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Will Australia’s ‘hydrogen road’ to Japan cut emissions?



For more than a century the sprawling lignite mines in Australia’s Latrobe Valley provided the fuel that powered the southern state of Victoria. At its peak five coal-fired power plants burnt the soft, brown sedimentary rock — one of the dirtiest sources of energy — casting vast plumes of toxic smoke into the atmosphere that accounted for more than half of the state’s total greenhouse gas emissions.

Now, with global warming focusing minds in a country where climate policy has brought down governments, the first phase of an energy transition is taking place following the closure of two coal plants and a lignite mine in the valley, which is about 120km east of Melbourne. A Japanese-Australian consortium is set to begin producing hydrogen from brown coal in a A$500m ($370m) pilot project seen by its architects as the first step in creating one of the world’s first zero emission energy supply chains.

The brown coal fuelled Hazelwood power station, which sits in Australia’s Latrobe Valley, is the oldest in Victoria © Hamish Blair/Getty/Getty

Kawasaki Heavy Industries, J-Power and Shell Japan have joined Australia’s AGL Energy and several international partners to produce, liquefy and ship hydrogen to Japan. They intend to burn some of the 5bn tonnes of lignite in the valley, enough to power Victoria for more than 500 years, to produce hydrogen. Eventually, they intend to capture the carbon generated by the process and inject it into undersea basins in the nearby Bass Strait. For now, however, their goal is to prove the viability of the supply chain and the emissions will continue to be released into the atmosphere.

The project, which is co-funded by both governments, includes the development of the world’s first liquid hydrogen transport ship. Tokyo hopes it can provide Japan, a nation that imports 90 per cent of its energy, a viable path towards decarbonisation. With investors such as BlackRock calling for a swifter transition, Canberra aims to use it to diversify its fossil fuel dependent economy, which generates A$70bn a year from exporting thermal coal and LNG to Asia.

For decades hydrogen — the lightest and most abundant element in the universe — has been hailed as a revolutionary, clean source of energy capable of supplying fuel for cars, heat for homes and storing electricity. But it has failed to live up to the hype for several reasons: the high costs of production compared with burning fossil fuels; challenges in transporting the fuel; lack of demand; and the inability of hydrogen fuel cells to compete with internal combustion engines or lithium-ion batteries in electric vehicles.

The companies leading the Latrobe project believe it can become a catalyst towards establishing a global hydrogen economy, which is forecast to be worth up to $11tn by 2050, according to Bank of America. The Latrobe plant is just one of several hydrogen megaprojects in the planning or development phase in nations ranging from Saudi Arabia to China and Spain.

“Clean hydrogen presents a massive commercial opportunity,” says Jeremy Stone, a director of the Australian subsidiary of J-Power. “It is also one of the critical technologies required to decarbonise the global energy system, particularly in energy constrained nations such as Japan.

“We simply can’t wait to deal with climate change,” he adds, “which is why this collaborative project in Latrobe is so important. We need to get going now with all forms of clean hydrogen.” 

Hydrogen from brown coal process graphic

‘Mind-bogglingly stupid’

Yet, the scepticism remains. Tesla co-founder Elon Musk has dismissed hydrogen fuel cells as “mind-bogglingly stupid”, saying it is inefficient to use them in a car compared with charging a lithium-ion battery directly from a solar panel. Other critics ask whether producing hydrogen from fossil fuels can ever be made cost effective or clean given that the industry has so far failed to prove the commercial case for carbon capture and storage.

Nevertheless, a growing number of scientists and investors believe the world is on the cusp of a hydrogen revolution due to technological advances reducing the costs of making, storing and deploying it. They hope the plummeting costs of solar and wind energy could finally make the production of emissions-free “green hydrogen” — made by using renewable energy to split water into hydrogen and oxygen — commercially viable.

The Paris agreement on climate change is driving investment in hydrogen, as nations prepare to meet their commitments to cut greenhouse gas emissions. BP and Danish wind energy group Orsted announced plans for a green hydrogen project in Germany in November and Airbus recently unveiled plans for hydrogen powered passenger planes. In October Japan and South Korea pledged to become net zero emission economies by 2050. China has set a similar target for 2060.

