Russia fund claims talks over tech investments with SoftBank

Russia’s sovereign wealth fund has said it is discussing making joint investments in Russian technology companies with SoftBank, after deciding against taking part in a second Vision Fund.
The talks began last year when the Japanese technology conglomerate was searching for investors for what it hoped would be a $108bn Vision Fund 2, according to four people familiar with the discussions.
Any such discussions about co-operating with the Russian state would be likely to trigger US scrutiny, given the wide-ranging sanctions in place against the Kremlin.

Moscow ultimately declined over concerns about risk, the people said. The equity value of some of the first Vision Fund’s key investments later fell by $18bn.
But Kirill Dmitriev, chief executive of the state-run Russian Direct Investment Fund, said talks on a separate joint venture are continuing.
“We have been having some discussions on co-operation with SoftBank,” Mr Dmitriev told the Financial Times. He added that the discussions are “mostly on joint investments in some Russian technology businesses and technology companies”.
SoftBank denied it had ever discussed a potential deal with the Russian fund, saying it had had “no discussions on fund 2 or on joint investments” with RDIF.
SoftBank intended the Vision Fund’s second round to eclipse its $98bn first fund, which was itself the largest pool of money ever raised privately. But the governments of Saudi Arabia and Abu Dhabi, which provided 60 per cent of the funding for the first round, stalled over their involvement, forcing SoftBank to turn to sources such as the National Investment Corporation of the National Bank of Kazakhstan.
SoftBank’s ties with Russia first came under the spotlight in late 2016 when Vladimir Putin was seen putting his arm around Masayoshi Son, the Japanese group’s founder, at a gathering of business leaders in Tokyo.
From left: Russian president Vladimir Putin, Russian Direct Investment Fund chief Kirill Dmitriev, Japan Bank for International Cooperation chief Tadashi Maeda and Japanese prime minister Shinzo Abe in 2016 © Mikhail Metzel/TASS/Getty
Following his meeting with Mr Putin, Mr Son told reporters that the Russian president had asked SoftBank to make “big investments” in Russia. The Kremlin declined to comment.

Progress on a wider set of Japanese investments into Russia, however, have foundered because of a festering territorial dispute dating back to the second world war over the Kurils, four small, sparsely populated islands in the Pacific.
Mr Son initially sought to reassure the Japanese government that a deal between SoftBank and the Kremlin would help Prime Minister Shinzo Abe resolve the dispute, according to two people briefed on the discussions. SoftBank denied this happened.
Mr Abe has bet heavily on personal diplomacy with Mr Putin to return at least two of the islands, meeting him more than two dozen times.
But the long-stalled talks appeared to receive a final death blow this month when Russia adopted some new amendments to its constitution, one of which bars Moscow from giving any of its territory away to a foreign power.
Viacheslav Volodin, the speaker of Russia’s lower house of parliament, said last week the amendment meant Moscow would never surrender Sakhalin, another Pacific island, or the Kurils.
Mr Dmitriev said RDIF wanted to grow its ties to Japan despite the dispute, pointing to its $1bn joint fund with the Japan Bank for International Cooperation, which has invested in a Covid-19 test that has sold more than 13m units worldwide.
“We showed that you can have business co-operation while still having political disagreement, and it works,” Mr Dmitriev said.
SoftBank’s denial of their talks is the second public rebuttal RDIF has faced in recent months as Mr Dmitriev has attempted to use the fund’s coronavirus-fighting efforts to bring Russia in from the cold.
The US-educated executive previously led failed efforts to develop a “reconciliation plan” through back channels with the Trump administration, as detailed in US special counsel Robert Mueller’s report last year into Russian election interference.
In April, the US denied RDIF’s claims that it had paid for half of a shipment of medical supplies from Moscow including ventilators made by a company under the US’s own sanctions blacklist.
RDIF, which is under more limited sanctions restricting its debt financing but is not on the blacklist, remains adamant it split the cost of the shipment, although it said it did not pay for the ventilators. Mr Dmitriev told the FT that “biases prevent [the US from using] very efficient solutions that other countries use”.

