Q1 2025 Lexinfintech Holdings Ltd Earnings Call
Will Tan; Investor Relations; LexinFintech Holdings Ltd
Wenjie Xiao; Chairman of the Board, Chief Executive Officer; Lexinfintech Holdings Ltd
Arvin Qiao; Chief Risk Officer; LexinFintech Holdings Ltd
James Zheng; Chief Financial Officer, Director; Lexinfintech Holdings Ltd
Emma Hu; Analyst; BofA Securities, Inc
Alex Ye; Analyst; UBS
Yada Li; Analyst; CICC
Operator
Good day and thank you for standing by. Welcome to Lexin first quarter 2025 earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded.I would now like to hand the conference over to your speaker today, Will Tan, head of Capital Markets. Please go ahead.
Will Tan
Thank you, operator. Hello, everyone. Welcome to first quarter 2025 earnings conference call. Our results were released earlier today and are currently available on our IR website.Today you will hear from our Chairman and CEO, Mr. Jay Wenjie Xiao, who will provide an update on overall performance and the strategies of our business. Our COO, Mr. Arvin Zhanwen Qiao, who will then provide more details on our risk management initiatives and updates. Lastly, our CFO, Mr. James Zheng will discuss our financial performance.Before we continue, I would like to refer you to our Safe Harbor statement in our earnings press release, which also applies to this call, as we will be making forward-looking statements. Last, please note that all figures are presented in Renminbi terms and all comparisons are made on quarter over quarter basis, unless otherwise stated.Please kindly note Jay and Arvin will give their whole remarks in Chinese first. Then the English version will be delivered by Jay and Arvin's AI-based voices.With that, I'm now pleased to turn over the call to Mr. Jay Wenjie Xiao, Chairman and the CEO of Lexin. Please.
Wenjie Xiao
(Spoken in foreign language)(interpreted) Thanks for joining us today for our first quarter 2025 earnings call. Despite ongoing macroeconomic uncertainties, our GAAP net profit reached RMB430 million, a record high in 13 quarters, representing quarter over quarter growth of 18.6% and year over year growth of 113%.Our first quarter results demonstrate the success of our transformation, centering on building a model driven by data analytics, risk management, and refined operations. Having completed this challenging transformation, we have entered a new phase of high quality development. The fundamental enhancement of our core capabilities will drive sustained value creation moving forward, and we remain confident in delivering our full year performance targets.Over the past two years of transformation, we have adhered to a risk first approach, comprehensively upgrading our core business capabilities. We have iterated and optimized the full life cycle strategy covering risk management, marketing, and operations while also strengthening our system infrastructure to achieve effective coordination between risk management and business development.By far we have completed the upgrade of our risk management framework and established robust risk management infrastructure. Furthermore, we have built a comprehensive quantitative business analysis framework that supports differentiated credit assessment and pricing strategies tailored to various customer segments. These initiatives have resulted in significant enhancements to our refined operations.Lexin also achieved significant progress across multiple ecosystem businesses. For our online consumer finance business, we have notably enhanced customer acquisition capabilities and efficiency by implementing model-based decision making upfront at the traffic allocation stage.Building on our different pricing strategy, we launched the on-demand credit product, [Fenqile], flexible loan in the first quarter featuring flexible use of credit repayment. The new products together with our existing product [Fenqile and tool] forms a competitive product matrix. Our overall product offerings features optimized credit lines, rates, and tenors, making our financial solutions more competitive in the market.For our installment e-commerce business, we've revamped the risk management system, upgraded the e-commerce supply chain, and expanded the boundary of user development. We match different users with tailored installment services. As a result, approval rate of installment applications increased significantly in the first quarter, driving e-commerce GMV to increase by 16.2%.For our offline inclusive finance business, targeting small and microbusiness owners, quantitative assessment is combined with manual review to accurately determine the credit lines granted for high quality users. In the first quarter, our offline inclusive finance business not only saw lower risks but also higher product competitiveness as we continued to increase penetration of small and microbusiness owners in lower tier cities and strengthen localized operations.GMV from tier 4, tier 5, and lower regions has accounted for over 70% of our inclusive finance GMV in the first quarter alongside sequential profit growth. For our overseas business, we have completed the upgrading of financial products in the Mexico and Indonesian markets, improved the risk management system, and enhanced the operational capabilities of customer acquisition channels.In the first quarter, customer acquisition costs decreased by 19% quarter over quarter, and the overseas business have achieved profitability. Our mature risk management capabilities, technological strength, and back office support enable us to expand into more overseas markets. As these businesses develop and mature, Lexin's ecosystem will gradually become our unique competitive edge.Moving forward, we will focus on the following areas. Firstly, we will maintain a user-centric approach, focusing on enhancing user experience and promoting the steady growth of high quality customers. Our strategy involves strengthening our product portfolio with more competitive offers and flexible repayment methods designed to boost user loyalty throughout the entire customer life cycle.Additionally, consumer protection will remain a priority. We will continue to optimize customer engagement and service experiences in order to increase overall customer satisfaction. Secondly, we will strengthen synergies across our ecosystem businesses to further build our unique and differentiated competitive advantage. We will match diverse products and services to different user segments, addressing their demands for carefree consumption, and flexible liquidity throughout their entire life cycle.For the installment e-commerce business, we will improve the merchandise supply chain to meet the differentiated demands of users with varying risk profiles. This will