China increases pressure on foreign companies, employing surprise inspections, investigations, and detentions in a multi-pronged approach



China increases pressure on foreign companies, employing surprise inspections, investigations, and detentions in a multi-pronged approachSourceMoneyGuru-

Luke Vargas: Tech earnings lead a rally in US stocks, but just how strong is the sector?SourceMoneyGuru-

Jason Dean: If you were looking for positive news, there was some to be found, but I'd hardly say that the results were good.SourceMoneyGuru-

Luke Vargas: Plus China cracks down on foreign businesses.SourceMoneyGuru-

Chelsea Delaney: China wants to control the narrative, and they want to be more in control of what kind of information auditors, consultants, law firms are collecting in China.SourceMoneyGuru-

Luke Vargas: And Europe narrowly avoids recession as the German engine falters. It's Friday, April 28th. I'm Luke Vargas with The Wall Street Journal and here is the AM Edition of What's News, the top headlines and business stories moving your world today. Tech earnings fueled a rally in US stocks yesterday with Amazon and Facebook parent Meta leading the charge. Improved ad spending, boosted their earnings, though concerns around slowing growth in cloud computing and continued pressure on the chip sector is muddying the overall tech outlook. We should note that industry leader Apple is still yet to report its earnings. It will do so next week, but for now, let's take stock of what has been a banner few days for big tech earnings. And to help us do that, I'm joined now by Wall Street Journal global tech editor Jason Dean in San Francisco. Jason, good morning or goodnight to you. Thank you so much for being with us.SourceMoneyGuru-

Jason Dean: My pleasure, thanks for having me.SourceMoneyGuru-

Luke Vargas: Okay, we've got a lot of tech earnings now in the rearview, some still to come, but now that we can kind of step back and assess things broadly, what do you see? Are the kids all right? What are these companies really telling us?SourceMoneyGuru-

Jason Dean: Well, it's a mixed picture still. I think if you were looking for positive news, there was some to be found. So you see investors getting excited about some of these results, but I'd hardly say that the results were good. You see things like Meta grew again, so that's nice, it's better to grow than not grow its revenue, but it grew by 3%. And these are companies that historically have grown well into the double-digit percentages year on year. So we get big stock movements on what by any standards other than the last year, year and a half would be pretty bad.SourceMoneyGuru-

Luke Vargas: All right, so positive news, you can find it if you want to, but there's also some caveats that go along with everything it seems. How do recent job cuts within the tech sector play into this?SourceMoneyGuru-

Jason Dean: Yeah, that's really part of it. Profitability numbers were better than expected in several of these cases. And yes, that comes not insignificantly from the fact that they've all been cutting costs. Of course, that goes both ways, as Amazon's CFO pointed out, their customers are also cutting costs and that's affecting their ability to grow. So I think Amazon captured the moment well. It reported growth that, by historical standards, overall was not good, but it beat expectations narrowly. And so you saw the stock go up quite well, and particularly in their cloud computing division, which is responsible for a huge share of their profits, I think the growth had been expected and revenue had been expected to be about 15%. It came in at 16%. And so investors were excited that it wasn't as bad as they thought. Historically, that business has grown at two to three times that rate. And then what happened after the numbers came out, the CFO said, "However, we should tell you that in the month of April, growth was about five percentage points slower than that in our AWS unit." And so the stock which had gone up 10% after the numbers came out in after hours trading was then down 2%.SourceMoneyGuru-

Luke Vargas: All right, so cloud's in the cloud, if you will, cloud computing typically being an indicator of business spending, whereas you've got Amazon, as you mentioned, also warning about consumers cutting costs. Is all this becoming an issue for tech companies now?SourceMoneyGuru-

Jason Dean: Yeah, we're seeing some evidence of that in a number of these companies. Again, it's depending on your perspective. If you were expecting it to be worse, then there was some positive signs in there. But as the tech companies are doing, so are their clients, whether they be businesses or consumers. This uncertain economic environment has people being more cautious and that their efforts to be more cautious are helping profit margins, but their customers' efforts are hurting revenue.SourceMoneyGuru-

Luke Vargas: Could that be the takeaway from, say, the Intel results?SourceMoneyGuru-

Jason Dean: Yeah, Intel was another one that was curious because you could look at those results and think, "My goodness, that's just awful." I mean, this is their biggest quarterly loss, it's their third quarterly loss in a row, some of the worst revenue numbers in over a decade. And yet the market liked the sound of the CEO saying, "We're seeing some green shoots, we're seeing some signs of life here. And it's going to be a slow recovery, but there will be a recovery." So it seems like if you look at the broader market, the Nasdaq Composite as a proxy for tech over the last several months, it's been picking up from its lows at the end of last year, but it's quite choppy.SourceMoneyGuru-