The hydrogen energy supply chain project’s Hastings site in Victoria will liquefy, store and load the gas on to a ship for export © HESC

To meet these goals nations will need to deploy massive amounts of solar, wind and hydro power to replace fossil fuels, which still account for four-fifths of global energy production. Renewables already play a vital role in the electricity sector but their intermittent nature is forcing industry to consider flexible solutions involving hydrogen to store, dispatch and ship power when required.

“Electricity is magical, in terms of its versatility and power. But there are some applications where it’s just not the most convenient way of delivering energy to the end user,” says Alan Finkel, Australia’s chief scientist and author of its hydrogen strategy.

He says long distance transportation by truck, train, ship or air and heating buildings — by converting existing pipelines in cities from gas to hydrogen — are key uses for the fuel. Its energy storage potential is vital for Australia, which can ship hydrogen and its derivatives, such as ammonia, to overseas markets to substitute its coal and gas exports, he adds.

“The most marvellous application of hydrogen of all is the ability for us to continue what we’ve been doing for hundreds of years,” he says, “ship energy from a continent where it is plentiful to the continents where it is in short supply.”

Bar chart of Share of energy mix, current (%) showing Japan's reliance on fossil fuels among highest in the world

Japanese demand

The potential market for Australian hydrogen can be found at the base of Tokyo Tower, where the industrial gases company Iwatani has built a filling station for fuel cell cars. It is one of 135 such stations spread across Japan — symbolic of the decades-long bet the country has placed on hydrogen.

For reasons of energy security and industrial strategy, Japan has long regarded hydrogen as the most attractive potential alternative to fossil fuels, and it has an ambitious strategy to build up use of the fuel. Its plans involve mixing hydrogen with natural gas to burn in power stations and having 800,000 hydrogen vehicles on the road by 2030 — a major advance on the 3,757 sold in Japan to the end of 2019.

Yoshihide Suga, Japan’s prime minister, has set 2050 as the deadline for the country to be carbon neutral © Kazuhiro Nogi/AFP via Getty

Yoshihide Suga, the prime minister, has stressed the importance of hydrogen to hitting the country’s 2050 emissions target, describing it as “a vital key to clean energy,” in October, and urging “revolutionary innovation to build up a low-cost, high-volume hydrogen supply chain”.

Japanese demand for hydrogen reflects its almost total lack of domestic hydrocarbons. Its heavy reliance on oil imports from the Middle East is a source of constant worry to industry and national security planners. Coal from Australia, by contrast, is regarded as one of the nation’s most secure energy supplies.

Column chart of Share of energy mix* (%) showing Japan plans to significantly reduce its fossil fuel use

To try to escape from its dependence on fossil fuel imports, Japan invested heavily in nuclear power, but the Fukushima disaster in 2011 has all but shut the industry down. That leaves renewables. However, Japan’s densely populated, mountainous islands are a difficult place to build large solar farms, while its steep continental slope gives little scope for offshore wind.

The country’s all-important car industry has increased its investment in batteries, following the success of Tesla, but it too is still focused on hydrogen. Toyota is launching the second generation of its Mirai fuel cell sedan, which is aiming for a 30 per cent increase in driving range over the original model’s 312 miles, while Honda offers a fuel cell version of its Clarity vehicle. For the delayed Tokyo Olympics in 2021, Japan intends to have fuel cell buses to shuttle visitors around.

“Electric vehicles have certainly been ahead of hydrogen ones in terms of development and adoption but I think hydrogen is catching up due to advances in high pressure hydrogen gas storage fuel tanks, fuel cell technology and hydrogen production from renewable energy,” says John Andrews, a professor at RMIT University in Melbourne.

“Elon Musk has been rather one-eyed on EVs,” he adds. “Hydrogen vehicles are likely to play a complimentary role in the future because they are particularly useful over long distances and for speedier refuelling.”

BP and Danish wind energy group Orsted have plans for a green hydrogen project at Germany’s Lingen Refinery © Kilian Westkamp

The ‘hydrogen road’

The production of hydrogen in Latrobe would be the latest milestone in a decade-long mission for Kawasaki Heavy Industries, the company leading the Australia-Japan supply chain project. In December it launched the world’s first hydrogen carrier, which will ship the fuel the 9,000km from eastern Australia to Kobe, Japan. A gas turbine power plant to be fuelled entirely by hydrogen has already been installed in the Japanese city and will provide heat and power to nearby municipal buildings.

