A power struggle straight out of Silicon Valley

October 7, 2024
by Björn Jeffery
SvD Näringsliv





The fight in Klarna’s boardroom is a sign of things to come

Published in Svenska Dagbladet, 2024-10-07. Translated from Swedish.

Tensions are rising ahead of Klarna’s approaching stock market listing. A power struggle with echoes of Silicon Valley appears to be taking shape in the boardroom.

For 19 years Klarna has been a privately held company. Its twentieth year looks set to be different. CEO Sebastian Siemiatkowski has been unusually clear — for the CEO of a major tech company — about his ambitions and plans for a listing. If Klarna goes public in 2025, much may change.

Life on the stock market is something different, for better and worse. Both the CEO’s outspokenness and the company’s operations may need to adapt. The internal struggle between Klarna’s major shareholders should be seen in that light. The Financial Times reports that the board intends to remove Mikael Walther from its membership in the near term. Walther represents Victor Jacobsson, one of Klarna’s founders and its third-largest shareholder.

Jacobsson is not currently active at Klarna beyond being a shareholder — but he has consolidated that position over recent years, buying shares on multiple occasions from former employees or investors who wanted to exit.

Siemiatkowski, for his part, is the fourth-largest shareholder and the company’s CEO. That combination gives him enormous power. Strictly speaking the voting register may not look overwhelming, but in practice it is decisive. It is unthinkable that a board would pick a fight with — or even irritate — a CEO whose company is about to list. And the absence of challenge creates power in these contexts.

The conflict between the two co-founders appears to stem from differing views on that power. How much influence will Siemiatkowski hold once the company is listed? The informal power will of course remain even in a public setting — but the complexity will increase. New shareholders will arrive who have no interest in old merits and achievements. Groups of shareholders will vote according to rules that can seem rigid, at least to those accustomed to private companies. A different way of running Klarna will be required, whether one wants it or not.

The issue is well-known. Among the American tech giants there are many entrepreneurs who have found ways to keep the best of both worlds — the control of a private company and the capital access of a public one. The method used is to convert some shares into super-voting stock, creating a controlling influence without needing to hold a majority stake. Sweden has plenty of examples of this too, including in Investor AB. By changing the share classes, founders create a mechanism to retain control. There is much to suggest it is precisely this type of process that the two Klarna founders disagree about — and what underlies the potential board change.

Changing share classes can seem unfair to individual shareholders, but it can also have advantages. The method creates a predictability and continuity that stock markets sometimes struggle to provide. Consider Twitter, bought by Elon Musk in 2022. The focus at the time was largely on the price and the conflict between buyer and seller. Less reported was that Twitter was one of the few larger tech companies where a takeover — without the consent of major shareholders — was even possible. Twitter did not have super-voting shares. Snap, Meta and Pinterest all do. That is why Twitter could be taken private and begin its transformation into what is now known as X.

Klarna has undergone major changes recently. It sold its checkout solution and has launched a long series of AI initiatives — the aim being to present a different kind of company than the image Klarna once had, in order to be well received on the markets.

The boardroom fight is a sign of the kinds of situations that may become more common going forward. It is understandable to want to keep control of the company close. It would be having the cake and eating it too. But having sceptical shareholders — perhaps all the way into the boardroom — is a situation Klarna and Siemiatkowski may need to get used to. On the stock market, more people get a say — even if super-voting shares help.


The layoffs won’t solve the problems

September 23, 2024
by Björn Jeffery
SvD Näringsliv





The layoffs won’t solve Northvolt’s problems

Published in Svenska Dagbladet, 2024-09-23. Translated from Swedish.

1,600 employees are losing their jobs at Northvolt in Sweden. Meanwhile, future financing is still not in place. What is actually happening now?

Why is Northvolt making so many redundancies now?

According to the company it is a result of the “macroeconomic climate” and the need to focus on fewer things. The expansion of the Skellefteå factory — which was supposed to triple production capacity — is now on ice. Northvolt Labs, based in Västerås, will continue at reduced pace.

Northvolt has faced serious problems with both production delays and the quality of its batteries. Despite significant improvements during the year, the existing factory is still running at only five percent capacity. Larger changes were therefore expected to be necessary.

How do the layoffs affect Northvolt’s future financing?

Northvolt is laying off around 20 percent of its global workforce. This will lead to a significant cost reduction — but probably not large enough to solve the battery company’s financial problems. It is more likely a condition set by prospective financiers: cut costs substantially before they are willing to invest more money.