Europe’s housing market shows signs of life

When swaths of Europe were forced into coronavirus lockdowns four months ago, it became almost impossible for aspiring home buyers to do house viewings or arrange a mortgage — freezing most activity in the region’s housing markets.
But there are indications that the sharp downturn may already be coming to an end.
Eurozone mortgage lending rebounded in May after sharp falls in March and April. And although eurozone banks reported a sharp decline in demand for mortgages in the second quarter, according to the latest survey by the European Central Bank, most banks predict mortgage demand will recover in the third quarter.

The consultancy Oxford Economics estimates that house prices fell on a quarterly basis in all major European economies in the three months to June — and countries that report monthly house price data, including Portugal and Germany, have documented rapidly slowing growth.
But estate agents and central bankers say property transaction volumes have begun to bounce back.
Anatoli Annenkov, economist at Société Générale, said: “I think much of the slowdown in the second quarter was just temporary, reflecting the problems of actually concluding deals.”

This suggests the housing market has so far escaped the worst impact of the pandemic — unlike the 2008 financial crash or the subsequent eurozone debt crisis, when it was the root cause of many problems.
“Even though the nature of this crisis is completely different to the 2008 one . . . of course housing transactions and the demand for mortgages declined a lot when the coronavirus hit — especially during the confinement, when people could not see homes or get a mortgage,” said Pablo Hernández de Cos, governor of the Spanish central bank.
So far, Spain has been one of the hardest hit housing markets. In May the value of second-hand residential housing sales fell to less than half the level of a year before, according to the national notary board.

All in all, household sectors came into this crisis better prepared and with unprecedented support from the governments

Fitch, the rating agency, forecasts that Spanish house prices will fall 8-12 per cent this year — compared to a rise of 0-4 per cent in Germany.

“But we are already seeing a pick-up in [economic] activity in Spain which should also extend gradually to the real estate market,” Mr Hernández de Cos said.
Sophie Chick, head of world research at estate agents Savills, said: “The [European] housing market ground to a halt because of the lockdowns, but now we are seeing more activity than expected and some pent-up demand.”
Efforts by European governments and central banks to mitigate the economic effects of the pandemic are helping to cushion the housing market, some economists say.
Ultra-low interest rates and massive levels of government support via furlough schemes and loan guarantees could help to avoid a repeat of the surge in bankruptcies and job losses which the continent experienced during the last crisis. And household debt levels are lower in many countries than they were in the run-up to the financial crisis.

“Government support, solid bank balance sheets and forbearance and low interest rates . . . will be helpful in averting a repeat of the global financial crisis house price crash continent-wide,” said Andrew Burrell, chief property economist at Capital Economics.
And housing markets such as Spain, which bore the brunt of the 2008 crisis, are better placed to weather the fallout from the pandemic.
While prices in Spain have rebounded since 2014, overall they are still a quarter below pre-2008 values. Spanish banks lend mortgages for up to 80 per cent of a property’s value — as opposed to more than 100 per cent before the last crash — and they scrutinise the finances of applicants who work in vulnerable sectors, like tourism, more closely. 
Spanish property developers also have less debt and built only about 60,000 new units a year between 2013 and 2019, compared to over 600,000 annually from 2004 to 2008 — reducing the risk of a supply glut. 

“Developers with projects today will finish them,” said Samuel Población, national director of land and residential product at CBRE España. “We won’t see the ugly half-finished skeletons we saw all over Spain last time around.”
Ana García Vizcaíno, team leader at the Keller Williams One estate agency in Madrid, said the experience of lockdown had shifted demand away from city centre apartments. Houses with outdoor space in the suburbs have become more popular.
“People are saying: ‘I’m going to sell because I’m going to change my life. I won’t spend another confinement without a terrace’,” Ms García said.
Some experts believe the true impact of the pandemic on Europe’s housing markets will only become clear later this year.

“All in all, household sectors came into this crisis better prepared and with unprecedented support from the governments,” said Tamara Basic Vasiljev, economist at Oxford Economics. However depressed activity levels “might spell more trouble next year, especially for markets where valuations are already stretched”, she warned. 
Mikel Echavarren, head of Spain at Colliers International, the property consultants, said the autumn selling season would be crucial. “Once the summer ends and people return to work, if the pandemic returns and the economy shows terrible numbers . . . it will be a reality check,” he said.
For her part, Ms García is trying to finish as many house sales as she can before a potential second wave of coronavirus or a surge in unemployment sends the market into a slump.
“That’s why I’m working so hard in the summer, to close as many deals as possible now,” she said. “I hope I’m wrong.”