“Kawasaki technology will link production sites to energy consumers, and in so doing give birth to the Hydrogen Road,” says Motohiko Nishimura, head of Kawasaki Heavy’s hydrogen development centre.

He forecasts that supply chains will progressively spread across Asia, much like LNG was imported by Japan, South Korea, China and Taiwan from the 1970s to provide energy. Kawasaki chose Victoria’s lignite deposits as a potential source of energy to produce hydrogen because it offers a cheap and plentiful supply based in a politically stable nation with a long history of shipping energy to Japan, says Mr Nishimura.

Yet, there are plenty of sceptical Japanese experts. “You have to produce the hydrogen, liquefy it, ship it, reconvert it and then use it,” says Hiroshi Kubota, professor emeritus at the Tokyo Institute of Technology. “It’s just a massive waste. This is a kind of national project but I don’t think it is practical or economic for Japan at all.”

Environmental groups have also raised objections to the Latrobe project over its use of brown coal. “The time for digging up dirty, brown coal is over,” says Cam Walker, an activist with Friends of the Earth in Victoria. “We support the development of green hydrogen produced from renewables.”

Mr Nishimura dismisses such criticism. “There is no time to waste in building the skills, infrastructure and market needed to ensure nations can reach their zero emissions goals,” he says. And if the cost of making hydrogen through renewables continues to fall the industry can move away from coal-based hydrogen production. “It will depend on the market,” he adds.

Kawasaki Heavy Industries launched the world’s first hydrogen carrier last year. It will ship the fuel for the Australia-Japan supply chain project © Kyodo Photo via Newscom/Alamy Live News

‘Green’ energy

About 70m tonnes of hydrogen are already produced every year, mainly for use in heavy industries, such as oil refining, ammonia and steel production. In the vast majority of cases it is produced through the burning of fossil fuels and the emissions generated are not captured and stored.

These traditional carbon intensive methods can produce so called “grey” hydrogen at costs of about $1 per kg, which compares with costs of $3-7.5/kg for “green” hydrogen, which is made through the use of renewable energy, according to BofA. But costs of renewable energy and the electrolysers used to generate hydrogen from water are falling rapidly.

“We think we’re reaching an inflection point where green hydrogen could supply our energy needs, fuel our cars, heat our homes and be used in industries that have no economically viable alternative to fossil fuels,” says Haim Israel, global head of thematic investment strategy at BofA. 

“We have a long road ahead of us, but this is an energy revolution that’s happening because it must . . . Together with renewable electricity, green hydrogen gives us a shot at attaining a zero carbon-emission global economy by 2050,” says Mr Israel. 

This transition to a solar, wind and green hydrogen economy poses a challenge for economies reliant on exports of fossil fuels, which are now exploring ways to tap into the emerging sector. 

In July a consortium led by Air Products, ACWA Power and Neom announced plans for a $5bn green renewables and hydrogen plant in Saudi Arabia, which aims to begin shipping ammonia to global markets by 2025. Russia recently revealed plans to export 2m tonnes of hydrogen by 2035, in part motivated by concerns that the EU and other customers are embracing zero emissions policies.

Australia’s ruling Liberal party — a staunch supporter of coal and gas — has already begun preparing for an energy transition. In October Canberra awarded “major project” status to a $36bn renewable energy project, which aims to build the world’s biggest power station and export green hydrogen and ammonia from a remote desert in the outback to Asia.

Airbus has developed a concept aircraft as part of its plans for hydrogen powered passenger planes © Airbus

Called the Asian Renewable Energy Hub, it is backed by Vestas, the wind turbine group, Intercontinental Energy, Macquarie Group and CWP Renewables. It involves building a massive solar and wind farm on a 6,500 sq km site in the Pilbara, a region in Western Australia better known as a source of LNG.

As well as exporting energy, the project would aim to supply iron ore miners and LNG producers in the Pilbara. Hydrogen could also attract new businesses to the region, including the production of “green steel”, says Mr Hewitt.

While analysts question whether hydrogen could reinvigorate Australia’s steel industry — which faces tough competition from Asian rivals — many feel the pivot towards a hydrogen economy is beginning to take place due to the falling costs of renewable energy, electrolysers and fuel cell technology.

