Saturday, January 31, 2015

Oil price fall cuts Caterpillar outlook



The steep drop in oil prices will help cut Caterpillar’s earnings by more than 20 per cent this year, the world’s largest maker of heavy equipment warned on Tuesday, as a prolonged mining slowdown and weak global economic growth continue to plague its profits.
The forecast, coupled with a 25 per cent drop in fourth-quarter earnings, sent Caterpillar’s shares down more than 7 per cent at $79.85 by the close of New York trading.

The company said lower oil prices would hit its construction segment and its energy and transportation business, which provide equipment, engines and turbines for drilling and well services in oil producing regions. If 2015 sales fall as forecast, it would be the first time since the Great Depression that Caterpillar has experienced three consecutive years of falling revenues.
“The recent dramatic decline in the price of oil is the most significant reason for the year-over-year decline in our sales and revenues outlook,” said Doug Oberhelman, chief executive.
The slide in crude prices could cause oil companies to slash capital spending by 20 per cent, or $28bn, by 2017 from last year, Morgan Stanley analysts estimate.
Caterpillar said it expected world economic growth to “only improve modestly in 2015”, with continued weakness in copper, coal and iron ore prices further hitting its struggling mining business.
Mr Oberhelman said the strong US dollar, which he expected to continue rising, would hurt US manufacturers, though Caterpillar’s global production footprint would help offset the impact.
The group now expects 2015 earnings of $4.75 a share, excluding restructuring costs, far below Wall Street’s $6.67 consensus forecast. The company lowered its 2015 sales forecast to $50bn, down about 10 per cent from 2014.
The Illinois-based company has slashed thousands of jobs and slowed production in response to a slowdown in spending by mining companies, which has cut into sales for about two years.
Weakness in mining and construction sales were partially offset in the fourth quarter by strength in Caterpillar’s energy and transport equipment division. Sales in that segment rose 11 per cent, to $6.2bn, while construction equipment sales slipped 9 per cent to $4.4bn and mining equipment sales fell 10 per cent to $2.4bn.
On Monday, the company reported that retail machine sales had fallen 12 per cent in the three months to December, driven by weakness in mining, which fell 22 per cent. Sales to the construction industry fell 9 per cent, but rose 5 per cent in North America, in a sign of the nascent US housing recovery.
Fourth-quarter earnings fell from $1bn, or $1.54 a share, to $757m, or $1.23 a share. Sales for the three months to December were down 1 per cent to $14.2bn.
Excluding restructuring costs, the company reported earnings of $1.35 a share. Analysts had expected earnings of $1.55 a share on $14.18bn in revenues.

Apple reports largest profit in history


 Apple reported the largest net income of any public company in history in the three months to December, as record iPhone sales of 74.5m units beat even the most bullish Wall Street forecasts.
“Demand for iPhone has been staggering, shattering our high expectations,” said Tim Cook, chief executive. “This volume is hard to comprehend.”

Apple has now shipped more than 1bn iPhones, iPads and iPods running its iOS operating system that launched in 2007.
Apple’s net profit grew 37 per cent to $18bn, topping ExxonMobil’s previous quarterly record of $15.9bn in 2012, according to S&P Dow Jones Indices.
The financial results and the iPhone’s strong performance come as a vindication for Mr Cook, who has seen off questions over whether anyone could succeed Apple’s late co-founder Steve Jobs. With pressure building to maintain the iPhone’s momentum, Mr Cook faces his next test in April with the launch of the Apple Watch, its first new device since the death of Jobs.
Sales of the iPhone leapt 46 per cent over the prior year in the crucial holiday shopping quarter, driven by the highest number of first-time buyers since the smartphone launched in 2007. Analysts say the performance brings Apple close to reclaiming its title from Samsung as the world’s largest smartphone maker by volumes.

First-quarter revenues at the company, now valued at $650bn by investors, grew 30 per cent year-on-year to $74.6bn. Earnings increased by 48 per cent to $3.06, well ahead of analysts’ estimates. “For a company of our size that is not a small feat,” said Luca Maestri, chief financial officer.
Apple’s cash position at the end of the quarter stood at $142bn, net of debt. That is almost $23bn up on three months earlier, with 89 per cent of its cash now held outside the US.
Surging demand in China for the latest iPhones saw sales of the smartphone there double and drove revenues in the region 70 per cent higher to $16.1bn. However, the iPhone’s biggest market remained the US, despite analysts’ predictions that it would be overtaken by China in the quarter.
Overall sales in the Americas grew 23 per cent to $30.6bn, with the US up 26 per cent.

