bloomberg businessweek - july 14 2014
TRANSCRIPT
July 14 — July 20, 2014 | businessweek.com
Inside Dov Charney’s salacious struggle
for American Apparel p42
U LY S S E - N A R D I N . C O MF o r a c a t a l o g c a l l : 5 6 1 9 8 8 8 6 0 0 o r
u s a 7 6 @ u l y s s e - n a r d i n . c o m
Sonata StreamlineSelf-winding. Patented manufacture movement with
Silicium technology and 24 hour alarm and countdown.
Titanium case with ceramic bezel.
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“With all this plastic, I could lay
the whole road to the airport”
p54
“If my father in heaven wants me to be the
test case for something, I’ll be the test
case for something” p48
“It’s kind of insane that as a 19- or 20-year-old,
you can make more than the U.S. average income in a summer”
p31
“If you took out the sex, it would be boring. And if you took out the idealistic
component … it would just be sleazy” p42
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Opening Remarks The Tinder scandal is more than a return of the Boom-Boom Room era 8
Bloomberg View House Republicans flunk college math • Presenting the GMO chestnut tree 10
Global Economics The debate over exporting U.S. oil 12
China nurtures red tourism to boost patriotism and make the Party look good 14
Brazil loses the World Cup, and the economy is sinking, but Dilma Rousseff may still win 15
Indian Prime Minister Modi’s hard choices 16
Ukraine’s richest man changes sides at the best possible moment 17
Companies/Industries Japan’s pachinko industry considers an alliance with big casinos 19
World Cup ratings broke all records, but what about ad revenue? 20
Why Brazil sees Mexico in its rearview mirror 21
British pubs try to reverse a decades-old hangover 22
Briefs: América Móvil gets Slimmed down; the latest Transformers is boffo at the Chinese box office 23
Politics/Policy Companies that go offshore to avoid U.S. taxes are still winning billions in federal contracts 25
Obama can reform immigration without Congress—up to a point 26
Insurers and drug companies bicker over who will pay for pricey new drugs 27
Republicans attack the CFPB’s office face-lift with creative math 28
Technology Are you a teen, love money, and need a summer internship? Head for Silicon Valley 31
GE and Pratt square off in the skies over more efficient jet engines 32
A smarter way to keep the lights burning, one utility at a time 33
Amazon is making inroads in India, but local company Flipkart isn’t conceding defeat 34
Innovation: Cue can detect everything from fertility to flu with a swab of bodily fluids 35
Markets/Finance An ex-banker wants to be Mr. Nice Guy making high-rate loans to small businesses 36
Puerto Rico may not be able to borrow in the bond market 37
Billionaire Guo Guangchang aims to be the Warren Buffett of China 39
A company that finances lawsuits bounces back from a bad bet 40
Bid/Ask: Archer Daniels Midland’s $3 billion acquisition of Wild Flavors is a natural; Expedia goes Down Under 41
Features“Chaos Has a Cost” The fall of Dov Charney and the future of American Apparel 42
Off the Grid in Suburbia Robin Speronis jerry-rigged her own utilities. Then she took on the law 48
India’s Garbage Solution A chemist known as Plastic Man turns litter into pavement 54
Etc.Offices for introverts: Steelcase’s new Quiet Spaces are an antidote to the open plan 59
Fashion: Sandals that aren’t too casual for the workplace 62
Survey: Icebreakers to put your elevator companions at ease 64
The Critic: A very blatant race to create the hit song of summer 65
Advertising: Drugstore brands are empowering women and hoping for viral-video success 66
What I Wear to Work: Gilt executive Jyothi Rao gilds her polished look with edgy accents 67
How Did I Get Here? There’s no playbook for being White House counsel, says Kathryn Ruemmler 68
July 14 — July 20, 2014
① “Cover is Dov Charney.”
“Oh boy.”
② “No black
and white.”
③ “Better, but can we try something more recognizably him?”
“Ask and ye shall receive, kind sir.”
⑥ “You and your quirky editor rules.
How about we just rip off the Andy Warhol Esquire cover, except
instead of falling into a soup can, Dov is falling into something else.”
⑧ “No, I believe the quote was,
‘Designers are best seen, not heard.’ ”
How the cover gets made
CoverTrail
④ “This
lacks—how should I put
this?—an idea.”
⑤ “Great, an idea! It also makes absolutely no sense.”
⑦ “I had no idea designers ripped each other off!”
“Speaking of Warhol, didn’t he say, and I quote,
‘It’s totally cool to copy stuff’?”
2
Innovative thinkers everywhere use
INDUSTRY SOLUTION EXPERIENCES
from Dassault Systèmes to explore
the true impact of their ideas. Insights
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new and innovative ways to create and
manufacture automotive parts from
unconventional and biodegradable raw
materials. How many more secrets does
the sea still hold?
want sustainabletransportation, could
we look to the sea?Algae-based bioplastic materials –a dream our software could bring to life.
It takes a special kind of compass to understandthe present and navigate the future.
3DS.COM/TRANSPORTATION
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EEBay (EBAY) 34Emson, Colin 40Enterprise Inns (ETI:LN) 22Enterprise Products Partners (EPD) 12Essentia Equity 44Expedia (EXPE) 41
FFacebook (FB) 8, 15, 23, 31Flipkart.com 34Folli Follie (FFGRP:GA) 39Forever Yogurt 36Fosun Group 39Fox (FOX) 20, 49Franklin Templeton Investments 37Frost & Sullivan 32Fruit of the Loom (BRK/B) 44FTI Consulting (FCN) 44Fundera 36
GGap (GPS) 44García Padilla, Alejandro 37General Electric (GE) 32Gilt 67Gladwell, Malcolm 44Glass, Noah 8Glassdoor 31Goins Waste Oil 36Goldman Sachs (GS) 12, 15, 36Google (GOOG) 31Gotham City Research 23Goulding, Ellie 65Greenfield, Lauren 66Gulczynski, Christopher 8Guo Guangchang 39
HHackett, James 60Hadapt 31Harbour Litigation Funding 40Harris, Calvin 65Hawthorn Leisure 22Hecht, Jared 36Helvetia Holding (HELN:SW) 41Hensarling, Jeb 28Honda Motor (7267:JP) 21
IIAC/InterActiveCorp (IACI) 8IHS (IHS) 12Ingersoll-Rand (IR) 25International-Matex Tank Terminals 41ITV Studios America (ITV:LN) 64
JJepsen, Carly Rae 65JPMorgan Chase (JPM) 39Juridica Investments 40
KKahala Franchising 64Kalamata Capital 36Keane, James 60Khattack, Ayub 35KKR (KKR) 41Konami (9766:JP) 19
LLaine Pub 22Lamach, Michael 25Landrieu, Mary 12Las Vegas Sands (LVS) 19Let’s Gowex (GOW:SM) 23Li Ka-shing 39LinkedIn (LNKD) 31Loews Hotels & Resorts 64Longford Capital 40Lookout 31Loveman, Gary 19Luttrell, John 44Lyft 23
Bloomgarden, Kathy 64BMW (BMW:GR) 21Boeing (BA) 32Bogart, Christopher 40Borg-Neal, Peter 22Boulud, Daniel 64Brean Capital 44Brown, Reggie 8Buffett, Warren 39Bulkin, Noah 22Bulltick Securities 15Burford Capital (BUR:LN) 40
CCAC Consultoria Politica 15Caesars Entertainment (CZR)
19Cain, Susan 60Calara, Mandy 36Carlyle Group (CG) 39CBRE (CBG) 28CenterPoint Energy (CNP) 33Cerberus Capital Management
22CFM International 32Charlie Bravo Aviation 64Chery Automobile 21Chevron (CVX) 40Chicago Bridge & Iron (CBI) 25Cisco Systems (CSCO) 14Citigroup (C) 39Clinton, Bill 68CLSA Asia-Pacific Markets 16Club Méditerranée (CU:FP) 39Cole, Tom 26Comcast (CMCSA) 20Cook, Tim 31Cordray, Richard 28Cosmo Pharmaceuticals (COPN:SW) 41Crumbs Bake Shop 23Cue 35
DDaimler (DAI:GR) 21DeVos, Rich 64Dish México 23Donziger, Steven 40Dropbox 31DTE Energy (DTE) 33Dynam Japan Holdings (6889:HK) 19D’Aloisio, Nick 31
IndexPeople/Companies
AAbbVie (ABBV) 41Abe, Shinzo 19Accenture (ACN) 25Adelson, Orly 64Admiral Taverns 22Airbnb 31Airbus (AIR:FP) 32Akhmetov, Rinat 17Alibaba Group 39Allen, Todd 49Amazon.com (AMZN) 34American Apparel (APP) 44American Electric Power (AEP) 33América Móvil (AMX) 23Apple (AAPL) 31Archer Daniels Midland (ADM)
41Aristocrat Leisure (ALL:AU) 41Arora, Rohit 36Ascend 32Avalere Health 27Avenue Capital Group 22Azalea, Iggy 65
BBadeen, Jonathan 8Bain Capital Partners 39Banglesdorf, Rene 64Bank of America (BAC) 49Bank of Baroda (BOB:IN) 16Bansal, Binny 34Bansal, Sachin 34Beck, Glenn 49Belle Haven Investments 37Bentham IMF 40Berkshire Hathaway (BRK/A) 39Bezos, Jeff 34BHF-Bank 39Biz2Credit 36
MMa, Jack 39Macquarie Group (MQG:AU) 41Mandis, Steven 36Markey, Edward 12Maruhan 19Mateen, Justin 8Mazda Motor (7261:JP) 21McCaul, Michael 12McHenry, Patrick 28Medtronic (MDT) 25Menendez, Robert 12Metinvest 17MGM Resorts International (MGM) 19Modi, Narendra 16Moody’s (MCO) 16, 37Munoz, Joe 8Myerson, Jeff 33
NNasdaq (NDAQ) 23Nationale Suisse 41New York Independent System Operator 33Nielsen (NLSN) 20Nikon (7731:JP) 19Nissan Motor (7201:JP) 21Nooyi, Indra 23Novartis (NVS) 27
OOakman Inns & Restaurants 22Obama, Barack 25, 26, 68Oppenheimer Funds 37
PP Ark Holdings 19Peak Reinsurance 39PepsiCo (PEP) 23Perry, Katy 65Pfizer (PFE) 27PG&E (PCG) 33Pierluisi, Pedro 37Pioneer Natural Resources (PXD) 12PKVerleger 12Planet Argon 31Podesta, John 12Poroshenko, Petro 17Pratt & Whitney (UTX) 32PricewaterhouseCoopers Health Research Institute 27Procter & Gamble (PG) 66Punch Taverns (PUB:LN) 22
QQuiet Revolution 60
RRad, Sean 8Raffaele Caruso 39Rajan, Raghuram 16Rao, Jyothi 67Reid, Harry 25Reis (REIS) 60Reserve Bank of India 16Rihanna 65Risk Capital Partners 22Rodriguez, Juan Carlos 20Rolls-Royce (RR/:LN) 23Rubio, Marco 10Ruder Finn 64Ruemmler, Kathryn 68Rurelec 40Ryzhenkov, Yuriy 17
SSafran (SAF:FP) 32Sakamoto, Satoshi 19Salix Pharmaceuticals (SLXP)
41San Diego Gas & Electric (SRE) 33Sandberg, Sheryl 66Sato, Yoji 19Saverin, Eduardo 8
Sayman, Michael 31SCM Holdings 17Seedfund 34Sega Sammy Holdings (6460:JP) 19Serruya, Michael 64Sever, Clint 35Shanghai Yuyuan Tourist Mart (600655:CH) 39Shire (SHP:LN) 41Skymet Weather Services 16Slim, Carlos 23Snapchat 8Snapdeal.com 34Speronis, Robin 49Spiegel, Evan 8Spiro Sovereign Strategy 15Spotify 65Standard General 44Steelcase (SCS) 60Stiles, Sheila 36Symantec (SYMC) 34
TTeal Group 32Technopak Advisors 34Tele2 41TeliaSonera (TLSN:SS) 41Thiel, Peter 31Tiger Global Management 34Timberlake, Justin 65Time Warner (TWX) 40Tinder (IACI) 8Tisch, Jonathan 64Tollgrade Communications 33Towa Sangyo 19Trane (IR) 25Twitter (TWTR) 8Tyco International (TYC) 25
UUber 23Uhlman, Bonnie 66Unilever (UL) 66United Parcel Service (UPS) 34Universal Studios (CMCSA) 44Univision 20
VValero Energy (VLO) 12Vasudevan, Rajagopalan 56Verizon (VZ) 66Viacom (VIA) 23Video Gaming Technologies 41Volkswagen (VOW:GR) 21
WWalt Disney (DIS) 20Warren, Elizabeth 28Weiner, Jeff 31Whitehead, John 49Wild, Hans-Peter 41Wolfe, Whitney 8Woodsford Litigation Funding
40Wotif.com Holdings (WTF:AU)
41Wyden, Ron 10Wynn Resorts (WYNN) 19
XXi Jinping 14
YYahoo! (YHOO) 31Yong An Insurance 39
ZZonal Retail Data Systems 22Zuckerberg, Mark 31Zuckerberg, Randi 64
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Corrections & Clarifications In “Vietnam’s War Over Catfish” (Global Economics, July 7-July 13, 2014), we incorrectly identified James Bacchus as a lobbyist for the Vietnam Association of Seafood Exporters & Producers. Bacchus was hired as an attorney for the association. � “Boeing Has a Belly Full of Trouble” (Companies/Industries, July 7-July 13) misstated the amount of cargo volume for 2014; it is 57.3 million tons. � In “Worst-Case Scenario” (Markets/Finance, July 7-July 13), Scout Unconstrained Bond Fund was incorrectly described as an exchange-traded fund. It is an open end mutual fund.
54India’sroads
17RinatAkhmetov
31MarkZuckerberg
4
Products are no longer enough
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THE AGE OF EXPERIENCE
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Executives and academics
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And yet, the task is a daunting one
at best. What exactly is meant by
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We live in an age where businesses need to look beyond the aesthetics of a product or the
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be sold to.
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Explained
The 3DEXPERIENCE platform
is a business experience platform.
It provides software solutions
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company – from engineering
to marketing to sales – that
help you, in your value creation
process, to create differentiating
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With a single, easy-to-use interface,
it powers INDUSTRY SOLUTION
EXPERIENCES, based on 3D design,
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software in a collaborative interactive
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INNOVATION INTHE AGE OF EXPERIENCE
It takes a special kind ofcompass to understand the
present and navigate the future.
About Dassault Systèmes Dassault Systèmes, the 3DEXPERIENCE Company, provides business and people with virtual universes to imagine sustainable innovations.
Its world-leading solutions transform the way products are designed, produced and supported. Dassault Systèmes’ collaborative solutions foster social innovation, expanding
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3DEXPERIENCE is a registered trademark of Dassault Systèmes or its subsidiaries in the U.S. and/or other countries.
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If you raised the topic of employee incentives with most business executives a few years ago, the typical response would have been something like, “They should be happy that they have a job at all.”That phrase has become a punch line in the $76.9 billion incen-tives and rewards industry, which is seeing robust growth in the wake of the recent recession. An improved economy, a more com-petitive job market and a generational sea change in the workforce have major corporations turning to incentive programs in order to engage and motivate employees.
