Thursday 26/07/18

  1. In TRADE WAR NEWS TODAY, Trump and the EU make moves to resolve differences as Ford, GM and Fiat Chrysler rein in expectations due to tariff impact

  2. In TECH NEWS, Qualcomm abandons its takeover of NXP, LG Display pulls back on smartphone investment and Facebook hits a bump in the road.

  3. In UK CONSUMER/RETAILER NEWS, household disposable income gets a boost, Joules defies high street gloom but retailers consider more job cuts.

  4.  In INDIVIDUAL COMPANY NEWS , Mattel announces job cuts and Fiat’s former boss dies.
  5.  In OTHER NEWS, I bring you an explanation of why the London Underground is so hot. For more details, read on…



So Trump and the EU try to make nice while Ford and GM join others in condemning tariffs…

US, Europeans agree to iron out trade differences (Wall Street Journal, Valentina Pop, Vivian Salama and Bob Davis) shows that Donald Trump and European Commission President Jean-Claude Juncker are at least making attempts to play nice in the trade war malarkey that’s going on at the moment. The two leaders have said that they are going to embark on discussions about eliminating the tariffs and subsidies that are disrupting trade at the moment, with the steel and aluminium tariffs getting a specific mention as well as other European retaliatory tariffs. * SO WHAT? * This all sounds great – and is at least a step in the right direction – but Juncker has got to get the approval of 28 countries to anything he manages to hammer out. As for Trump, a deal with the Europeans could help him to concentrate his economic firepower on China – and who knows, he might even be



able to persuade Europe to join in. We’ll just have to see how this progresses – trying to double-guess what Trump will do in negotiations is a very inexact science!

Trump has been facing pressure from fellow politicians and lawmakers to ease off the heat on tariffs, but he is also facing pressure from corporate America as well, as per Ford joins GM and Fiat Chrysler in trade war warning (Financial Times, Peter Campbell and Patti Waldmeir) where the three automakers cut profits forecasts in a clear sign that the global trade war is starting to damage the world’s largest car makers. GM and Ford’s shares fell by around 4%, but Fiat suffered even more with shares falling by 15.5% on a combination of the company stating that Chinese import tariffs were choking off demand and announcing that its chairman, Sergio Marchionne, had died. * SO WHAT? * GM had actually been on track for another record year for profits until Trump’s steel and aluminium tariffs drove up input costs, even though most of the steel and aluminium it uses is produced domestically. Fiat Chrysler had to cut vehicle prices in China to stimulate demand. If this trade war drags on for too long, there are going to be some serious repercussions for all involved as I get the impression that what we are seeing now is just a tiny glimpse of what could happen in the near future.



In tech news, Qualcomm abandons NXP, LG Display gets the wobbles and Facebook hits a bump…

Trade war fears are spreading into other sectors as well as per Qualcomm plans to abandon NXP deal amid US-China tensions (Wall Street Journal, Eliot Brown and Bob Davis) where Qualcomm, a US leader in the development of 5G tech, is planning on walking away from its proposed $44bn purchase of Dutch chip manufacturer NXP because it has failed to get approval in China. China was the last of nine markets that needed to approve the deal which would have been amongst the biggest tech deals ever. Instead, it plans on embarking on a big share buy-back programme and will have to pay NXP a $2bn termination fee. The deal had been expected to close by the end of last year, but China dragged its feet. * SO WHAT? * This is just smart negotiation by the Chinese as they are using all options to put pressure on Trump. They don’t need to rely on tariffs to punish the US – there are so many other ways to do it.

In South Korea’s LG Display slashes investment plans by $2.7bn (Financial Times, Song Jung-a) we see that LG Display, which supplies Apple, has cut its investment plans to the tune of $2.7bn due to an uncertain outlook for the smartphone market. The company is the world’s second biggest display maker and painted a very sombre picture of what it expects for the second half of this year, citing structural oversupply (especially from Chinese LCD makers) and stiff industry competition. CFO Don Kim said that “LG Display will invest ₩3tn ($2.7bn) less than


originally planned by 2020 by adjusting the timing and amount of investment, while continuing to speed up the shift toward an OLED-focused business. It is a conservative approach resulting from uncertainty around the mobile market”. * SO WHAT? * Premium smartphone sales have been slowing down for some time now and LG Display is just the latest company to build this into their forecasts. Another Apple supplier, Taiwan Semiconductor Manufacturing, cut its capex outlook last week. I suspect that there will be more downgrades to come up and down the supply chain.

