Commercial Awareness Update: January 2019!

[Abstruser]

Hello everyone,

After a brief holiday hiatus, we are happy to share that our weekly commercial updates are back again! We will be posting our take on the week's most topical stories every Wednesday, so do follow this thread for more commercial updates.

Commercial Awareness Update: 23/01/19

The topics covered in this week's update are:

1. The UK Automotive Industry (by @bugsy malone)
2. Netflix's Q4 2018 results (by @Abstruser)
3. Potential tightening of US privacy laws (by @kitk)
4. The UK Supermarket industry (by @Sara Moon)
5. Apple's share plunge (by @Angel)

1. The UK Automotive Industry (by @bugsy malone)

The story:

The automotive industry seems to be heading for a down turn as it faces multiple challenges including:

• A fall in Chinese sales. China has been a huge growth market for premium carmakers so their slowdown has affected companies like Jaguar Land Rover (JLR) who heavily invested in the Chinese market, establishing production facilities. JLR saw a significant loss of around 50% in its October and November sales.
  
• The shake-up of tech.Demand for alternatively fuelled vehicles such as hybrids and pure electrics has increased by 30.7% to take a market share of 6.9%. To keep up with this growing demand and prepare for the future, carmakers are being forced to make big investments in electric cars, autonomous vehicles and mobility services such as car-sharing and ride-hailing. Carmakers also have to stay competitive against American tech giants such as Google with potential sights on venturing into transportation.
• Emissions regulation. The uncertainty around taxes on diesel cars has been blamed for declining sales.
• Brexit uncertainty. This has also been blamed by carmakers as negatively impacting on consumer sales. Additionally, a change in border checks could negatively impact carmakers who rely on just in time deliveries of parts. And this week JLR called on the government to ensure the UK does not leave the EU without a deal to prevent companies from having to make costly contingency planes.

Impact on businesses and law firms:

Law firm restructuring departments are likely to see an increase in work as companies are forced to take drastic action to survive this challenging time. Law firms may need to help companies with down sizing or leaving loss-making countries completely. For example, JLR announced they would cut 4,500 jobs last week to simplify its management structure and attempt to save £2.5bn.

Alternatively, M&A departments are likely to see companies seeking to increase sharing costs by forming alliances or full mergers which could bring large scale cost savings. An example of this consolidation is the new alliance between Ford and Volkswagen. The Economist commented these pressures for consolidation are unlikely to waver any time soon and an equity research firm said 2019 will be the year of “endless M&A rumours” as demand wobbles and costs soar.


2. Netflix’s Q4 2018 results (by @Abstruser)

The story:

Last week, Netflix released its financial results for the last quarter. The company added 8.8 million new subscribers over the last quarter, exceeding its own forecasts of 7.6 million. It also added $4.19 billion in revenue, a marked increase from this time last year. However, despite the strong performance, Netflix’s stock price fell sharply, dropping as much as 3.8% after the announcement.

At first blush, this seems puzzling. However, three days before releasing its results, Netflix announced that it would be implementing its largest subscription rate hike since it launched 12 years ago. US subscribers, its largest customer base, will see subscriptions hiked by 18% this quarter. This price hike is expected to help Netflix ease its huge debt pile. Netflix currently has a debt burden of $10 billion, more than twice its current revenue. Most of Netflix’s debt is issued to fund its content creation (ie, producing Netflix Original TV shows and movies, like Bird Box and Bandersnatch). Last year, Netflix spent $8 billion on content creation, so it is likely to spend even more this year.

Impact on businesses and law firms:

Netflix’s recent stock performance adds to the FAANG’s recent woes, as investors start to re-evaluate the viability of high-growth tech stocks.

More broadly, Netflix’s continued push on content creation, rather than deleveraging and scaling back its spending, is indicative of a larger battle for dominance in the content streaming industry. Amazon and Hulu already compete with Netflix in this sphere, but the real Goliath will be Disney, who is in the process of launching its own streaming service. With Disney’s vast array of original movies (think: the staggering range of Marvel and Pixar movies), added to by its recent acquisition of Fox, the stage is set for a titanic Netflix v Disney showdown. Grab your popcorn.

For law firms, this shifting dynamic will generate a lot of work for commercial departments. For platforms like Netflix, and possibly Amazon, the onus will shift to creating new content, which means contracting actors and producers to make new movies and series. Disney is also pulling all of its content off other platforms like Netflix, so intellectual property lawyers may be involved in shortening licenses, or seeking to negotiate extensions of current licenses, depending on which side you’re on.