help unlock consumption potential across different customer tiers and increase GMV from high quality users, enhancing customer engagement and acquisition.For the inclusive finance business, we will leverage our in-house offline team's capabilities in customer acquisition and personalize one on one service. We will deepen our presence in industrial clusters and specialized markets in lower tier cities, explore and refine various business models, and strengthen localized operations and deepen market penetration to increase the share of quality microbusiness owner customers.For the online consumer finance business, we will focus on expanding high quality customer acquisition channels, tapping into the potential of large platform partnerships, and broadening our business boundaries to maintain sustainable growth and scale.Thirdly, we'll increase investment in technology, particularly in applying AI to empower various business scenarios and enhance the company's competitiveness. By locally deploying mature and high performance large AI models, we will reshape business processes, improve operational efficiency, and reduce service costs. We will explore the application of AI agents with financial adaptive capabilities in the pre-lending process to autonomous decision making and task execution.We will promote process automation and decision intelligence and scenarios such as customer acquisition, operations and risk management, further enhancing the company's operational refinement. Despite the volatile macroeconoptic environment evolving industry landscape, and yielding uncertainties, our operational resilience has significantly improved, thanks to our continuously enhanced capabilities and unique ecosystem advantage.Therefore, we are confident in achieving sustained growth in net profit for full year 2025. We affirming our fully year 2025 profit guidance of substantial year over year growth. The company has always attached great emphasis on shareholder's returns and remains committed to delivering value to our shareholders through various channels.In November 2024, we announced to increase our cash dividend payout ratio from 20% to 25% of total net profit starting from 2025. The Board of Directors has approved to further increase the dividend payout ratio to 30% of net profit, effective from the second half of 2025. Now, I would like to give the floor to our CRO, Arvin.
Arvin Qiao
(Spoken in foreign language)(interpreted) Thanks Jay. Next, I will provide a review of our key initiatives and achievements in risk management for the first quarter. In the first quarter, we remain committed to our strategy of prioritizing asset quality, focusing on scale stability and profitability enhancement. Specifically, we focused on improving risk, strategy system identification capability, optimizing risk strategy system, and developing smart risk tools, as well as actively exploring the application of large models in risk management.Thanks to the initiatives we've taken, risks of both new and overall assets maintained the downward trend in the first quarter, leading risk indicator for new loans, first payment default, FPD over seven days of the first quarter declined by about 5% compared to the previous quarter. On total loan portfolio, day one delinquency ratio decreased by about 11% and 90 days delinquency ratio decreased by 9% quarter over quarter.I will introduce in detail the key initiatives we've taken for the first quarter. Firstly, in terms of risk identification capabilities, we've continued to improve the performance of our risk identification models, we built a multimodal fusion model, integrating different types of heterogeneous data including textual time series, numerical, and graph features which help further improve the risk identification capabilities by 10%.Meanwhile, we deployed a two-stage modeling structure. A standard model was used to identify the mid to long tail customer groups. We then optimized the data samples and brought additional data sources to conduct more granular risk identification for these customers, further improving the risk differentiation capabilities.Besides, for customers from different channels, we conducted deep joint modeling with our channel partners. This allowed us to fully leverage both partner channel data and our own internal data to improve model performance.Secondly, we also strengthened risk management through preventive and proactive approaches. Regarding high risk assets, we adopted a preventative approach. Specifically for customers who have borrowings across multiple platforms, exhibit weaker repayment capabilities, or present volatile risk profiles, we reduced or suspended their credit lines. Additionally, we optimized repayment reminders and enhanced the auto debit repayment functionality both on and after the due date to minimize the formation of overdue assets.Regarding high quality assets, we conducted a proactive approach. We promoted the growth of high quality assets by strengthening the competitiveness of offers to customers. These concerted efforts have collectively contributed to reducing risks, optimizing our asset mix, and enhancing asset quality. In the second quarter, we will respond more to market dynamics and asset quality performance, fully leveraging a combination of proactive and preventative risk management approaches and tools to ensure the continued decline in asset risk levels.Thirdly, we continue to ramp up the development and application of intelligent risk management tools which significantly increase the accuracy and time efficiency of credit line and pricing decision making. We have developed credit line robot and pricing robot and gradually applied them in various business scenarios.Our A/B testing results demonstrate that these robot tools substantially helped improve the effectiveness and time efficiency of decision making. Over the past year, our efforts in enhancing risk identification capabilities, building a more robust risk management framework, and applying intelligent risk management tools comprehensively have contributed to a sustained decline in risk levels for both new and total assets for four consecutive quarters.Looking ahead to the second quarter of 2025 amid increased volatility in the external environment and evolving industry dynamics, we will continue to strengthen our capabilities in automated high risk assets, screening and resolution, further refine credit approval and lending management, and swiftly identify and address potential high risk assets. These measures are aimed at ensuring that key risk indicators remain on a downward trajectory.Next, I will hand over to our CFO James to provide a review of the company's financial performance for the first quarter.