In the process, the rewards themselves have also changed. Gone are the knockoffs and discounted items that once made the
idea of “reward” and “recognition” seem like a bad gag. In their place are luxury-brand, “trophy-value” items—designer clothing, jewelry, electronics, home accessories—that signal to employees that they are valued.
“For mainstream business leaders, incentives are no longer a joke,” says Louise Anderson, President of the Incentive Marketing $VVRFLDWLRQ��,0$���D�WUDGH�JURXS��´)XOO�VHUYLFH�LQFHQWLYH�ÀUPV�[those that supply both consulting and analytics] can show com-panies that when employees are engaged and recognized, there’s a lift in performance.”
But something more is at stake today: the engagement and retention of millennials, who currently compose an estimated 53 percent of the workforce. With baby boomers now in the minority and workers changing jobs more frequently, “the balance of power has changed and with it the dynamics of incentive programs,” says Paul Gordon, Vice President of Sales at Rymax Marketing Services Inc., a full-service loyalty marketing provider that creates and man-ages rewards and incentives programs.
In place of recognizing years of service at annual events, new incentive programs, according to Gordon, are moving toward peer-to-peer recognition, and at closer intervals. “It’s become important WR�QRW�VD\��¶,Q�ÀYH�RU�WHQ�\HDUV��KHUH·V�ZKDW�\RX·UH�JRLQJ�WR�JHW�·�EXW�rather to have programs that recognize people on a regular basis and drive the business.”
Millennials’ importance to companies is not to be underesti-mated, argues the IMA’s Anderson. “Granted, they got a trophy for everything [when they were kids], but today, more than recogni-tion, they want feedback. Even when they’ve gotten corrections or suggestions on improvement, that says to them that someone has noticed them and wants them to be successful. So that phrase, ‘They want a lot of recognition’? Dig into it and you’ll see the source of productivity in a big, big way.”
Companies are also paying more attention to exit surveys, Anderson believes, because they want to retain younger workers as older ones are retiring. “They’re concerned,” she says. “The number-one reason for younger employees leaving a job isn’t com-pensation, it’s a lack of recognition or appreciation—they didn’t feel their work was valued.”
To engage the new workforce, as well as play to the post-recession job market, Rymax went after products that hadn’t occupied the motivational space in the past—high-brand equity items such as Michael Kors handbags, Kate Spade accessories and Beats by Dr. Dre headphones. The company, which has exclusive partnerships with a number of brands, matches products to an organization’s culture, the demographics and characteristics of its workforce and its budget for meetings and events, with an eye on return on investment.7KH�HIÀFLHQF\�RI�VWUDWHJLF�LQFHQWLYH�DQG�DZDUGV�SURJUDPV�LV�
possible because Rymax is manufacturer-direct for most brands, a differentiation that provides it considerable buying power. “It’s an extremely cost-effective way to communicate,” says Gordon.Something else Rymax has done is to take the player-loyalty
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multilevel pedestals, as if on tiers on a TV game show. Participants drew random numbers and won both a safe’s contents, valued at $150, and the safe itself, then swapped the rewards with one another in what Gordon terms “a feeding frenzy.” At other events, rewards are mailed two to three weeks later to employees at home, producing residual effects by allowing an organization to enclose information about initiatives, objectives and long-term goals.
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“It’s a new world,” he adds. “Where corporations once looked at incentives as a necessary evil, some are now seeing that they really and truly move the ball. For those companies that don’t think they’re important, the parade is going to pass them by. But the better companies do incentives, and they do them in a way that attracts and retains the best people.” — Tom Connor
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companies that when employees are
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Return of The Boom- Boom Room By Nick Summers
A culture of rampant sexism plagued Wall Street for years. Is the tech industry next?
The parallels between Silicon Valley in the 21st century and the Wall Street of the 1980s and ’90s are by now well established—the exponential growth, the billions in revenue, the ability to lure the brightest young minds with outsize pay. But there’s a darker side of the analogy that deserves more scrutiny. Thirty years ago, the financial industry’s rise was marked by a culture of rampant sexism as banks and brokerage firms were unable or unwilling to rein in a male-dominated, star-driven system —epitomized by the infamous “Boom-Boom Room” of a Smith Barney brokerage in Garden City, N.Y., where female employees were habitually stalked. Now it appears that the frat-boy ethos of Wall Street persists at some of the decade’s most successful tech startups.
On July 1, Whitney Wolfe filed a sexual harassment suit against Tinder, the popular hookup app, and its corporate parent, IAC/InterActiveCorp. Wolfe, a former vice president for marketing, says she was subjected to a constant stream of sexually charged abuse and that both Tinder’s chief executive officer and his supervisor at IAC looked the other way. The behavior Wolfe alleges in her com-plaint is awful: She says that Tinder Chief Marketing Officer Justin Mateen, whom she had dated, called her a “desperate loser” who “jumps from relationship to relationship,” a “joke,” a “gold digger,” a “disease,” and a “slut” who needed to be “watched” if she were to keep her job. Tinder CEO Sean Rad, Wolfe says, dis-missed her pleas for help as “dramatic” and told her that if she and his pal Mateen couldn’t get along, she’d be fired. Wolfe left the company after a Tinder party in April 2014, at which she says Mateen called her a “whore” in front of Rad.
That would all be abhorrent enough. What is more troubling is that Wolfe says she was also stripped of her title as co-founder and that her role in launching the venture was written out of its history. If so, this isn’t just adding insult to injury; it’s adding injury to injury, since a co-founder of a hot startup can expect to attract better career opportunities than someone who was an ordinary employee.
Monkeying with the truth about who did what and airbrushing people out of origin stories is common to popular startups—think Facebook and Eduardo Saverin, Twitter and Noah Glass, Snapchat and Reggie Brown. If what Wolfe alleges is true, it would establish that the widespread chauvinism in the industry isn’t limited just to low-level “brogrammers” but infects the “founder class,” too. It’s a different, quieter, but no less punishing form of sexism than the kind practiced in the Boom-Boom Room,
and it may be more prevalent in the tech industry than its blithely positive entre-preneurs want to acknowledge.
What makes someone a “co-founder” vs. a mere early employee? I have some perspective on Tinder, after spending two weeks last summer reporting a feature for Bloomberg Businessweek. What I found was a meteoric startup that wasn’t really a startup, owing to IAC’s majority stake, one of many facets of the company that Rad and Mateen seemed eager to spin. To hear them tell it, they had thought up Tinder before either entered IAC’s orbit and were responsible for the app’s success. Having spoken to nearly every-body who was involved, here is what I believe made Tinder work. It was a team: Joe Munoz, who built the technical back end; Jonathan Badeen, who wrote the iOS code; Christopher Gulczynski, who created the design; Rad, who played point. And Wolfe, who ran marketing.
In the summer of 2013, with Rad and Mateen loath to credit others, I opted not to referee the pettiness in the maga-zine, referring obliquely to the work of
88
because of her age or gender, and her complaint paints an inaccurate picture of my actions and what went on here. We take gender equality very seriously.” Rad didn’t mention the co-founder angle.
There’s little to be said about Rad and Mateen’s good judgment. Last summer, I noticed that both had posted a screen-shot of a new Urban Dictionary term, “Tinderslut,” to their Instagram feeds. When I mentioned this to them, Rad was embarrassed and said he was scrubbing the post from his account, while Mateen said, “I don’t think you should delete it. It was an exciting day for us.” It was no aberration—Mateen’s private Instagram feed was filled with photos of nearly naked women and sneering captions about “bimbos” and anatomy.
“Although it is tempting to describe the conduct of Tinder’s senior executives as ‘frat-like,’ ” Wolfe says in her suit, “it was in fact much worse—representing the worst of the misogynist, alpha-male stereotype too often associated with tech-nology startups.”
These unzipped attitudes are preva-lent in the tech scene. In recently pub-lished e-mails from his college days, Snapchat founder Evan Spiegel rages about “sororisluts.” The 2012 TechCrunch programming conference included the presentation of an app called “Titstare,” which drew gales of laughter from the overwhelmingly male audience.
Can this culture be changed? Another Wall Street parallel is edifying: It was money, of course, that finally compelled financial firms to combat sexual bias and abuse. They spent millions to settle most of the lawsuits filed against them, installed chief diversity officers, and promised to professionalize their cultures. Silicon Valley may be on the cusp of a similar and expensive run of litigation.
Founded in many cases by people who were not even alive when the Boom-Boom Room thrived, tech startups were supposed to be better than this— meritocracies where the best could advance regardless of pedigree, race, or gender. That’s why the Tinder lawsuit matters. It’s not just about compensation, which Wolfe is suing to recover; it’s also about a woman’s right to be recognized for her work. Whitney Wolfe was part of the creation of Tinder, and that deserves to be known. �—With Sheelah Kolhatkar
others without giving their names. And I didn’t cite Wolfe, for an entirely different reason. After a single, passing reference from Tinder’s (female) PR rep, none of the many men I spoke to had mentioned her, and it simply didn’t occur to me to include her.
After more conversations with Tinder people post lawsuit, I’m convinced that Wolfe has as much right to be called a co-founder as the others. Getting an app to critical mass isn’t easy. In 2012, when Tinder was still unknown, Wolfe devised a plan to promote the service at college sororities. “We sent her all over the country,” Munoz says. “Her pitch was pretty genius. She would go to chapters of her sorority, do her presentation, and have all the girls at the meetings install the app. Then she’d go to the correspond-ing brother fraternity—they’d open the app and see all these cute girls they knew.” Tinder’s user base tripled, Munoz says. “At that point, I thought the ava-lanche had started.” Only then was Mateen hired by his longtime friend Rad, as Wolfe’s superior.
In her lawsuit, Wolfe says she was the one who suggested the name “Tinder” to Rad. “She never got credit for [her con-tributions],” Munoz says. “She never got credit for it. It got taken away and mar-ginalized in favor of the friend.” Munoz started to say that Rad hadn’t done this solely because Wolfe was a woman. But I asked him if it wasn’t the case that Rad had shunted aside a good, if not excellent, female employee in favor of someone whose main qualification was being his “bro pal.” Munoz laughed. “I think that’s a fair interpretation of events,” he said.
Mateen and Rad did not respond to requests for comment for this story. Their supervisor at IAC, Sam Yagan, who is CEO of the conglomerate’s Match dating divi-sion, declined to comment, as did Wolfe via her attorney. IAC has suspended Mateen indefinitely. In a memo to Tinder employees, Rad called Mateen’s com-munications “unacceptable,” while also calling Wolfe’s complaint “full of factual inaccuracies and omissions.” He added: “We did not discriminate against Whitney
Wolfe alleges that she was not only harassed but also erased from history as a co-founder of Tinder
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If the greatest living American were a tree, it would probably be the chestnut. Nat King Cole sang about it. Abraham Lincoln probably built his log cabin from it. The telegraph era, which required tall poles of strong wood, was enabled by it. In the first half of the 20th century, however, the American chestnut fell victim to a fungus unintentionally imported from China, and the tree that once dominated the forest canopy of the eastern U.S. all but disappeared.
For years, scientists have been trying to develop a strain of chestnut tree that is immune, using traditional hybridization methods to instill resistance from Chinese chestnut trees into the American variety. Now plant scientists have found another way to develop a chestnut tree that fights off the fungus. Bor-rowing a gene from wheat, they created a strain that produces a substance that neutralizes the fungus’s lethal acid. What’s more, this trait is passed along to seedlings. Versions with even greater resistance are in development.
In the last few years, researchers have planted several exper-imental stands of the trees. If they get approval from the U.S. Environmental Protection Agency and Department of Agricul-ture, these genetically modified chestnut trees will be planted in the wild.
Will this plan cause an outcry among the foes of genetic mod-ification, the ones trying to keep GM foods off grocery store shelves? Probably not—though the Food and Drug Administra-tion may have to give its OK before anyone roasts a GM chestnut on an open fire. And opponents of GM food will undoubtedly continue to try to scare consumers away from any food made from genetically modified plants.
But that controversy is years away. Until then, the only proper response to the incipient return of this American icon, which once numbered 4 billion in the eastern woodlands of the conti-nent, is celebration. Straight and durable, the American chest-nut tree stands—or will soon again—as evidence of the benefits of genetic engineering. �
How to Keep Colleges Honest About Costs
The Return of An Old Chestnut
House Republicans shouldn’t block the list of most expensive schools
Should genetic engineering be allowed to restore a fallen tree?
Shame. That’s the reason Congress, when it passed the Higher Education Opportunity Act of 2008, required the Department of Education to publish a list of the most expensive colleges and universities, which it did once again on June 30. The hope was that this simple act of public exposure would put pressure on colleges to hold down costs and offer more aid.
Congress had good reason to take that step: The increase in the price of a college education has far outpaced the inflation rate over the past two decades. There is a healthy debate over what to do about this trend, and the simple release of data alone won’t reverse it. But a little public information doesn’t hurt.
However, several House Republicans have now introduced a bill repealing the requirement that the list be published. True, the list isn’t perfect—its definition of net price, for example, could lead colleges to game the distribution of financial aid—but all college rankings come with caveats. Even if the bill passes and the list is no longer a congressional mandate, the Department of Education should continue publishing it. It doesn’t need Con-gress to tell it how to present data.
Republicans say their bill, which replaces the list with detailed reporting rules, will give people more useful information. Even if some provisions of the House bill have merit, such as order-ing the Department of Education to disclose the percentage of Pell Grant students who graduate, colleges are already required in many cases to report such information to the federal govern-ment and are failing to do so. Better enforcement, not new leg-islation, should be the No. 1 priority.
Providing consumers with more useful information requires less law, not more. In 2008, Congress prohibited the Department of Education from collecting and publishing the most basic data about college graduates. Consider this: If you are a high school senior looking at engineering programs, wouldn’t you like to know what percentage of each college’s engineering majors find jobs and what their average salaries are?
In the Senate, a bipartisan bill sponsored by Republican Marco Rubio and Democrat Ron Wyden is aimed at providing
answers to those kinds of questions. But House Republicans, not to mention college presidents, don’t want students to have that information in a standardized format for easier compari-son. Restrictions can be placed on the data to protect privacy—and even limit the use of it. But a blanket prohibition protects colleges’ reputations at great cost to students.
Before adding new reporting requirements, Congress should reduce the prohibitions on information it has already imposed. Legislators in both parties are constantly trying to run the executive branch, eliminating agencies’ discretion wherever possible and creating more regulatory headaches. If House Republicans are serious about improving transparency, they should stop blocking the government from providing it.
To read Mohamed A. El-Erian on Brazil’s World Cup loss and Leonid Bershidsky on hackers and credit cards, go to Bloombergview.com
10
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July 14 — July 20, 2014
� Debate heats up over the wisdom of banning sales abroad
�“A “slugfest between industrial consumers and producers”
To sell abroad or stay at home: Those are the terms of a debate roiling the U.S. oil industry. At the heart of the disagree-ment is a 1975 ban on U.S. oil exports imposed by Congress when domes-tic reserves were dwindling and the country was still spooked by the 1973 Arab embargo. Thanks to new technol-ogy, oil production in the U.S. now tops 8 million barrels a day, the highest since 1988. That’s prompted U.S. producers to call for an end to the ban so they can serve new markets. Refiners and other companies want the ban maintained to benefit from the cheap prices of the local oil they use to make gasoline, chemicals, and plastics. “This debate is a major slug-fest between industrial consumers and producers of oil,” says Michael Webber, deputy director of the Energy Institute at the University of Texas.