3. Potential Tightening of US Privacy Laws (by @kitk)

The story:

The US is facing multiple calls for a tightening of its privacy laws.

In December 2018, a bill co-authored by 15 Democrat Senators, the Data Care Act of 2018, was released. This obliges online service providers to "reasonably secure" information which identify individuals and vow not to use it in harmful ways, notify users in case of a data breach and hold third parties with access to the data to the same standard. In the same month, a non-profit organisation, the Center for Democracy and Technology, introduced a draft nation-wide privacy law for data processing by private companies.

Just last week, Florida Senator Marco Rubio introduced the American Data Dissemination Act. It requires the Federal Trade Commission (FTC) to develop recommendations for the formulation of privacy law and submit them to Congress for approval. If Congress fails to approve of the suggestions within two years, the FTC could approve and enforce their own rules.

Currently, the US has various federal laws that protect specific types of data like those related to consumer health and credit scoring. Last June, California passed the California Consumer Privacy Act, which will enter into force on 1 January 2020. Still, there is no overarching, national-level data privacy legislation unlike, say, the UK’s Data Protection Act.

Impact on businesses and law firms:

As there is a trend towards fragmentation of data protection rules which apply in different jurisdictions, law firms must constantly keep abreast of regulatory changes which are related to data protection. In practice, this fragmentation also means that law firms might err on the side of caution and advise their clients to adopt a single data protection standard which satisfies the most stringent data protection requirements of different pieces of legislation. This can lead to an overall “racheting upwards” of data protection standards.

With the possibility of more data protection legislation, businesses that operate in and/ or deal with customers in multiple countries must more carefully consider the necessity, costs and risks of their data collection and use.

 

[Abstruser]

4. How the UK supermarkets are surviving in the gloomy retail sector (by @Sara Moon)

The story:

According to the British Retail Consortium, the British retail sector had the worst Christmas since 2008, with most of the companies suffering a decline in sales over Christmas. Overall, UK retail sales fell by 0.7% from December 2017. This Christmas nightmare was a result of several factors, including the increase in rents, business rate and wage rise, and uncertainties over Brexit.

However, the grocery retailers emerged victorious in the Christmas season. Tesco, the UK’s largest supermarket, had its best Christmas since 2009. Aldi, the German-based supermarket, earned £1bn in December. Morrisons experienced a rise in sales by 0.6% for the nine weeks to 6th January. Asda reported 0.7% rise in its sales. Amid the celebration of the UK’s largest supermarkets, Sainsbury’s was the only supermarket, among the “Big Four Supermarkets” of the UK (Asda, Tesco, Sainsbury’s and Morrisons) to suffer loss in sales. Sainsbury’s same-store sales fell by 1.1% in the 15 weeks to 5 January. Same-store sales measures growth in sales and revenue of a company’s existing stores over time. Sainsbury’s defeat was, however, primarily due to the aftereffects of the Black Friday rather than problems over the Christmas season. Despite the current trend in the grocery market being fierce undercutting, Sainsbury’s decided to reduce the discount rate during the Black Friday, leading to sales suffering dramatically.

With overall grocery retailers showing surprising strength, I thought now would be an interesting time to analyse how UK supermarkets are surviving in the gloomy market conditions of the retail sector. The general trend is slashing prices. This trend could be said to have been initiated by the German supermarkets, Lidl and Aldi. Both are well-known discounting stores and have shown huge success in the UK with their undercutting strategy. To stay competitive against them, UK supermarkets have been following their active price-cutting. Asda has reduced the price of everyday household goods, Morrisons announced it is cutting the price of 935 products by an average of 20%, Sainsbury’s has cut the price of 190 items, and Tesco reduced prices by more than 50% on its own-brand items.

In addition to undercutting, M&A has also been adopted as a powerful strategy in attracting customers. Tesco, for example, acquired Booker, the UK’s largest wholesaler, last year. One of the reasons why Tesco won over Christmas was a rise in sales at Booker by 6.7%. Sainsbury has also decided to merge with Asda and the Competition and Markets Authority (CMA) is currently investigating whether the deal will give less choices to consumers, raise prices, or worsen quality of services.

Impact on businesses and law firms:

With continuing uncertainties over Brexit and business rates set to rise again, 2019 will be a challenging year for UK supermarkets. This may mean that in order to maintain their growth in sales, they have to find alternative ways to continuously cut their price. With supermarkets already providing hugely discounted prices, undercutting doesn’t seem to be a sustainable strategy. Continuous mergers and acquisitions could take over the current undercutting trend or an increase in reliance of digital innovation could emerge as a new common strategy. Sainsbury’s has been operating the “Scan & Go solution” in some of its stores, allowing customers to scan products as they go with a handheld scanner or mobile phones, and check-out without having to go to tills. It is also testing personalised offers on the Isle of Wight. Therefore, it would be interesting to keep our eyes on where the supermarkets’ strategies head, and lawyers will be playing a crucial role in ensuring that companies do not breach competition laws when carrying out mergers and acquisitions or data protection laws when adopting digital services using personal data.