James Zheng
Thanks, Arvin. I will now provide a detailed overview of our first quarter financial results. Please note that all figures are presented in Renminbi terms and all comparisons are made on a quarter over quarter basis unless otherwise stated. Our first quarter performance marked another strong leap forward and well on track on our profit growth road map.During the quarter, our net income increased by 18.6% to RMB430 million and 113.4% year over year, even though the overall new loan volume and the loan balance declined slightly due to the Chinese New Year seasonality.Our net income margin increased to 13.9% from 9.9% last quarter. Net profit take rate calculated as the net income divided by the average loan balance increased to 1.58% from 1.31% from last quarter and 0.66% a year ago, and advancing by 27 basis points sequentially. The net income, net income margin, and net pay rate, all reached the highest level in the last three years, laying a solid foundation for future profit expansion.From unit economics perspective, the 27 basis point net profit take rate improvement quarter to quarter is led by a 47 basis point increase of revenue take rate, which is calculated by dividing the sum of credit facilitation service and the tech empowerment service income after deducting the funding and the credit cost by the average loan balance.During the quarter, the revenue take rate increased from 6.22% to 6.69% of the previous quarter. The improvement of revenue take rate reflects our ongoing risk centered business transformation, which resulted in better asset quality and therefore a lower credit and funding cost and a refined business operations.The specific business execution involved focused on retaining prime customers through competitive loan offers, including lower prices and improved tenor, and then migrating subprime borrowers to capitalize model via Intelligent Credit Platform, ICP, to reduce the risk exposure of the optimized profitability.Next, I will provide more details in the following three highlights. First, reduction in credit cost is driven by continuous improvement in asset quality. The reduced the credit cost reflected our sustained improvements in asset quality driven by our enhanced risk management capability.The following key risk indicators demonstrated improvement: On the low balance side, day one delinquency rate declined by 11% and the 90 day delinquency ratio declined by nearly 33 basis points from 3.6% to 3.3%. On the new loan side, on a quarterly basis, the first payment default rate over 7 days decreased by about 5%. With higher quality new loans gradually replacing matured vintage loans, we expect to see continued asset quality improvement contributing to our profit expansion.Meanwhile, our provision coverage ratio, which is calculated as the total outstanding provisions divided by the total outstanding loan balance between 90 and 180 days, still sufficiently add 268%, the highest level since the second quarter of 2024.Second, decrease in funding costs. Funding costs for new loans and the capital heavy model dropped by 9 basis points to 3.93%, further boosting our revenue take rate. While we've already achieved relatively low funding costs, we expect to maintain this advantage through improving asset quality, strengthening partnerships with funding partners, and diversifying our funding sources.Third, capital-light model volume growth. During the quarter, we have optimized our risk bearing arrangements by shifting more high risk volumes to the capital-light model through our Intelligent Credit Platform, ICP, where we don't take principal risks for customers with risk rating beyond our preferred range.Total volume and the cap light model increased by 43% quarter over quarter and accounted for 28% of the total GMV up from 20% of last quarter. And in the capital heavy model, we have improved competitiveness of our offering with a lower pricing and improved the tenor to attract the prime customers.The APR was lowered about 100 basis points from 23.9% down to 22.6% for the last quarter, while at the same time, the user quality has improved, as evidenced by the subprime customers taking a higher percentage of new loans.With the capital-light model, we migrated more subprime customers to the ICP platform, offering risk-based pricing and shortened loan tender to reduce overall risk exposure. As a result, the overall tenor for new loans and both capital heavy and capital-light models slightly decrease quarter over quarter.To summarize the above three highlights, due to the improvement of credit cost and funding costs, our net profit take rate increased from 1.31% to 1.58% last quarter. Additionally, the capital-light model volume growth has lowered the risk exposure for our businesses, enabled differentiating risk-based pricing for high risk users, enhanced risk adjusted returns, and sustained our offer competitiveness for high quality customers.Let's go through some key financial items. Total revenue from lending related business, which include credit facilitation and service income and the tech empowerment service income combined decreased by 15% quarter to quarter. There are three factors attributing to the change. One, lower APR of loans and the capital heavy model as our effort to attract better quality customers as mentioned earlier. Two, increased early payoff due to more flexible early payoff terms for offer competitiveness and the customer satisfaction.Three, the GMV volume shift to capital-light model where the revenue is booked net of related credit cost. While in comparison and in the capital heavy model, gross revenue and the credit costs are booked in two separate lines. Loan volume originated and the capital heavy model decreased by 11% quarter over quarter and accounted for 72% of