The cost savings from redundancies take time to show up on the bottom line. Notice periods can be long and severance pay or similar programmes may apply. Northvolt saving its way out of a crisis is therefore unlikely — this looks more like a restructuring to ensure the financing the company needs can be put in place. Something the company has been forced to do to meet the conditions that financiers are imposing.

How will things go for Northvolt going forward?

The company still faces enormous challenges. CEO Peter Carlsson himself cites macro factors, but there are far more immediate internal issues at play. Persistently low capacity at the factory has caused major delays, and customers — including shareholders like BMW — have cancelled their orders. Northvolt has also experienced several workplace accidents and employee deaths that have not been satisfactorily explained. Reports have emerged that batteries are not meeting the quality standards promised. There is still a great deal that Northvolt needs to resolve.

But the most pressing issue is financing. Northvolt is still in a build-up phase and is losing large sums every month. New financing must be secured for the company to continue operating. Monday’s announcement suggests a temporary solution may at least be on its way — but that financiers are setting tough conditions for it. What appears to be emerging is a different, substantially smaller Northvolt. And it is still not clear who would be willing to fund it.

Can the Swedish state become a shareholder in Northvolt?

Prime Minister Ulf Kristersson has told Swedish Radio that the state will not become a shareholder in Northvolt, but that it may be able to help facilitate the financing process where possible. Northvolt’s Peter Carlsson has himself said that the state — and other stakeholders, including the German government — must contribute to a long-term solution. What that would look like in practice remains unclear.


Is anyone willing to save Northvolt?

September 16, 2024
by Björn Jeffery
SvD Näringsliv





Who can save Northvolt from its crisis?

Published in Svenska Dagbladet, 2024-09-16. Translated from Swedish.

The crisis at Northvolt is deepening. Money is running out and the options are few. Who can save the company now?

More than 100 billion kronor has been pumped into Northvolt. Now the ground is shaking beneath the giant battery factory in Skellefteå before it has even reached full production. Customers have pulled out, employees have been given redundancy notices — and the money is running out.

When a company is doing well, its shareholder list resembles a hall of fame — representing those who saw something before others did, believed in the vision, and are now richly rewarded at a sale or listing. In the opposite scenario — when a company looks to be on its last legs — being on that list is not so glamorous. Owners must then ensure the company survives. Having to inject more money into a struggling business can feel painful. But it may also be the only way to rescue the investment already made.

In Northvolt’s case the shareholder list is long — and the names are well-known. The question is how many of them are willing to help the company out of its crisis, and whether it will be enough.

The largest shareholder is Volkswagen, with a 22 percent stake. But the German automotive giant has its own problems, which may make it difficult for them to step in. Earlier in September it was reported that Volkswagen was considering closing factories in Germany — which would be the first time in the company’s history. The aim is to cut costs, but it is unclear when negotiations with German trade unions would begin. Is this the right moment to inject more capital into a struggling Swedish battery factory? Hardly. On Monday Bloomberg reported that Volkswagen was in “close contact” with Northvolt — but no concrete investment figures were mentioned, and more importantly, no conditions were specified.

The second-largest shareholder is investment bank Goldman Sachs. A market capitalisation of around $150 billion gives an indication of the resources available. But it is unclear to what extent the bank actually holds Northvolt shares on its own behalf, as it also trades on behalf of clients. The position may be registered in Goldman Sachs’ name but actually consist of many smaller investors channelling money through the bank. Goldman Sachs has declined to comment on the ownership structure.

Third largest is Vargas Holding, the investment company of Harald Mix. He has told Affärsvärlden that they “will of course continue to support the company financially if that becomes relevant.” Well and good — but Vargas’ pro-rata share of a rights issue would be around one billion kronor, while the total investment made by Vargas and Harald Mix’s private holding company Kallskär amounts to 175 million kronor. To defend their stake they would in other words need to more than quintuple their investment.

The full shareholder list is long, but only the two largest own double-digit percentages. There is no dominant major shareholder beyond them — a weakness for Northvolt in this situation. A rights issue of this magnitude would require considerable time and scrutiny from the investor community. Moreover, many of the smaller players tend to look at how the larger ones act. If the biggest shareholders participate in a new round, the others may follow. But the reverse is equally true.

There are of course other forms of financing beyond rights issues. Loans and credit have been mentioned frequently in connection with the company. The Swedish National Debt Office has issued loan guarantees, for example — though these relate to loans that have not yet been disbursed, according to finance minister Elisabeth Svantesson, who has also stated that it is “not relevant” for the government to assist with the company’s financial problems.