Shares in the company rose 5.8 per cent in after-market trading to $115.42.“Our results would have been even stronger absent fierce foreign exchange volatility,” Mr Cook said on a conference call with analysts. Mr Maestri said that the company was considering “realigning” pricing of its products in Russia, a very unusual move between new product launches, due to thetumbling rouble.

Apple’s gross margin rose 2 percentage points to 39.9 per cent, its highest in more than two years.
While Apple did not reveal sales of individual iPhone models, a $50 increase in its average selling price to $687 suggests that the larger 6 Plus experienced strong sales.
“Demand [for iPhones] has been so strong we haven’t been able to reach supply and demand balance until this month,” Mr Maestri said.
However, the iPad remained a weak spot, with unit sales dropping 18 per cent to 21.4m, as Apple’s tablet computer faces growing competition from cheaper devices and existing customers delay upgrading.
For the quarter ending in March, Apple said it expected between $52bn and $55bn in revenues, with a gross margin of 38.5-39.5 per cent.
“We feel very good about the guidance considering the fact we are going to have some significant foreign exchange headwinds,” Mr Maestri said, without which it would be forecasting margins to increase further.

Friday, January 30, 2015

McDonald’s and its challenges worldwide: a market-by-market look



 


McDonald’s shook up its leadership this week as it struggled to keep up with changing consumer tastes, appointing Steve Easterbrook, a veteran of UK high street restaurant chains, to replace Don Thompson as chief executive.
FT reporters around the world take a market-by-market look at the challenges facing the company.