Luke Vargas: I think it's safe to say it's been choppy waters for chipmakers too, who really benefited from a chip shortage during the pandemic, but now the big players, Samsung, Intel, are having some of their worst quarterly results ever. What is going on with the chip sector?SourceMoneyGuru-

Jason Dean: It's been one of the most dramatic. I mean, this is an industry that historically has had lots of cycles, it's a cyclical industry, but this we've witnessed over the last several years, one of the most dramatic boom-bust cycles in a compressed amount of time. And so obviously in the pandemic, as we all know, chips were incredibly hard to get their hands on for companies, and we had the shortage, it drove up stock prices, and that gave very quickly way to surpluses, largely because people and companies were not buying at the rate they were before. So PC sales plummeted after going through the roof. And Intel is still suffering from that, chipmakers broadly still suffering from that, but saying they're starting to see the end of the bad stretch, even if it's very unclear whether the recovery will be vigorous at all.SourceMoneyGuru-

Luke Vargas: Looking ahead here, regulation is another big unknown for tech companies, but what we do know is that the EU is now planning new laws on AI, and antitrust issues also seem to crop up regularly. How does that affect the outlook in tech?SourceMoneyGuru-

Jason Dean: These things take a little while to play out, but you saw a good example of this with Microsoft where, on the one hand, their reporting results that investors appreciated, and on the other hand, the British Competition Authority came out and rejected their planned acquisition of Activision, which is a huge part of Microsoft's strategy going forward, and by far the biggest deal it's ever attempted. So still to be seen whether they'll be able to get that across the finish line in the UK and elsewhere, but a clear sign of the cost of the current regulatory environment.SourceMoneyGuru-

Luke Vargas: That was Wall Street Journal global tech editor Jason Dean in San Francisco. Jason, thanks for staying up for us, appreciate you.SourceMoneyGuru-

Jason Dean: My pleasure, thank you.

Luke Vargas: Coming up, China is ramping up pressure on foreign companies, with office raids and detentions of senior officers raising serious concern among businesses. We've got that story and more after the break. Just months after telling global investors that it was open for business, China is ratcheting up its pressure on foreign companies. The country's spy law has been broadened to counter perceived foreign threats, and authorities have, in recent weeks, targeted several firms that are operating in China. That includes making a surprise visit to consulting firm Bain's office in Shanghai to question staff, detaining an employee of a Japanese drugmaker, launching a cybersecurity review of chipmaker Micron Technology and raiding the Beijing office of US due diligence company Mintz Group. Journal markets reporter Chelsea Delaney says those moves undercut Beijing's invitation to overseas investors and are leaving foreign executives nervous.

Chelsea Delaney: Well, I think what's clear from this news is that China wants to control the narrative around their development, around their governance, and they want to be more in control of what kind of information auditors, consultants, law firms are collecting in China, and how that influences how China is perceived in the world. Western business leaders have already hit back at this. They're concerned about their ability to gather information that's pretty crucial to operating in China about risks related to Taiwan, about human rights, about semiconductors, about the tech sector. And they're saying that those topics, which are very crucial to their decision making, are now essentially off limits with their Chinese counterparts.

Luke Vargas: The Chinese embassy in Washington didn't immediately respond to a request for comment. The Eurozone has narrowly avoided recession according to data out this morning, and my colleague Paul Hannon has been tracking the numbers coming in. Paul, yesterday's US GDP number was weaker than expected, how is Europe comparing?

Paul Hannon: So the European economy grew very modestly. The German economy stagnated after a fairly deep contraction at the end of last year. But on the other hand, actually Italy did much better, I think, than people expected, and Spain was pretty strong, and France grew despite the protests and strikes that we've seen over recent months. So yeah, Germany, a disappointment, but the rest of it wasn't quite so gloomy.

Luke Vargas: Right. So Paul, what does that tell us about growth? I think people want to know if we're facing an economic downturn.

Paul Hannon: Well, the surveys that we've seen recently suggest that there will be continued growth in the quarter in now, the three months through June. Further down the line, however, it's touch and go still whether the Eurozone economy will fall into recession or not. And one of the big factors there is what the European Central Bank decides to do with interest rates. I mean, when you're so close to zero, another little push from higher borrowing costs could send the Eurozone economy into contraction. And on that front there isn't great news because some figures released today also show that inflation picked up in France and Spain. So what that means is that very likely next week the European Central Bank is going to raise its key interest rate.