So why is Northvolt not drawing on the state loans, if it is facing a liquidity crisis? Most likely because they are conditional on a rights issue. This structure is common for late-stage technology companies: the combination of a rights issue and a loan allows the money to go further without diluting existing shareholders’ stakes as much. But it typically requires the rights issue to be in place first — which Northvolt appears to be struggling to arrange right now.

A final possibility is that a completely new player decides to step forward — a white knight. It is unusual but not impossible. Such an actor would however need to explain to themselves why they understand Northvolt’s future potential better than the existing shareholders who have chosen not to invest. That reasoning tends to be difficult to make. There is one exception: if the valuation can be pushed down far enough that a large stake can be acquired for a relatively small sum. But if a player is looking at Northvolt from that perspective, why would they be in any hurry? Buying a company out of receivership will be cheaper and quicker than negotiating right now.

Many parties are likely watching and would be ready to act if that opportunity arises. But they will not rush the process toward it. The only one who is in a hurry right now is Peter Carlsson, Northvolt’s CEO — and time does not appear to be on his side.


Is the screen really the problem?

September 4, 2024
by Björn Jeffery
SvD Näringsliv





Little evidence of a link between mental illness and screen time

Published in Svenska Dagbladet, 2024-09-04. Translated from Swedish.

Opinion.

The screen is today the route to community, news, schoolwork and culture. Rather than restricting access to the phone, we should ask ourselves what is actually happening on it.

At Ohio State University in the spring of 1947, a panel convened to discuss the great media question of the day. Parents were worried and experts were called in. Is radio really good for our children? The panel debated whether some programmes were harmful, while others felt it was the sheer volume of radio listening that most affected children and family life. A telling quote about the panel in the Muncie Evening Press describes how “instead of sharing the experiences of the day, everyone escapes from each other. Radio makes thinking, good conversation and concentration almost impossible.”

I think about this after reading the 94-page knowledge compilation produced by Sweden’s Public Health Agency and the Media Authority. The report addresses the link between digital media and young people’s health, and forms the basis for the screen-time recommendations recently released.

The assumption that there is a connection between screens and young people’s health is taken for granted before the work has even begun. The many pages then attempt to substantiate that thesis as best they can, using scientific research and various other studies. It does not go particularly well. There is very little research suggesting that the link is as strong as many parents may feel it to be. It is also difficult to make confident statements about recommendations for people aged 0 to 25 — the age range the report covers. Restrictions on screen time for children under two are less controversial than for older teenagers.

The subject is familiar to me. Beyond being a parent myself, I founded and was CEO of one of the world’s largest children’s games companies, Swedish Toca Boca. For eight years I worked in Sweden and the United States on everything from legislation and privacy protection to product development and communications. I have spent countless hours discussing screen time with researchers, teachers and parents — including the person behind the American screen-time recommendations from the AAP, the American Academy of Pediatrics. They have had theirs for 25 years. In Sweden we got ours only now.

As the radio example shows, parental anxiety about children is nothing new. In the late 1800s parents worried that young women could not distinguish reality from fiction — because they read too many novels, as depicted by Gustave Flaubert in Madame Bovary, whose book-addicted heroine is drawn into a corrupting fantasy world. The video violence debate of the 1980s was not entirely different. The fact that anxiety repeats itself is no reason to dismiss it. But it can help us contextualise it — and by looking back we can also see how those earlier concerns played out. An overconsumption of fiction and radio did not become a major social problem, after all.

When the Public Health Agency looks for problems with screen time, this perspective seems to have been lost. The report cites cross-sectional studies, described in the report as giving “a picture of how factors are related to each other, even if it is not possible to determine whether there are causal relationships.” Particularly clear causal relationships are not to be found — neither in the material nor in the world at large.

At the press conference where the recommendations were presented, the social affairs minister said that “we cannot simply stand by and watch as young people feel worse and screens tighten their grip on their lives.” The concern for young people’s wellbeing is something many can share — but why presuppose the cause? Statistics Sweden data shows that anxiety, worry or angst among 16–24-year-olds has increased. But that increase started in 1994. Instagram launched in 2010 and TikTok in 2016. Screens may well be a contributing factor, but singling them out as the cause of young people’s mental health is a one-eyed analysis.