US: left behind by shifts in dining habits
McDonald’s faces perhaps its greatest challenge in its home market. Critics charge that the company has been unable to cope with fundamental shifts in the restaurant business in recent years, writes Neil Munshi in Chicago.
Upstart rivals have been able to capitalise on consumer demand for food that is perceived as healthier and made with fresher, natural ingredients.
Markets beyond US
 China
 India
 Japan
 Russia
 Europe
 Latin America
McDonald’s has built a global empire based on the consistency of its products, down to the thickness of fries and the number of pickles on a sandwich. But the age of the Big Mac and fries has given way to the age of organic kale and small-batch aioli.
In a sign of how drastically the restaurant game has shifted, McDonald’s will attempt to compete this year by expanding a customisable burger pilot programme to up to 2,000 US outlets, or one out of every seven stores. That will give consumers the chance to add bacon or mushrooms or caramelised onions to their Quarter Pounder.
Compounding McDonald’s home market challenges are the nationwide protests that have broken out over raising the minimum wage. The fast-food giant has become the poster child for the fight for a $15 hourly wage — more than double the national minimum.
A top US labour regulator recently ruled that the company might be liable for how its franchisees treat employees, dealing a blow to the entire franchise model.
Steve Easterbrook, the incoming chief executive, confronted just such a challenge in the UK. He turned that market round through a campaign that included allowing consumers to ask what goes into McDonald’s food and promoting the upward mobility that so-called “McJobs” afford.
But the US is a market roughly 10 times the size of the UK. Turning round the brand on its home turf will be all the harder.
China: food safety concerns undermine brand
Food safety ​​​​comes near the top of any league table of public concerns in China, so McDonald’s was hit hard when an undercover television investigation accused the company last July of using a mainland supplier that relabelled expired meatwrites Patti Waldmeir in Shanghai.
McDonald’s said earlier this month that same store sales in the Asia-Pacific, Middle East and Africa region continued to suffer the effects of the scandal, dropping 4.8 per cent in the fourth quarter, year on year.
“Consumers in China are still leery of the brand and haven’t really been convinced that McDonald’s has supply chain issues under control,” said Benjamin Cavender of China Market Research in Shanghai.
Foreign fast food brands such as McDonald’s and Yum’s KFC have long enjoyed a reputation for cleanliness, quality and safety on the mainland, which has faced a string of food quality scandals in recent years. These included the scandal of melamine in infant milk, which killed six babies and sickened several hundred thousand.
But ​recently, ​supplier scandals have hit both big US chains hard, with KFC facing several successive allegations of substandard supplier practices. Yum Brands was also targeted in the July expired meal allegations.
The Shanghai government responded to the media exposé by closing down the affected factory of Shanghai Husi Food Co, a subsidiary of US food group OSI, and detaining staff.
Problems with food quality have also coincided with other trends that have challenged western fast-food brands, industry analysts say. “Fast-food consumers in China have shifted away from their original curiosity about western fast food, and nowadays they are pickier and more focused on health,” said Shi Jun, catering industry analyst at Beijing-based Alliance PKU Management.
2,000
Number of McDonald’s outlets in China. KFC has 4,600
“McDonald’s is facing more pressure from fast-casual restaurants and Chinese quick-service chains as consumers look at alternatives that they increasingly view as more healthful and safer,” said Mr Cavender.
KFC remains the clear market leader with 4,600 outlets, more than double the 2,000 McDonald’s. But Dicos — a Taiwanese-owned fast-food chain strongest in lower-tier cities, with cheaper menus — recently eclipsed the US burger chain with 2,200 stores. It planned to have nearly 3,000 by the end of last year.
Additional reporting by Zhang Yan in Shanghai
India: legal dispute eats away early advantage
McDonald’s ought to be well-positioned to profit from surging demand for convenient, clean and affordable meals in India. The market for Western-style fast-food is still relatively small, but growing rapidly as a young population increasingly grabs meals on the go, or celebrates special occasions by dining out, writes Amy Kazmin in New Delhi.
An early Western arrival into India’s competitive food market, McDonald’s worked for years to overcome a fundamental problem. Its core product offering — beef burgers — is taboo for India’s Hindu-majority population.
Although it has finally found a recipe to appeal to Indian palates — through ample chicken and vegetarian offerings — McDonald’s is locked in a bitter legal dispute with an estranged former partner, which has stymied the chain’s expansion.
McDonald’s is fighting entrepreneur Vikram Bakshi for control of Connaught Plaza Restaurants, their erstwhile joint venture, which owns and operates 185 McDonald’s restaurants in north and east India.
McDonald had sought to buy Mr Bakshi out of the venture since 2008, but the two sides had deep differences on pricing. Simmering tensions finally erupted in 2013, when McDonald’s ousted Mr Bakshi from his role as managing director of the joint venture, after 18 years.
Mr Bakshi has since filed a lawsuit before India’s Company Law Board, accusing McDonald’s of mismanagement. Last month, the Delhi High Court issued a stay order, preventing McDonald’s from proceeding with international arbitration in London, as the company says it is entitled to do under the terms of its joint venture agreement with Mr Bakshi.
Rs14.2bn
McDonald’s Indian revenues last year, trailing local Jubilant’s Rs16.2bn
