Sweden's Northern Powerhouse plus other victims of global revolutions
Thoughts on why isn't British business backing rejoin, the battle to save Northvolt, is OpenAI really worth $157 billion, will climate change swing the US election, and the WFH productivity miracle
1. Better Off In
I spent a few days last week in Latvia, part of which was spent at a conference where the focus was on some of the huge economic challenges facing the eurozone. The concern among policymakers at the continent’s economic stagnation was palpable. I wrote it here. I was also delighted last week to join Nick Cohen, one of the most incisive British political commentators, for a discussion for his Lowdown podcast on some of the challenges facing the British economy. You can listen to it here.
One of Nick’s questions, reasonably enough was whether my gloominess about the European Union economy vindicated Brexiteers who argued we that Britain is better off out. My answer is quite the opposite. Brexit has not provided any respite from the continent’s economic difficulties, but it has made Britain’s considerably worse while denying the government any influence over wider European solutions. That was of course why Sir Keir Starmer was in Brussels last week urgently seeking a “reset”.
Indeed, the urgency of that reset will be all the greater if, as I suspect, and wrote about last week, Brussels pushes ahead with implementing many of the recommendations in the 400-page report from Mario Draghi on how to improve the EU’s competitiveness. The risk is that as the EU pushes ahead with deeper single market integration, it will create new obstacles for UK businesses in areas such as defence and financial services.
But how much of a reset is possible given Starmer’s red lines of no return to the single currency, customs union or free market remains to be seen. That prompted another good question from Nick: given the obvious economic damage caused by Brexit, when will business start to lobby for rejoining?
Personally, I think this is unlikely. Most businesses affected by Brexit have already incurred substantial costs adjusting to the new regime, including by reconfiguring supply chains, relocating operations or even simply abandoning trade with the continent. Indeed, some may even be benefitting from reduced competition in the domestic market.
What’s more, the world is very different today to the 1960s and 1970s when business was an enthusiastic advocate of membership of the European Economic Communities. Then, the commanding heights of the economy, as they used to be known, were in British hands. Whereas today, even Britain’s leading industries such as financial services are largely foreign-owned. Will global groups push for change?
It seems just as likely that businesses, faced with new rules emanating from Brussels, will push for divergence rather than alignment. Meanwhile Labour will face pressure from vested interests for subsidies and other forms of protectionism. Even as Starmer seeks a closer relationship with the EU, the risk is that his party gradually reverts to the economic nationalism that defined it for much of its post-war history.
Finally, on the subject of Brexit, here is Boris Johnson in an interview promoting his new memoir confirming what we all knew already: that he saw his role as the leader of the Brexit campaign to be “to win an argument”, rather than to give any thought to how Brexit might work in practice, which he saw as David Cameron’s job as prime minister to sort out by producing a white paper. In other words, he saw Brexit as some kind of puerile debating competition and bore no responsibility for the outcome.
How contemptible.
2. Northern Powerhouse
Nowhere is Europe’s economic challenges more than in the automotive sector which risks being eaten alive by Chinese competitors which are streets ahead (excuse the pun) in the transition to electric vehicles. Last week, the EU, after months of internal wrangling, decided to push ahead with plans to impose tariffs of 45 per cent on Chinese EV imports. It was a finely balanced decision, reflected in the voting.
On the one hand were those who believed that it was essential to protect domestic manufacturers, particularly after America effectively banned Chinese EV imports entirely, thereby raising the prospect of state-subsidised Chinese excess output being dumped on the EU market. And on the other hand those who feared Chinese retaliation, including against European car sales in China. The outcome was to set tariffs at a level that could be said to level the playing field by penalising Chinese subsidies and so were defensible within World Trade Organisation rules.
Whether this ruse proves sufficient to deter Chinese retaliation remains to be seen. Germany’s decision, taken by chancellor Olaf Sholz agains the wishes of his coalition, to vote against the tariffs, even though it was clear it would be on the losing side, has been interpreted as a cynical attempt to ensure that if there is retaliation, it is taken against other EU member states. But either way, the tariffs are likely to offer only limited respite: the new taxes won’t prevent cheap Chinese EVs being imported into the EU, nor will it stop Chinese exports flooding into global markets, particularly in the Global South, where Chinese carmakers are already making inroads.