What about sedentary behaviour? Parents have always felt that children should be “outside playing” rather than whatever it is they want to do instead. Looking at the Public Health Agency’s own data: the proportion of children aged 11 to 15 who exercise at least four times a week has increased — nearly tripled in some cases — between 1985 and 2021. The share who are physically active for an hour has been stable for 20 years. Certainly there are likely groups of young people for whom activities have decreased in favour of screen-based alternatives. But the breadth of the problem does not appear as widespread as many parents experience it to be.

One of the recommendations is to limit teenagers’ screen time to a maximum of three hours a day. Parents who try to implement this restriction will have a hard time. The screen for a teenager — as for an adult — is the gateway to communication, community, news, schoolwork, music, literature and film. Everything happens on the same screen. Restricting at that level becomes faintly parodical — a swing at thin air that is unlikely to help either the conversations between young people and adults, or the wellbeing of either party.

One concept mentioned in the report is displacement effects: what happens when something crowds out other things important to wellbeing — food, sleep or social relationships, for example. Here there is a recommendation worth listening to: do not let any single thing crowd out everything else. But to do that, we need to look one level deeper than the screen itself. What is actually happening on it? Is it games providing constant, immediate feedback? It may be worth reducing those to maintain the patience needed for other things. If, on the other hand, it is a group chat providing support and care, that may be worth keeping.


Why Nvidia is crashing — and it’s happening now

September 4, 2024
by Björn Jeffery
SvD Näringsliv





2,800 billion kronor wiped out — why Nvidia is crashing

Published in Svenska Dagbladet, 2024-09-04. Translated from Swedish.

2,800 billion kronor were erased in a single day when the shares of hyped chipmaker Nvidia fell sharply on Tuesday evening. Why are they falling now?

It was a broader collapse across the chip and semiconductor sector on American markets on Tuesday. The category — which includes companies like Intel, AMD and Qualcomm — had its worst collective day since March 2020. Nvidia, as the market leader in the AI field, was hit hardest given how extreme its rise has been. In total Nvidia fell 9.5 percent on Tuesday and slipped a little further in after-hours trading.

One contributing factor is likely the growing anxiety that AI development will take longer than expected and not be as transformative as many companies had hoped. If companies like Microsoft and Google decide to invest less — or simply more slowly — in the AI sector, that would hit Nvidia directly.

It is also worth remembering how high the starting point was. Nvidia had gained 118 percent on the stock market so far this year, and with a market capitalisation of an almost incomprehensible 27,000 billion kronor, even small adjustments translate into enormous sums of money.

When Nvidia reported its quarterly results last week the numbers were stellar — and still not enough to meet market expectations. Nvidia’s profit nearly tripled and revenue grew 130 percent. Despite that, the report was received with mild scepticism as the forward guidance was not as glittering as in previous quarters. With sky-high expectations from the outside world, and a position as one of the most important companies in AI development, it is a stock watched with extraordinary scrutiny. The slightest signal that something may be stirring can create uncertainty.

Another factor that may have contributed has nothing directly to do with Nvidia. Monday was Labor Day in the United States — a public holiday that traditionally marks the end of summer. Everyone is back at work after the holiday period, and it acts as a kind of reset ahead of the coming autumn. It is possible that parts of the market reconsidered the sector somewhat during the summer break and became a little more cautious.

What happens next for Nvidia? The company has just reported quarterly results, so it will be several months before we see new figures. However, Bloomberg reported late on Tuesday evening that Nvidia is under investigation for suspected antitrust violations. That the Department of Justice was looking into this was already known — but the investigation has now advanced further and Nvidia has been formally required to provide internal information, which can be seen as an escalation.

Antitrust scrutiny has increased significantly in the tech world recently; Google was among those found to have an illegal monopoly in the search market. In Nvidia’s case it is not entirely clear what the DOJ is looking for, but Bloomberg reports it may relate to how customers are treated differently depending on how many different categories of products and services they purchase from Nvidia.

Should it emerge that Nvidia has in some way impeded fair competition, it could substantially alter the company’s business model and outlook. This type of investigation — regardless of outcome — generally takes a long time. An immediate concern about this specific issue is therefore unlikely to be the primary cause of Tuesday’s fall.


Must surpass what was once unthinkable

August 29, 2024
by Björn Jeffery
SvD Näringsliv





Nvidia’s quarterly report: the burden of market expectations

Published in Svenska Dagbladet, 2024-08-29. Translated from Swedish.

Nvidia delivered strong quarterly figures but was met with mild scepticism from the market. The company now faces its biggest challenge yet: market expectations.