5. Apple’s share plunge: What happened and what it means (by @Angel)

The story:

At the end of 2018, Apple cut its revenue estimate because of unexpectedly slow sales of iPhones. The day after the news was announced, Apple’s share price plunged by a further 10%. Unsurprisingly, such news sent the market into a convulsion.

Impact on businesses and law firms:

Market actors and professional service providers, including lawyers, will be quick to analyse the reasons behind the fall of this blue-chip company and whether this is signalling a different direction for the conglomerate. Some reasons are as follows.

First, the economic slowdown in China. Tim Cook himself expressly attributed slower sales to this reason because China does account for approximately 18% of Apple’s sales. Indeed, repercussions of the US-China trade war in affecting buying habits is a topic that analysts have been considering for a while.

Second, that such a cycle is simply a common trend within the technology industry. In an interview by The Economist, an analyst from New Street Research says that such market trend happens to almost all revolutionary technology, including cars, televisions, and computers. The cycle kicks off with the first generation of the product being mediocre and not be too great. Engineers will then be quick to learn their mistakes and make steep improvements, bringing high value into the second generation of these products. These improvements will then be so optimal that any subsequent improvements become mere refinements that no longer hold the same excitement as before. This is what is happening now. After a decade-long bloom, smartphones that once revolutionised the world have become ubiquitous.

Third, Apple’s business strategy and targeted market. Brand loyalty is definitely Apple’s competitive advantage. The most loyal Apple fans will associate the brand as trustworthy and transparent. However, Apple’s steep product prices were bound to limit the conglomerate’s reach. With ruthless competitors raising the game in recent years, consumers are more informed and faced with comparable, or perhaps better, choices and value for money than ever. While Apple is busy raising its prices to squeeze customers to make up for lower volumes, non-Apple products are doing the exact opposite.

Some thoughts on Apple's share price:

With that said, the crucial question is how long this slump will last and where this industry will be steered into in 2019. Market optimists will argue that a new wave of innovation can rejuvenate demand. For example, there are rumours that Samsung is planning to launch a foldable phone later this year- a device that can function as both a smartphone and tablet. It is also no surprise that 2019 will see the release of smartphones that are compatible with the latest ultra-fast ‘5G’ network.

However, quoting The Economist, such innovation seems more ‘evolutionary rather than revolutionary’. These are merely form factor changes. In fact, many may have already become complacent with the current design of their gadgets. The incentive to pay extra money to try something so out of the norm is simply not there. The same goes to the network upgrade. It is definitely an improvement to the industry as a whole. However, similar to the possible reasons for the market slowdown, for the majority of consumers, it is safe to say that the current technology is satisfactory for everyday life.

What do you think? Do you think the market is too saturated and businesses should start looking elsewhere in 2019?


That's all for this week! Let us know in the comments what you thought about this update, and have a great week ahead

 

[Angel]

Hi everyone,

We hope you've been well. We're back with this week's update. Happy reading!
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Commercial Awareness Update: 30/01/19

The topics covered in this week's update are:

1. Santander closing its branches (by @Sara Moon)
2. Patisserie Valerie store closures and fraud allegations (by @bugsy malone)
3. Facebook's plan to integrate Messenger, WhatsApp and Instagram (by @Abstruser)
4. China joining e-commerce talks last-minute (by @kitk)
5. China's slow growth (by @Angel)

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1. Santander closing its branches (@Sara Moon)

The story:
Last week, Santander announced that it will be closing down 140 branches across the UK. This Spanish-owned bank said that this is due to the change in consumer behaviour in the British banking industry, as more and more customers are banking online through websites and mobile apps. Over the past three years, Santander saw a 23% reduction in branch transactions while digital transactions have doubled.

Other banks have also made similar decisions to close branches and place focus on online banking services. To date, Royal Bank of Scotland have closed 476 branches since last year and Lloyds have shut 131. According to The Guardian, between 2007 to January 2019, half of all high-street bank branches are now closed.

Impact on businesses and law firms
In relation to the impact on businesses, there is an apparent disruption in the banking industry caused by the digital revolution. This means that high-street banks now have to focus on competitive and cost-effective online services to retain customers ranging from individuals to multinational firms. Banks are already heavily investing in FinTech, and many are collaborating with FinTech start-ups to achieve long-term competitiveness.