the total GMV, down from the 80% in the first -- in the previous quarter. As a result, credit facilitation and service income primarily associated with the capital heavy model decreased by 19% quarter to quarter.In contrast to the decline in the credit facilitation service income, the tech empowered service income, which is primarily associated with our capital-light model, increased by 4% quarter to quarter. This revenue now accounted for 20% of total revenue, up from 16% last quarter, mainly driven by the increased volume from the capital-light model and partially offset by increased provision driven by our prudent provision estimation.Similar to the revenue side of the story, total credit costs, including to provisions, total provisions and a fair value change of financial guarantee derivatives and the loans at fair value decreases by [40%] quarter over quarter. This is partially due to the net wealthy accounting method, as well as the contribution from the asset quality improvement.As a cross reference, we can take a holistic view to add total revenue and the credit cost and both the capital heavy and capital-light models together. Total revenue from lending related business net of total cost was about [RMB18.2 billion], increased by 5.6% or [RMB97 million from $17.2 billion] last quarter.Separately, installment e-commerce platform service income decreased by 16.4%, while GMV grew by 16.2% quarter over quarter. Similarly, this difference was caused by accounting difference due to the volume mixed shift between the third party sellers and the company direct sourcing. For third party sellers, only platform service commission is recognized as a revenue rather than the entire transaction amount under the direct sourcing model.This structure volume mix change is evidenced by the [sales-wealth] volume from third parties seller accounting for 56% of the total e-commerce GMV in the first quarter, up from 36% in the last quarter. As a result, our installment e-commerce platform service income decreased despite total e-commerce GMV increase from [RMB970 million to RMB1.1 billion].Furthermore, it's worth highlighting that the gross profit from e-commerce business more than doubled in the first quarter. As a priority within our integrated ecosystem, we'll keep growing our e-commerce business moving forward. By developing tailored financial solutions that actively stimulate and fulfill the evolving consumption and financing needs across diverse custom settlements, we aim to diversify our revenue structure and eventually enhance the overall operational resilience and the profitability.Total operating expenses, which include processing and servicing costs, sales and marketing expenses, research and development expenses, and general and administrative expenses remained relatively stable at [RMB1.3 billion].Driven by the aforementioned factors, our net income in the first quarter increased by 18.6% quarter to quarter from RMB363 million to RMB430 million and then when net income margin increased from 9.9% to 13.9%. For balance sheet items as of March 31, our cash position, which includes cash, cash equivalent, and restricted cash, was approximately RMB5 billion. Shareholders equity remained solid at about RMB11.2 billion.Looking ahead, despite challenging macroeconomic environment, evolving industry landscape, and geopolitical uncertainties, the management remains confident in achieving a significant year over year growth in net income, reaffirming our full year earning guidance.This concludes our prepare remarks for today. Operator, we're now ready to take questions.
Operator
(Operator Instructions)Emma Hu, BofA.
Emma Hu
(Spoken in foreign language)So how does the company address various external challenges such as the impacts of the new rules on loan facilitation business and geopolitical uncertainties on the company's listing standards? Does the company have any plans for Hong Kong IPO?
Wenjie Xiao
(Spoken in Hindi)(interpreted) This is the translation for Jay's remarks. Despite significant changes in the macroeconomic environment and industry landscape this year, the company has delivered outstanding results by adhering to strategy, focusing on risk management, data analytics, and refined operation. Although external challenges persist, the company is well prepared to navigate through them, and management remains confident in achieving its 2025 performance targets.Regarding the new rules on loan facilitation business, we welcome and support regulators efforts in standardizing the industry. While the full impact of these rules remain to be seen in the short term, they're expected to foster a more compliant, healthy, and sustainable environment for the sector in the long run, a trend that particularly benefits large and compliant platforms membership. For us, we have the capabilities and resilience to address the potential impacts of the new rules. Therefore, we are confident in achieving our full year profit target.Regarding the geopolitical uncertainty, the company has proactively taken measures to prepare, including exploring potential listings on different exchanges, including Hong Kong Stock Exchange, in order to protect the interests of all shareholders. Once any concrete plans or significant progress materialize, we will promptly disclose relevant information to the market in accordance with laws and regulations.
Operator
Alex Ye, UBS.
Alex Ye
(Spoken in foreign language)So my, questions, the first one is, what are the progress and development plans for your ecosystem business?And the second is, can you give us more color in terms of where we are in terms of our [asset quality] improvement trend and how to understand the strength of the current risk management capabilities and what's your plan for the next stage? Thank you.