A small group of enthusiasts gathered at a sports bar in New York on Wednesday afternoon. But it was not a game on the screens — they were there to watch chipmaker Nvidia’s quarterly earnings report. The hottest tech stocks have been blazing this year, and the scene at the bar suggests we may be entering a phase where things are becoming slightly absurd. Quarterly earnings are not traditional entertainment — they tend to be dry as dust. But if you have watched your Nvidia shares rise more than 160 percent over the past year, they become considerably more exciting.

Given the company’s size and weighting in the S&P 500 index, Nvidia’s figures mattered to the entire market. The question everyone wanted answered was whether investment in AI appeared set to remain at record levels, or whether there were signs of a coming slowdown.

Nvidia delivered numbers that for any other company would have been extraordinary. Revenue grew 130 percent year-on-year. Gross margin expanded. Profit nearly tripled. On top of that, the company announced a share buyback programme worth around 509 billion kronor. These were figures that any CFO would dream of presenting.

But the stock market is not only about what you deliver — it is about how you deliver relative to market expectations. And for the first time in a long while, several analyst estimates exceeded even these strong figures. The stock fell around 5 percent in after-hours trading.

The concern likely stemmed from Nvidia’s revenue guidance. It came in at the lower end of market expectations, and the company indicated that its new chip — Blackwell — had some production issues. Despite this, Nvidia said it expected Blackwell to generate “billions of dollars” in revenue within just two quarters.

But when you have a stock that has already risen so extraordinarily quickly — around 500 percent over the past two years — the expectations are priced in accordingly. A perceived deceleration, even from a very elevated level, is enough to create anxiety.

Nvidia has effectively become a barometer for AI development as a whole. The tech giants’ investments in the sector flow largely into Nvidia’s pockets — companies like Amazon, Google and Microsoft invest billions in data centres where Nvidia chips are often a critical component. As long as the willingness to invest among the tech majors remains strong, Nvidia benefits.

On the horizon one can sense a concern about whether that investment appetite will prove as enduring as the market hopes. Goldman Sachs reports suggest AI’s contribution to GDP growth may be closer to 1 percent than the 6-plus percent previously forecast — and the payoff may lie considerably further into the future. If that is the case, will the tech companies’ shareholders tolerate such large investments without seeing revenues increase at the same pace? Any hint of doubt could hit Nvidia hard, priced as it is for continued extraordinary growth.

For every other chipmaker, the challenge is catching up with Nvidia — competitors’ products simply are not as good yet, and billions are being invested around the world to close that gap. Nvidia’s challenge is an entirely different one. It has the products, the customers and the momentum. Now it must live up to the expectations created by its phenomenal run.

It is no longer enough just to be good — Nvidia must essentially beat numbers that a year ago would have been unthinkable. The market’s reaction on Wednesday evening showed that the road ahead will not be as smooth as the road that got it here.


Why did Russia change its position on Telegram?

August 26, 2024
by Björn Jeffery
SvD Näringsliv





Pavel Durov’s relationship with Russia raises many questions

Published in Svenska Dagbladet, 2024-08-26. Translated from Swedish.

Drug trafficking and contract killings take place on the messaging app Telegram. But that is not the whole story behind the arrest of its founder Pavel Durov, whose relationship with the Russian state raises many questions.

When Sweden’s justice minister invited social media companies for talks about crime last week, one company name was absent: Telegram. It is a little like inviting representatives of the fast food industry and leaving out McDonald’s. The reason Telegram was not present likely has a simple explanation — its representatives would not have come anyway. The app has become known as a haven for both unwelcome political views and outright illegal activity. At the weekend, founder Pavel Durov was arrested at a Paris airport, reportedly for failing to take action against the criminal activity occurring on the platform.

The underlying question has existed since the internet was popularised: are internet platforms responsible for what happens on them? The answer is not clear-cut and varies by jurisdiction. In the United States it is governed by what is known as Section 230, a 1996 law that both political parties have tried to revise without success — leaving it rather toothless and poorly adapted to the modern era. In the EU the relatively new Digital Services Act governs, requiring services with more than 45 million monthly users in the EU to meet stricter rules on content moderation.

For services like Instagram and Pinterest that threshold is straightforward — they are listed companies that report user figures regularly. For Telegram it is considerably less clear. How many users does Telegram have within the EU? Fewer than 45 million, at least — if you believe the company itself. A spokesperson for the Belgian postal and telecoms authority — responsible for regulating Telegram in Europe — expressed scepticism, but diplomatically: “Depending on how you count the number of active users, you can arrive at different figures.”