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Bernstein, an investment group, forecasts the cost of producing green hydrogen could fall to less than $2/kg by 2030, which is equivalent to $1/gallon for petrol. Fuel cell costs should decline by 80 per cent over the same period to $30/kW, as the hydrogen industry scales up. By the mid-2020s heavy goods vehicles powered by hydrogen fuel cells could be more competitive than diesel trucks and by 2030 fuel cell cars could rival electric vehicles in terms of the total cost of ownership.

“The pivot toward hydrogen is starting to make compelling business sense,” says Neil Beveridge, analyst at Bernstein. “Those that embrace the energy transition may survive and even thrive, while those that do not risk being confined to history.”

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McKinsey partners sacrifice leader in ‘ritual cleansing’




The news this week that Kevin Sneader would be McKinsey’s first global managing partner since 1976 not to win a second three-year term stunned many of the consultancy’s partners and influential alumni. 

Few could point to any one mis-step that had felled the 54-year-old Scot. “It added up,” one veteran said simply of the litany of reputational crises he had tried to resolve. 

But nor did many think that Sven Smit or Bob Sternfels, who beat Sneader to the last round of voting, would represent a cleaner break with the past — or that whoever won the final vote in the next few weeks would face an easier task than he had. 

Within days of taking over in 2018, Sneader flew to South Africa to apologise for failures that had embroiled the firm in a corruption scandal. “We came across as arrogant or unaccountable,” he admitted in a speech that began with the word “sorry”.

That set the tone for a tenure defined by the need to make up for other crises that largely predated his promotion, from damaging headlines about McKinsey’s contracts in authoritarian countries to US states’ lawsuits over its work to boost sales of highly addictive opioids

Speaking to the Financial Times less than two weeks before senior partners voted him out, Sneader said he had focused on making the private firm more transparent, more selective about which clients it took on and better structured to avoid surprises in a global group whose rapid growth had made it more complicated. 

According to people who witnessed those efforts, though, pushing them through consumed much of the political capital Sneader needed to win re-election. For some, particularly younger staff, his reforms did not go far enough. For an older group more prominent among the 650 senior partners who vote on their leadership every three years, they went too far.

Kevin Sneader’s failure to win a second three-year term as McKinsey’s global managing partner has stunned many at the consultancy © Charlie Bibby/FT

Sneader’s downfall looked like a case of “the partners not wanting to take the medicine”, one former partner said. Another argued that Sneader’s push for more oversight over partners who prized their freedom had made the firm “too corporate”, while some Sneader allies saw the “protest vote” as a rejection of his reforms rather than a clear mandate for Smit or Sternfels. 

Sneader was not helped by the timing of this month’s $574m opioid settlement with 49 US states, added Yale School of Management professor Jeffrey Sonnenfeld, who said that consultants outside the US did not understand why he agreed to the payout.

Sneader might have been able to reassure them in person, but with McKinsey’s frequent-flyers grounded by a pandemic, “there are limits to what you can do with Zoom”.

‘In business, as in poker, there is uncertainty’

Laura Empson, author of Leading Professionals, said one question now was whether the vote against Sneader was “a ritual sacrifice to appease the bad PR” or a sign that McKinsey’s partners were willing to take more radical action. 

The run-off between Sternfels and Smit may not resolve that issue, say people who know them both, who note that they are of a similar age to Sneader and members of the leadership council that signed off on his reforms. 

Sternfels, a California-born Rhodes scholar who joined McKinsey in 1994, was the runner-up to Sneader in 2018. As head of “client capabilities”, he has a role akin to that of a chief operating officer and is closely associated with the rapid expansion of the firm under Dominic Barton, Sneader’s predecessor. 

Based in San Francisco after six years in Johannesburg, the former college water polo player is known as an effective operator and, the second former partner says, “the guy who built the new business models”. 

But some of McKinsey’s newer activities have dragged him into controversies: last year, he was called to testify in litigation brought by the restructuring specialist Jay Alix — the founder of rival consultancy AlixPartners — over McKinsey’s disclosures while advising clients in bankruptcy. 

When a frustrated judge asked whether he was dealing with “a group of people who are so educated, so arrogant, that they just can’t admit that they’re wrong”, Sternfels apologised, insisting that “we try and not foster arrogance”. 