Facebook shares plunge as security drive dents profits (The Guardian, Olivia Solon) highlights a massive 20% fall in Facebook’s share price in after-hours trading following the company’s CFO saying that revenue would “continue to decelerate in the second half of 2018” as it continued to ramp up investment in security and privacy. Facebook’s quarterly revenues and user growth fell just short of consensus estimates although it still made $13.2bn – a whopping 42% increase on last year. User growth was +11% although it was flat in the US and Europe and the company emphasised that future growth would come from its messaging apps and Instagram (especially Instagram TV) rather than its core Facebook platform. * SO WHAT? * 20% is a big drop, but it sounds like Facebook is making all the right noises. OK, so things are taking a bit of a breather in its core US and European markets in terms of user growth, but given the impact of various scandals and the introduction new legislation such as General Data Protection Regulation (GDPR) – not to mention all the “false news” stuff – it is hardly surprising. The company has clearly used this lull to highlight its other services such as Instagram TV, Facebook Messenger and WhatsApp – which should have the potential to be decent revenue earners going forward given the size of their respective user bases. Investing now in security is a good thing and will no doubt help Facebook’s image down the road – at the same time as raising barriers to entry for newcomers.



In UK consumer and retailer-related news, household disposable income has gone up, Joules bucks the gloom but then retailers talk about more job cuts…

Household disposable cash rises £2,000 since recession (Daily Telegraph, Anna Isaac) cites figures from the Office for National Statistics which show that British households have £2,000 more cash to spend this year than they did before the 2009 recession (yay!). It also showed that the average household has an extra £300 to spend in 2018 versus the same period in 2017. Having said that, disposable household income growth has slowed down, which would suggest that higher inflation and poor wage growth is continuing to put pressure on living standards. * SO WHAT? * Whilst it is kind of useless to know that we are now £2,000 better off than we were nigh on ten years ago, I guess that the slowdown in disposable household income that we are seeing right now is something that the Bank of England will be taking into account when it makes its decision to raise interest rates or keep them unchanged in the meeting scheduled for next month. Not great news for either consumers or retailers.

Talking about retailers, Joules defies high street gloom with handbags (Daily Telegraph, Ben Woods) heralds a

bright spot in an otherwise relatively gloomy area as sales of its handbags and purses helped it to beat analyst expectations in its results yesterday with pre-tax profits for the year to May 27th rising 29% as it built on its core clothing offering to diversify into homeware and lifestyle products. The company opened 17 stores over the last year and international sales shot up by 40% thanks to US department store Dillard’s rolling out Joules womenswear to 100 outlets this year. * SO WHAT? * It always seems to me that Joules is targeting that slightly-more affluent shopper with middle-of-the-road tastes which is probably a good thing right now. Certainly the Dillard tie-up is proving to be a good way to boost international sales with minimum hassle. It’s always good to see a bright spot on the UK high street anyway!

Unfortunately, A fifth of retailers consider job cuts as World Cup boost fades (The Guardian, Sarah Butler) shows that we are going back to full-on grump mode with a survey conducted by the British Retail Consortium showing that almost 20% of retailers are targeting job cuts in the next three months. This is particularly sobering when you consider that the number of people employed in the retail sector – the UK’s biggest employer – has fallen almost 3% in the last three months alone, with redundancies at triple the level they were this time last year. As Alpesh Paleja, chief economist of the CBI put it, “While the heatwave has boosted retail sales…we may be seeing some early signs of a cooling-off. Indeed, the long-term challenges facing the retail sector are significant. Continually subdued real wage growth means that households are still feeling the pinch, and retailers are still grappling with deeper structural issues, such as digital disruption”.



In individual company news, Mattel identifies more job cuts and Fiat Chrysler’s Marchionne dies…

Mattel to cut more than 2,200 jobs as toy maker battles losses (Wall Street Journal, Patrick Thomas) is just more evidence of the bloodbath going on in the world of toymakers (I referred to this last week with the attempted revamp of Hornby) as Mattel said it would cut over 2,200 jobs – equating to almost 25% of its current workforce – as the maker of Barbie dolls and Hot Wheels cars reacts to falling sales and deepening losses. The majority of the cuts will come from back office and support functions and are estimated to cost the company about $75m in severance

 but then save about $150m a year thereafter. * SO WHAT? * This is a serious move as the whole toy industry – makers and retailers – continues to fight against the ongoing popularity of “non-traditional” toys and changing customer behaviour re buying habits. Mattel is not on its own when it says that it has been adversely affected by Toys R Us’ downfall – Hasbro reported weaker profits and a 7% fall in quarterly revenue in an announcement on Monday.

I thought I’d take a moment to highlight Marchionne, the tough boss who revived Fiat’s fortunes, dies at 66 (The Guardian, Gwyn Topham) as Sergio Marchionne was the man who saved not only Fiat, but also Chrysler to complete two MASSIVE corporate turnarounds. When he took over at Fiat in 2004, revenues were close to €47bn. They are now over €140bn. Given that we live in times where actors who’ve done some movies or acted in soaps make the news headlines when they die (or even Demi Lovato with her overdose) I think it’s worth highlighting the far worthier contribution this man has made to the world over the years and the thousands of lives his decisions have affected.



… And finally, in other news…

I couldn’t find ANYTHING that made me laugh today in the “other press” so I thought I’d leave you with this instead: Why is the Central Line and other London Underground lines so hot? (Metro, Daniel Mackrell This probably won’t be any consolation to you if you’re reading this on the Underground at the moment – but at least you’ll be better informed!

As always, thank you for reading Watson’s Daily!