McDonald’s is expanding in India’s prosperous south and west region, where its other Indian partner, Hardcastle Restaurants, was converted from a joint venture into a master franchisee in 2010.
But McDonald’s dispute with Mr Bakshi is allowing rivals such as Domino’s, KFC and Subway, to erode its former lead.
McDonald’s was India’s biggest Western fast-food chain in 2008 with revenues of Rs6.6bn, according to Euromonitor data. That was more than double Domino’s sales of Rs3.2bn. KFC, with revenues of Rs1.5bn, lagged far behind.
McDonald’s revenues in India hit Rs14.2bn last year. But Yum Brand’s KFC had nearly caught up, with Rs12.5bn in sales. Domino’s, which in India is operated by Mumbai-listed Jubilant Foodworks, surpassed McDonald’s with revenues of Rs16.2bn.
Japan: consumer backlash against cost cuts
McDonald’s Japan had its own management shake-up in the summer of 2013 when the US head office brought in Sarah Casanova, a 24-year McDonald’s veteran, to run the local unit. The chain had enjoyed nearly a decade of strong growth in its second-biggest market. But sales in Japan — with some 3,100 outlets — started slowing as consumers became disgruntled with its service and food offerings, writes Kana Inagaki in Tokyo.
The McDonald’s brand became synonymous with cost cuts and a push for efficiency, highlighted by the backlash in late 2012 when Japanese stores pulled menus from its counters to shorten the time taken by customers placing orders. Angry consumers punished the chain by dragging its sales down for almost all of 2013, excluding May and June.
The problems were capped by a flood of complaints that came to light this month when objects — from a human tooth to pieces of vinyl and a bracelet — were found inside its products. McDonald’s Japan, which is half owned by the US group, now expects its first annual loss in 11 years, totalling Y17bn ($144m), after sales tumbled by double-digits since July.
“McDonald’s is already no longer a must-go place. They must regain consumer trust or else people would just not be interested in them any more,” said Nomura analyst Kyoichiro Shigemura.
Ms Casanova has promised steps to ensure food safety through increased audits of suppliers. McDonald’s Japan also plans to remodel its stores and offer a wider line-up of menus, with better pricing.
But analysts say it will be a hard road ahead to restore confidence in a market known for its finicky and picky consumers. When Ms Casanova appeared at a news conference in July, she was criticised for failing to appear apologetic enough. Three months later when she spoke again, she wore a dark suit with her hairstyle in a tight updo.
“A new start is always a good thing,” she said.
Russia: burger business caught up in geopolitics
McDonald’s has long been portrayed as a success story in Russia, but over the past six months the fast food company has fallen foul of deteriorating relations between Moscow and the US, writes Courtney Weaver in Moscow.
In late July, as the EU prepared its strongest sanctions against Russia to date, a regional branch of Russia’s consumer protection agency suddenly announced that certain McDonald’s items ranging from its cheeseburgers to Caesar wraps did not meet Russia’s health safety standards. This was either because they contained evidence of E-coli or because they contained more carbohydrates and calories than the menu stated, according to the agency.
By October, 200 out of McDonald’s 440 Russian restaurants were under government investigation, with as many as nine McDonald’s outlets closed during the period.
The Russian agency, known as Rospotrebnadzor, has since finished its inspections and all the McDonald’s outlets that were closed have been reopened. However, the difficulties for McDonald’s in Russia are continuing.
The fast-food group is now the subject of dozens of Russian court cases related to the agency’s findings, the FT’s Russian sister paper Vedomosti reported on Thursday.
200
Number of McDonald’s Russian restaurants under investigation, out of a total of 440
Some of the court complaints relate to McDonald’s lack of a centralised laundromat for its employees’ uniforms, while others take issue with the layout of McDonald’s kitchens and the separation of different food products. McDonald’s counters that the layout required by Rospotrebnadzor does not reflect modern food industry standards when many food products are processed.
Other court cases relate to McDonald’s alleged mislabelling of its food products.
Russia’s consumer protection agency and health ministry have repeatedly insisted that the McDonald’s investigations have nothing to do with the geopolitical backdrop.
But in the past few months, McDonald’s has figured in close to 100 Russian court cases, Vedomosti reports. In the previous seven years, it only figured in 10.
Latin America: regional woes hit revenues
Paula, a McDonald’s worker in São Paulo, says she cannot think of anything worse than eating hamburgers for lunch every day, writes Samantha Pearson in São Paulo.
“You saw what happened to the man in that documentary from America, right?” she said, referring to Super Size Me, the 2004 documentary in which film-maker Morgan Spurlock eats only at McDonald’s for a month.
However, after a string of complaints, Paula and the rest of Brazil’s McDonald’s employees now have the option of eating a typical Brazilian meal of rice, beans and beef in their breaks instead.
The option is even available to customers for R$23 (US$9) if they look hard enough, she said, pointing to the small print at the bottom of the menu.
Catering to local tastes in the region, however, is not the only challenge for Arcos Dorados, the Buenos Aires-based company that owns the exclusive right to operate McDonald’s restaurants in 20 Latin American and Caribbean countries.
In the three months to September 30, the company recorded consolidated revenues of $904m, down 11.5 per cent from the previous year. Arcos accounts for only about 6 per cent of McDonald’s global sales.
The problems at Arcos are largely related to local competition and the macroeconomic environment of its five main markets, said Martha Shelton, equity analyst at Itaú BBA.