Besides, what has really caught my eye in recent weeks is the crisis surrounding Northvolt, the Swedish battery-maker. This was supposed to be Europe’s best hope of creating a domestically-owned battery-making capacity, thereby reducing the bloc’s reliance on Chinese technology. Yet despite having raised £15 billion of capital at the start of this year, Northvolt is mired in difficulties. This is from the WSJ:
The company has managed to produce thousands of batteries, but they haven’t been up to automaker standards or met adequate volumes. BMW pulled $2 billion of orders from Northvolt after the company was unable to meet an original deadline to deliver its batteries… Last week, Northvolt said it will cut 1,600 jobs in Sweden and it is abandoning efforts to double the size of its plant in Skellefteå, in northern Sweden… Last month, the company outlined a strategic review and said it was seeking a partner to produce batteries in Poland, and was also putting its lithium refinery plans on ice.
A collapse of Northvolt would clearly be a disaster for the European clean tech sector, particularly given how much political capital has been invested in the company’s success, as The Guardian reports. But while intense negotiations are underway to try to prevent Northvolt falling into bankruptcy, the Swedish government has firmly ruled out investing any financial capital itself. That is hardly surprising when one considers what Northvolt is up against. This from the WSJ again:
A recent report from BloombergNEF showed the market is oversupplied in terms of manufacturing capacity. By 2025, BNEF estimates there will be 7.9 terawatt hours of global capacity, compared with a projected demand of 1.6 TWh. In 2023, demand totalled 950 gigawatt hours, which could have been met entirely by Chinese battery production.
How Europe has contrived to become one of the biggest losers from an energy transition that it has championed it is one of the great mysteries of our times.
3. Is OpenAI Worth It?
A few weeks ago, I speculated in one of these newsletters that the AI bubble might be bursting. I should have known better. Last week, Open AI raised $6.6 billion in new capital, valuing the company behind ChatGPT at $157 billion, almost double what it was worth nine months ago. Not bad for an outfit that is still officially a nonprofit and which is expected to lose $5 billion on just $3.7 billion of revenues this year. The cash is needed to train new models. But according to the New York Times’s Dealbook, the round underscores a widespread belief by investors in OpenAI’s dominance.
Potential investors were reportedly asked to commit at least $250 million just to see the company’s financial documents. Several went beyond that, with SoftBank investing about $500 million and Tiger about $350 million.
How do the investors, who also include some of the biggest names in the tech sector, including Microsoft and chipmaker Nividia, justify such valuations? The bet is that Sam Altman, OpenAI’s founder, can grow those revenues to $100 billion in five years by charging customers $44 a month to access ChatGPT. Assuming consumers continue to make up 70 per cent of the revenues with third-party business customers making up the rest, this would suggest it needs around 150 million paying customers. Currently OpenAI has 10 million customers paying $20 a month.
That may look doable, but as Robert Cyran noted at ReutersBreakingviews, “when companies scale, pricing power often compresses. For example, Netflix has almost twice as many subscribers, but only pulled in $33 billion of revenue last year.”
Then there is the issue of costs, which are vast. As The Economist recently noted:
Large language models have a keen appetite for electricity. The energy used to train OpenAI’s GPT-4 model could have powered 50 American homes for a century. And as models get bigger, costs rise rapidly. By one estimate, today’s biggest models cost $100m to train; the next generation could cost $1bn, and the following one $10bn. On top of this, asking a model to answer a query comes at a computational cost—anything from $2,400 to $223,000 to summarise the financial reports of the world’s 58,000 public companies. In time such “inference” costs, when added up, can exceed the cost of training. If so, it is hard to see how generative ai could ever become economically viable.
Finally, there’s the question of competition which is sure to be intense. Apart from the big tech players such as Google and Meta, the owner of Facebook, who are ploughing billions into AI, which they can afford to fund from their vast profits, OpenAI faces competition from plenty of start-ups. Perhaps it is not surprising, then, that investors in OpenAI were required to pledge not to invest in its biggest competitors.