A recent development has put a spot-light on the dispute. In late June, the Commerce Department determined
that two Texas companies, Pioneer Natural Resources and Enterprise Products Partners, could start export-ing an ultralight type of crude called condensate, which occurs naturally as a gas and condenses into a liquid once drilled out of the ground. Condensate is added to heavier crudes to make them easier to refine, and is a basic ingredient for chemicals. Horizontal drilling has unlocked far more condensate than the U.S. can use. Exporting it should relieve the surplus building up. The two com-panies had asked Commerce if mini-mally processed condensate could be classified as a refined product, which can be exported. Commerce said it could but insisted the ruling doesn’t open the door to abolishing the ban.
The ruling could be a precursor to rolling it back. In April, Texas Republican congressman Michael McCaul intro-duced a bill to end the ban, but the like-lihood of Congress passing it seems slim, with both houses in near-gridlock and powerful industries lined up on either side of the issue. Democratic Senator Mary Landrieu of Louisiana, chair of the Senate Energy and Natural Resources Committee, is perhaps the person in Congress best placed to lead the effort to kill the ban. But she’s facing a tough reelection this year and has both refin-ers and oil producers in her state. Two senators, Robert Menendez (D-N.J.) and Edward Markey (D-Mass.), are asking Commerce why its ruling doesn’t violate the ban. And there’s some movement from the executive branch. In May, pres-idential adviser John Podesta said the possibility of allowing crude DATA: GOLDMAN SACHS
Fueling the Economy
Keeping the ban would help U.S. refiners, as domestic crude would need to be refined at home
Contribution to GDP in 2020
Ban on oil exports stays Ban goes
Oil refiners
Oil extractors
Crude’s total contribution to U.S. GDP
$800b
$400b
$0b
13
Ukraine’s richest man displays a great sense of timing 17
Bringing the revolutionary past alive in China 14
Brazil’s economy, not soccer, is Rousseff’s big problem 15
Will Modi take unpopular steps to boost Indian growth? 16
exports is “a topic that’s under consider-ation” at the White House.
The American Petroleum Institute says lifting the export ban would create 300,000 jobs across the economy and cut the trade deficit by $22 billion by 2020. Energy research firm IHS is even more bullish: Ending the ban by 2016 would help create about 1 million jobs and boost investment in the oil indus-try by almost $750 billion. Both say lifting the ban will increase U.S. oil pro-duction. Selling U.S. crude abroad, they argue, will lower international prices and make gasoline cheaper in the U.S. “It’s time to unlock the benefits of free trade for U.S. consumers and further strengthen our position as an energy superpower,” says Kyle Isakower, the Petroleum Institute’s vice president for regulatory and economic policy.
Those against ending the ban point to its economic benefits. Having all that crude trapped in the U.S. has lowered the price of domestic oil compared with crude from overseas. Over the past three years, the average price of West Texas Intermediate oil has been $13 per barrel cheaper than the international bench-mark, Brent crude. That gives large consumers of oil such as refiners and chemical companies a big cost advan-tage over foreign rivals and has helped the U.S. become the world’s top exporter of refined oil products. Net income at Valero Energy, the biggest refiner in the U.S., has more than doubled since 2010. Lifting the ban could erode that edge by raising the price of U.S. oil, which in turn could push gasoline prices upward. Taking that step is also hard to justify with the U.S. importing more than
7 million barrels a day. A June 10 Goldman Sachs report suggests keeping the ban in place
for a few more years until the U.S. is so saturated in domestic crude that refin-ers can’t absorb it all. With refiners using about 91 percent of their capac-ity, there’s room to run. “You will know when the U.S. is saturated when domes-tic crude trades at a much larger dis-count to international prices,” says Damien Courvalin, a Goldman oil analyst who co-authored the report. He disputes producers’ concern that the export ban will crash U.S. oil prices and make drilling unprofitable. According to Courvalin, the break-even price to produce oil in the U.S. is $85. With U.S. oil at around $100, producers can make money even if the price slips.
The real threat to the U.S. oil boom isn’t a lack of exports, it’s the lack of efficient ways to move crude around the country, says Philip Verleger, a former director of the office of energy policy at the Department of the Treasury and founder of PKVerleger, a consult-ing firm in Colorado. Five years into the oil boom, the country is still build-ing pipelines to the new areas of pro-duction. The industry has had to rely
DATA: U.S. ENERGY INFORMATION ADMINISTRATION
A GusherBarrels of crude per day
Imports
Domestic production
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Ideology
Red Tourism Stages a Comeback in China
� Historical sites of the revolution are flooded by Chinese tourists
� “Coming here helps one understand China’s red spirit”
Ear-splitting explosions go off and plumes of gray smoke drift over the arid Shaanxi countryside of north-western China. Ragtag Communist sol-diers in blue uniforms fire their rifles at an advancing Nationalist tank while villagers run for cover. Finally, justice prevails; the red flag of the Chinese Communist Party is held proudly aloft while peasants dance in celebration.
It’s a scene repeated every day at 11 a.m. as 350 actors reenact the “Defense of Yan’an,” a famous battle against the Nationalist forces of Generalissimo Chiang Kai-shek that was crucial to the founding of the People’s Republic in 1949. “By coming here we can understand how the party sac-rificed, created the new China, and built such a beautiful country for us,” says 13-year-old Deng Yi, visiting from Wenzhou, who along with his mother and father, each shelled out 150 yuan ($24) to watch the show.
That’s what China’s leaders want to hear as they expand “red tourism” in more than 100 sites across China. Their goal: to boost patriotism and support for the Chinese Communist Party. “We need to seize these two concepts—red bases and patriotic education on the one hand and developing red tourism on the other,” said President Xi Jinping in March.
Red tourism is not new to China. Millions flocked to red sites including Mao Zedong’s birthplace in Shaoshan,
Hunan province, during the Cultural Revolution from 1966 to 1976. Visits to revolution-ary locales spiked in 2011, as China prepared to celebrate the party’s 90th anniversary. If China’s leaders have their way, red tourism will have a massive renaissance. Already last year, 786 million tourists visited revolution-ary sites, up 17.3 percent from the pre-vious year, generating 198.6 billion yuan ($32 billion) in revenue, up 19.1 percent, according to the National Tourism Administration.
One of the most popular is Yan’an, the “cradle of the revolution” where Mao, General Zhu De, and other revo-lutionaries spent more than a decade living in caves starting in 1936. It’s also where President Xi, while a teenager, spent seven years among the peas-ants during the Cultural Revolution. Jinggangshan, in Jiangxi province, where the rebels hid out in the late 1920s and early 1930s, and Zunyi, in Guizhou prov-ince, a key stop on the Long March, are also top destinations.
To prepare for the onslaught of photo-snapping fellow travelers, China’s Ministry of Civil Affairs last year
spent 2.8 billion yuan on construct-ing memorials, while the state bureau in charge of cultural relics earmarked 487 million yuan for renovating red sites. Another 1.5 billion yuan was spent on 66 “red tourism highways” across the country.
“We hope to teach the next gener-ation about what happened before,” says Hong Jiasheng, chairman of Yan’an Shengdian Red Tourism Development, which is run jointly with the local gov-ernment and draws 500,000 tour-ists annually. An entrepreneur from Zhejiang province, Hong launched on July 6 a similar show in Fushun, Liaoning province, reenacting an important 1948 battle.
The push to develop red tourism is part of a larger campaign launched in December to instill citizens with what Xi calls core socialist values aimed at realizing the “Chinese Dream.”
on oil trains that are proving dan-gerous and face possible restrictions. “The issue of exports is entirely moot until we fix the transportation infra-structure,” says Verleger. “Even if we do lift the ban and produce an extra million barrels a day, how are we going to move it?” —Matthew PhilipsThe bottom line According to one estimate, lifting the export ban on U.S. oil would create almost 1 million jobs.
“We need to seize these two concepts—red bases and patriotic education on the one hand and developing red tourism on the other.”
—President Xi
15
Global Economics
Elections
Will Voters Shrug Off Brazil’s World Cup Loss?
� Rousseff may win a second term despite inflation and weak growth
� “The government ... intervenes heavily in the economy”
Brazil’s battered psyche was evident in scenes of crying fans and players after the country’s worst World Cup defeat. Some in the stands vented their frus-tration by cursing President Dilma Rousseff, whose government doled out a record $11 billion to fund the tourna-ment. Rousseff, who’s seeking a second term in October, can at least boast that the event came off without a hitch, con-trary to what many expected. “People will be in a bad mood for a few days, but the Cup won’t decide the elections,” says João Augusto de Castro Neves, an analyst with Eurasia Group, a politi-cal consulting firm that gives Rousseff a 70 percent chance of winning.
The big challenge for Rousseff will be mending the world’s seventh-largest economy, which is growing at the slowest rate under any president in more than two decades. That’s in part a result of investors’ distaste for her adminis-tration’s policies. Business confidence has fallen to the lowest level in more than a decade. And among the seven largest Latin American economies, Brazil ranks last in fixed investment, at about 18 percent of gross domestic product. Growth forecasts for 2014 have been cut in half from the start of the year, to just over 1 percent. “Brazil is flirting with recession,” says Nicholas Spiro, manag-ing director at Spiro Sovereign Strategy, a London-based investment consult-ing firm, and without political consen-sus about policy it “will bump along the bottom for a long time.”
University of Hong Kong. Xi “is a natural believer in many of the values of Mao Zedong, but it is also political expediency,” says Lam. “Associating himself with Mao and his values is a way to strengthen his authority.” —Dexter Roberts and Jasmine ZhaoThe bottom line Last year, China spent 2.8 billion yuan on building revolutionary memorials to rekindle patriotic tourism.
Those include patriotism, dedica-tion, civility, and harmony. The values campaign will expand patriotic edu-cation in primary and middle schools, with university students encouraged to go on organized weeklong summer visits to red sites. Since China’s opening to the world, “Chinese have embraced diversified thoughts, includ-ing the decayed, outdated ideals of mammonism and extreme individ-ualism,” the People’s Daily said in a February editorial.
“We all have read about this in our textbooks but you need to see it for yourself,” says 43-year-old Wu Kunliang, an engineer for Cisco Systems in Beijing, while on a visit with his family to Yan’an. “Mao said the people must have spirit. Coming here helps one understand China’s red spirit.”
Xi hopes red tourism can also help bolster the party’s legitimacy as his anti-graft campaign uncovers cor-ruption among senior party officials, according to Willy Lam, an expert on Chinese politics at the Chinese
In most countries, the one benefit of a slack economy is that it helps keep a lid on prices. Not in Brazil, where annual inflation in June broke through the 6.5 percent upper ceiling of the central bank’s target. It would be almost 8 percent if it weren’t for government policies restraining prices for gasoline, electricity, and public transportation, says Alberto Ramos, Goldman Sachs Group’s chief Latin America economist. At the same time, high interest rates are doing a better job of stifling consumer demand than damping inflation.
Despite all this, Rousseff commands a sizable lead over rivals. Her elec-toral support jumped four percentage points, to 38 percent, following three straight drops this year, according to a Datafolha poll in July, indicating that even Brazilians who had questioned the costs of staging the Cup gave her credit for it. The poll showed support for her main challenger, Aécio Neves, at 20 percent, up one point from June. “The biggest legacy of this Cup is renew-ing the confidence of the Brazilian people in the country and its capacity,” wrote Rousseff in a July 7 question-and-answer Facebook session.
Brazil’s president can still count on the backing of low-income voters, surveys show. Roughly 50 million Brazilians, or a quarter of the pop-ulation, receive benefits through Bolsa Família, the federal antipoverty program. What’s more, unemployment remains at near-record lows, in part because more youth are opting for post-secondary training than in the past. If reelected, Rousseff has pledged to double the number of low-cost homes built each year to more than 5 million. “I still believe in this government’s pol-icies,” says José Vicente da Silva, a 53-year-old doorman. “They’re directed at the country’s most needy. That’s why I’m going to vote for her.”
Rousseff has tried to rev up growth with payroll and sales tax cuts and by
DATA: CENTRAL BANK OF BRAZIL
Anemic Outlook
1/2014 7/2014
Disappointment with Rousseff’s policies has led economists to cut GDP growth estimates
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boosting lending by state banks. The loose fiscal policy helped trigger a sover-eign debt downgrade in March, the first in more than a decade. Her administra-tion also has pressured utilities to accept lower electricity rates and capped fuel prices, causing revenue shortfalls at the state-run oil company, Petrobras. Many investors say these policies have fueled mistrust. “The government doesn’t comply with any of its guidance, inter-venes heavily in the economy, and often doesn’t abide by the rules of the game,” says Klaus Spielkamp, the head of fixed income at Bulltick Securities in Miami.
The same discontent over public services, inflation, and graft that trig-gered protests last year hasn’t gone away and may douse any positive effect from the World Cup, according to José Luciano Dias, directing partner of CAC Consultoria Politica, a consulting firm in Brasilia. “The day-to-day concerns about education, health, everything involved in social well-being are much more important than the games,” says Adenir Freixo, a resident of Rio de Janeiro. “We can’t forget the problems we have.” — Raymond Colitt and David BillerThe bottom line Brazil’s low-income voters are likely to buoy President Rousseff’s reelection chances in October.
Subsidies
Great Expectations for Modi’s First Budget
� Investors hope the government will deliver on its pro-growth promises
� “He has about two to three years to show that his model works”
Investors have been euphoric in the two months since India Prime Minister Narendra Modi swept into office. Campaigning on promises to kick-start the economy, Modi’s strong mandate has boosted confidence that he will carry through on his pro-business reforms—increasing spending on infrastructure and opening India to more foreign investment.
Modi’s budget, expected to be released on July 10, will be the first step of a plan to revive the country’s weak economy. It will also be a gauge of how willing he is to make unpopular choices. Cutting government subsidies is one
of Modi’s biggest challenges. In each of the past two fiscal years, food, fertilizer, and oil subsidies cost the government about 2.5 tril-lion rupees ($42 billion), equal to about half of the deficit each year. The subsidies “detract from spending on other things like ports and rail,” says Glenn Levine, senior economist in Sydney with Moody’s Analytics. “If ever there was a time to push through a tough budget in India, this is it,” Levine says. “He has the political capital.”
Modi has some room to maneuver, thanks in part to optimism about the economy’s growth so far this year. Gross domestic product, which grew 4.9 percent in 2012 and 4.7 percent last year, will improve slightly in 2014, rising 5 percent, projects Moody’s Analytics. It may reach as high as 6 percent next year.
Modi has been treading cautiously. A plan to raise passenger train fares, announced soon after he assumed office, has been modified in response to mounting pressure from citizens who took to the streets in Mumbai and New Delhi to protest the hikes. An increase in government-con-trolled natural gas prices has also been delayed. Although an advocate of free trade, he has imposed a higher tax on sugar imports, which should make local sugar growers more competitive and help reduce their debts. Modi has also extended costly tax cuts on cars, capital goods, and some consumer products to promote growth.
“India can’t revive its economy by giving fiscal goodies to individu-als,” says Rajeev Malik, a senior econ-omist at CLSA Asia-Pacific Markets in Singapore. “Difficult decisions are needed to engineer good days.”