In Venezuela, Arcos has been hit by the country’s deepening economic crisis and shortfalls of basic goods — McDonald’s restaurants across the country even ran out of fries this month, according to local media. In Argentina, high inflation has weighed on profits.Brazil, Argentina, Mexico, Puerto Rico and Venezuela make up 80 per cent of the company’s sales, in that order, she said.

“We expect Arcos Dorados’ growth strategies to reflect efforts in minimising exposures to these two countries,” said Moody’s in a note.
In Brazil, which accounts for more than half of Arcos’s sales, currency depreciation and a slowdown in consumption, even during the World Cup last year, have eroded profits.
In Mexico, Arcos has also struggled to compete with the informal market — the man selling tacos on the street corner who even extends credit to his best customers. “That will always cause difficulties for hamburger chains,” said Itaú’s Ms Shelton.
Europe: ideas laboratory hit by economic downturn
Steve Easterbrook’s reward for his successful stint at the head of the UK division was to be appointed president of McDonald’s Europe. When he quit in 2011 to head PizzaExpress, Europe was MacDonald’s fastest-growing regionwrites Roger Blitz in London.
Commonly a laboratory for the company’s new ideas, McDonald’s Europe was attracting customers with high-end beef, breakfast and garden wraps.
Mr Easterbrook’s strategy suited recession-hit Europe. Cash-poor Europeans swallowed their misgivings about the godfather of American-imported fast-food culture and stepped gingerly inside McDonald’s restaurants — lured by some tailored offerings.
France got a McBaguette, and gave McDonald’s its most profitable international market. Sales across more than 1,200 restaurants in France topped $5bn.
But its most recent results suggest that, as in other markets, many European consumers are now spoilt for choice when it comes to fast food. Fourth-quarter same-store sales dropped 1.1 per cent and operating income was down 14 per cent.
While the UK was doing well, the company was suffering from “consumer confidence issues” in Russia and Ukraine and weakness in France and Germany.
Competition comes from top-end burger chains, plus fast-food businesses focusing on specialities such as Japanese and Mexican food.
McDonald’s is still expanding across Europe, pushing up actual sales. But the decline in like-for-like sales means that the performance overall is “fragile”, said Euromonitor analyst Karla Rendle.
“The poor economic climate in countries such as Greece and Italy will have also impacted McDonald’s sales,” she added.
“McDonald’s three main challenges — brand image, market positioning and menu changes — are the same for Europe as they are for the US and the rest of the world.”

Philippine economy defies Asian slowdown



The Philippines has defied regional trends by recording a pick-up in growth in the fourth quarter, as a bounce in government spending gave a fresh boost to one of Asia’s fastest-growing economies.
The Southeast Asian country grew at an annualised pace of 6.9 per cent in the final three months of the year, far ahead of the 6 per cent expected by most analysts. The quarter-on-quarter figure of 2.5 per cent was the highest in almost two decades, according to calculations from analysts at Barclays.

A rebound in government spending was a key driver of the higher growth rate. Exports also proved strong, with manufacturing growing 10.7 per cent year on year, while the agricultural sector also performed above expectations.
The Philippines has been among the brightest economic stars in Asia since president Benigno Aquino came to power in 2010. Although the annual growth figure of 6.1 per cent is the lowest since 2011, the economy remains one of the fastest-growing in the world.
The acceleration in growth last quarter contrasts with a slowdown in many regional economies, including India, Indonesia and China.
Investors have given the Philippines a clear endorsement in both the bond and equity markets this year. The Manila index briefly rose above 7,700 points for the first time on Thursday, having clocked up a string of record highs in recent days.
This month the Philippines became the year’s first sovereign issuer in the US dollar bond market, selling $2bn of 30-year debt while paying a record low yield. Unlike Indonesia, all three major international rating agencies now regard the Philippines as investment-grade.
Investor demand has helped make the peso the best-performing currency in Asia in the past three months, during which time it has risen 1.5 per cent against the dollar. No other currency in the region has strengthened against the dollar over that period.
The Asian Development Bank expects the Philippine economy to grow 6.4 per cent this year, the highest in the region after China.
Philippine growth
However, some analysts say lower oil prices and the unexpected uptick shown in the latest data suggest the economy may grow even faster.
Research from Capital Economics highlights the country as the world’s biggest beneficiary of the lower crude price.
“The outlook for the rest of the economy is promising. Consumer spending should remain strong on the back of falling oil prices, which will boost consumers’ purchasing power,” said Gareth Leather of Capital Economics in a report.