4. Political Storms
Will climate change end up influencing the outcome of the American election? And if so, in what way? Until last week, the subject had been barely mentioned. But the devastation caused by Hurricane Helene, the deadliest storm to hit the United States since Hurricane Katrina in 2005, has put it firmly on the agenda.
According to AP, “more than 40 trillion gallons of rain drenched the Southeast in the last week, an amount that if concentrated in North Carolina would cover the state in 3 1/2 feet of water.” More than 200 people have died and the storm is likely to have caused between $25 billion to $30 billion in physical damage and losses. Add in the cost of lost economic output and, according to some estimates, the cost could rise to a staggering $160 billlion. The key point is that very little of this will have been covered by insurance. This is from Bloomberg Green:
Roughly 4% of Americans have flood insurance, according to the Federal Emergency Management Agency (FEMA), with most policies issued under the government’s National Flood Insurance Program. The rate in no way matches the risk posed by more frequent extreme rainfall events.
Flooding is the most damaging of all perils. It has cost US taxpayers more than $850 billion since 2000 and is responsible for two-thirds of the costs from all natural disasters, says Flood Defenders, a nonprofit flood insurance advocacy organization. FEMA estimates that a single inch of floodwater in a home can cause $25,000 in damage.
Donald Trump has spend the past few days characteristically and demonstrably lying about the federal response, to the frustration of his own Republican colleagues trying to deal with the crisis. But the devastation caused by the hurricane has highlighted in extreme form the extent to which climate change has become an economic issue, making it a pocket book issue for Americans, and indeed the world.
5. No Place Like Home
One of the few things I miss about my previous job at The Times is my commute. That clearly makes me unusual, since research suggests that for most people, commuting is the most detested part of their day. But I used to enjoy my daily cycle to work with a stop for a swim in the Serpentine lake in London’s Hyde Park whatever the weather. Yet it turns out that by working mostly from home these days, I am contributing to a global productivity boom that could deliver a surge in growth in the coming years.
It is unlikely you will read much about this in the legacy media since newspapers have a vested interest in persuading people to work from offices, in the increasingly forlorn hope that they might still pick up a physical edition at the train station. But according to Nicholas Bloom, professor of economics at Stanford University, writing in the latest edition of the International Monetary Fund’s F&D magazine, the huge rise in working from home since the pandemic is having a hugely beneficial effect on the economy. It is doing this through a variety of channels:
Labour: Bloom credits the rise of working from home for a huge increase in labour supply. This can be seen in the 2.1 million people with disabilities in the US who have reentered the workforce, a crucial factor in delivering America’s soft landing. It can also be seen in the rise in female working age employment, which is rising 2 per cent faster than for men. In the longer term, it could even lead to a rise in the fertility rate by making it easier for working couples to parent.
Capital: Increased working from home releases space in under-used office buildings for alternative use, including housing, thereby addressing shortages of land supply. In major US city centres, office occupancy rates are down 50 per cent on pre-pandemic levels. It also reduces strains on transport networks, making for faster journey times.
Productivity: Once positions can be filled remotely, says Bloom, employers go from taking the best local employee to taking the best regional employee for hybrid and the best global employee for fully remote work. “This can have massive productivity benefits. Going from 10 to 10,000 qualified candidates for a position allows a far more productive match, particularly if AI can help screen applicants.”
Better still, says Bloom, the WFH revolution is likely to generate positive feedback loops, not least as technology firms come up with targeted products for homeworkers that increase efficiency. His conclusion?
When it comes to working from home, the winners massively outweigh the losers. Firms, employees, and society in general have all reaped huge benefits. In my lifetime as an economist I have never seen a change that is so broadly beneficial.
I’m happy to take Bloom’s word for it, though I can also attest to the productivity-enhancing powers of a bracing early morning dip.
Amazing how he can stick to his EU fantasies while demonstrating that he quite clearly is aware that the EU is a sclerotic nightmare