Why supermarkets are struggling to profit from the online grocery boom

Jo Ronan had never done a grocery shop online before Covid-19. Now, she and her husband Mike doubt they will venture back into a supermarket until at least next year.
“I haven’t been in a supermarket since March,” says Ms Ronan, a retired teacher who lives in Essex in southern England and has asthma. “I do like going round shops. But until there is a vaccine, I cannot really see myself going back to a store. It’s too risky.”
Instead, the couple buy occasional items from a local corner shop and order bulky items online, from one of the UK’s big four supermarket groups. They are among millions around the world who have tried online grocery shopping for the first time during the coronavirus outbreak — and found that they like it.

In the UK, ecommerce took two decades to go from zero to around 7 per cent of total grocery sales. It then went from 7 per cent to 13 per cent in about eight weeks.
Even in parts of Europe that have been ecommerce laggards, interest has picked up sharply. Researchers at Bain estimate that both German and Italian online grocery sales doubled during the pandemic and now account for 2.9 per cent and 4.3 per cent of the total, respectively.

Simon Roberts, Sainsbury’s chief executive, says Covid-19 is ‘driving a huge step-up in online grocery participation’ © Toby Melville/Reuters
Sainsbury’s delivery vans at a branch of the supermarket in London in January © Toby Melville/Reuters

But there is only one problem with the surge in online sales: many supermarket chains are struggling to make a sizeable profit — and in some cases, any profit — from ecommerce because of the huge commitment in resources that it requires.
The two largest UK operators, Tesco and J Sainsbury, have both said they expect to make around the same profit this year as last — despite a huge transfer of food consumption from restaurants to home and a property tax holiday. One of the main reasons is the high cost of expanding online delivery operations.
Sainsbury’s chief executive Simon Roberts summed the situation up, saying Covid-19 was “moving sales out of our most profitable convenience channel and driving a huge step-up in online grocery participation, our least profitable channel”. Most supermarket groups do not publish detailed figures for online sales and profits.
When ecommerce accounted for comfortably less than 10 per cent of supermarkets’ sales, improving its profitability could safely be regarded as a long-term project.

“Supermarket groups were hoping that slow adoption would give them time to find a model that was not so dilutive,” says Marc-Andre Kamel, leader of the global retail group at Bain. Companies now needed to “find a much more rapid fix” for the weak profitability of their online operations while “at the same time ramp up their ecommerce capacity to meet the surging demand”.

No one expects online grocery shopping to return to pre-Covid levels. Research by UBS in the UK found that 71 per cent of respondents said they will shop online “as often or more after the Covid -19 situation improves”.
Based on other survey evidence, Bain estimates that between 35 per cent and 45 per cent of the recent increase in online sales will turn out to be permanent.
Tim Steiner, chief executive of UK online grocer Ocado, which has prospered during lockdown, thinks the long-term impact of the pandemic will be substantial. He points out that the group he founded has more than 1m people waiting to become customers once it has the capacity to serve them.
“We find that if people do between three and five online shops in a 12-week period, then their propensity to carry on shopping online is very high,” he says.
“The whole world has also been educated in pandemics and virus transmission. Everybody is taking less risk than they did historically, and it’s about deciding where and when you want to take your risk. Do I take it to visit my family and friends, or do I take it to go grocery shopping?”

Tim Steiner, chief executive of Ocado, thinks the long-term impact of the pandemic will be substantial © Chris J. Ratcliffe/Bloomberg
An Ocado distribution centre. Its own food retail operations saw sales grow 27 per cent during the first quarter but profit rose by almost 90 per cent because of bigger deliveries © Chris J. Ratcliffe/Bloomberg

Automation problem
For many years, retailers were daunted by the capital spending and the technical challenges of offering ecommerce for food shopping at scale. The US in particular was scarred by the 2001 failure of Webvan, an early online grocery venture.
Even Amazon, whose financial might and technological innovation has disrupted sectors from books to electronics, seemed to have no ready solution for most of the past two decades to the problem of delivering temperature-controlled products to doorsteps.
In the UK, the launch of Ocado in 2002 forced the incumbents into action. Because it had no stores of its own, Ocado went for a model built around automation from the start, building a large distribution centre north of London. The inadequacy of the off-the-shelf solutions available led it to develop its own systems and software to pick orders and plan delivery routes.