Smit, who joined in 1992 and is based in Amsterdam, is known inside McKinsey as a more cerebral figure. Now co-chairman of the McKinsey Global Institute, the consultancy’s research arm, “there’s not a university campus he couldn’t parachute into and be received as one of the smartest people in the room,” Sonnenfeld said. 

The Dutch mechanical engineer earlier ran McKinsey’s western European operations and may attract less support from US peers, but the first former partner describes him as “the conscience of the firm”, who will say no to ideas with which he disagrees. The second thinks he may “take the firm back to more of an old-school McKinsey”.

Smit’s writing on topics from urbanisation to the future of work made him popular with clients and provided a glimpse into his thinking on strategy, which he likened in one report to poker. “In business, as in poker, there is uncertainty, and strategy is about how to deal with it. Accordingly, your goal is to give yourself the best possible odds,” he wrote.

Discontent runs deep

Whether the cards fall for Smit or Sternfels, colleagues past and present question whether either will reverse the reforms that seem to have triggered unrest about Sneader. 

“I don’t think Kevin had any choice but to centralise,” said one Sneader ally.

One of the former partners added: “What were the alternatives? It’s a large firm to govern and you do need structures.”

What the election result has already revealed, however, is that discontent with the state McKinsey finds itself in runs deeper than had been obvious outside the firm. 

Whichever candidate triumphs, they will need to listen seriously to the concerns of alumni, clients and policymakers and make clear that he plans meaningful cultural reforms, Empson says.

Sneader’s successor will also have to defy the odds in professional services firms, she adds. “Often with partnerships, when something goes wrong, they appoint someone else in reaction to the problem and that isn’t the solution either and they cycle through another round of leaders quickly,” she says: “It’s almost as though they have to go through this ritual cleansing.” 

McKinsey, which does not disclose its financial performance, earned annual revenues of $10.5bn in 2019 by Forbes’ estimate. Sonnenfeld points to the irony that the firm, which charges a premium for its services, has stumbled in this way.

“It’s odd that McKinsey doesn’t create the kind of leadership that would thrive in a crisis,” he reflected. Before the succession process starts again in 2024, “they need to go into overdrive on leadership development”.

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Investors look to Sunak for clarity on new UK infrastructure bank




Ever since chancellor Rishi Sunak announced the setting up of a UK government infrastructure bank last autumn, investors have wondered what its role will be. Next week, in the Budget, they will get the answer.

The Treasury has only said it will focus on supporting new technologies that are too risky for private finance and would contribute to meeting the government’s target of net zero carbon emissions by 2050. As examples, it gave carbon capture technology and the rollout of a nationwide network of electrical vehicle charging points. 

The selection process has just begun for a part-time chair, working two to three days a week, and it is scheduled to open on an interim basis on April 1.

The bank’s creation has prompted a debate about how infrastructure should be funded in the UK, at a time when the government’s finances are stretched and customers are likely to resist tax or bill increases, the means by which many sectors — such as ports, airports, energy, telecoms, water, and electricity — are funded. 

Many of these assets in England are owned by sovereign wealth, pension and private equity funds, and regulated by arm’s length bodies, under one of the most privatised infrastructure systems in the world.

The government’s finances have been stretched by the coronavirus pandemic, limiting funds for infrastructure projects such as rail © Niklas Halle’n/AFP

Dieter Helm, a utilities specialist at Oxford university, said the bank was “a good idea but it needs scale — a balance sheet and capital funding from the state, in which case you’ve essentially created a new arm of the Treasury”.

“The question is whether this is going to be the primary vehicle through which the government implements infrastructure,” he said. 

John Armitt, chair of the National Infrastructure Commission, a government advisory body, suggested it needed an initial £20bn over five years to make an impact and reach projects the market might be unwilling to support.

The institution, which Sunak has said will be based in the north of England as part of the government’s levelling up agenda, will partly replace the low-cost finance provided by the European Investment Bank, which is no longer available since Brexit. But it is unclear if it will be able to match the €118bn the EIB has lent to the UK since 1973.