Wenjie Xiao
(Spoken in foreign language)(interpreted) Lexin has always had very diverse business employment in not only having online business but also offline, and we have unique competitive edge in our own ecosystem business. More specifically, as I mentioned in my remark for our online customer business, we continue to improve the risk management capabilities and operational refinement and have witnessed a substantial enhancement in the capability and efficiency of customer acquisition.Going forward, we're focused on providing tailored products to match customers with varying profiles in reaching our product portfolio to enhance customer offer competitiveness and expanding customer acquisition in China. Meanwhile, we will further explore collaboration with huge traffic platform, which has already exhibited good momentum this year and expanded our business to achieve sustainable volume growth.For our installment e-commerce business, we have resembled risk management system, upgraded merchandise supply chain, and expanded the business boundary. By tailoring employment services to users based on their risk profile, we better address diverse customer demands.Going forward, we will fully leverage our e-commerce to better engage existing customers and attract new ones, making it a key lever for us to adapt to industry changes and enhance the company operational resilience.For our offline inclusive finance business, which is quite a unique feature of our business [performance], we have strengthened our in-house channel development and optimize the risk management model to ensure that differentiate competitiveness of our products and also secure sequential increase of [process].Going forward, we will continue to increase the penetration of microbusiness owners in lower tier cities, enhance localized business development, and increase operational efficiency. Well, I [always said to] further optimize the business model and capabilities at various fronts. By far, our [average rate of return] have achieved profit overall. Going forward for overseas business, we will adopt a prudent approach in terms of investment in discussion. Thank you.
Arvin Qiao
(Spoken in foreign language)(interpreted) Over the past year, we have comprehensively upgraded our risk management system across multiple fronts including risk identification, differentiate our risk strategy, differentiated risk pricing, risk bearing models, risk monitoring and early warning, and risk management tools, et cetera. This has led to a significant improvement in our risk management strength and our ability to handle risk volatility.Thanks to our efforts and upgrade in the past year, we have established a mature, robust, quantitative driven risk management system. As a result, risk levels of both new and overall assets have exhibited a sustained decline over the past year.In light of the persistently challenging external environment and ongoing uncertainty, we remain committed to our risk centric strategy and prudent operational approach. We'll further strengthen our risk management capability while actively exploring the application of large models to enhance the accuracy and efficiency of our risk management system. This will ensure asset rate maintain the current downward trajectory.
Operator
Yada Li, CICC.
Yada Li
(Spoken in foreign language)Then I'll do the translation. First, congrats to the record high results and thanks for taking my questions. My first question is, in this quarter, I've noticed that the revenue structure experience and material changes, and I was wondering what are the main reasons to drive this change.And second, what is the company's plan in shareholders' returns going forward? Thank you so much.
James Zheng
Okay, I will take the first question and ask Jay to talk about the second. So the first question, first of all, as I mentioned in my previous script, it is important to bear in mind that despite the different factors contributing to the quarter-over-quarter revenue variance analysis, we should always take a holistic view to look at the total revenue and the credit costs together to get the big picture.The big picture is that, from the unit economics perspective, our revenue take rate increased from 6.22% to 6.69% quarter-over-quarter. And the net take rate after offsetting the operational cost increased from 1.31% to 1.58% quarter-over-quarter.So in terms of the specific revenue variance analysis, basically the quarter-over-quarter variance in total revenue was primarily due to lower credit facilitation service income driven by the reduced the pricing, higher early repayments, and a shift in GMV towards the capital-light model.While the tech empowerment service line income saw some increase driven by the capital-light GMV volume migration, here the net-based accounting recognition is used where the revenue is net of related credit costs instead of recognizing revenue and the credit cost in two separate lines. So related to this, the total credit cost declined at the same time, partially due to the same reason.Additionally, despite the sequential GMV growth of 16.2% quarter-over-quarter, the installment e-commerce platform revenue decreased similarly as a result of the revenue recognition difference due to the volume mixed shift between the third party sellers and the company direct sourcing. For the third party sellers, only the platform service commission is recognized as a revenue rather than the entire transaction amount and the direct sourcing model. The sales volume from the third party seller accounts for 56% of the total e-commerce GMV in the first quarter, up from the 36% in the last quarter.So, in conclusion, the, rapidly structural variance really reflected our ongoing risk-centric business transformation and our operational refinement. While the accounting treatment across different business models may cause some top line variances, however, our profit and a profit margin continue to improve, really firmly tracking our plan.
Wenjie Xiao
(Spoken in foreign language)(interpreted) The company has always attached great importance on shareholders' return and is committed to delivering value to shareholders in various needs. Since November 2024, the company has increased its cash dividend payout ratio twice within six months, demonstrating its emphasis on shareholders' return. This not only testifies the company's stable and reliable profitability, but also reflects the management confidence in achieving stable and sustainable growth in the future.The company will continue to create value for shareholders. We understand investors' expectations regarding shareholders' return and will work to align our dividend policy with shareholders' expectations by considering the company's resources, its business development, and capital market conditions while striving to enhance returns appropriately.
Operator
Thank you for all the questions. I see no further questions at this time. I will now hand the conference back to Will for closing remarks.
Will Tan
Thank you, operator. This conference is now concluded. Thank you for joining today's call. If you have any more questions, please do not hesitate to contact us. Thanks again.
Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.