Mr Steiner points out that traditional supermarkets also tried automation initially but were deterred by the complexity of it, and reverted to picking customers’ orders in stores and then putting them on to trucks for distribution.
That is the least efficient way of fulfilling orders. “You can polish the turd all day long, but store pick loses money,” says Steve Hornyak, chief commercial officer at Fabric, an Israeli start-up that develops in-store automation technology.
He added that having to pick orders in a store that is also full of shoppers limits picking capacity to 100-200 orders per day.
An online order from the supermarket Morrisons, in Marsden, northern England in April, during the nationwide lockdown © Oli Scarff/AFP/Getty
The additional costs of in-store picking were compounded by supermarkets’ pricing strategies for online services, which often involved widespread use of promotional coupons and offers of free delivery to lure customers.
“They launched with no fee, or a fee that was nowhere near enough to cover the costs,” says Mr Kamel. “They have educated customers that picking and delivery was free when actually it costs around €12-€14 per order.”
His research suggests grocers around the world are typically suffering a negative operating margin of about 15 per cent on online orders. Even a $7 delivery fee does not lift that number into positive territory.

The market developed differently in the US, where grocers’ lack of enthusiasm for ecommerce led to the creation of Instacart in 2012. Its freelance shoppers pick customers’ orders and deliver to them, with the customer paying an annual subscription and a per-order fee.
China went down a similar route. Early start-ups tried next-day delivery of fruits and vegetables, while another wave of entrepreneurs tried the intermediary model similar to that used by Instacart, ferrying items from grocery stores to customers. China’s grocery delivery market includes ecommerce leaders like Alibaba, JD.com and Meituan and start-ups such as Miss Fresh, Dingdong Maicai and Xingsheng Youxuan.
Miss Fresh embodies a new trend. Backed by funding that Crunchbase puts at $1.4bn, it has built out a network of small warehouses in 16 major cities with lower rents and fewer items than supermarkets.
Its pink-clad couriers on scooters deliver 60-70 orders a day while the micro warehouses can hold double the item count of similarly sized stores, according to chief operating officer Cecilia Sun. Ms Sun said it took three to nine months for each new warehouse to break even on a standalone basis.
But even though China has the advantages of densely populated cities and cheap labour, there is no indication that companies in the country have entirely solved the profit problem either. About 150 Chinese grocery delivery start-ups have failed in recent years, according to ITjuzi, a Beijing business information provider.
Mr Hornyak believes intermediaries are only a stopgap for big retailers. “If any grocer believes Instacart is a strategic solution for ecommerce then they are proclaiming the death of their company,” he says. “You are handing the keys to your kingdom to a third-party data and technology company.”

China’s grocery delivery market includes ecommerce leaders like Alibaba © Qilai Shen/Bloomberg
About 150 Chinese grocery delivery start-ups have failed in recent years, according to ITjuzi, a Beijing business information provider © Qilai Shen/Bloomberg