Luke Vargas: And speaking of inflation, the Fed's preferred gauge is coming out later today along with US data on wages. Both are key readings ahead of the Federal Reserve's monetary policy meeting next week. We will also be getting reports from the Fed and the FDIC into their handling of the collapse of Silicon Valley Bank and Signature Bank, that's at 11:00 AM and 1:00 PM Eastern Time. And it's another busy earnings day with energy giants Exxon and Chevron reporting this morning. Warring parties in Sudan have agreed to extend a fragile ceasefire for three more days. The existing truce had calmed but not fully stopped fighting as thousands tried to flee for safety. The United States, which helped broker the ceasefire along with Saudi Arabia, is urging Americans to use the truce to leave the country. This morning, however, Sudan's paramilitary Rapid Support Forces accused the country's military of breaking the truce, suggesting that the latest ceasefire is also unlikely to hold. There was no immediate response from the military. Former Vice President Mike Pence has testified about the January 6th attack on the US Capitol, according to a person familiar with the matter. Pence's appearance before a grand jury investigating former President Donald Trump's efforts to remain in power after the 2020 election followed failed efforts by Trump to block the testimony on grounds of executive privilege. Prosecutors viewed Pence as a key witness given his role in certifying election results as Senate President. Trump has denied any wrongdoing in connection with the January 6th attack or his efforts to be certified winner of the 2020 election. In sports, last night's NFL draft was supposed to be about new stars entering the league, but it was existing star quarterback Lamar Jackson who upstaged the night. Just hours before the draft, Jackson signed a record-breaking $260 million contract extension with the Baltimore Ravens, proving that money can fix some problems, after Jackson previously said that he wanted to play elsewhere. And it's almost always about time for a meal. That is not changing, but restaurants are, as they contend with a pandemic-fueled change in how diners want to enjoy their meal. Wall Street Journal Heard on the Street editor Spencer Jakab has been surveying the radical real estate makeover that could be coming to your favorite dining destination soon, and he joins me now from New York with the details. Spencer, what are restaurants telling us about the changes that are taking place in diner behavior?

Spencer Jakab: Well, the thing that shocked me the most was in the fine dining category, Morton's and places like that, places where you could drop a few hundred bucks, 18% of business last year was off-premise. And then you get up to three quarters when you get down to quick-serve restaurants. So these days, when you walk into a Wendy's or a McDonald's or a Burger King or a KFC, generally people will order from a gigantic iPad basically, or more and more often, they'll order through an app and they'll come in and pick it up. And that convenience is fine, but what's interesting is that it's permeating higher up in the quality chain in restaurants. Olive Garden and Applebee's and places like that are getting a substantial share of their business from people who don't eat inside.

Luke Vargas: I'm sure all business is good business for these restaurants to some degree, and yet these are changes in consumer behavior that these restaurants really do urgently need to respond to. How are they reacting?

Spencer Jakab: Well, in different ways. So some of these chains, when they're building new restaurants, they look very different. So they have different doors for delivery people, they have drive-throughs, they have less seating and more kitchen space, like a new Wendy's concept, the kitchen runs the entire length of the restaurant because you need a lot more kitchen space. They're selling a lot of food, for sure, but they don't have as many people coming in. And at the extreme end, for quick-serve restaurants, what they have are locations like Chipotle has a Chipotlane, which is completely digital, where you can drive up and get it or they'll deliver from it, but you can't really go in.

Luke Vargas: Who is likely to benefit from these changes in diner behavior? It sounds like there's quite a bit of opportunity to be had here, but also a lot of costs associated with retrofitting real estate, for instance.

Spencer Jakab: Yeah, I mean, I think it's especially a challenge to the higher end you go because people are really accustomed to eating in their car, eating at home and stuff like that. And then you have these restaurants trying to accommodate them, but then they run into all kinds of problems. If you drop a lot of money on a meal, then the DoorDash guy is late or mixes up the order or something, you're going to not like that restaurant. And so there's a lot more that can go wrong. Things become out of their control. And so some chains, for example, Darden Restaurants Incorporated, which is the most valuable casual dining chain in the world, owner of Olive Garden, they've said, "We're not going to do delivery at all. You could do curbside pickup or we can control it, it's still warm, but with delivery, we're just going to issue that business because it's too much reputational risk." And then you have chains that sell a lot of booze. I mean, when you go to a restaurant, that is the highest margin thing that you could order, when you have a bottle of wine or you order a margarita or whatever.

Luke Vargas: Okay, so there could be a margin hit then for businesses that are not as well-suited for this transition.

Spencer Jakab: Right. And then they have a lot of real estate that is becoming slowly obsolete. Because if they have a place, it's 5,000 square feet and three quarters of it is dining space and a quarter of it is kitchen space, the ratio is all wrong. So that's fine if you're designing a newer place, but most of those restaurants are legacy older restaurants and it costs a lot to retrofit them. And so the mix of floor space is not right.

Luke Vargas: That was Wall Street Journal Heard on the Street editor Spencer Jakab. Spencer, thanks for the update.

Spencer Jakab: Hey, thanks.

Luke Vargas: And that's What's News for Friday morning. We'll be back tonight with a new show. I'm Luke Vargas with The Wall Street Journal. Have a great weekend, and thanks for listening.




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