Telegram has responded to its CEO’s arrest on X with the words: “It is absurd to claim that a platform or its owner is responsible for the misuse of that platform.” For a service run by an avowed libertarian, that reaction is understandable. But it is in the direction of greater platform accountability that legislation is inevitably moving — whatever one thinks of it. Even in Sweden, greater focus has been placed on the platforms that serve as marketplaces for crime, as gang-related shootings have increased.

An additional complexity with Telegram specifically is its connection to Russia. Arrested founder Pavel Durov is a Russian-born billionaire who made his name as the founder of VKontakte, often described as Russia’s Facebook. In 2014 a stake in VKontakte was sold to a company linked to oligarch Alisher Usmanov, and Durov became wealthy. Despite the outcome, Durov has described the sale as forced by the Russian state when he refused to hand over data on its users. The deal has also been described as the motivation behind his desire to start a new kind of service — one where Russia could not influence how it was run. Around this time Durov also became a French citizen, one of at least four nationalities he holds. The new service became Telegram, an app today formally based in Dubai.

Given that description it is easy to view Telegram as a resistance movement against Russian censorship and data collection — and that may have been the original intent. But there are indications that Telegram is now being used as a tool for the opposite. Reports in Wired magazine in early 2023 gave examples of Russian security services citing Telegram messages in police interrogations of dissidents — messages that senders and recipients believed were secure and encrypted.

For a long time Telegram was also blocked in Russia, but in June 2020 the app was permitted again. Today it is the most popular messaging service in the country. When announcing that Telegram would be allowed back, the Russian government cited an agreement touching on matters “in the context of terrorism.” Telegram denies any such agreement existed, but the circumstances have created unease among users.

Exactly what Pavel Durov has been arrested for is not fully established. What is known is that Telegram went from being banned in Russia to becoming a popular channel for Russian communication — particularly in relation to the war in Ukraine. What caused the Kremlin to change its position is unclear. But to view Telegram only as a bastion of free speech would be to underestimate how certain countries use platforms like Telegram for their own purposes. Whether Telegram is a useful tool or a deliberate actor in this remains to be seen.


The market has doubts — alarm over ‘bubble land’

August 17, 2024
by Björn Jeffery
SvD Näringsliv





The AI boom: doubt has arrived for the first time

Published in Svenska Dagbladet, 2024-08-17. Translated from Swedish.

After this spring’s stock market surge among tech companies, markets have started to doubt. Will AI deliver the economic explosion investors hoped for? Several influential voices are now expressing scepticism for the first time.

“I think it is insane.” Barton Briggs, strategist at investment bank Morgan Stanley, was speaking about Cisco in April 2000. The networking giant had been the star of the dotcom era, but some were beginning to wonder whether everything was as it seemed. “I cannot understand how you can make money on a stock trading at 150 times revenue, with a market cap of $500 billion,” Briggs continued, to the Wall Street Journal. He was right. A year later Cisco’s stock had fallen 80 percent. The dotcom bubble had burst.

After a turbulent summer for tech stocks, more experts are now asking whether we are facing a similar moment. Chipmaker Nvidia has fallen 15 percent from its summer peak. For the year as a whole the company is still up 145 percent, and looking back five years the gain is over 2,800 percent.

Attention is now turning to Nvidia’s next quarterly earnings, due within two weeks. Can the locomotive of the AI boom keep growing? One can sense some doubt, at least.

Much of the criticism centres on concern about how much is being invested in AI relative to the value companies are extracting from it. This summer Goldman Sachs published a report highlighting several critical voices. Daron Acemoglu, professor at MIT, is among the sceptics. He believes AI development is important, but that the major breakthroughs are further away — closer to ten years than one or two. While Goldman Sachs’ own economists believe AI could drive GDP growth of 6.1 percent, Acemoglu puts the equivalent figure closer to 1 percent. He is also sceptical that AI will deliver the cost savings many have hoped for.

Jim Covello, head of equity research at Goldman Sachs, argues that AI needs to be capable of solving very complex problems to justify today’s investments of around $1 trillion. That is something the technology currently cannot do. He also believes the savings being generated by AI today are too simple and too cheap to justify the enormous cost of building and maintaining these new services — and sees no reason to expect this to change in the near term.