Still, given that Modi’s Bharatiya Janata Party has a majority in the lower house of Parliament but doesn’t
control the upper house or most state govern-ments, the prime minis-ter will need time to make his mark. Modi’s focus on “more governance and less government” is a break
from Indian leaders since the coun-try’s first prime minister, Jawaharlal Nehru, says Madhav Nalapat, a political commentator and professor at Manipal University. Forcing cuts to popular subsidies too soon in his term could backfire. “He has about two to three years to show that his model works,” says Nalapat. “If that happens, people will be willing to accept a certain amount of pain.”
As Modi tries to keep Indian voters on his side, he’ll need help from the heavens. In a country with limited irri-gation networks, farmers rely on the annual monsoon to deliver 70 percent of the rainfall. This year’s seasonal rains have been 42 percent lower than average since June 1. Jatin Singh, the chief executive officer of private fore-caster Skymet Weather Services, puts the chance of drought at 60 percent. That could put pressure on food prices and lead to a spike in inflation.
Retail prices went up 8.3 percent in May. If inflation remains stubbornly high, central bank Governor Raghuram Rajan may be forced to intervene again. Since taking over at the Reserve Bank of India in September, he’s raised interest rates three times and has said further tightening won’t be warranted if con-sumer price inflation doesn’t exceed 8 percent by the beginning of 2015.
India remains heavily depen-dent on oil imports, with its refiners getting 85 percent of their crude oil from overseas. Turmoil in Iraq could push energy prices higher. That, com-bined with a weak monsoon, could quickly cut short Modi’s honey-moon with Indian voters and foreign
“India can’t revive its economy by giving fiscal goodies to individuals. Difficult decisions are needed to engineer good days.”
—Rajeev Malik
Passenger fare hike announced by Modi
in June
17
Global Economics
Ukrainian Army has ousted the militias from their stronghold in Slovyansk and has advanced on Donetsk. In a televised interview, Akhmetov urged the government not to bomb the city. Ukrainian President Petro Poroshenko’s spokesman, Svyatoslav Tsegolko, declined to comment on Akhmetov’s role in the conflict.
Akhmetov’s 100-plus companies include steel mills, coal mines, chemi-cal plants, and power stations as well as a soccer club , banks, insurance com-panies, and media outlets. Together they generated $23.5 billion in revenue in 2012, according to the website of his holding company SCM Holdings. Results for 2013 have not been reported.
Both the pro-Kiev and pro-Russia camps have heaped criticism on Akhmetov. “His TV stations and news-papers are working against us,” says Andrei Purgin, deputy premier of the self-declared Donetsk People’s Republic. Akhmetov waited too long to declare his loyalty to the new government in Kiev, says Yuriy Yakymenko, head of polit-ical studies at the Razumkov Center research group in Kiev. If this resistance against the rebels “in the Donbas had started sooner, we could have avoided huge human losses,” he says. “For that we would have needed those who have influence in the Donbas to use it.” The billionaire didn’t respond to questions e-mailed to SCM.
Akhmetov got his start buying coal from Ukraine’s many mines and selling it to factories, power plants, and steel mills. His partner was local businessman Akhat Bragin, who in the early 1990s was accused by police in Donetsk of being a crime boss. Bragin denied the allegation and in 1995 was killed in an explosion at his soccer club’s stadium. Akhmetov took charge and now owns the team.
After Yanukovych became presi-dent in 2010, in a campaign Akhmetov helped fund, the billionaire’s power business won five government auctions for some of Ukraine’s biggest power generators and distributors, two as the sole bidder, all for about $600 million.
To gain the confidence of his workers—and keep them from joining the separatists—Akhmetov has raised pay by about 20 percent. He also offered bonuses of $25 a day to employees in conflict zones who patrol the streets with local police loyal to Kiev. Those incentives have paid off in Mariupol, a city of 500,000 on the Sea of Azov
Edited by Christopher PowerBusinessweek.com/global-economics
Civil Unrest
Ukraine’s Top Oligarch Walks a Fine Line
� Rinat Akhmetov defies the rebels, but Kiev questions his loyalty
� “Don’t pay much attention to what people say on the bus”
Each day at noon, hundreds of thou-sands of factory workers in Ukraine’s east pause as sirens blare for three minutes, an act meant to signal defi-ance against pro-Russian militias. The workers’ boss, Rinat Akhmetov, wants to restore unity to Ukraine and preserve the fortune that makes him Ukraine’s richest man.
The daily siren and the hefty raises at his metal and power plants and coal mines are just two of the ways the bil-lionaire is rallying support in the Donbas region for the national government. The Donbas, Ukraine’s industrial and coal mining region in the east, is where most of Akhmetov’s workers live. Many of his 300,000 employees backed the revolt when the fighting started. Not anymore, say company officials. “Now 99 percent of the workforce understands the events that are happening and supports the principle that Donbas is part of Ukraine,” says Enver Tskitishvili, who runs a steel mill for Metinvest, the steelmaker at the core of Akhmetov’s empire.
Akhmetov, worth $13.2 billion according to the Bloomberg Billionaires Index, supported Kremlin-backed President Viktor Yanukovych until the politician fled in February and protesters in Kiev toppled his govern-ment. When separatists in the Donbas first clashed with the Ukrainian Army, Akhmetov, 47, sat on the sidelines as they seized buildings and claimed autonomy. Then in May he came out against the uprising and vowed to help end it. It’s been a good call so far. The
investors. “The major risks for him are oil and water,” says Rupa Rege Nitsure, Mumbai-based chief economist at Bank of Baroda. “His hands will be very, very tied.” —Bruce Einhorn, Unni Krishnan, and Kartikay MehrotraThe bottom line Modi’s first budget will be judged in part by how much it curbs enormous but popular government subsidies.
that was recaptured by government forces on June 13. Lawlessness spread after an earlier government offensive failed on May 9, prompting Metinvest, Mariupol’s largest employer, to call on its steelworkers and the people of the city to help secure the streets. More than 33,000 people signed up to join unarmed patrols alongside police offi-cers in one week alone, according to company officials.
Now through factory floor meetings, e-mails, and in-house publications, managers make sure every employee is educated on the dangers of separatism, says Dmitry Cherkez, a deputy depart-ment head at Ilyich, one of Metinvest’s two steel mills in Mariupol. “We say to people: ‘Don’t read the Internet too often, don’t pay much attention to what people say on the bus,’ ” he says. Some workers say they’re unimpressed. Yevgeny Nikolaenko, an engineer at Akhmetov’s Azovstal, a Metinvest steel mill, says while the patrols helped restore order in Mariupol, he’s neutral. “I don’t support one side or the other,” he says. “This is all about geopolitics.”
Some of the steelmaker’s manag-ers have had to fend off militias to prevent them from forcibly enlisting factory workers, says Yuriy Ryzhenkov, Metinvest’s chief executive officer. “They come and say, ‘Give us your people to fight,’ ” he says. “We explain that if that happens, production will stop, some-thing that didn’t even happen during the Great Patriotic War,” referring to World War II. He adds, “We hope this will come to an end tomorrow, but we are trying to make sure that even if it continues for several years, we can keep the com-pany’s operations together.” —Stepan Kravchenko and Henry MeyerThe bottom line Akhmetov’s factory workers have been given 20 percent pay raises to boost their morale and secure their loyalty.
Innovators like Interface® are using the
LEED® green building program to meet
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George Bandy Jr.
Vice President of
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Interface
Pictured: LEED Platinum Interface showroom, Chicago, Ill.usgbc.org/LEEDON
July 14 — July 20, 2014
Briefs: A crash diet for Carlos Slim 23
World Cup TV ratings soar; U.S. ad revenue, maybe not 20
In an upset, Mexico’s cars score a goal against Brazil 21
British pubs hope to win crowds back with food 22
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“Welcome!” two young women in shorts and Hawaiian shirts chime over the clatter of pinballs and J-pop at the entrance to Million pachinko parlor in Tokyo’s Suginami district. Nearby, garish orange, green, and yellow signs woo visitors with promises of fun within: “All your favorite machines are waiting for you, nice and clean. We lead you to the next level of amusement.”
For nearly a century, this is how mil-lions of Japanese office workers, housewives, and retirees have kicked off long, smoky nights out.
And their fading-but-still-fervent appetite for the pastime has helped turn pachinko, a pinball-slot machine hybrid that’s managed to skirt Japan’s gambling ban for decades, into an industry with 19 trillion yen ($187 billion) in annual bets—bigger than the economy of New Zealand.
But limits on big pachinko payouts, an aging player base, and time have taken a toll on Japan’s indigenous form of wagering. Attendance at parlors has sunk more than 60 percent since the mid-1990s, and pachinko operators have been unable to raise capital through public stock offerings on Japanese securities markets because of the game’s murky legal status. So the industry is looking to an unlikely savior to stem the slide: casinos.
With the 2020 Tokyo Olympics prom-ising to attract millions of cash- toting foreign tourists and governments hungry for the greater tax revenue that legal gaming could bring, Japanese law-makers in December took up a bill to legalize casinos in the world’s third-largest economy. Prime Minister Shinzo
Abe said in June that his ruling party would seek to
pass the bill in the fall. If approved, Japanese casinos could log an esti-mated $40 billion in revenue annually as early as 2025, forecasts brokerage CLSA, making it Asia’s second-biggest gaming market after Macau.
The chance to grab a piece of that growing market is tempting big parlor operators and pachinko machine makers such as Dynam Japan Holdings and Sega Sammy Holdings to embrace a change that threatens their long
To play, drop money in here
Winning balls come out here
As balls cascade through a sea of pegs, some get stuck; others
trigger additional prize balls to drop
Use the crank to shoot the ball
�Japan’s homegrown pastime considers casinos for growth
�“We will have to find a way to survive in this war”
19
dominance of Japan’s tradi-tional gaming market. Some smaller pachinko operators seek the social legitimacy that’s likely to come with any gambling legis-lation, making it easier to recruit employees. “Pachinko compa-nies are feeling a sense of crisis that they will go into decline unless they do something,” says Daigo Fukunaga, a senior analyst at Advanced Research Japan.
Pachinko companies argue that their deep roots in the Japanese gaming industry make them ideal collaborators for global casino com-panies, such as MGM Resorts International and Wynn Resorts, that may need local part-ners to help them break into the market.
The potential ben-efits are most obvious for pachinko machine makers such as Sega Sammy. Best known outside Japan for its discontinued video game con-soles, the company gets almost half its $3.7 billion annual sales from pachinko machines. In May it said it would begin making electronic table games for Macau and Singapore casinos.
Konami, whose products include pachinko machines and video games, already makes slot machines and other gaming equipment for Las Vegas Sands and MGM Resorts in other countries. The company says it may strike equipment deals with clients including both casino giants, as well as Caesars Entertainment. Satoshi Sakamoto, chief executive officer of Konami’s gaming unit, said in May that Japanese casinos “could be a turning point” for the company.
Dynam, Japan’s second-largest pachinko operator, may sell additional shares to fund its entry into the casino market, Chairman Yoji Sato said in March. And Maruhan, Japan’s biggest pachinko operator, is also interested in running casinos, according to people familiar with the company’s plans who were not authorized to disclose them and declined to be named.
There are 11,000 pachinko parlors across Japan. Players often sit for hours, plunking down up to 4 yen (4¢) for each metal ball. Although there is some skill involved in determining the amount of force to use when shooting the balls,
pachinko is mostly a game of chance. The balls beget more balls, which beget prizes such as a Hello Kitty bread maker or a Nikon Coolpix digital camera. Instead of the phys-ical prize, winners can get
tokens that can be redeemed at a shop next door for money, avoiding laws that bar cash payments. That Coolpix camera would fetch about $100 at the exchange.
Japan prohibits gam-bling except for state-run options such as horse and boat racing. Pachinko has been allowed to operate in a legal gray area because operators rely on these third-party
shops to exchange prizes for cash. The National Police Agency, which oversees the pachinko industry, has described the system as “not imme-diately illegal” without endorsing it.
The legal ambiguity is why Tokyo-based parlor owner P Ark
Holdings’ 2005 application to list on the Jasdaq Securities Exchange was rejected and why Dynam went to Hong Kong in 2012 for the first public offer-ing by a pachinko operator. A national gaming law could change all that. “If casinos are legal, saying no to pachinko doesn’t make sense,” Advanced Research’s Fukunaga says.
The game’s reputation had long been sullied by concerns that pachinko feeds gambling addictions that were exacerbated by machines offering high payouts. Under public pressure, the industry in 1996 voluntarily removed machines that paid out lavish amounts. Regulators further crimped jackpots in 2004, when winnings could reach $10,000 per day. Without big payouts, today pachinko offers few thrills a smartphone can’t match.
The change signaled an end of the seven decades of growth for pachinko, which saw bets peak at 31 trillion yen in 1995, according to the Japan Productivity Center, a think tank. At that time 29 million people played the game, about a quarter of all Japanese.
Motoyuki Nakajima, executive manag-ing director at the Pachinko Chain Store Association, says he welcomes an end to the gambling ban. “We have to change our environment, which people think is dirty, smoky, and noisy,” he says. “With casinos, we will be able to change.”
In February a group of law makers proposed legislation to supplement a
scheduled corporate tax cut by impos-ing a 1 percent tax on pachinko win-nings. This would generate 200 billion yen of tax revenue, but parlor opera-tors want legitimacy in return. Two of the five major industry groups so far support the move, Nakajima says. “If the cashing issue is cleared, it makes it possible for pachinko parlors to get listed,” he says. “There are 10 to 20 com-panies wanting to do [an] IPO, and they are all preparing.”
Some pachinko operators are hes-itant to embrace casinos. Masato Kishino, president of Towa Sangyo, which operates 26 pachinko parlors around Tokyo, says casinos could speed pachinko’s decline. “I can’t think of any positive factor” for the industry if casinos are legalized, he says. “We don’t have stores nationwide like Dynam or Maruhan. We will have to find a way to survive in this war.”
Even big pachinko players may not fare well. Dynam spokesman Kazuyuki Sugiyama says the company’s typical parlor requires about $4.4 million for the initial investment, without the pachinko machines. But casino compa-nies such as Sands and MGM say they’re ready to spend as much as $10 billion to build a single casino resort in Japan. That’s one reason Caesars Chairman Gary Loveman isn’t keen on forming a partnership with pachinko parlors. “I think it’s a less likely fit for us, because it’s not clear what the complementary set of skills would be in their case,” he says. —Yuki YamaguchiThe bottom line Japan’s pachinko parlor operators take in $187 billion in bets annually. A decline has them eyeing casinos.
Head to the pachinko parlor
Sports
Another World Cup Surprise: TV Ratings
� Soccer’s highest-ever viewership in the U.S. came at a bargain price
� “The bulk of the advertising … was not presold on these numbers”
Whatever the ratings for the final match in Rio de Janeiro on July 13, the 2014 FIFA World Cup in Brazil has been a record-setting success on television in the U.S. The match between the U.S. and Portugal on ESPN on June 22
Wow! You won 2,590 balls
That’s enough to trade in for …
… a Nikon Coolpix digital camera!
Or receive a token that can be exchanged at the shop next door for cash.
Now you have about
$100!
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drew a record audience for soccer, with an average of 18.2 million viewers, according to Nielsen. On Univision, Mexico’s match with the Netherlands on June 29 set the viewership record for any U.S. Spanish-language telecast at 10.4 million viewers. Almost 25 million people watched the U.S. play Portugal on the two networks, about 10 million more than the average for the National Basketball Association finals and Major League Baseball’s World Series.
