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Boeing’s 737 Max Grounding Grinds On: CEO Daily

Good morning.

Katherine Dunn here, filling in from London for Alan, who is on vacation this week.

The saga of Boeing’s 737 Max continues, as the months-long grounding keeps rearing its head in the second-quarter results of airlines around the world.

This morning, low-cost Irish carrier Ryanair, famous for its cheap European deals, announced that profits in Q2 were down 21%, and while the drop was hardly due to the grounding alone—in particular, Brexit-stressed Britons now need to be tempted into vacations with ever-cheaper flights—the company’s CFO said it is still in talks with Boeing to determine how the plane maker will provide compensation. Earlier this month, Ryanair said that it will fly 5 million fewer passengers next year due to delayed deliveries of the 737 Max; it had ordered 135 in total.

That’s indicative of the effect of the grounding, which has hurt U.S.-based airlines—Southwest in particular—but has dealt an even harder blow to international firms. The pain has been particularly intense for low-cost carriers in Europe and Asia that have smaller fleets and face brutal competition; they are already struggling with rising costs, including for fuel.

Boeing has certainly felt the sting of its own crisis, but as analysts pointed out last week to Fortune, the plane maker does have one advantage: for new planes, carriers simply don’t have many other options (or really, just one other option: Airbus).

That hasn’t stopped the bad news from coming. This weekend, the New York Times published an investigation into fumbles by the Federal Aviation Authority (FAA), whose cosy relationship with the company appears to have resulted in patchy regulatory work, delegating tests to in-house Boeing engineers, and FAA officials siding with Boeing over the protests of their own staff. The result was that after two crashes, which killed hundreds, the FAA was left in the dark about what exactly went wrong.

More news below.

Katherine Dunn

katherine.dunn@fortune.com

@katherine_dunn

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Is panpsychism accurate? Modern physics delivers a reality check.

  • According to panpsychists, all of reality is infused with experience. In other words, the fundamental ingredient of reality, they believe, has the felt quality of experience in it.
  • In this view, the reason that we humans are conscious is that we’re configured based on these fundamental experiential ingredients.
  • If philosophers don’t try to mesh their long-held views with what we’re discovering from good science, then we have a problem. For instance, panpsychism may be due for for update: panprotopsychism, a view that says as these fundamental ingredients combine, they give rise to conscious experience and that those fundamental ingredients are “quasimental.”


Artificial You: AI and the Future of Your Mind
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Softbank Takes the Lead on A.I. Funding: CEO Daily

Good morning.

While the U.S. and China vie for A.I. dominance, a Japanese investor—Softbank’s irrepressible Masayoshi Son—is taking the lead in the race to fund it. Son announced he is raising $108 billion for his second Vision Fund, and investors include Apple, Microsoft, Foxconn, and Standard Chartered. Missing from that list—at least so far—is Goldman Sachs, although the company’s involvement was reported earlier by the Wall Street Journal.

Japan itself is not much of a player in the A.I. sweepstakes. Son said recently his home base is an “underdeveloped country in A.I.,” lagging behind China, India and others in Southeast Asia. “It is in a pretty bad situation, so Japan needs to awaken.”

Son’s first Vision Fund of $100 million took some heat because of Saudi Arabia’s role as lead investor. (The Saudis were absent from yesterday’s announcement.). But the first Vision Fund also showed impressive returns and made investments in the likes of Uber, WeWork, Didi and Grab. The usually smart folks at Reuters’ Breaking Views called the new fund “broader, fuzzier” than the original, but I would beg to differ. We know A.I. has the potential to transform almost every industry over the next decade or two, and that’s going to drive a wave of new companies devoted to that industrial transformation. Son’s boldness has put him in a prime position to profit from the trend.

A separate question is why companies like Apple and Microsoft feel so compelled to latch themselves to Son’s wagon. Probably a corporate version of FOMO. My colleague Polina Marinova wrote in Term Sheet yesterday that “an investment is what it costs to gain access to an ecosystem of high-flying companies you can do business with.” But, she added, “what do you do when only SoftBank holds the key?”

More news below.

Alan Murray

alan.murray@fortune.com

@alansmurray

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China’s wobbly giants

In China, publication of the Fortune Global 500 has become a major media event. Companies advancing even a place or two rush out press releases. Those making the list for first time bask in the achievement; this year’s most notable Chinese debutant, smartphone maker Xiaomi, celebrated by doling out $24 million in stock to its 20,000 employees.

The 2019 list gives Chinese firms something special to crow about: the number of Chinese firms rose to a record 129, including 10 from Taiwan, overtaking the 121 firms from the United States. As Geoff Colvin observed in an overview of this year’s tally, this is the first time since the creation of the Global 500 in 1990—”and arguably…the first time since World War II”—that a nation other than the U.S. has topped the ranks of global big business. Geoff’s essay bears an apt title: “It’s China’s World.”

In Chinese, the Global 500 is known as the wubai qiang (五百强), which literally means “500 strong.” And yet, as astute Fortune readers know, the ranking is based strictly on revenue—and is thus a measure of size, not strength. The two can be very different things.

On this year’s list, China’s private firms accounted for some of the most spectacular gains. Xiaomi, which went public only last year, may be the youngest firm to ever crack the Global 500. Chinese property developer Country Garden made this year’s biggest leap, rising 176 places to No. 177. Tech giants Alibaba Group and Tencent Holdings, which debuted on the Global 500 only last year, climbed 118 places to No. 182 and 92 places to No. 237 respectively. Online retailer JD.com jumped 42 places to No. 139.

Even so, the most striking characteristic of China’s presence on the Global 500 remains the overwhelming—and growing—dominance of state-owned firms. A calculation by Hong Kong’s South China Morning Post found that, if firms from Hong Kong and Taiwan are excluded, state-owned enterprises account for 80% of the revenue generated by Chinese companies on the 2019 list, up from 76% last year.

Derek Scissors, resident scholar at the American Enterprise Institute, argues the prevalence of state-owned behemoths among Chinese firms “reveals more weakness than strength.” He questions whether firms like Ping An Insurance Group (No. 29) and Huawei Technologies (No. 61) are truly private; doubts the veracity of financial results reported by China’s state-owned firms; and notes that Chinese SOEs are mostly sleepy monopolies. The vast revenue of state-owned Chinese companies on the Fortune 500, he concludes, “primarily represents waste.”

Former Financial Times China correspondent Richard McGregor offers a more nuanced explanation for the ascendance of China’s state-owned giants in his new book Xi Jinping: The Backlash. For China watchers, the entire book is a must-read, but this excerpt published recently in The Guardian, summarizes Richard’s account of how and why Xi sought to bolster state-owned enterprises at the expense of private enterprise.

I’m contemplating the distinction between size and strength this morning because I write from Tokyo, where eons ago I covered the collapse of Japan’s “bubble economy” for the Wall Street Journal. The unmistakable lesson of that era: propping up big, unprofitable companies preserves stability and government control—at the expense of growth and innovation.

More China news below.

Clay Chandler
– clay.chandler@fortune.com
– @ClayChandler

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