Sunak has promised that the government, which spends much less than most European states on infrastructure, will spend £600bn over the next five years. But ministers hope that more than half their national infrastructure plan will be paid for by the private sector. However, private finance is generally more expensive than government borrowing and requires taxpayers to underwrite the construction and financial risks.

Infrastructure spending (as a % of total government expenditure) for Netherlands, UK and Germany. Also a band showing the min and max for all 31 European countries

“The government wants the public to believe that the country can have this wall of private sector investment without higher bills and taxes now but investors will only come if the government will guarantee they will receive a return and it acts as a backstop,” Helm said.

Dissatisfaction with UK infrastructure has been widespread for years: a CBI/Aecom survey in 2017 found that nearly three quarters of businesses were unhappy with facilities in their region.

The lockdowns have taken a heavy toll, for example forcing the renationalisation of rail services. At the same time the Eurostar train service, airports and airlines have called for taxpayer bailouts, while the government is also paying for some households’ broadband.

Although the prime minister has in the past year given the go-ahead to some rail and road schemes, including a tunnel under Stonehenge, other projects — including £1bn of rail improvements — have been axed. 

A road tunnel under Stonehenge is one of the infrastructure projects given the go-ahead © Matt Cardy/Getty Images

Meanwhile, local authorities — which are responsible for urban roads and other key infrastructure — have been forced to shift their limited financial resources to care for the elderly and vulnerable during the pandemic and so want more central government help.

Despite this growing demand, some investors have questioned the need for the new bank, even though they are popular elsewhere — such as Canada, which established one in 2017. 

“Given there is at least $200bn of international capital looking for projects in which they can invest, the government has to be careful it doesn’t just crowd out existing finance,” said Lawrence Slade, chief executive of the Global infrastructure Investor Association, which represents private sector investors.

He argued the new bank, which will take over the government’s guarantee scheme, should only take on projects that are “too risky” for institutional investors, pointing out that the Canada Infrastructure Bank was mandated to lose up to C$15bn (£8.45bn) over 10 years. “It’s not yet clear what question the new infrastructure bank is trying to answer,” he said.

Ted Frith, chief operating officer of GLIL Infrastructure, a £2.3bn fund backed by UK pension funds, said the EIB loaned money at competitive rates to projects that also borrowed from capital markets. “This is a global market and there are plenty of alternative sources of finance to replace the EIB,” he said. However, he added that the infrastructure bank could play a role in addressing the shortage of available projects.

While investors will put equity into existing or smaller infrastructure projects — such as an airport extension or a wind farm — they are wary of new projects, according to Richard Abadie, head of infrastructure at consultancy PwC, because the latter carry long term construction risks and do not provide an income stream for several years.

“The NIB can play a role de-risking projects but the main challenge is how we can afford and manage the cost of energy transition, not whether finance is available to bridge the cost,” he said.

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H&M experiments as it refashions stores after the pandemic




The Hennes & Mauritz flagship store on Stockholm’s main square is trying to break the mould. A woman sewing a patch on to trousers, party dresses for hire, a beauty salon and a personal shopping service is not standard fare for most fast-fashion outlets.

But it could be a taste of things to come as H&M, the world’s second-largest clothes retailer, works out what to do with its vast network of 5,000 stores after a pandemic that has increasingly pushed shoppers online. The Swedish chain is not just looking at services such as renting and repairing clothes, but on whether its shops can play a role in the logistics of online selling.

For Helena Helmersson, appointed last year as the first H&M chief executive outside the company’s founding Persson family, it is all about boosting relationships and engagement with customers.

“The physical store network that we have is one of our strengths. It’s the different roles the stores can play, the different formats. What kind of experiences are there in a store? Could they be part of an online supply chain? There are so many things to explore . . . it’s almost thrilling,” she told the Financial Times.

Helmersson, 47, has had a tough first year as chief executive. At the height of the first wave of the Covid-19 pandemic, four-fifths of H&M’s physical stores were closed and a big push online was unable to offset the hit. Sales fell a fifth in H&M’s financial year until the end of November to SKr187bn ($22.6bn), while pre-tax profits plunged 88 per cent to SKr1.2bn, interrupting a nascent recovery after years of decline.

Line chart of Ebit margins (%) showing H&M has lagged behind Inditex's profitability

Sales plunged in March and April, before rebounding strongly in the summer, and then getting hit again around Christmas.