For Walt Disney’s ABC and ESPN, which hold rights to English-language telecasts in the U.S., total viewership through the first 60 matches is up 42 percent over the 2010 World Cup. For Univision, the Spanish-language rights holder, viewership is up 38 percent over 2010. These figures don’t include record traffic on the two networks’ streaming services or the crowds watching at bars.
Celebrations at ESPN and Univision, however, will be muted and short-lived. The immediate financial benefit to the networks is minimal, since most of the advertising inventory for the tourna-ment was sold well ahead of time—and likely at rates pegged to lower viewer-ship. “The bulk of the advertising, the 70 or 80 percent that was presold, that was not presold on these numbers,” says Marc Ganis, president of the Chicago consulting firm SportsCorp.
Moreover, both networks were outbid for the next two World Cups, in Russia in 2018 and Qatar in 2022. Fox owns the English-language rights to the pair, and Telemundo, a property of Comcast/NBCUniversal, has the Spanish-language rights for the U.S. “It’s bitter-sweet,” Scott Guglielmino, ESPN’s head of soccer programming, says of the net-work’s lame-duck status. “We are cer-tainly living in the moment.” Both Guglielmino and Juan Carlos Rodriguez, president of Univision Deportes, say the success of this year’s World Cup is partly a testament to their cover-age. “Univision Deportes continues to be the No. 1 destination for soccer
fans 12 months out of the year,” writes Rodriguez in an e-mail. Still, accord-ing to Brad Adgate, director of research at Horizon Media, “there has got to be some second-guessing” at the two networks over the failure to bid high enough for the next two World Cups.
Although FIFA doesn’t disclose finan-cial details of its agreements, multi-ple news outlets reported that ESPN paid $100 million for the rights to the 2010 and 2014 World Cups, while Univision paid $325 million for the same pair. For 2018 and 2022, fees more than doubled, with Fox paying roughly $450 million and Telemundo $600 million. The steep price increases are in keeping with a boom in the cost of sports program-ming, which has maintained its live audience better than most television against digital recorders.
For ESPN and Univision, this year’s ratings will still pay off in goodwill with advertisers and potential leverage in negotiations with carriers over the per-subscriber fees they pay for the chan-nels. For Fox and Telemundo, both of which declined comment, this year’s numbers raise the floor, but not nec-essarily the ceiling, for 2018 and 2022.Brazil’s peak audiences are probably not sustainable. The record-setting U.S. match with Portugal aired at 6 p.m. on a Sunday on the East Coast. The team’s elimination match with Belgium at 4 p.m. the following Tuesday attracted a slightly smaller audience of 16.5 million. Both matches fell within an ideal window for many, toward the end of the workday but before competition from prime-time programming. “The time zone this year was perfect,” says SportsCorp’s Ganis. And the two main attractions for the U.S. audience—the U.S. and Mexican teams—made it to the round of 16.
Time zones in Russia and Qatar are far less favorable. Russia ranges from 7 to 16 hours ahead of New York. And Qatar, during the summer, is 7 hours ahead. A 6 p.m. match in Moscow would be on at 10 a.m. in New York. During the 2006 and 2010 World Cups, matches starting between 9 a.m. and 11 a.m. on ABC and ESPN averaged 2.1 million viewers. And there’s no guar-
antee that the U.S. and Mexican teams will qualify for future World Cups. “The TV ratings, I think, will be going down,” says Ganis. “But the alternative means of viewing—if not the whole games, at least snippets of them, and if not live, on a
form of a delay—will go up.” Fox can use that marquee programming to try to boost the fees it charges carriers for the two 24-hour sports channels it launched in 2013. —Ira BoudwayThe bottom line The World Cup match between the U.S. and Portugal on ESPN drew 18.2 million viewers, a record for soccer.
More U.S. Viewers Watch the Other Football
Final
Semi
Group
Quarter
Sixteen
Autos
Why Mexico Is Speeding Past Brazil in Cars
� It benefits from low labor costs and a rich neighbor
� “The auto industry is going to continue as the icon of this country”
Remember in the 1990s when some Cassandras feared the North American Free Trade Agreement would someday help Mexico eclipse car production of its higher-cost rivals north of the border? Two decades later, Mexico is
The Spain vs. Netherlands final becomes the most watched soccer match in the U.S.
Growth of ABC/ESPN’s audience through the first 60 matches over 2010
Data not yet available
Average TV audience share for match telecasts by World Cup round
2006 Germany 2010 South Africa 2014 Brazil
0% 10% 0% 10% 0% 10%
37%
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making its move, but against another competitor: Brazil.
The country is poised to overtake South America’s largest nation as the top Latin American automobile pro-ducer for the first time in more than a decade. Mexico’s ascent is fueled in part by auto sales running at the fastest pace in almost eight years in the U.S., its largest market. The boom coin-
cides with a slump in Brazilian pro-duction through June as its domestic demand cools.
“People talk about the energy and telecom indus-tries in Mexico, but the auto indus-try is going to con-tinue as the icon of this country,” says
Luis Lozano, lead automotive partner at PricewaterhouseCoopers in Mexico City. Passing Brazil, where output has fallen 17 percent this year, would vault Mexico to No. 7 among the world’s auto produc-ers. China is No. 1, followed by the U.S.
The diverging fortunes of Mexican and Brazilian auto production reflect the state of their biggest markets. Because of high labor costs and taxes, Brazil-made cars and trucks are too expensive to send abroad and go mostly to local buyers. Mexican factories export 8 out of every 10 cars they produce—with more than half bound for the U.S.
Auto output in Mexico rose 7.4 percent during the first six months of 2014, to 1.6 million vehicles, bolstered by new plants owned by Nissan Motor, Honda Motor, and Mazda Motor, according to the Mexican Automobile Industry Association, known as AMIA. Brazil’s production through June was 1.47 million, reports Anfavea, Brazil’s automaker association.
Mexico’s proximity to the U.S. also gives it an advantage, as do labor costs for carmakers that are about 20 percent of U.S. levels, according to PricewaterhouseCoopers. So the broader reason for the big surge “is the appeal of Mexico as the produc-tion source for North America,” says Bill Rinna, senior manager of North American forecasts at LMC Automotive. LMC forecasts Mexico will pass Brazil in 2016; other researchers put it sooner.
The recent plant openings in Mexico by Honda, Mazda, and Nissan represent a combined investment of $4 billion.
Drinks
To Keep the Ale Flowing, U.K. Pubs Look to Data
� Numbers-savvy owners find a new way to boost sales
� Analysis of what a person drinks “is an incredibly important element”
Noah Bulkin is not the man you’d expect to be pouring your next pint of ale. Oxford-educated, Bulkin, 37, spent 15 years as a mergers-and-acquisitions specialist at Merrill Lynch and Lazard before leaving last year to start his own pub company, Hawthorn Leisure. He’s acquired hundreds of struggling pubs and plans to turn them around
And Volkswagen’s Audi unit is build-ing a $1.3 billion plant to assemble the luxury Q5 sport utility vehicle.
In June, Daimler and Nissan said they would produce luxury vehicles, including Infiniti compact cars, at a new $1.4 billion factory in Mexico, the biggest project to date in their four-year-old partnership. Earlier this month, BMW said it will invest $1 billion in a new factory in central Mexico that will make about 150,000 cars annually. “Whatever is made there can be exported” to any of the more than 40 countries that have free-trade agreements with Mexico, including the U.S., says Augusto Amorim, analyst for South America at IHS.
Brazil has logged some new plants of its own. In April, Nissan opened a $1.5 billion complex in Resende, and Chery Automobile has a $530 million factory in São Paulo state that will start production this year, marking the Chinese automaker’s first major invest-ment outside its home country.
Yet as Mexico’s auto exports have advanced 9.7 percent this year, Brazil’s shipments have fallen 37 percent. And Brazilian consumers have slowed pur-chases because of tighter credit and a weakening economy. That’s one reason IHS is forecasting Mexican auto output this year of almost 3.2 million, ahead of Brazil’s 3.17 million. —Brendan Case and Christiana SciaudoneThe bottom line With labor costs just 20 percent of those in the U.S., Mexico could pass Brazil to become the No. 7 auto producer.
1.6mMexico
1.47mBrazil
Share of sales from food at pub chain Oakman Inns & Restaurants
by tracking everything from the price charged for beer to daily sales fluctua-tions to customers’ drink preferences.
Understanding pricing and the mix of drinks is key, Bulkin says: “A lot of pubs don’t have that data.” As he sees it, British pubs have long suffered from a lack of attention. “If you can make them the core of your business,” he says, “there’s a fantastic opportunity.”
Over the past decade, Britain’s £70 billion ($120 billion) pub indus-try has fallen on very hard times. About 20,000 outlets have closed since 2004, according to the British Beer & Pub Association, hit by the reces-sion, a smoking ban that took effect in 2007, and the availability of cheaper booze in supermarkets. The volume of beer imbibed in U.K. bars has declined 45 percent since 2000, leaving large pub companies such as Punch Taverns and Enterprise Inns weighed down by debt after years of rapid expansion.
The industry is fighting back, thanks in part to investors like Bulkin. After six years of declines, sales at pubs open at least a year have grown for 14 consecu-tive months, according to pub industry data provider CGA Strategy. Several pub deals, valued at a total of $730 million, have been announced in the past year, more than in the prior two combined.
Britain’s 50,000 pubs fall into three categories: those owned and managed by companies; so-called tied or tenanted pubs leased by individuals who pay rent to the pub’s corporate owners; and inde-pendently owned establishments. The tied pubs have suffered the most, due to what a Parliamentary business com-mittee in a 2009 report called “down-right bullying” of tenants by owners. The committee has conducted several investigations over the past decade into claims that owners are taking advan-tage of tenants, withholding information about how rents are set and forcing them to buy beer from just one supplier.
Bulkin is buying up mostly tenanted pubs—he’s acquired 363 since early May. He is spending anywhere from roughly £10,000 to £100,000 per bar on
Vehicle productionJanuary-June 2014
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Briefs
América Móvil Slims Down
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By Kyle Stock
Edited by James E. Ellis and Dimitra Kessenides Businessweek.com/companies-and-industries
○u○ Bending to Mexico’s new antitrust rules,
Carlos Slim’s América Móvil agreed to dial back
its Mexican telecom empire. The government
had proposed profit-crushing restrictions on the
main business unit controlled by Slim, the world’s
second-richest man. América Móvil’s board agreed
to divest some assets, reducing its share of Mexi-
co’s land lines and mobile phones to below 50 per-
cent. It also won’t acquire pay-TV provider Dish
México. ○ ○ Viacom’s Paramount Pictures set a box-office
record in China with Transformers: Age of Extinction. In just 10
days in theaters there, it garnered $223 million, besting Avatar.
The special- effects spectacle was savaged by critics, but its
producers carefully courted mainland consumers by setting
part of the movie in China and casting it via a popular Chinese
reality show. ○k○ Let’s Gowex, a
Spanish builder of Wi-Fi hotspots,
which had been considered a rare
success story in the recession-
ravaged nation, went out of business
after its founder and CEO admitted
to falsifying financial records for
more than four years. The mea culpa followed an eight-month
investigation by Gotham City Research, a short-selling firm that
accused Let’s Gowex of misleading investors. ○q○ Lyft,
a car service, said it will expand to New York
City, upping its rivalry with Uber. The startup,
known for the pink mustaches it puts on its
vehicles’ grilles, will initially target those parts
of the city where traditional taxis can be hard
to find. ○ ○ Crumbs Bake Shop, which built
a semisweet business on gourmet baked
goods, said it will close all its stores, days
after Nasdaq delisted its stock. Last year,
Crumbs posted an $18.2 million loss.
CEO Wisdom
Global advertisers spent 57 percent more per Facebook ad impression in 2014’s second quarter vs. the first three months, says media buyer Nanigans. That’s $1.95 per thousand impressions.
renovations, including new touchscreen cash registers that are linked to a cen-tralized database and allow Bulkin to see what’s selling and what’s not. With the help of a former banking colleague, he’s projecting potential sales and earnings
at the pubs. “Applying some granular analysis of what a person might drink and what they will pay is an incred-ibly important element,” he says.
“This hasn’t been done in the bottom end of the sector.” Two beers that are identical in price and taste similar could deliver as much as an 80 percent differ-ence in profit per keg to the pub, he says.
Bulkin also hopes to improve rela-tionships with tenants. He requires his managers to meet with tenants weekly—previous owners, he says, checked in only once every few weeks—to discuss which beers to offer, pricing, and how to differentiate the pub from competitors. “We can be very flexible and creative to come up with the right structure for each pub,” he says.
Another investor in Hawthorn Leisure is New York-based Avenue Capital Group. Cerberus Capital Management bought pub company Admiral Taverns last year, and Risk Capital Partners of London recently invested in Laine Pub, a 45-unit chain based in Brighton. The fresh money is inspir-ing new ideas and business models. Oakman Inns & Restaurants, a chain of nine high-end pubs, has expanded its dining menu and now gener-ates 60 percent of its sales from food. Founder Peter Borg-Neal uses the same meat supplier as Windsor Castle and has spent about £1 million per pub on upgrades, adding dining rooms and outdoor seating.
Zonal Retail Data Systems, which sup-plies registers and databases to U.K. pubs, says it will increase sales to about £50 million this year, more than double what it sold in 2010.
Still, technology can do only so much to improve the camaraderie that attracts Britons to pubs. “I feel special here,” says Bruce Brunson at the White Horse in Welwyn, Hertfordshire. “When I walk in, it’s like I’m Norm from Cheers.” —Matthew BoyleThe bottom line New investors are pouring fresh money and ideas into Britain’s $120 billion pub industry.
Increase in Rolls-Royce sales in the first six months of 2014. Ultraluxury vehicles are now the hottest segment of the car industry. 33%
“I don’t think women can have it all. … Every day you have to make a decision about whether you are going to be a wife or a mother, in fact many times during the day you have to make those decisions. And you have to co-opt a lot of people to help you.”
Indra Nooyi, CEO, PepsiCo
23
Companies/Industries
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July 14 — July 20, 2014
GOP attacks on the CFPB’s office redo don’t add up 28
How Obama can reform immigration without Congress 26
The fight over who should pay for pricey new drugs 27
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Ingersoll-Rand is a great American success story. Founded 143 years ago by a Connecticut farmer who invented a steam-powered rock drill, the company made tools that carved out the Panama Canal and shaped Mt. Rushmore. More recently it’s become a leader in energy-efficient air conditioners: Ingersoll-Rand’s Trane unit has won more than $350 million worth of federal con-tracts to retrofit government build-ings and military facilities as part of a U.S. Department of Energy conserva-tion program. When President Obama announced an expansion of the initiative in May, Chief Executive Officer Michael Lamach was a guest. Obama offered “thanks to all the companies who are doing the great work.”
What Obama didn’t mention is that Ingersoll-Rand is no longer a U.S. company, at least not on paper. In 2001, amid a wave of corporate expa-triations, it shifted its legal address to Bermuda, cutting its tax bill in half. Other companies that did business with the U.S. government, including Tyco International and Accenture, had also adopted Bermuda addresses, prompting members of Congress to say they’d punish corporations that pull up stakes. “There is no reason the U.S. gov-ernment should reward tax runaways with lucrative government contracts,” fumed Democratic Senator Harry Reid of Nevada, whose father wielded an Ingersoll-Rand jackhammer as a hard-rock miner. Republican Charles Grassley of Iowa called for an end to “fat govern-ment contracts” for such companies.