There are naturally still enthusiasts in the market. The more optimistic camp sees a market that is still in its infancy. For them, AI development does not necessarily need to create wholly revolutionary products and services. Simply making existing things easier and faster may be entirely sufficient.

Looking back at the early dotcom period, the payback time on those investments was long too — particularly at the start. But as the technology matured, the pace accelerated. Eric Sheridan, a somewhat more optimistic equity analyst at Goldman Sachs, concedes that the paybacks need to be larger to justify the enormous investments now being made. But he does not believe that a somewhat extended build-out phase will deter the major companies from continuing to invest in AI.

For the large tech companies — Google, Amazon, Meta — the risk of investing too little and falling behind appears to feel considerably greater than the risk of wasting money on something that never materialises. Those with the most reason to be enthusiastic are those with large stakes in Nvidia, the company that has become the central node of AI development alongside OpenAI. Nvidia’s success is built largely on other tech companies’ investments in the sector — their capital expenditure becomes Nvidia’s revenue.

It comes down to patience, on several levels. How long will the tech giants be permitted to spend billions of dollars on bets that generate little in return? Will demands come from major shareholders wanting dividends or buybacks instead? Activist fund Elliott Management has taken a clear position, saying in a letter that Nvidia is in “bubble-land” — while adding that it would be “suicidal” to try to short the stock, given its trajectory.

As long as enthusiasm around AI remains high among the biggest tech companies, Nvidia should continue to do well. But for the first time in this cycle, at least some doubt is being heard. When Nvidia’s quarterly report is unveiled, we will see whether that doubt shows up in the numbers.


He beat Silicon Valley with improbable timing

August 3, 2024
by Björn Jeffery
SvD Näringsliv





Mercado Libre: From garage project to $70 billion

Published in Svenska Dagbladet, 2024-08-03. Translated from Swedish.

From a garage to becoming Latin America’s most important tech company. The Mercado Libre success story sounds like a cliché — but with near-perfect timing, Marcos Galperin has built a company that Silicon Valley cannot touch.

“He is now morbidly obese, a drug addict, has cancer, AIDS and is an alcoholic.” That is how Marcos Galperin describes Argentina’s economy to The Economist. As the founder of the e-commerce platform Mercado Libre — and thereby Argentina’s richest man — he has become someone people listen to. Galperin swings hard with his criticism of left-wing politics and his praise of capitalism.

His position is easy to understand given his background. Capitalism has created enormous wealth for him. His company, Mercado Libre, has become the hub of e-commerce across all of Latin America.

Galperin came from a privileged starting point. His family owned a leather goods empire in Argentina, and for a time he considered becoming a professional rugby player. Combining elite sport with business proved too difficult, and he chose the latter.

In the late 1990s he enrolled at Stanford Graduate School of Business — GSB — in Palo Alto, in the heart of Silicon Valley. Like many others who have passed through those doors — among them Reid Hoffman and Kevin Systrom, founders of LinkedIn and Instagram respectively — he spotted a market opportunity. Auction sites like eBay were growing rapidly. Why did nothing like this exist in Latin America?

He sensed a business opportunity. Galperin decided to start a company from a garage — exactly as the founding myth tends to go. The first seed of Mercado Libre was planted.

At the same time, on the American east coast, another would-be entrepreneur had the same idea. Argentine-born Alex Oxenford was studying at rival school Harvard Business School. He moved back home to set up his company, Deremate. Both launched in 1999, and neither knew a deep dotcom crisis was imminent. Oxenford took the fast, aggressive path — heavy venture capital, strong growth, quick execution. Galperin moved more cautiously, focusing on customer loyalty. When the crash came, Oxenford’s model became unsustainable. Risk capital dried up entirely.

After a few years of stagnation Oxenford’s side admitted defeat, and Deremate was sold to Mercado Libre. Dominance was established. It was time to expand.

The e-commerce giant we see today began to take shape. The platform is best described as a blend of Amazon, an online classifieds site, and PayPal all in one. It sells its own products and enables peer-to-peer commerce. Like Amazon, calling it a mere “website” is misleading — it is an ecosystem providing everything from logistics to payments and credit.

In 2007 it was time to scale seriously. Mercado Libre had expanded across Latin America and become a force in e-commerce that no one could ignore. The company decided to go public, listing on the American Nasdaq as the first Latin American company ever to do so.

Here too, timing proved decisive. On the very day of the IPO, what would become a global financial crisis began. Central banks injected liquidity into markets. A few months later Lehman Brothers collapsed. But Galperin managed to fund his company, got a strong start on the exchange, and navigated through the years that followed.