But as the pandemic has forced H&M into speedier decision-making and increased flexibility and with Helmersson forecasting a wave of pent-up demand when Covid-19 comes under control, the chief executive is emboldened to say: “Overall, we will come out of the pandemic stronger.”

Boarded up H&M store in Minneapolis, Minnesota, US, in April 2020
With four-fifths of H&M’s stores closed at the height of the first wave, pre-tax profits plunged 88 per cent © Ariana Lindquist/Bloomberg

Anne Critchlow, analyst at Société Générale, said that relatively small increases in sales at H&M could lead to bigger rises in profits. “Potential recovery is part of the attraction of H&M to investors at the moment: it’s very highly operationally geared. H&M should be the fastest to recover,” she added.

But she argued that Inditex, the Spanish owner of Zara that overtook H&M as the world’s biggest fashion retailer by sales a decade ago, was a “better quality company”, and that the Swedish group may be a “bit slower” at returning to its pre-pandemic profit levels as some customers steer clear of its stores.

H&M’s shares fell consistently from 2015 to 2018, before largely treading water since then, although they have climbed 50 per cent since their Covid-19 low in March last year.

Helmersson, a H&M lifer who joined the retailer in 1997 as an economist, said she started to see “light at the end of the tunnel” after a “very demanding” period. “I have super-high expectations on myself. Adding a crisis on top of that, it’s been a really tough year.”

Now, however, her focus is moving to a critical question for H&M: “Where do we need to move faster?”

Line chart of Total sales growth (%) showing H&M's sales have kept pace with Inditex

Despite being in fast fashion, critics said H&M had become slow, outpaced by nimbler Inditex and online retailers such as Zalando and Asos. Inditex could get new clothes to Zara stores in weeks from nearby manufacturing sites in Europe while H&M, with more sourcing in Asia, took longer. Opening new stores gave the Swedish group an easy path to sales growth but did not help its profit margins, which have been declining consistently for the past decade.

Helmersson said H&M took “really, really fast decisions” at the start of the pandemic on how it bought garments, worked with its supply chain, and moved to selling more online. She pointed to how technology allowed designers, suppliers and the production office to work together at the same time to produce new clothes, rather than waiting for one to send a garment to another.

H&M’s rental service at a store in Stockholm, Sweden
It is ‘difficult to gauge how big’ trials such as clothes rental could become, said the H&M chief © DAVID THUNANDER

“It sounds really basic but if you do that in many processes you can be much faster. You also have data to give you more customer insight, which means you can act much quicker,” she said, adding that accessories can now go from conception to store in a few weeks, T-shirts in six weeks, and trousers in eight.

H&M is also trying to increase its speed on sustainability, bringing in a target of using 30 per cent recycled materials by 2025. Critchlow said that the group was leading the industry in its attempts to become circular, although many voice concerns over how much fast-fashion groups encourage excess consumption. Strong investor demand this month led to H&M reducing the interest rate for its maiden sustainability-linked bond, which was 7.6 times oversubscribed

Line chart of Share prices rebased showing Inditex has outperformed its rival over the past decade

Helmersson, a former head of sustainability at H&M, said that the hardest task for the retailer was decoupling its growth from its use of natural resources. She added that the trials in repairing and renting clothes as well as selling second-hand garments through the website Sellpy, in which H&M is the majority owner, were important but difficult to gauge how big they could become. “We have such a size that we can to some extent influence customer behaviour. But we will also see how willing they are,” she added.

Critchlow said H&M deserved “full credit” for the trials but that they were unlikely to lead to soaring profit margins. She added that the crucial questions were how fast H&M returned to pre-pandemic sales and profit levels and whether it could go further. “It requires H&M to manage the costs of the stores,” she said, adding that renegotiated leases during the pandemic had only helped a little.

There is also a debate about how much increasing online sales — expected to rise from 28 per cent of H&M’s total last year to about 43 per cent in 2025, according to Critchlow — help given that they come with additional costs such as delivery and returns as well as in logistics.

Helmersson is unbowed, arguing that H&M will offer multiple ways for customers to engage with the retailer through various store formats offering different services, online, and its own club. “The customer journey is constantly evolving,” she said. “We will follow, and influence. Before, it was about transactions, now it’s about relationships with customers.”

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