Google suffers shortfall in paid clicks



Google added to Wall Street’s concerns about a slowdown in its core desktop search business and eroding profit margins as it reported quarterly earnings that fell short of already downbeat forecasts.
However, company executives took the opportunity in an analyst call later in the day to blame the disappointing numbers on a series of one-off factors and claimed that the underlying health of its search business was intact.
The company also admitted for the first time that an internal management shake-up around the Glass headset earlier this month reflected a cutback in investment in the project after it had failed to meet internal targets. 

The admission came in stark contrast to the upbeat message that had been projected earlier this month, when it said Glass was “graduating” from the Google X research lab as it moved closer to commercialisation. 
Patrick Pichette, chief financial officer, used the rare admission of the setback to a high-profile project to try to reassure Wall Street about Google’s financial discipline despite the big bets it has placed on everything from broadband networks to driverless cars.
The comments helped overcome a fall in the company’s shares in after-market trading to a low of $492.22 when the numbers were first announced. It recovered to trade slightly higher at $510. However, the stock has still lost some 9 per cent of its value in the past 12 months, compared to a 13 per cent gain in the Nasdaq Composite in the same period.
Fears about a slowdown in desktop search advertising along with a recent escalation in operating costs and capital spending and the effects of the rising US dollar have all combined to weigh on the shares.
In the final quarter of last year, Google’s top-line growth slowed to 7 per cent from a year before, with revenues net of traffic-acquisition costs reaching $14.5bn, below the $14.8bn that analysts had been expecting.
Mr Pichette blamed the shortfall on the rise of the US dollar, with foreign exchange adjustments wiping $600m from revenues. He added that a parts shortage had meant that Google could not produce as many Nexus 6 smartphones as it had hoped, further denting revenues.
Despite these factors, underlying growth in Google’s company-owned sites, before foreign exchange adjustments, held steady at 18 per cent in the quarter, he said.
However, the number of paid clicks that Google records, an indicator of the health of its search business, rose by only 11 per cent in the final quarter of last year, slower than the 17 per cent that most analysts had excepted.
The company has looked to a rapid increase in paid clicks to offset falling prices as more of its advertising shifts to mobile. Mr Pichette blamed the weak paid click number on “cleaning up” that the company had performed to improve the quality of the ads seen by users. 
The average cost per click fell another 3 per cent, in line with the decline of the previous quarter and with Wall Street expectations.
Staff numbers rose by some 2,000 in the quarter to reach 53,600. Google’s founders, whose majority control of the company is assured in the long term thanks to a three-tier share structure, have said on recent earnings calls that they expected to continue the heavy spending given the scale of the opportunities in new markets.
The latest rise in operating costs cut further into profit margins, with the pro forma operating margin falling to 31 per cent from 34 per cent a year ago.
Net income for the fourth quarter rose by 41 per cent to $4.76bn, thanks to the effects of shedding the Motorola handset business. Pro forma earnings per share — the basis on which Wall Street judges the company — rose to $6.88 from $6.01, but were below the $7.13 that analysts had been expecting. 

Democratising finance: mobile phones revolutionise access



The simple technology behind mobile payments is revolutionising access to finance for millions of people in emerging markets.
Africa — where less than a quarter of people have a bank account, but more than 80 per cent have access to mobile phones — is leading the charge.
 
In Latin America large populations also live in poverty beyond the formal financial system — but with widespread mobile-phone access. But mobile payment has not caught on to the same degree.
As part of the series “Democratising Finance”, the FT analyses the contrasting developments in the two regions.

Africa in front

Ruth Wamaitha Ngotho no longer loses time and money travelling to the market every day to buy car accessories one at a time. Thanks to a loan, the 37-year-old seller of air filters and oil at a small roadside shop in Nairobi can stock up.
“Now I can buy stock by the carton rather than in [single] pieces, so I get a better margin,” says the mother of three, who employs two people.
Both the loan and the business are tiny. The business turns over Ks50,000 ($550) a month and Ms Ngotho is repaying the $1,100 loan over six months at an 18 per cent annualised interest rate.
But her experience is indicative of a remarkable trend that has revolutionised finance — and daily life — for millions of people in the east African hub. Provided by Safaricom, Kenya’s $6bn mobile operator, it shows how technology is providing access to finance in even the most remote communities.
After launching its landmark mobile money transfer and payment service M-Pesa in 2007, Safaricom last year announced that it had joined forces with KCB, the country’s biggest bank, to provide unsecured loans of up to Ks5m.
“The future is a convergence between banking and telecoms,” says Joshua Oigara, KCB chief executive.
Unlike any other part of the world, Africa is bringing about this convergence. The development of the simple technology, combined with regulatory backing missing in other jurisdictions, has provided a necessary leap.

