and bonds that offer better returns than they can get at home. Indeed, Japanese investors have loaded up on short-term foreign debt to enable them to buy even more. Holdings of foreign assets in Japan rose from 111% of GDP in 2010 to 185% in 2017 (see bottom chart). The impact of capital outflows is evident in currency markets. The yen is cheap. On The Economist’s Big Mac index, a gauge based on burger prices, it is the most undervalued of any major currency.

Investors from Japan have also kept a lid on bond yields in the rich world. They own almost a tenth of the sovereign bonds issued by France, for instance, and more than 15% of those issued by Australia and Sweden, according to analysts at J.P. Morgan. Japanese insurance companies own lots of corporate bonds in America, although this year the rising cost of hedging dollars has caused a switch into European corporate bonds. The value of Japan’s holdings of foreign equities has tripled since 2012. They now make up almost a fifth of its overseas assets.

What happens in Japan thus matters a great deal to an array of global asset prices. A meaningful shift in monetary policy would probably have a dramatic effect. It is not natural for Japan to be the cheapest place to buy a Big Mac, a latté or an iPad, says Kit Juckes of Société Générale. The yen would surge. A retreat from special measures by the BoJ would be a signal that the era of quantitative easing was truly ending. Broader market turbulence would be likely. Yet a corollary is that as long as the BoJ maintains its current policies—and it seems minded to do so for a while—it will continue to be a prop to global asset prices.

Rabbit’s sales patter seemed to have a similar foundation. Anyone sceptical of his mileage figures would be referred to the April issue of Consumer Reports. Yet one part of his spiel proved suspect. The dollar, which he thought was decaying in 1979, was actually about to revive. This recovery owed a lot to a big increase in interest rates by the Federal Reserve. It was also, in part, made in Japan. In 1980 Japan liberalised its capital account. Its investors began selling yen to buy dollars. The shopping spree for foreign assets that started then has yet to cease.

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