Lloyds is currently seeking to move its 500,000 customer accounts to a new banking system built by Thought Machine. Lloyds says this move will cut costs and allow it to offer more personalised products. Barclays currently offers Pingit, a mobile money transfer service, and BARX NetFX, an automated risk management solution for organisations carrying out large volumes of multi-currency transactions. HSBC is trying to implement distributed ledger technology (DLT) to help clients with cross-border payments better manage their currency flows and has completed the world’s first trade-finance transaction using blockchain last year.

As for the impact on law firms, just like any other technological innovations, banks’ increasing reliance on FinTech entails data security problems. Banks are using big data to analyse customer needs and to offer personalised products. The use and storage of a mass amount of personal information requires strong data security measures as well as ensuring compliance with GDPR, such as by obtaining necessary consent from customers on the use of personal data.

Development of FinTech driven services has also led to FinTech patents race. Banks are yet behind tech firms in obtaining intellectual property rights for FinTech products. This means that they may be paying huge sums of money in the future in royalties and licensing fees for using FinTech services. This is highly problematic considering the rising importance of providing FinTech services to survive in the industry. Barclays seems to be in the lead in the patent race, with currently more than 160 FinTech patents to its name. Banks would have to focus on obtaining patents on FinTech services to avoid unnecessary costs in the future. This would involve FinTech lawyers advising on securing intellectual property rights.
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2. Patisserie Valerie store closures and fraud allegations (@bugsy malone)

The story:
Patisserie Valerie has fallen into administration just three months after an alleged fraud was uncovered. 70 of its 200 outlets are closing and prospective buyers are being sought to acquire the remaining stores. Approximately 900 people are being made redundant with a further 2,100 jobs at risk. Luke Johnson (with 37% shareholding) has seemingly advanced another £3 million to keep one third of the stores trading and to fund January wages. This is quite an exceptional case as Patisserie Valerie was seemingly making good profits prior to this. For example, in October 2018 it was trading with approximately a £100 million turnover.

Employees will be keeping a close eye on whether a buyer can be found for the rest of the outlets. On the face of it, Patisserie Valerie is a good brand with a good high-street presence and was making good profits for a long period of time. Thus, there is a high chance that the remaining stores will stay opened as long as they are what the administrators consider as ‘profitable stores’. With that being said, prospective purchasers will likely be wary of the current fraud allegations, figures and ‘black-hole’ in the chain’s accounts that is estimated to be around £40-50 million. Indeed, this may dampen the price that they are prepared to pay for the chain. An in-depth investigation is clearly needed. There is also a criminal aspect to the allegations. Thus, the police and serious fraud office are likely to be involved to investigate how the irregularities emerged and whether it was fraudulent.

Impact on businesses and law firms:
Administrators will be focused on trying to preserve as much of the business as they can for the benefit of creditors. Financial backers, such as banks with unsecured loans, are likely to take a hit. These fraud investigations may lead to further enquiry on the management and structure of the chain’s corporate governance. Patisserie Valerie will require legal assistance on its potential criminal liabilities and redundancies made. It will be interesting to see the outcome of these fraud investigations and whether this will have knock-on effects for other companies to seek legal advice on their current management.
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3. Facebook’s plan to integrate Messenger, WhatsApp and Instagram (@Abstruser)

The story:
Facebook has announced that it is planning to merge Facebook Messenger, WhatsApp and Instagram into one integrated system, so that it will be possible to send messages across platforms without switching apps. Facebook plans to implement end-to-end encryption across these three apps, which means that only participants of a conversation will be able to view sent messages. Currently, only WhatsApp features end-to-end encryption. Facebook acquired WhatsApp and Instagram in 2014 and 2012 respectively, but the original founders of both companies left last year.

Mark Zuckerberg’s plan to integrate and encrypt these platforms comes during a tumultuous time for Facebook. The company has come under recent fire over data protection concerns. For example, last year, it came to light that political consultancy Cambridge Analytica had accessed the personal data of up to 87 million Facebook users without their consent. The data was allegedly used to influence political events such as the Brexit vote and the Trump campaign. Therefore, this move may very well be an attempt by the company to clean up its data protection record. However, given Facebook’s recent history, many users have voiced concerns about how much data will be shared between platforms. In 2016, the UK’s Information Commissioner investigated data sharing between Facebook and WhatsApp, in an effort to increase transparency about how their personal data was being used and shared for advertising or other purposes.