The vanguard is Kenya. Now classified as a middle-income country, but where only 22 per cent have formal bank accounts, more than 12m people — 29 per cent of Kenya’s population — regularly send money via M-Pesa (pesa is Swahili for money). It was introduced only seven years ago; but M-Pesa users now send an average of $44m daily, via 6.8m transactions, adding up to 31 per cent of the country’s annual GDP.
Now users can pay bills and school fees, buy eggs in shops or flights online — all with their phones.
“Deepening the market via digital finance is the best way to go,” says Kenya’s central bank governor Njuguna Ndung’u. He helped spark Africa’s mobile-phone explosion by giving regulatory backing to mobile finance in Kenya, rather than defending banking monopolies that exist elsewhere.
Kenya remains the world’s most famous adopter of mobile payments, with a network of 139,000 M-Pesa agents. But the system is catching on. It is being emulated globally, including in India and Romania. It provides a solution in some postwar countries including Sierra Leone and DR Congo, where infrastructure has been shattered.
A bank-telecoms tie-up in South Sudan, currently in the midst of a civil war, is planning to launch it soon.
Kenya’s Equity Bank, which has the most customers in the nation, has partnered with phone operator Airtel, which offers its own version of mobile money services.
Although the Safaricom initiative has so far made only 1,000 loans, it is aiming for 1m loans by the end of this year. “SMEs account for about 40 per cent of the country’s GDP,” says Bob Collymore, Safaricom’s chief executive. “If you can start to empower [them] you can really start to get this economy running.”

Latin America’s struggles

More than 80,000 Paraguayans have taken out insurance via a tie-up between Tigo Money, the mobile operator and Swedish micro-insurer Bima.
They pay for it without red-tape, forms or fuss, entirely via mobile phones. “It’s fantastic,” says Andrea González, the 26-year-old seller of clothes in a town near Asunción, the capital, who uses the service. “It will help me a lot if I have an accident or injury.”
For many others in Latin America, buying financial products is still out of reach. Like Africa, Latin America has large populations living in poverty beyond the formal financial system — but with widespread mobile-phone access. So the combination of cellphone technology and electronic money launched by M-Pesa in Kenya would seem like a no-brainer that should have caught on in Latin markets too.
Except that it has not, to the same degree. While a range of electronic payment and mobile-wallet initiatives exist across Latin America and the Caribbean, many are struggling with scale. Latin American markets have bigger bank networks, while agent banking — the use of shops for simple transactions — is also prominent. Without such infrastructure in Africa, there was a greater need for M-Pesa’s mobile services.
“When M-Pesa started, there were 700 ATMs in the whole of Kenya, no Western Union or money remittance or agent banking,” says John Owens, head of policy on mobile money at the Alliance for Financial Inclusion (AFI).

Tigo Money also operates in Guatemala, where it has been used by Oxfam to pay aid directly to people in poor communities. But a lack of cellphone infrastructure in some rural areas means there are constraints on this kind of service. Rosario Robles, Mexico’s social development minister, says the prospect of paying state handouts by mobile is “a dream for us”.M-Pesa-style initiatives have spread in some of Latin America’s poorest countries, the closest thing being Tigo Money, a mobile-money service that has been successful in Paraguay.

Brazil, Latin America’s largest economy, has also lagged behind some of the region’s smaller countries.
“For years, the Brazilian market has been waiting for mobile payments to become a reality,” said Spanish phone giant Telefónica when it launched a tie-up with MasterCard to offer mobile-wallet functions in Brazil last year.
Critics have blamed tussling between banks — which have been supported by regulators — and mobile operators for Latin America’s slow adoption of mobile payments. But Mr Owens says regulations are changing rapidly, meaning banks are now eyeing opportunities.
Colombian lender Bancolombia has launched a mobile-payments system called Ahorro A la Mano (“Savings in your hand”).
BBVA Bancomer, a Mexican bank that has a big low-income clientele, plans to launch virtual accounts, enabling customers to dispense with cards that are costly for the banks to administer.
Carlos Danel, chairman of Gentera, whose Compartamos bank offers microfinance in Mexico, Peru and Guatemala, says mobile technology is “an opportunity to transform how we serve clients”.
“Face-to-face interaction most probably won’t disappear entirely, but will be partially substituted,” he says. The upshot? “Transaction costs for clients will be lower, and service costs for banks will be lower as well.”