Quest for rational pricing
Supermarkets everywhere began to take ecommerce a lot more seriously after Amazon’s surprise 2017 acquisition of Whole Foods, a transaction that caused their share prices to fall.
Those with the financial capacity stepped up their investment. Walmart, the world’s biggest food retailer, poured money into both home delivery and click-and-collect — or “kerbside” as it is known in the US.
Others turned to Ocado, which started licensing the technology it had developed in 2014. Almost all of the deals it has concluded with retailers around the world were signed after the Amazon/Whole Foods transaction was announced. It is now raising £1bn through debt and equity to capitalise on the growing market.
Dave Lewis, the outgoing chief executive of UK market leader Tesco, acknowledges that online operations have at best broken even in the past, but aims to change that with greater efficiency and more realistic pricing.
“There is definitely an opportunity to be more commercially oriented in the way that we put delivery prices together,” he told investors recently. “Do I see a situation into the future where pricing becomes more rational? Yes.”
A flurry of recent agreements between retailers and food delivery apps like Deliveroo and Uber Eats, many of which involve delivery fees for consumers, suggests he is right.
Kroger, a major US supermarket chain that is a user of Ocado technology, is banking on capturing more spend. “When a customer first switches to online, it typically takes three or four years before that customer’s profitability is the same as when they shop in the store,” says Rodney McMullen, chief executive. “But what we find is we get a significantly higher share of that customer’s total household spend.”
Three years on from the Whole Foods deal, Amazon has done a lot of experimenting about how to use its vast infrastructure to operate delivery of groceries and offers a number of services to customers that include the sale of fresh fruit and vegetables. But it has yet to make a decisive push into online grocery, even if most executives in the industry expect that it eventually will.
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Mr Kamel says advertising is a significant untapped revenue stream; just as brands pay for enhanced promotion in store, they could pay a premium for better positioning on a website. He notes that Instacart derives around a third of its revenue from this source.
One feature of the pandemic — larger transaction sizes — could also help profitability. Ocado’s own food retail operations saw sales grow by 27 per cent during the first quarter, but profit rose by almost 90 per cent because it made fewer but substantially bigger deliveries.
The other major lever is reducing the cost of fulfilment. Ocado is busy building 54 robotic fulfilment centres around the world for its clients. These high-tech sheds can pick a $100 grocery order in minutes, but their capital costs and lead times are significant and they take time to reach full capacity.
Others prefer to leverage what they already have. Mr Lewis says that Tesco’s large number of stores means that it is close to many customers, which allows it to scale up deliveries without heavy capital expenditure. “Owning [the] last mile in the way we do is the important thing,” he says.
Store picking efficiency is gradually improving. But traditional supermarkets are not arranged with rapid picking in mind. They are laid out to force customers to wander the aisles and make additional impulse purchases.

A customer in Copenhagen, Denmark, receives a delivery from online supermarket Nemlig in May © Martin Sylvest/Ritzau Scanpix/AFP/Getty
Dylan Baird, Philly Foodworks co-founder, helps crew members choose items for an online order in January © Bastiaan Slabbers/NurPhoto/Getty

‘Exploding with orders’
One company that has rethought that approach completely is China’s Alibaba, which designed its 207 Freshippo supermarkets with delivery as the main priority, rather than a later addition.
Pickers often outnumber shoppers in the stores, also known as Hema. Glued to their handheld devices, they scurry between shortened aisles to pick frozen dumplings, seafood and vegetables, and send the items whirring over shoppers’ heads on conveyor belts to an in-store packing station.
Orders are then delivered by scooter couriers, often in under 30 minutes. “We’re exploding with orders,” says one rider who earns Rmb5.30 ($0.75) per order delivered. Growth jumped to more than 100 per cent year on year in the first quarter.
A less radical alternative, appealing to those retailers with a surfeit of store space, are the automated micro-fulfilment systems which can operate within stores and are touted by companies such as Fabric, Auto Store and Takeoff. Mr Hornyak says such centres can increase the capacity of a store to more than 500 orders a day and reduce picking costs by up to 80 per cent. Tesco is already working with Takeoff on up to 25 of the centres in its UK stores; the first is due to start up shortly. Ahold Delhaize, the Netherlands-based retailer, has also deployed them in the US.
Ocado is building 54 robotic fulfilment centres around the world for its clients © Peter Nicholls/Reuters
Mr Steiner is sceptical, saying such systems are less efficient than centralised warehouses and that much of the technology is unproven in a commercial setting.
But Mr Kamel points out that micro-fulfilment centres can be installed in a few months — as opposed to up to two years for a large automated warehouse — and at much lower capital cost.
And in recent investor presentations, Ocado has been emphasising that it can offer the full range of options from giant centres processing 200,000 orders a week to compact ones that would easily fit within a large superstore.
Its most recent licensing deal, with Japanese retailer Aeon, committed it to providing a mixture of different facilities. Other agreements have even featured a degree of in-store picking.
The future of online grocery looks increasingly like a mix of solutions: big automated facilities in big densely populated cities, smaller ones closer to shoppers in more suburban environments, and a mix of store pick or intermediaries in rural areas.
Mr Steiner thinks online grocery penetration could ultimately reach 70 or 80 per cent, with the market consolidating into a few giant Amazon-like players. If he is even half right, the need to fix the profit conundrum will become existential for many of today’s supermarkets.