The third and final crisis was the pandemic. Galperin had just made a massive investment in a new logistics system capable of reaching customers across all of Latin America — infrastructure that enables commerce even in parts of the region where people have no bank account. When the pandemic hit, digital commerce became more important than ever. Galperin’s investment paid off immediately.

Today Mercado Libre has a market capitalisation of around $70 billion and is the region’s second-largest company, after an oil company. Galperin has moved the headquarters to Uruguay, but his engagement with Argentina continues. When Javier Milei became president in December 2023, Galperin posted an image on social media of birds breaking free from chains. The caption was short and clear: “free.”

Free trade has made Marcos Galperin personally worth around 63 billion kronor. He is one of the region’s largest employers and expects Mercado Libre to have 76,000 employees this year. Can anything stop them? It does not look that way today — and if history is any guide, timing has always been on Mercado Libre’s side.


Beat Amazon — with unexpected methods

July 28, 2024
by Björn Jeffery
SvD Näringsliv





How Flipkart won the battle against Amazon in India

Published in Svenska Dagbladet, 2024-07-28. Translated from Swedish.

They have been called India’s Amazon — but the road there was long and complicated. From nothing, Sachin and Binny Bansal built the e-commerce giant Flipkart in a country of nearly 1.5 billion people, most of whom had no internet access.

Entrepreneurial stories of founders who spotted an opportunity to do better than the competition are plentiful. Rarer are those who had to build their entire market from scratch before they could even begin.

That was the situation Sachin and Binny Bansal found themselves in 2007. The two friends — sharing a surname but unrelated — worked together as software engineers at Amazon in India. The e-commerce giant had staff in the country but no consumer-facing business. The reason was clear to anyone who looked at the macro picture: while Sweden had started getting broadband a decade earlier, only five percent of India’s population had internet access at all.

The Bansals sensed an opening. Why were there no price comparison sites in the Indian market? They quit Amazon and went independent. The analysis proved shallow — they quickly realised that price was the least of the problems with Indian e-commerce. Internet coverage among potential customers was poor, and the stores selling goods were not trustworthy. Would you even receive what you ordered? Could you trust that the payment would go through?

The company had to pivot immediately. Before customers started trusting e-commerce in general, there was no point trying to compare prices. Instead they set about improving online retail itself. They borrowed two things from their former employer Amazon: the idea of selling books and an obsessive customer focus. When the first real book order came in, they had to manually search through physical bookshops to find what the customer wanted. The system was rough, but the service mentality was strong.

Over time Flipkart expanded. In 2010 it started selling mobile phones, and a new set of challenges became clear. Shipping books is relatively straightforward — a slightly bent book is still readable. Mobile phones are another matter: nothing can be broken in transit, and at significantly higher price points customers were nervous. The perceived risk of losing money loomed large. To address fears of a damaged product, Flipkart offered full returns on everything — money back, no questions asked. And to ease anxiety about paying online, an unconventional solution emerged: pay the courier in cash. It felt like a normal purchase at the point of payment, but the order still happened online.

The system was now working, and Flipkart had solved some of the toughest barriers to Indian e-commerce. Competitors noticed. Domestic rival Snapdeal made a big push, but the hardest challenge came from the Bansals’ former employer. Amazon launched in India in 2013. To compete, Flipkart had taken in significant venture capital and become the country’s second unicorn — a company valued at over a billion dollars.

The investment enabled major spending on logistics and delivery infrastructure. In a country of nearly 1.5 billion people, the complexity is easy to underestimate. But because Flipkart had arrived first, it was also forced to build systems that actually worked for its home market. That infrastructure has since generated enormous value — and made it very difficult for new entrants to challenge.

The success drew attention from around the world. In 2018, American retailer Walmart bought 77 percent of Flipkart for 16 billion dollars — one of the largest tech acquisitions ever. Walmart is one of the few companies that has managed to challenge Amazon on its home turf, and the template was familiar: Flipkart was essentially Amazon, but for India. With the acquisition, Sachin Bansal stepped down; a few months later Binny Bansal departed as well.

Flipkart is today India’s largest e-commerce player — just ahead of Amazon — with around 22,000 employees and a 48 percent market share. India has also raised internet penetration to around 40 percent, which in rough terms gives a potential market of around 600 million people. The company’s next step is rumoured to be a stock market listing, perhaps as soon as 2025.