In the years since, Congress has passed several pieces of legislation to limit or ban these contracts. Yet the law is riddled with exemptions that allow the offshore companies to legally bid for gov-ernment work. A company that avoids domestic taxes by shifting its address abroad can still be eligible for federal contracts if it has “substantial busi-ness” in its new home—thus nominally demonstrating its move wasn’t solely for tax reasons. The rules also don’t cover U.S. companies that acquire foreign addresses, and tax benefits, through takeovers of overseas competitors.
More than 40 U.S. companies have reincorporated in tax havens, a strat-egy known as inversion, 11 of them since 2012. Seven more are in the process
�Companies that register abroad to avoid taxes get federal dollars
�“There is no reason the U.S. ... should reward tax runaways”
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of doing so. Last month, Medtronic, a Minnesota medical device maker whose customers include the Veterans Affairs Department, announced plans to become Irish. The government awards more than a dozen companies that have left the U.S. contracts worth more than $1 billion a year.
The law defining inverted com-panies doesn’t cover Accenture, a company with Chicago roots that incor-porated in Bermuda in 2001. The same is true for Chicago Bridge & Iron, a Texas-run corporation with a Dutch address. According to public records, Accenture earned $960 million from federal contracts in 2013, and CB&I made $734 million. A spokesman for CB&I says the company complies with the law. Accenture spokesman James McAvoy says the company is eligible for government contracts because it was never incorporated in the U.S. When it first separated from Chicago-based Arthur Andersen in 1989, it was set up as a network of separate partnerships around the world overseen by a Swiss entity. For that reason the U.S. General Accounting Office concluded in 2002 that Accenture wasn’t an inverted company. McAvoy says a 2012 review by the U.S. Department of Homeland Security con-firmed that Accenture, now based in Ireland, isn’t subject to the ban.
In its brochures, Ingersoll-Rand touts its projects for the Army and Navy. Yet for years it told shareholders and cus-
tomers in public filings that it might be subject to the law. Recently the company con-ducted an “exhaus-tive legal analysis” and decided it’s not covered, says spokeswoman Misty Zelent. The government relies
on contractors to police themselves. Zelent says the company works closely with government contracting officials to ensure compliance with a “complex area of the law.” Its contracts show just how complex it is and how many legal ways there are around the rules.
For the most part, Ingersoll-Rand has been able to sidestep the question of whether it’s inverted. Three separate gaps have allowed the company to con-tinue doing business with the U.S. gov-ernment. First, the ban applies only to contracts funded by annual congres-sional appropriations. Ingersoll-Rand sought contracts paid for with other money, including a contract to main-tain equipment at military-base super-markets. Signed in March 2010, it’s funded with a 5 percent surcharge on purchases at the stores.
Second, Ingersoll-Rand was awarded contracts during periods when the rules had lapsed. Congress’s first government- wide contracting ban expired in September 2008 and didn’t go back into effect until the following March, when Congress passed a funding bill for the 2009 fiscal year. In the interim, Energy Department officials added the company to a list of contractors authorized to pursue up to $5 billion in government work over as many as 10 years. Ingersoll-Rand has been awarded two projects under authority of the DOE deal.
Third, some contracts allow Ingersoll-Rand to bid on new projects under what spokeswoman Zelent calls a “grand-father clause,” without running afoul of the law. Thus Ingersoll-Rand has bid for and won energy-saving projects under the authority of Energy Department contracts signed years earlier.
The biggest was a $124 million project at Naval Air Station Oceana in Virginia Beach, Va., the East Coast home of the Navy’s fighter jets. In August 2009, Ingersoll-Rand’s Trane unit was hired to replace an old steam plant with a more
Executive Power
Obama Goes It Alone On Immigration
� He can fix the problem without Congress—up to a point
� “The president cannot give people green cards”
With immigration reform dead on Capitol Hill, President Obama says he will use his executive authority to make changes to the law himself. “I’m begin-ning a new effort to fix as much of our immigration system as I can on my own,” Obama said in June. “If Congress will not do their job, at least we can do ours.”
How much can he do without congres-sional approval? Actually, quite a bit. The president has the power to grant many of the estimated 11 million undoc-umented immigrants already in the U.S. relief from deportation simply by instructing the Department of Homeland Security not to pursue their cases. In 2012, after Congress repeatedly declined to pass the Dream Act, which would have offered citizenship to immigrants whose parents brought them to the U.S. illegally as children, Obama said he would offer the immigrants “deferred action”—essentially a two-year stay on deportation proceedings. More than 550,000 people have qualified.
Since 1982 more than 40 companies have moved abroad
Seeking Greener Pastures
1982 2014201020052000199519901985
Chicago Bridge & Iron reincorporates in The Hague
Ingersoll-Rand joins a wave of corporate inversions
Medtronic announces plans
to become Irish= one company
McDermott Intl. adopts the address of a Panamanian subsidiary as its legal headquarters
Amount U.S. companies with
overseas addresses earn from federal
contracts annually
$1b
efficient heating system, with the cost covered by the Navy’s energy savings. It was Trane’s third such job at the base. The project came under the authority of a Trane contract from 1999. “The Navy had no legal basis for not considering Trane’s proposal, which the Navy found to be the best value to the government,” a Navy spokesman said in an e-mail.
Democratic Representative Rosa DeLauro of Connecticut, who was instru-mental in passing the first federal con-tracting ban in 2002, says she’s working on a bill to expand the prohibition to cover more corporate runaways, includ-ing most of the current crop. “We should not be rewarding them,” DeLauro says. “Let’s give it to the companies that stay here, employ people here, and pay their taxes here.” —Zachary R. MiderThe bottom line U.S. companies that head overseas to avoid taxes are still able to win lucrative government contracts.
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Health Care
Who Should Pay the Bill For Wonder Drugs?
� Patients are caught in a fight between insurers and Big Pharma
� “You can’t keep increasing prices at this level”
In 2010 the first oral medication for multiple sclerosis became available, a pill from Novartis called Gilenya. At about $4,000 a month, it was the most expensive treatment for MS. Now it’s the cheapest. “When it came on the
The National Council of La Raza, a Hispanic civil rights group, the AFL-CIO, and other immigrant advocates have urged the White House to extend deferred action—which can include authorization to work in the U.S.—to anyone who would have qualified for the “pathway to citizenship” under the terms of the immigration reform bill passed by the Senate last year. That program would have covered people who’ve been in the U.S. since 2011 and don’t have serious criminal records, which accounts for about two-thirds of all undocumented immigrants. “These are people that we know are going to eventually be legalized by Congress,” says Marshall Fitz, director of immi-gration policy for the liberal Center for American Progress, who adds that polls show a majority of Americans support the Senate bill.
What Obama can’t do is declare an amnesty. “The president cannot give people green cards—you know, lawful permanent resident status,” says Hiroshi Motomura, a UCLA law profes-sor. “This is all temporary reprieve.” The president can make changes to the way immigration laws are enforced. Liberal groups are pressing for an end to federal immigration enforcement programs like Secure Communities, under which local police share the
finger prints of people
they arrest with federal immigration authorities. Civil liberties advocates say such initiatives violate privacy laws and that some U.S. citizens have been mistakenly held as undocumented immigrants. Because the rules were created by Homeland Security and not Congress, “there would be no question that the president could suspend or terminate that program,” says Yale Law School professor Michael Wishnie.
Beyond these steps, the president begins to bump up against the limits of his power. Obama says he wants to redeploy federal immigration enforce-ment agents to the Mexican border. That’s something he can do within the confines of existing law, but he needs Congress to agree to pay for it. On July 8 the White House requested $3.7 billion in emergency appropriations for addi-tional surveillance, detention, and ser-vices for migrants, and to hire more immigration court judges to expedite deportations, particularly of unaccom-panied children arriving from Central America. House Republicans were quick to counter with threats to reject the special requests—and withhold money for federal agencies next year if the president moves ahead without their approval. “There’s always appro-priations tools where you can direct and deny funding,” says Republican Representative Tom Cole of Oklahoma,
a deputy majority whip. “There’s abun-dant weapons there.”
Obama has said he’ll announce his next steps by the end of the summer. With the midterm elections approach-ing and the Democrats’ Senate majority at risk, the question is how far he’s pre-pared to go. “As a legal matter, his discre-tion is really broad,” says Motomura. “As a political matter, I think it’s much more constrained.” —Josh EidelsonThe bottom line With Congress deadlocked, the White House may exercise its executive authority to achieve immigration reform.
Dr. Katherine Mitchell, testifying before the House Veterans’ Affairs Committee on June 8. Mitchell, a physician, said Veterans Administration officials ignored her repeated warnings about poor care at the VA hospital in Phoenix. When she persisted, she said she was reprimanded, suspended, and transferred from the hospital.
Quoted
“The VA, in my opinion, has routinely intimidated any employee who brings forth information that is contrary to the public image that the VA wishes to project.”
Politics/Policy
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market all the older drugs raised their prices,” says Ted Thompson, vice presi-dent of federal government relations at the National Multiple Sclerosis Society.
Breakthrough medications that cost tens of thousands of dollars or more a year are becoming common for treating chronic conditions such as MS, cancer, HIV, and hepatitis C. In coming years dozens of new specialized medicines are expected to arrive with similar price tags. The U.S. health-care system has yet to sort out who will pay for them, and how much. It’s a question that’s pitting drug companies that develop medicines against the insurance com-panies and government programs that buy them—and leaving patients caught in the middle.
The blockbuster drugs of previous decades were aimed at dis-eases affecting tens of mil-lions of people. One in 10 U.S. adults under 65 takes cho-lesterol medication such as Pfizer’s Lipitor, introduced in 1996. Today, “biopharma companies are targeting more complex diseases affecting very small populations,” says Robert Zirkelbach, spokesman for the trade group Pharmaceutical Research & Manufacturers of America. Of the 27 drugs approved by the U.S. Food & Drug Administration last year, 19 were specialty medications, includ-ing nine cancer treatments, accord-ing to PricewaterhouseCoopers Health Research Institute. Selling expensive-to-develop pills to fewer people means each dose will cost more. The institute projects that by 2016 spending on such
Office Space
OK, Maybe the Granite Fountain Is a Bit Much
� Republicans use iffy math to attack the CFPB’s office renovation
� Updating the aging building is a “blatant waste” of public money
When the U.S. Consumer Financial Protection Bureau opened in 2011, the best available government office space large enough to accommodate its thousand-plus employees was a run-down concrete building on G Street near
treatments will more than double from 2012, to $192 billion.
U.S. taxpayers have a lot at stake. Although the government pays 37 percent of America’s $263 billion pre-scription drug bill through programs such as Medicaid, Medicare, and military and veterans’ health care, Washington’s buying power doesn’t always translate into the lowest prices. By law, drugmak-ers must sell prescription medications to the military and to Medicaid, the state-federal health program for the poor, at prices below the retail average. The per-centage discount, based on a drug’s average sale price, is set by a complex formula. But when Medicare’s prescrip-tion benefit for the elderly was created in 2003, the pharma industry success-fully lobbied to prevent the program
from negotiating similar dis-counts, arguing that competi-tion among the private insurers that administer Medicare’s drug plan would hold down prices.
That didn’t work: Medicare pays on average 69 percent more than Medicaid for brand-name drugs, accord-ing to a June U.S. Government Accountability Office report. Even if Medicare could bargain
with drug companies, it might not make much difference. Earlier GAO research found that when Medicaid’s pharmaceu-tical discounts were created in the 1990s, drugmakers responded by raising retail prices—diminishing the effect of the dis-count and raising costs for other buyers.
Since the late 1990s prescription drugs have consistently made up about 10 percent of America’s total medical bill. The amount individuals pay has changed, though. Half a century ago patients covered more than 90 percent of medication costs. As recently as 1991, Americans still bore more than half of drug costs directly. By 2012, they paid just 18 percent. Private insurers and Medicare picked up a greater share as treatments became more sophisticated and expensive.
Insurers have been trying to shift more of those costs back onto patients, saying people who have to pay part of their way will use services more prudently. A recent analysis of 123 Obamacare drug plans found more than half had at least one class of medicines that required patients to pay 30 percent of the cost, including for generics. The report, by consultant Avalere Health, was funded by the pharmaceutical industry.
Charging a percentage of drug costs, rather than a flat co-pay, means patients with chronic conditions can pay thou-sands of dollars more than healthy people on the same insurance plan. “The specialty drugs are typically on the highest tier with the highest cost-shar-ing,” says Thompson of the MS Society.
The Affordable Care Act limits the total amount people have to pay out of pocket each year to $6,350 for individuals or $12,700 for families. Most people never have to shell out that much. But a patient with MS—or HIV, or cancer—might hit that ceiling in the first few months of the year paying 30 percent or 40 percent of drug costs, as some plans require.
Advocates for patients argue that insurers design health plans with high fees on specialty drugs to steer sick people away, an end run around Obamacare’s ban on discriminating against those with preexisting con-ditions. The nonprofit AIDS Institute filed a complaint with the government on May 29, arguing that four insurers in Florida were discriminating against patients by putting all HIV drugs into the highest cost tier. The bigger problem, insurers say, is the high cost of medi-cines: “You can’t keep increasing prices at this level and have a system that’s sus-tainable,” says Brendan Buck, spokes-man for America’s Health Insurance Plans, the industry lobby. As advances in medical science make their way from lab benches to pharmacy counters, paying for cures may become as vexing a problem as finding them. —John TozziThe bottom line Some insurers require sick patients to pay extra for expensive breakthrough drugs to treat chronic diseases.
$150b
$250b
$200b
$50b
$100b
1980 2012
Gilenya went from being the most
expensive treatment for MS
to being the cheapest
Drug costs have risen twice as fast as health spending
since 1980
Private insurance
Patient out-of-pocket
Medicare
Medicaid
Other
Prescription Drug Spending
DATA: NATIONAL HEALTH EXPENDITURES
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Edited by Weston Kosova and Allison HoffmanBusinessweek.com/politics-and-policy
the White House that once housed the now-defunct Office of Thrift Supervision. The bureau’s director, Richard Cordray, has called the dark, musty structure a “dump.” The U.S. Department of the Treasury said the building, erected in 1976, was in need of “major renova-tions,” which the low rent reflected.
Three years later, the CFPB’s plans to fix up the place are under attack by Republicans who fought to block the agency’s creation and have tried since to weaken or kill it. Representative Jeb Hensarling of Texas, chairman of the House Financial Services Committee, decries the renovation as a “blatant waste” of public money. The CFPB says it will cost about $140 million; Republicans predict it will come to much more.
The U.S. General Services Administration is managing the project and intends to update the interior, fix the leaky roof, and upgrade the build-ing to LEED Gold environmental stan-dards. Hensarling and other opponents have latched onto a planned glass stair-case, and a granite fountain, benches, and trees in the building’s public outdoor plaza as evidence of opulent excess. “It has become abundantly clear that it’s not 1700 G Street that needs an overhaul, but rather the entire structure of the CFPB,” Representative Patrick McHenry of North Carolina, chairman of the committee’s Oversight and Investigations Subcommittee, said in a July 2 press release.