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'The program stated that the Air Force definitized the MTA rapid prototyping effort contract in August 2024 to deliver two operationally capable E-7A prototype aircraft in fiscal year 2028,' GAO's new assessment further notes. 'The program added that the total acquisition cost increase of 33 percent resulted from updated methodologies to include additional scope related to non-recurring engineering, with the primary drivers being software and air vehicle subsystems.' Last year, the Air Force had been very open about the difficulties it was having finalizing a contract with Boeing for the RP jets. The two parties ended up agreeing on a deal valued at nearly $2.6 billion. A contracting notice the service put out earlier this year also pointed to significant expected differences between the RP aircraft and the full production examples, including the possibility of a new radar. Existing versions of the E-7 in service elsewhere globally today are equipped with Northrop Grumman's Multi-Role Electronically Scanned Array (MESA) radar. The USAF's move to drop the E-7 and leverage the E-2D, which is already in the Pentagon's stable, prompts many questions. For instance, just how many of these aircraft will the USAF end up with? As of 2024, the USAF's E-3 fleet stood at 16 aircraft. Above all else, there are major capability trades here. The Hawkeye is a much smaller aircraft than both the Sentry and the Wedgetail. It is extremely capable, but it is also optimized to exist within the confines of carrier operations. The crew size is just five individuals. This limits the amount of shear manpower to perform highly complex operations and other tasks beyond traditional AEW&C. The E-2 also has less range and is far slower than both the E-3 and E-7. This means longer transit times, and the aircraft doesn't fit in as seamlessly with the jet-centric operations for the counter-air mission the service currently enjoys. The E-2D's AN/APY-9 radar from Lockheed Martin is hugely capable, but many of its other advanced data fusion and relay systems are unique to the Navy. These systems would either be stripped or just left unused for USAF-focused operations. It's also possible that other systems will replace them, but this will cost money and take time to integrate and field. Hawkeyes, being turboprop aircraft, also operate at lower altitudes, giving their radar, radio systems, and electronic surveillance suites reduced line-of-sight, limiting their range and fidelity at distance for some targets and surveillance application, in some cases. Then there is the aerial refueling issue. The E-2D has gained this ability relatively recently, which expands its endurance. Typical missions can now last over seven hours. However, the aircraft uses the Navy-preferred probe-and-drogue refueling method, not the boom and receptacle one favored by the USAF. The USAF's KC-46 tankers do have a hose and drogue system and some of the service's KC-135Rs have podded hose and drogue systems. Otherwise, they require a basket attachment to their boom, often called the 'Iron Maiden' or 'Wrecking Ball,' due to its rigid metal frame and potential to smack into and damage airframes. This system makes the KC-135R useless for refueling receptacle-equipped aircraft when it is fitted. The E-2D also refuels lower-and-slower than jet aircraft. All these issues are not 'show-stoppers,' but they are ones that will impact operational planning and flexibility. The E-2D, being already a highly upgraded and a much smaller airframe, also lacks the same capacity for future expansion compared to the E-7. This could include adding more personnel for various non-traditional functions, including using its advanced radar to scan the surface more extensively or for unique battle management needs, such as controlling future drone swarms, or even for more extensive passive intelligence collection and exploitation and data fusion operations. High-bandwidth datalinks can possibly make up for some of the manpower differentials, allowing folks on the ground to execute critical functions in near real time as part of a distributed crew arrangement, but there are downfalls to this concept, as well. On the other hand, having commonality with the Navy's AEW&C aircraft should help reduce costs for both services and accelerate the type's entry into USAF service. It could also benefit the future evolution of the E-2D as more money will be flowing into the program. It's also a very capable and well-proven platform, lowering risk. Above all else, joint service E-2Ds could be absolutely critical to the USAF's Agile Combat Employment (ACE) combat doctrine that will see its forces distributed to remote forward locales and constantly in motion. The E-2D's turboprop performance, robust landing gear, and arrested landing capabilities mean it can be pushed far forward to very austere operating locations with limited runway length. And it can do this without sacrificing the quality of the data it collects or the efficacy of its use as a battle manager. This is something a 707 or 737 platform simply cannot match and could prove decisive in a major peer-state contingency. TWZ highlighted these exact benefits after U.S. Central Command (CENTCOM) released a video last year showing a Navy Hawkeye refueling from a USAF HC-130J Combat King II combat search and rescue aircraft, which can act as a probe-and-drogue tanker, primarily for helicopters and Osprey tiltrotors. A @USNavy E-2D refuels inflight from an @usairforce HC-130 over the U.S. Central Command area of responsibility. — U.S. Central Command (@CENTCOM) August 6, 2024 While the USAF's move away from the E-7 is certainly surprising, and it will result in shortfalls in some areas, it also unlocks new capabilities, some of which are arguably more applicable to tomorrow's wars. It also buys down additional risk, which is looming very large as it isn't clear at this time, at least publicly, how far along the Pentagon's persistent space-based aircraft sensing constellation development actually is. All of this still has to make it through congressional approval, which could be a challenge considering the special interests involved. But as it sits now, the flying service is pivoting big once again when it comes to its increasingly dire AEW&C needs. Contact the author: Tyler@