The changing face of employment


Last week, during the lofty proceedings of the World Economic Forum, I watchedAndy McAfee, an MIT luminary, conduct a fascinating test with a group of Davos delegates.
McAfee took a whiteboard and drew a chart with “innovation” marked on one axis and “employment” on the other. Then he asked the delegates to put a dot on the diagram to show where they thought these two issues would intersect in the next decade. If you expected more innovation and more jobs, you marked a point accordingly; if you expected less innovation but fewer jobs, you marked another. And so on.
It is a test worth trying at home, if only to help clarify our thinking on one of the most crucial issues we face today. Given the technological revolution of the past decade, the 21st century ought to be an age of extraordinary abundance. Two decades ago, mobile phones were a rarity and the internet a novelty; today, three billion people are connected to the web and Ericsson predicts that by 2020, 90 per cent of the world’s population (over the age of six) will have a mobile phone.
This connectivity is unleashing extraordinary new opportunities. As Ajay Banga, CEO of MasterCard, pointed out during one Davos debate, vast swathes of the world’s population can now access financial services for the first time. They can also tap into information on topics ranging from commodity prices to politics to health and education, with extraordinary implications. “We haven’t seen anything yet in terms of the impact of technology,” enthuses Erik Brynjolfsson, another MIT professor (who co-authored with McAfeeThe Second Machine Age, about the cyber revolution).
The Davos elite does not expect this giddy pace of change to slow down. On the contrary, when presented with McAfee’s test, the delegates all marked the chart to predict more — not less — innovation in the coming years. The implication is that we live in a wildly creative age.
©Shonagh Rae
But there is a rub: when it came to the “employment” axis on McAfee’s chart, most of the delegates predicted a decline. There were a couple of optimists. Some executives working at technology companies predicted that the cyber revolution would create fields of new work — China, for example, is apparently set to gain eight million cloud-computing jobs. “Technology always amplifies people’s ability and increases productivity but people will always be at the centre and they will be able to do more with less,” declared Vishal Sikka, CEO of Infosys, India.
This optimism was the exception, not the rule: most delegates expected bar codes and robots to replace humans at an accelerating rate. One widely cited statistic at the World Economic Forum was a projection that automation would end up replacing some 45 per cent of jobs in the US in the next 20 years. And the consensus was that it would be the middle tier of jobs that would disappear. The future of employment — at least according to Davos — is a world bifurcated between low-skilled, low-paid service jobs (say, dog walkers and cleaners) and highly skilled elite roles (computer programmers, designers and all the other jobs that Davos luminaries do). Everything else is potentially vulnerable.
Hopefully, this gloomy vision will turn out to be wrong (and history shows that the Davos prognosis is often inaccurate). When the agricultural revolution hit the western world in the 19th century, technological innovation displaced vast numbers of farm workers. But agricultural workers eventually found different jobs in factories. That might yet happen again here. But the challenge of the cyber revolution is that the pace of change is so fast that few pundits have good answers about how institutions — let alone societies — can adapt.
In last week’s debates there was no support for the idea of slowing down innovation — nobody wants to smash up the robots or bar codes. But nobody liked the thought of redistributing wealth on a large scale either. Elite turkeys rarely vote for Christmas. Instead, the favoured “solution” that the Davos delegates kept proffering was more education and better infrastructure. There was a widespread belief that if everyone on the planet could partake in the digital economy, it would relieve the current strains. 
Perhaps so. What is still critically unclear is how all this investment in infrastructure and training is going to be paid for. Philanthropy? Taxes? It is also unclear how mass access to the internet will recreate those disappearing mid-tier jobs. Given that, it is perhaps no surprise that when I asked a group of Davos grandees for a show of hands on whether income inequality would get worse in the coming years, almost everybody in the room voted “yes” — without hesitation. That is deeply sobering. Not least because this is the prediction coming not from the angry dispossessed — but from that ever-more privileged elite.