Services Committee spokesman says their calculations use a smaller foot-print for the renovation than the GSA, but that explanation doesn’t account for all of the extra $169 per square foot. At the overstated $421, the project actually would cost less per square foot than the Bellagio ($482) and Trump Tower ($448) if adjusted for inflation to make the numbers comparable—something the GOP estimate doesn’t do.
The GSA has said the costs are in line with other government renova-tion projects, and the inspector general concluded the CFPB followed proper contracting procedures. The report did take the agency to task for not initially making a required “business case” to justify the renovation.
Republicans have cast the project as a misuse of public dollars in a time of tight budgets. “The CFPB is funded by the Federal Reserve, which happens to be taxpayer money,” Hensarling said in a February speech that denounced the renovation. But the Federal Reserve is self-financed, largely with income on securities such as government bonds, so the amount Congress needs to set aside for the office redo is precisely zero. —Karen WeiseThe bottom line Republicans say the CFPB’s new office will cost more per square foot than the Bellagio. They need to check their figures.
“... It also equals more than $590 per square foot① being renovated at
the CFPB’s rented headquarters. That means the CFPB is spending much
more per square foot than it cost to build the Trump World Tower ($334/
square foot),② the Bellagio Hotel and Casino ($330/square foot)③ and the
Burj Khalifa in Dubai ($450/square foot).”④
From the GOP-led House Committee on Financial Services’ July 2 press release: “Inspector General Reports CFPB Renovation Costs Now Exceed $215 Million—$120 Million More Than Previous Estimate”
② ③ ④①$590 per square foot? Really?The inspector general actually estimated construction costs for the 512,000 sq. ft. project will total $145.1 million. That comes to
$283.40 per square foot. To reach their higher number, GOP critics added tens of millions in extra costs not usually included in construction estimates.
Pricier than the Bellagio? Really?The square-foot costs that critics use aren’t adjusted for inflation, so it’s not a head-to-head comparison. In today’s dollars, Trump Tower cost
$448per square foot, the Bellagio
$482,and the Burj
$500, all way more expensive than the CFPB’s makeover.
The GOP members say their calcu-lations show the renovation will cost $215.8 million, or $590 per square foot—more than double the CFPB estimate, and more than it cost per square foot to construct the lavish Bellagio Hotel and Casino in Las Vegas. These figures were picked up by newspapers and conser-vative websites, which ran them under headlines like “Elizabeth Warren’s Brainchild Builds HQ Costlier Than Trump Tower.” There’s just one hitch: Their numbers don’t add up.
At McHenry’s request, the inspec-tor general of the Federal Reserve, the CFPB’s parent agency, prepared a report in June examining the project’s price tag. It said the job would cost an estimated $145.1 million for construction, con-struction management, and GSA fees. The report said the renovation covers 512,000 sq. ft., bringing the estimate to $283 per square foot. The renovation has since been scaled back to 503,000 sq. ft.
The Republican figures inflate the total price by tacking on $70.7 million for costs such as hiring movers and renting temporary offices to use during the construction. Those expenses aren’t typically included in calculating con-struction costs, says Randolph Harrell, executive vice president at the brokerage CBRE. “But it is a real cost,” he says.
Even with all of that packed onto the price, though, the grand total would still only reach about $421 per square foot, well short of the GOP’s $590. A Financial
MathCheck
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Politics/Policy
© 2014 Samsung Telecommunications America, LLC. Samsung, Galaxy Tab and The Next Big Thing Is Here are all trademarks of Samsung Electronics Co., Ltd. Appearance of devices may vary. Device screen images simulated.
T H E N E X T B I G T H I N G
I S H E R E™
�Silicon Valley recruits interns out of high school
�“The point is we’re always on the lookout for really top talent”
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Innovation: A kit that tracks fertility and flu 35
Can Amazon trounce India’s homegrown e-commerce stars? 34
Bringing power to the people with a little help from data 33
In the jet engine wars, it’s Pratt vs. GE 32
mobile news-summarizing app. Early Facebook investor Peter Thiel pays teen-agers $100,000 to quit school and work on their own projects.
Online coding tutorials and collab-orative Web communities are helping high schoolers produce successful apps before they earn computer science degrees. Hackathons and bug-hunting contests can connect skilled kids with companies, says James Anderson, 15, who met the founders of Portland (Ore.)-based Web startup Planet Argon at a conference on the Ruby on Rails pro-gramming language. Then 13, the self-taught app maker impressed the Argon engineers and persuaded them to let him intern for them last summer after he graduated from middle school. “I felt like age shouldn’t hold me back, as long as I can code,” says Anderson, who just fin-ished ninth grade.
On Facebook’s campus, Sayman can get a meal or a haircut or have his laundry done for free whenever he wants. “My life here is basically the
mom was like, ‘No, you have to learn to live on your own,’ ” he says.
While teens aren’t overrunning Silicon Valley yet, talent-starved tech compa-nies are reaching out to kids to fill spots in their internship programs. Facebook says it has just begun to recruit teens before their freshman year of college. LinkedIn opened its summer program to high schoolers two years ago; Airbnb has had interns as young as 16. “Talent is our No. 1 operating priority and our most important asset,” LinkedIn CEO Jeff Weiner said on his company’s most recent earnings call, welcoming this summer’s crop of interns.
For established companies, it’s all about playing defense against Silicon Valley’s newer-is-better culture, espe-cially as the young and technically inclined see that the biggest jackpots can come from creating their own start-ups. College dropout Zuckerberg is an obvious example; Summly founder Nick D’Aloisio became a millionaire at 17 last year when Yahoo! acquired his
After Facebook recruited Michael Sayman last November, it didn’t mess around—it flew him out from Miami to meet Mark Zuckerberg. The chief execu-tive talked to Sayman about 4 Snaps, the mobile game he built using Facebook’s development tools that has attracted more than 500,000 players. Sayman’s mom, Cristina, came with him, because he was still in high school. “When I got the e-mail saying—oh my God—Mark Zuckerberg wants to meet you, I had to make sure nobody was playing a prank on me,” the young coder says.
Sayman, now 17, started in June as a summer intern at Facebook’s Menlo Park (Calif.) headquarters just after gradu-ating from high school and six months before he’s due to get his braces off. “I try to keep my mouth closed during meetings because I don’t want people to see them and not take me seriously,” he says. He’s staying in a suite in Facebook’s Mountain View intern housing with an older colleague. “They gave me the option of living with my mom, but my
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opposite of my life back home,” he says. Perhaps more dazzling for high school-age kids, it’s become standard for engineering interns to make more than $6,000 a month on top of free housing and transport, according to job search site Glassdoor, which relies on employee reports. “It’s kind of insane that as a 19- or 20-year-old, you can make more than the U.S. average income in a summer,” says Daniel Tahara, 21. (America’s average monthly household income is $4,280.) Tahara interned at big-data startup Hadapt last summer and mobile security startup Lookout the year before. Tahara, who wouldn’t say how much he was paid, started full-time at Dropbox this month.
Hiring minors means dealing with concerned parents, says Doris Tong, who manages recruiting at LinkedIn and once had to get a parental release for a young participant at a company hack-athon. Under-18 hires can also mean extra paperwork. Bern Coh, in charge of recruiting interns at Airbnb, says to hire a 16-year-old last year, “we actually had to get a work permit for him.”
Kyle Ewing, Google’s head of global staffing, says her company isn’t inter-ested in hiring high schoolers. They may be able to build apps, Ewing says, but she’s recruiting for projects that require a higher degree of academic rigor. She
says Google won’t take on an intern who isn’t at least working toward a college degree and prefers that they complete their course of study.
Facebook’s head of global recruit-ing, Miranda Kalinowski, says the company has
“no hard and fast rule” on intern ages, though it typically recruits from univer-sities. “The point is we’re always on the lookout for really top talent,” she says. Sayman has heard there are other high school-age interns at Facebook, but he hasn’t seen them.
Sayman taught himself to build apps when he was 13, partly to help his mother, now a driver for Lyft, and father, an audio engineer, pay the bills after a home foreclosure four years ago. Almost immediately, he became the family’s main breadwinner, his mom says. Sayman says he isn’t sure whether he’ll go to college. For now,
he’s busy touring the Valley and snap-ping selfies with the likes of Apple soft-ware chief Craig Federighi and CEO Tim Cook. If Facebook makes him a full-time offer, he says, he’ll take it. “I’m 17, and these guys are the best of the best,” he says. “I don’t know the things that they talk about that are old, like cassette tapes, but we get along.” —Sarah FrierThe bottom line Tech companies aren’t shy about hiring teenage makers of hit apps, so long as their parents are OK with it.
Hardware
The Great Jet Engine Race
� The quest for fuel efficiency leads to unconventional designs
� Rising oil costs mean “you simply can’t drag around the old engines”
As airliners replace their fleets with more efficient models, jet engine makers are reimagining how planes are powered in a bid to score deals with Boeing and Airbus. The narrowbodied Boeing 737 Max and Airbus A320neo, slated to hit the skies over the next two years, are designed to take advantage of improved aerodynamics. CFM International and Pratt & Whitney are building engines meant to cut fuel use by 15 percent, though they’re taking different paths to get there. Jet engine sales in the next decade will total $500 billion, according to industry analyst Teal Group.
CFM, a joint partnership of General Electric and French aerospace company Safran, says it plans to close more than $8 billion in deals with airplane manu-facturers for its new engine, the Leap, at the biannual Farnborough International Airshow that begins in England on July 14. First announced at the air show six years ago, Leap’s technology was developed mostly at GE’s global research center in upstate New York. GE has spent 20 years tinkering with a carbon com-posite used in the engine’s fan blades, which can weigh one-third less than con-ventional aluminum ones. It’s making carbon composite engines by molding a woven, flexible carbon fiber and cooking it with epoxy resin to yield a material as durable as metal. Other parts of the engine use materials with the low weight
and heat resistance of ceramics. Three-dimensional printing has enabled GE’s team to create one-piece parts that used to come in 20 heavier pieces. “They’ve really taken it beyond in terms of com-posites,” says Wayne Plucker, an analyst at researcher Frost & Sullivan.
GE’s R&D operations last year cost $5.5 billion—twice what it spent a decade ago and more than 487 compa-nies in the Standard & Poor’s 500-stock index. The funds cover everything from undersea oil facilities to bioengineering, but aviation is a top priority for GE, says Mark Little, who runs its global research center. “People around the world are flying a lot more, so the number of air-planes is going up by a factor of two over a decade,” he says. “Airliners are refreshing their entire fleets, because with that high-priced fuel, you simply can’t drag around the old engines.” GE’s revenue from aviation businesses is now 14.8 percent of its total, up from 10 percent three years ago.
Richard Aboulafia, vice president of analysis for Teal Group, says competi-tion helped push the long-gestating GE engine to market. “They needed to rein-vent their product offering to fight off a challenge from Pratt,” he says. Pratt’s new engine, the PW1000G, is based on a counterintuitive idea: increasing effi-ciency by spinning fan blades more slowly. The two main parts of any jet engine are the fan, which moves air through the engine, and the turbine, which burns fuel to spin the fan. The
1. Palantir $7,012
2. VMware $6,966
3. Twitter $6,791
4. LinkedIn $6,230
5. Facebook $6,213
6. Microsoft $6,138
7. EBay $6,126
8. ExxonMobil $5,972
9. Google $5,969
10. Apple $5,723
Average monthly pay for internsData from Glassdoor
Leap engine
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Technology
Energy
Updating an $876 Billion Museum Piece
� U.S. utilities are starting to invest in a smarter grid
� “Many utilities are blind beyond the substation”
On a recent muggy morning, Jeff Myerson, director of business trans-formation for Houston-based utility CenterPoint Energy, is pointing to mundane-looking gray metal boxes high on a wooden utility pole. They mask
state-of-the-art wireless relays that collect data on customers’ power use every 15 minutes. Myerson is showing a visitor around Braeswood, a tree-lined neighborhood of several hundred 1950s-era ranch homes about 7 miles south-west of downtown. It’s being refitted for CenterPoint’s “intelligent grid.” This first phase is scheduled to be completed by yearend at a cost of $138 million, with the help of $50 million from the federal government.
When fully deployed, the grid will encompass a network of sensors, switches, smart meters, and data anal-ysis software that will give CenterPoint more control over and insight into its almost 50,000 miles of power lines. Breaks in the lines typically take hours, even days, to find, particularly in the wake of bad storms. Starting in Braeswood, CenterPoint, which powers more than 2 million homes and businesses, is gaining the ability to almost instantly pinpoint a problem to a single block. It plans to use algo-rithms that can analyze weather pat-terns and spot weaknesses in the lines to predict failures. The smarter equip-ment can also reduce the risk of over-load by telling customers when energy costs them the least. “We’re bringing a mechanical system into the digital age,” says Myerson.
The U.S. electrical grid, once one of the world’s great marvels, is crum-bling after decades of underinvest-ment. Valued at $876 billion by the Edison Electric Institute, an indus-try group, the grid is an amalgam of almost 7,000 power plants that send electricity over 450,000 miles of high-voltage transmission lines and 2.5 million miles of feeder lines. All this is managed by 3,300 utilities serving 150 million customers. The grid is argu-ably the biggest machine on earth. It’s also something of a relic, largely built after World War II from designs that date to Thomas Edison. Half of U.S. homes still have mechanical meters that require workers to show up and read them. Most utilities can’t analyze their customers’ energy use beyond the monthly bill.
CenterPoint is among a growing number of utilities remodeling their pieces of the grid with the kinds of
GE R&D expenses
FY2003 FY2013
$6b
$3b
$0
GE aviation revenue
FY2005 FY2013
$22b
$11b
$0
The CFM Leap engine undergoes icing tests in Winnipeg, Man.
> Site 3B, 1 of 10 test sites at the GE Aviation Peebles Test Operation in Ohio
relationship between the parts, tradi-tionally connected to the same shaft, is push-pull: Turbines produce more thrust when moving at top speed, but fans create more drag as they spin faster. Pratt’s new engines have geared turbo-fans, which allow the two components to move independently. The fan blades can slow down while the turbine spins furi-ously. Pratt declined to comment on its engine or competition with CFM.
Planemakers are split on which approach is best. Boeing, a longtime CFM customer, decided to design the 737 Max around the Leap engine. “We saw their technology road map and how they were bringing that to the Leap, and it made a lot of sense for us,” says Keith Leverkuhn, general manager for the Max line. Boeing already has more than 2,000 orders for the plane, bring-ing CFM’s total engines ordered to 6,770 as of June 30, an edge over Pratt’s 5,500, according to the companies.
CFM and Pratt are battling for Airbus’s business and have split its orders for A320neo engines, says aero-space consultancy Ascend. Airbus lets airlines choose their engines, and 36 percent of its A320neo inventory will carry the Leap, while 35 percent will use the PW1000G; the other 29 percent are unannounced. Aboulafia says CFM will
eventually have to make a geared tur-bofan engine to keep pace with the effi-ciency Pratt’s design could achieve. For now, however, anyone in the market for a jet engine has a difficult decision to make, he says: “It’s rather remarkable that they are able to take such differ-ent paths and have such similar results.” —Joshua BrusteinThe bottom line CFM and Pratt & Whitney are fighting for slots on new Boeing and Airbus planes with their redesigned engines.