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16 minutes ago
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Why Trump Is Losing His Trade War
The Atlantic Daily, a newsletter that guides you through the biggest stories of the day, helps you discover new ideas, and recommends the best in culture. Sign up for it here. Donald Trump's trade war is fast turning into a fiasco. When the president started the war, Team Trump advertised it as certain to be fast, easy, and cheap. Trump would impose tariffs. The world would yield to his will. The tariffs would do everything at once. They would protect U.S. industry from foreign competition without raising prices, and generate vast revenues that would finance other tax cuts. Americans could eat their cake, continue to have the cake, and trade the same cake for pie—all at the same time. 'There's not going to be any pain for American workers,' Trump's press secretary, Karoline Leavitt, vowed in April. The advertising rapidly proved false. The U.S. economy is slowing because of the Trump tariffs; China's is thriving in spite of them. Team Trump falsely promotes vague five-page outlines with alienated former allies as big deals; China is successfully wooing some of its former rivals, such as Vietnam. America's standing in the world is measurably sinking; China's is measurably rising. Courts are ruling that Trump's tariffs are illegal; public opinion mistrusts the tariffs, regarding them as expensive and unproductive. The promise of huge flows of painless money from tariff revenues is evanescing as the fantasy it always was. Oh, and the country's largest chain of Halloween retailers canceled its traditional summer grand opening because of Trump-caused supply disruptions. What comes next, as things go wrong? Trump's first instinct is to blame the targets of his economic aggression for not cooperating with his wishes. On May 30, Trump accused China of violating an imaginary agreement with him. On June 4, he complained that Xi Jinping was 'extremely hard to make a deal with.' But Trump seldom chooses to quarrel with foreign dictators, saying in the same breath, 'I like President Xi of China, always have, and always will.' Today, in all-caps emphasis, Trump announced that a deal had been done, declaring that his 'RELATIONSHIP IS EXCELLENT' with the Chinese president-for-life. The lack of details in the announcement strongly suggests that Trump yielded more and gained less than his publicity apparatus wants Americans to believe. That's because, in reality, Trump's global trade war has always been subordinate to his domestic culture war. Trump much prefers to vent his rage against enemies within. Get ready for him to blame the failure of his trade war on fellow Americans who did not support him enough. The Trump tariffs will be ballyhooed as an act of patriotism, a necessary sacrifice to be laid on the altar of the nation. One of Trump's television talkers reminded viewers that Americans melted down their pots and pans to win the Second World War. If the president needs to ration dolls and colored pencils, how dare any true American raise a contrary voice? The coming call for national solidarity with Trump's Great Patriotic War against imported Halloween costumes deserves all the scoffing it will get and more. Trump ordered the nation into economic warfare. He did not do any of the things necessary to create any hope of success in that war. The impending defeat is his personal doing, entirely his own fault. [Jonathan Chait: The good news about Trump's tariffs] Recall the classic Norm Macdonald bit in which the comedian marvels that in the 20th century, Germany decided to go to war with 'the world,' twice. That was meant as a joke. Trump adopted it as his actual strategy. Trump's rationalizers invoke anxiety about China as his justification. Yes, China numbered among the targets of Trump's 'Liberation Day' tariffs. But so did Australia. So did Brazil. So did Canada. So did Denmark. So did Egypt. And on and on, through the whole alphabet of American allies and trading partners. The United States is by far the planet's strongest national economy, producing slightly more than one-quarter of the planet's goods and services. Including its historic and recent partners, the United States could potentially lead a group of nations sufficiently influential to write economic rules that everybody would need to take into account. That fact underpinned the Trans-Pacific Partnership concept of the Obama years: Form a large-enough and attractive-enough club, and China will have no choice but to comply with the founding members' terms. Trump's alternative concept is for a quarter of the world economy to cut itself off from the other three-quarters, and then wait for the three-quarters to beg for mercy from the one-quarter. Unsurprisingly, that concept is fast proving a stinker. But suppose the president sincerely believed that the U.S. had no choice: The one-quarter must fight the three-quarters as a matter of national survival, or 'liberation,' from the tyranny of foreign goods and services, foreign fruits and vegetables. Crazy, but suppose he did. What would follow? A rational president would grasp that a U.S. economic war against the rest of the world would be a big, protracted, and painful undertaking. Such an enormous commitment would require democratic consent from a large majority of the public, all the more so because the United States is starting the war itself. Trump's trade conflict is very much a war of choice. The president must explain why he chose it. A rational president determined to fight an economic war would try to mobilize broad support from the public and from Congress. He would seek allies in Congress, and not only from his own party. He might, for example, compromise on some of his other goals. If he also wanted to tighten immigration at the same time as waging a global trade war, or to roll back DEI programs, or to cut taxes for the wealthy, or to relax anti-corruption measures, or to pardon the crimes of his violent supporters, or to plan any other ambitious but divisive project, he might think twice about pursuing them. You can't ask your opponents to pay more and do without if you won't forgo even a