Consulate closure risks sending US-China relations to a new low

The Trump administration’s decision to close China’s consulate in Houston over concerns about spying is seen as a significant escalation in tensions between Washington and Beijing, but experts are divided over whether it marks a turning point in their fractious relationship. 
For Evan Medeiros, Barack Obama’s former top Asia official, it represents the moment that competition between the two most powerful nations on earth tipped towards a new Cold War.
“This is a very, very serious accelerant and the Chinese absolutely will retaliate,” he said, citing the administration’s efforts to “package” its hardline response to Beijing.

But Jim Carafano, national security expert at The Heritage Foundation, a conservative think-tank, said the US was meeting China at its own level of aggression, and bringing it into line with behaviour America expected.
“This is about reciprocity,” he said. If the US failed to take action against China it would “look like a pancake”.
Repeating a Republican refrain that the Obama administration had let Beijing get away with a series of aggressions, Mr Carafano argued that comparison with the Cold War was “unhelpful”.

President Trump has said enough; we’re not going to allow this to continue to happen

The US and China are at odds on a series of issues including trade, military ambitions, Hong Kong, treatment of Muslim Uighurs, responses to the coronavirus pandemic and accusations of intellectual and commercial espionage.
The US opens a new counter-espionage case against China every 10 hours, FBI director Christopher Wray said this month. This week, the US charged two Chinese citizens with attempting to steal trade secrets, including coronavirus research, from US firms over the course of a decade. 

John Demers, assistant attorney-general, said in an interview with The Cipher Brief on Wednesday that the decision to close the consulate reflected not “so much one particular thing but a slow build-up of what we’ve been seeing over time”. The decision was taken to “disrupt” China rather than merely confront it, he added. 
The Republican leader of the House foreign affairs committee, Michael McCaul, said he hoped the action would “deal a significant blow to the CCP’s spy network in the US and send a clear message that their widespread espionage campaigns will no longer go unchecked”.
While the administration has stopped short of calling China an enemy, it treats Beijing as the single greatest threat to democracy and free enterprise, casting the competition in ideological terms.
“[T]he United States must take decisive action to counter [China],” Steve Biegun, deputy US secretary of state, told a Senate hearing on Wednesday. He said China had failed to embrace the rules-based international order. “[T]he unfortunate trends we see in China make our actions all the more urgent.”
Mike Pompeo, the secretary of state, was due to give a wide-ranging speech on countering China on Thursday following his return from a visit to the UK and Denmark. On that trip, Mr Pompeo pushed US allies to take further action to squeeze Beijing’s geostrategic ambitions.
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“President Trump has said enough; we’re not going to allow this tocontinue to happen,” Mr Pompeo said on Wednesday of the decision to close the consulate.
The Trump administration has made clear since 2017 that China had become its priority in both its national security and defence strategy documents.
Donald Trump has in recent weeks dispensed with some of his earlier flattery of Chinese leader Xi Jinping. As Mr Trump approaches the November presidential election, he has also reverted to referring to coronavirus as “China virus”. Both parties are attempting to “out-tough” each other in their approach to China ahead of the polls, analysts said.
“The Chinese right now are in a bind because they’re trying to hedge their bets,” said Mr Medeiros. He added that Beijing would probably tread more carefully and avoid a “death spiral” before the US has elected its next president.
Bonnie Glaser, Asia expert at the Center for Strategic and International Studies, said that despite what she saw as another “major step in the downward spiral” in relations between the two countries, the conditions for Cold War were not yet there. This was because the US and China were operating without coalitions that might replicate the competing east versus west blocs of the Cold War.
“I believe most countries will try to avoid taking clear sides on all issues,” she said. “[But] more effective crisis management mechanisms are needed.”
Additional reporting by Kadhim Shubber in Washington