Impact on businesses and law firms:
Facebook’s plan to integrate these services comes at a time of stiff competition from other tech companies like Apple and Google, who compete with Facebook through their own messaging services like iMessage. According to one former Facebook executive, merging these three platforms will help to boost flagging user growth in developed regions like Europe and America.

However, the merging of Facebook Messenger, WhatsApp and Instagram may pose problems for competition law enforcement. Integrating the three services ties up the company more compactly, making it harder for regulators to break up the company into smaller components. In addition, while end-to-end encryption may assuage demands for greater data privacy, some criminal law enforcers have voiced concerns that encrypted conversations may make it difficult to track criminal activity. Balancing these competing imperatives will be a difficult feat, and all eyes will undoubtedly remain on Facebook as it navigates these concerns.

 

[Angel]

4. China joining e-commerce talks last-minute (@kitk)

The story:
In a last-minute move last week, China joined a group which has launched World Trade Organization (WTO) talks with an objective to negotiate trade rules for the global e-commerce market. The group is led by Singapore, Australia and Japan. It comprises of 76 WTO members, accounting for 90 per cent of global trade. Other key members of this group include the EU and the US.

These talks intend to result in rules that would achieve, amongst other things, a reduction in cross-border hurdles to e-commerce, guaranteeing validity of e-contracts and e-signatures, banning duties on electronic transmissions and addressing forced data localisation requirements. These negotiations are to formally begin in March.

Currently, there are no specific multilateral rules in the WTO regulating this e-commerce trade. A variety of rules agreed by countries in their bilateral or regional trade agreements are used in e-commerce.

Impact on businesses and law firms:
Due to their wide geographical and industrial scope, these prospective rules will likely seek to standardise and simplify the legal requirements that current apply to a great portion of cross-border trade. Presumably, multinational businesses that specialise in carrying out online retail transactions, like Amazon, will be most affected by these rules.

It is important for law firms to monitor the developments of these talks. The rules that these talks can generate can potentially affect many areas of law like tax law, data protection law and international trade law.
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5. China's weakest growth in 2018 (@Angel)

The Story:
China’s growth in 2018 was its slowest in nearly three decades since 1990. This gave Donald Trump, the opportunity to pressurise the Chinese government to make a ‘Real Deal’ on trade with America. However, it is important to understand the reasons behind the decline before concluding what the slowing economy of the behemoth is signifying.

Impact on businesses and law firms:
Such headlines are undeniably correct but arguably, misleading. A closer look at the data would show why the Chinese leaders are less panicked than how Trump had portrayed to the world. The following are some possible reasons why it is not as bad as it seems.

i. The sheer size of China’s economy ​

• Prior to 2018, China had been on a growth spurt. This led to a rapid expansion of its economy.
• Thus, owing to the sheer size of its economy from the previous years, China is simply growing from a much larger base. When compared to its previous glorious years, China’s growth in 2018 is shadowed.

ii. China is making modest progress to clean up its financial systems​

• With creeping, but increasing, debt-to-GDP levels for the past few years, the Chinese government had taken actions and implemented policies with an aim to deleverage.
• Critics may argue that the Chinese government did not make any real progress based on empirical figures but, as pointed out by The Economist, the Chinese government’s real goal is actually stabilisation and not right-out deleveraging.
• If so, then, there are positive progress because since 2015, the pace of China’s debt accumulation had slowed sharply.

iii. The nature of China’s growth is changing ​

• China’s focus on exports is undoubtedly affected by the trade war where American tariffs had led to a drop in China’s foreign sales.
• However, with a growing domestic demand, this point must be considered against the fact that export orders matter less to China than they used to.
• Have a look at the chart from The Economist and you will see that consumption (domestic demand) had more than plugged the shortfall by net exports.

Final thoughts:
While it is important to look beyond headlines to understand what is really going on, it does not mean that speculators or the market players are necessarily optimistic about China’s growth in 2019 either. With increasing redundancy rates and incomes growing more slowly, consumption growth does look less promising in 2019 than in 2018.

Taken together with the falling sales of mobile phones and cars (for the first time in two decades), what do you think is the outlook for China’s growth in 2019? Do you think that Trump is genuinely believing that the Chinese economy is at a decline and if so, is he overestimating the strength of America’s hand? More importantly, how will investors perceive this? Perhaps, what is certain is that law firms with clients doing businesses in these countries would be concerned about how these regulations and economic prospects will affect their businesses and lawyers will need to be armed with answers!
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That’s all for this week’s commercial news update. We hope you found it useful. Let us know what you think or if there are any topics that you would like us to cover. Have a great week ahead!