scrap of your partisan agenda. You can ask anyway, but don't be shocked when they answer with a Bronx cheer. That president would also lead from the front. A president seeking to inspire Americans to endure hardship for the greater good would certainly not throw himself a multimillion-dollar birthday parade at public expense. He would not accept lavish gifts from foreign governments, would not operate a pay-for-access business that collected billions of dollars for himself and his family from undisclosed favor-seekers. While asking other Americans to accept less, he would not brazenly help himself to more. He certainly would not troll, insult, and demean those who may not have voted for him, but whose cooperation he needs now. This president has, of course, done the most egregious version of every item above. His economic war is adjunct to his partisan culture war. He did not seek broad support. He gleefully offends and alienates everyone outside his base. Which works for him as long as times are prosperous, as they were in the first three years of his first administration. Allow things to get tough, though, and it's a different story. Trump cannot ask for patience and trust, because at least half the country has unalterably judged him as untrustworthy and out only for himself. [David Frum: The ultimate bait and switch of Trump's tariffs] Trump bet his presidency on the theory that trade wars are 'good and easy to win,' as he posted during his first term. His second-term trade war, however, is proving not so easy, and not so good, either. He is fighting it alone, without global allies or domestic consent, because that's his nature. It's now also his problem. In the 1983 movie WarGames, a computer thinks its way through dozens of terrifying nuclear scenarios and concludes: 'The only winning move is not to play.' In other words, the only safe way to conduct a nuclear exchange is never to have one. The same could be said of trade wars, at least when fought by one nation, however big and rich, against all the others, all at once. Trump decided he did not care about Americans' support for his economic war. He did not ask for their backing. He did not make any effort to win it. He willfully alienated at least half of the public. Now that he's losing, his supporters want to scold the country because it rejects the whole misbegotten project as stupid and doomed. Don't listen to their reproaches. This is Trump's war, and his alone. The only way to win now is to end Trump's trade war as rapidly as possible. And then end the excessive, unilateral trade powers of a corrupt president who blundered into a pointless and doomed conflict without justification, plan, or consent. Article originally published at The Atlantic
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20 minutes ago
- Yahoo
Deal gets US-China trade truce back on track: Trump
A deal getting the fragile truce in the US-China trade war back on track is done, US President Donald Trump says after negotiators from the United States and China agreed on a framework covering tariff rates. The deal also removes Chinese export restrictions on rare earth minerals and allows Chinese students access to US universities. Trump took to his social media platform to offer some of the first details to emerge from two days of marathon talks held in London that had, in the words of US Commerce Secretary Howard Lutnick, put "meat on the bones" of an agreement reached last month in Geneva to ease bilateral retaliatory tariffs that had reached crushing triple-digit levels. "Our deal with China is done, subject to final approval with President Xi (Jinping) and me," Trump said on the Truth Social platform. "Full magnets, and any necessary rare earths, will be supplied, up front, by China. Likewise, we will provide to China what was agreed to, including Chinese students using our colleges and universities (which has always been good with me!). We are getting a total of 55 per cent tariffs, China is getting 10 per cent." It was fantastic to team up with Secretary Scott Bessent and Ambassador Jamieson Greer. World-class team delivering world-class results for America. — Howard Lutnick (@howardlutnick) June 11, 2025 A White House official said the 55 per cent represents the sum of a baseline 10 per cent "reciprocal" tariff Trump has imposed on goods imported from nearly all US trading partners; 20 per cent on all Chinese imports because of punitive measures Trump has imposed on China, Mexico and Canada associated with his accusation that the three facilitate the flow of the opioid fentanyl into the US; and finally pre-existing 25 per cent levies on imports from China that were put in place during Trump's first term in the White House. Lutnick said the 55 per cent rate for Chinese imports is now fixed and unalterable. Asked on Wednesday on CNBC if the tariff levels on China would not change, he said: "You can definitely say that." Still, many specifics of the deal and details for how it would be implemented remain unclear. Officials from the two superpowers had gathered at a rushed meeting in London starting on Monday following a call last week between Trump and Chinese leader Xi that broke a stand-off that had developed just weeks after a preliminary deal reached in Geneva that had defused their trade row. The Geneva deal had faltered over China's continued curbs on critical minerals exports, prompting the Trump administration to respond with export controls preventing shipments of semiconductor design software, aircraft and other goods to China. Lutnick said the agreement reached in London would remove restrictions on Chinese exports of rare earth minerals and magnets and some of the recent US export restrictions "in a balanced way" but did not provide details after the talks concluded around midnight London time. "We have reached a framework to implement the Geneva consensus and the call between the two presidents," Lutnick said, adding that both sides will now return to present the framework to their respective presidents for approvals. "And if that is approved, we will then implement the framework," he said. In a separate briefing, China's Vice Commerce Minister Li Chenggang also said a trade framework had been reached in principle that would be taken back to US and Chinese leaders.