7,000power plants
Valued at $876 billion
The U.S. grid 2,950,000
miles of lines3,300managing utilities
150,000,000customers
The Leap is 15 percent more fuel-efficient than the previous
CFM engine
This tower houses fuel and other service lines
required to operate an engine
DATA: BLOOMBERG
33
Technology
Technology
ILL
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E-Commerce
Flipkart’s Fight to Maintain Its Lead in India
� The company found a way to do online business in cash
� Now Amazon “has come to within striking distance”
In 2007, when Indian software engineers Sachin Bansal and Binny Bansal were starting their online bookstore Flipkart.com out of a two-bedroom apartment, they faced a challenge Amazon.com founder Jeff Bezos never had: how to collect payment. At first the two, who aren’t related, accepted credit cards, but because few Indians use them, they needed a way to conduct e-commerce
in cash. Payment-on-delivery was the obvious solution, but Flipkart didn’t want third-party couriers to carry large quantities of its money. So in 2010 the company decided to remake itself as a version of both Amazon and United Parcel Service.
Becoming a delivery service brought a slew of infrastructure problems. India has no standardized street address system, and road conditions are rough. Often a building name, street, and series of landmarks are needed to locate a house. And customers have to be home to receive a package. “You cannot leave anything outside the door, because it will just disappear,” says Ashok Banerjee, Flipkart’s former vice president for logistics, now chief technology officer for e-business at Symantec in California.
The entrepreneurs looked at dis-tribution as a technology problem. “The advantage we had was we were not a logistics company trying to do e-commerce,” says Mekin Maheshwari, head of human resources. “Because we were creating the systems completely in-house, we could actually solve it.” With venture funding from Tiger Global Management, Flipkart’s engineers developed systems to determine the best warehouse locations; it has six across the country. It alerts customers by text several hours before a scheduled deliv-ery and has a lab dedicated to improving the final stage of deliveries, from local warehouses to buyers.
The market leader, Flipkart delivers 5 million shipments monthly—books,
data analysis tools that hardware makers have been hawking to consum-ers. While talk of a smart grid has been around for years, the utilities’ efforts mark the start of a huge, albeit decen-tralized, infrastructure makeover that could total almost half a trillion dollars in retrofitting costs before it’s com-pleted, according to the Electric Power Research Institute, a research arm of the utility industry.
The deteriorating grid is forcing some utilities to act quickly. Power outages are up 285 percent since 1984, and the U.S. ranks last among the top nine Western industrialized nations in the average length of outages, which the federal U.S. Energy Information Administration says cost businesses as much as $150 billion a year. Hundreds of thousands of miles of power lines can’t be monitored from a central location, so repairers spend 60 percent of their time searching for breaks. “Many util-ities are blind beyond the substation,” says Edward Kennedy, chief executive officer of Tollgrade Communications, which makes grid sensors and consults with utilities on smart-grid projects.
Besides CenterPoint, Columbus (Ohio)-based American Electric Power, Sempra Energy’s San Diego Gas & Electric, and New York Independent System Operator, which runs New York State’s grid, are smartening their systems. Giant PG&E has established an R&D facility with more than 120 engineers and techni-cians testing ways to speed smart-grid adoption. In Detroit, DTE Energy has begun a five-year, $250 million grid upgrade. Working with Cranberry Township (Pa.)-based Tollgrade, the utility is installing outage-predicting sensors and software that it estimates will eliminate about 500,000 outage minutes for its 2.1 million customers over the next three years. In Austin, Texas, smart-grid researcher Pecan Street is using 300 test homes to show how a utility that tracks power flow can change how and when to gener-ate electricity as well as how and when consumers use it. Ultimately, the goal of these projects is to digitize energy-use data so that power generators and customers can exchange information about demand to eliminate overbuild-ing and waste.
The smart grid may be a necessity if the utility system is to absorb and manage changes in U.S. power genera-tion. A surge in rooftop solar has turned
tens of thousands of consumers into generators, and regulators and green groups are pushing utilities to incor-porate more of that power. “There is a lot of technology coming, and if you don’t integrate it successfully, you’re going to have one hell of a mess on your hands,” says Roger Duncan, chairman and one of the founders of the Pecan Street project. “The current grid is just not designed to handle this.”—Mark Chediak, Jim Polson, and Ken WellsThe bottom line Local utilities are remaking the grid with smart meters, wireless relays, and data analysis software.
GRAPHIC BY BLOOMBERG BUSINESSWEEK. DATA: EATON
Spread across vast distances, rural
power grids are more vulnerable to disruption
Black Holes
N/A
Some Twin Cities households were in the dark for six days
in June 2013 after powerful storms
In September, 6,000 people lost power after
a raccoon invaded a utility substation in
Cookeville, Tenn., and caused a “huge ball
of fire”Hours of power outage per 100,000 people, 2013
0 to 0.5 0.5 to 1 1 to 1.5 1.5 to 2 2+
34
Edited by Jeff MuskusBusinessweek.com/technology
②①
Next StepsCue, which began taking preorders in May, expects U.S. Food and Drug Administration clearance in 2015. Khattak says he hopes that beyond flu diagnoses and fertility testing, people will eventually use the kit to keep closer track of the benefits of exercise, sleep, and healthier eating. “It makes a really big difference if you can see the actual results for yourself on a daily basis,” he says. —Caroline Winter
Innovators Ayub Khattak and Clint Sever
Age Both 29
Title Co-founders of Cue, a four-year-old startup in San Diego
Form and function
A home test kit that uses a drop of bodily fluid to, in minutes, diagnose the flu or analyze levels of inflammation and certain vitamins and hormones, including luteinizing hormone, which triggers ovulation.
Innovation
Cue
electronics, makeup, and clothing—to 18 million registered users in 150 cities, and its cash-on-delivery model made e-commerce more viable in India. “Flipkart really changed the rules of the game,” says Pragya Singh, associ-ate vice president at consulting firm Technopak Advisors, who estimates that India’s $3 billion e-commerce market will reach more than $19 billion in five years. India has one of the youngest online populations, and its smartphone adoption is growing faster than China’s. And because e- commerce totals less than 1 percent of retail spending, “There’s room for a lot of us to grow,” says Sandeep Komaravelly, senior vice president for marketing at Snapdeal.com, a Flipkart competitor backed by EBay.
The market has proven irresistible to Amazon, which a year ago launched its own Indian site. Although laws prevent foreign retailers from selling products in India, Amazon can serve as a marketplace for local merchants and deliver their goods. Amazon India adopted cash-on-delivery from the get-go and introduced one-day delivery in December. Flipkart has countered with its own one-day delivery and a loyalty program similar to Amazon Prime and says it’s also shifted away from selling its own inventory in favor of acting as a marketplace for others.
Flipkart says it sold more than $83 million in merchandise in March, putting it at an annualized $1 billion sales rate. Snapdeal says it’s close to those numbers; Amazon wouldn’t comment for this story, but Technopak’s chair-man, Arvind Singhal, says Amazon India will reach that level by the end of next year, if it hasn’t already.
Despite the market’s growth poten-tial, Amazon has a good chance to over-take Flipkart on its home turf, says Mahesh Murthy, a managing partner at Seedfund, a venture capital firm in Mumbai. “I believe that one viable busi-ness will dominate the niche. However, it increasingly appears that Flipkart may not be that company,” he says. Amazon, he notes, “has come to within striking distance of Flipkart … and it continues to have deep pockets, and it’s a patient player.” —Bianca Vázquez TonessThe bottom line Flipkart has been an early leader in online shopping in India, but it may be overtaken by Amazon.
Funding Cue, which has 12 employees, raised $1.5 million from angel investors.
Customers Many early adopters are in Silicon Valley. The founders say most are interested in testosterone monitoring.
Analysis Sensors convert the biological sample into digital results and transmit them to an app on the user’s smartphone via Bluetooth. The app stores results to build a patient profile.
2.
Design The device sits on a wireless charger, measures 3 cubic inches, and weighs roughly 6 ounces.
Origin Khattak says the 2009 swine flu outbreak convinced him that people needed a way to test themselves quickly.
Sampling A Cue wand is used to collect nasal fluid to diagnose flu; saliva to measure testosterone; or blood to test levels of inflammation, vitamin D, or fertility. The wand is placed in a cartridge.
1.
Technology
35
July 14 — July 20, 2014
�Mandis wants to be a nice guy in high-rate small-business lending
�“Providing capital to people … is, I think, a good thing”
A Nasty Neighborhood’s
Mr. Rogers
Steven Mandis was working on a book two years ago about whether Goldman Sachs put profit above principles when he decided to get into small-business lending’s version of subprime: a corner of Wall Street where brokers push loans with interest rates that can climb higher than 100 percent to dentists with bad credit and pizzeria owners behind on their bills.
As Mandis, a former Goldman Sachs banker, scouted for lenders to invest in, he saw offices that looked like boiler rooms, with salespeople furiously working the phones. The co-founder of one firm he visited had been sentenced to probation for insider trading.
Mandis was not deterred. Although some competitors may take advan-tage of borrowers in distress, he says, he’s driven by something loftier than profit. “There’s this obligation to try to do something to solve a problem in America,” he says. “Providing capital to people to grow their businesses and to give jobs to people is, I think, a good thing.” Mandis began by investing in two lenders, then started his own firm, Kalamata Capital, late last year.
Borrowers who turn to the costly loans often have bad credit, little collat-eral, or maxed-out credit cards. Taking out high-rate loans they may not be able to repay can lead them to bankruptcy instead of growth. “This is like a payday loan for a business,” says Pat Fossett, a lawyer in Corpus Christi, Texas, making a comparison to costly cash advances for workers. “Unless they’re making a large profit to pay that high interest, they’re shooting themselves in the foot.”
Small-business lending has yet to recover from the financial crisis. Loans of less than $1 million are down 22 percent from 2007 because of tighter lending standards, Federal Reserve research shows. Even as banks have pulled back from funding businesses directly, Wall Street investors have fun-neled at least $1.7 billion in financing over the past two years to the high-rate lenders rushing in to fill the gap, accord-ing to data compiled by Bloomberg.
Mandis says he’s funding Kalamata with his own money and chose the name because of his family’s Greek heritage to evoke an olive branch extended to customers. He wants to make his company the first choice for P
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Bid/Ask: ADM walks on the Wild side; tax-driven drug deals 41
Warren Buffett is a role model for a Chinese billionaire 39
A litigation finance firm learns from a mistake 40
Muni Bonds
Can Puerto Rico Keep the Lights On?
� A credit rating downgrade may keep the island from borrowing
� “They’re done. They’re not going to be issuing any more debt”
After Moody’s Investors Service cut Puerto Rico’s rating to B2, five steps below investment grade, on July 1, the price of the island’s general obligation bonds plummeted to record lows. The downgrade puts Puerto Rico in a tough spot: No U.S. state or city with a credit rating that low has ever borrowed money in the public markets, accord-ing to data compiled by Bloomberg. “They’re done,” says Matt Dalton, chief executive officer of Belle Haven Investments, which manages $2.1 billion in munis. “They’re not going to be issuing any more debt on the island. I don’t see how they can bring people back to the trough at this point.”
Puerto Rico and its agencies have operated for years on borrowed money—accumulating $73 billion in debt and, since 2000, paying Wall Street $910 million in fees for arrang-ing its bond sales, Bloomberg data show. Its economy has contracted about 11 percent since 2006, according to its Planning Board. The unemployment rate of 13.8 percent is more than twice the U.S. rate.
If the government can’t sell bonds at affordable rates, it will have to curtail
small- business owners when they need financing. Mandy Calara, who runs the Forever Yogurt frozen-yogurt chain in Chicago, says his Kalamata loan worked out. He borrowed to cover payroll and rent in November when harsh weather kept customers home. Calara says he found Kalamata through an online service called Biz2Credit and doesn’t remember the terms of his deal. He didn’t have time to apply for a bank loan. “It’s sort of the best of the bad loans,” Calara says. “It was still pretty aggressive.”
For all Mandis’s good intentions, it’s hard to come off as a nice guy in the busi-ness. Sheila Stiles was one of Kalamata’s first clients. Her family firm, Goins Waste Oil, has been collecting used motor oil from auto shops in Tennessee and turning it into fuel for more than 60 years. With sales dropping, Goins took a Kalamata loan in November to avoid layoffs before Christmas.
Goins borrowed $122,000, agreeing to pay back $165,920 in about 11 months, according to a copy of the contract with Kalamata. Although Stiles says she was aware of the terms, they turned out to be more onerous than she had thought. Goins furloughed employees so it could afford the payments that Kalamata automatically withdrew daily and then weekly from the company’s bank account, she says. “The way they present it, it’s so tempting, especially when you know you’re in such a bind,” says Stiles, the company’s treasurer. “He’s taking advantage of the small- business owners because of the interest rate he charges.”
The Goins contract shows a rate of 36 percent. When cal-culated as an effective annual percentage rate—which takes the timing of payments into account—that doubles to 72 percent, says Marco Lucioni, a vice president at nonprofit lender Opportunity Fund. The Truth in Lending Act requires that the effective rate be stated on loans to consumers, but not to businesses. “Every time you make a payment, you’re reducing the amount of money you had available to work with,” Lucioni says, so you are making the same payment on what is in effect a smaller loan.
After Stiles and Mandis were
interviewed for this story, Stiles complained to Kalamata, which said she could repay the loan more slowly, low-ering her payments by about $1,000 a week. Kalamata did that voluntarily and “without imposing any penalty,” Mandis says.
Kalamata sued the owner of a New Jersey liquor store for defaulting after borrowing $100,000 in February. The annual interest rate on the eight-month loan, 17 percent in the contract, is effec-tively 53 percent, Lucioni says.
Mandis says the higher rates are jus-tified because the businesses are risky, post little collateral, and can’t get the money elsewhere. What he does isn’t subprime lending because the term refers only to loans made to people, he says, and Kalamata’s customers are businesses. Sometimes the money he advances isn’t really a loan at all, he adds—it’s financing. “When you put it in a percentage, it sounds big and eye-popping, but you need to have a relative sense of it all,” Mandis says. “Should we let that company just go bankrupt … or should we have these alternatives?”
Kalamata’s rates are relatively low for the industry, according to Rohit Arora, co-founder of Biz2Credit, who says rates have topped 200 percent. Jared Hecht, a co-founder of Fundera, an online loan middleman that’s planning to work with Kalamata, says that as the industry matures, “business owners should theo-retically be able to run a competitive process and get the lowest rates.”
After 12 years at Goldman Sachs, Mandis left in 2004 for a hedge fund. In 2009 he enrolled at Columbia University, where his work for a Ph.D. in sociology formed the basis for his 2013 book, What Happened to Goldman Sachs. In it he describes how the firm adopted a legalistic approach that enabled it to make more money. “The sense that
one is doing God’s work or serving a higher purpose can easily transmute into a holier-than-thou attitude and an excuse for any behavior,” he wrote.
He also teaches at Columbia Business School and has tutored Harlem teen-agers. “If I’m choosing something to do, there has to be some intellectual curios-ity related to it, because that’s how I’m driven,” Mandis says.
Kalamata is still a small business itself, with two employees in Bethesda, Md. Mandis says it has made $6 million in financing. Kalamata’s website features a family history and a photo of him in a sweater and tie. “What I thought I would do with Kalamata is say, ‘Here’s who I am. I’m a real person,’ ” he says. “You have to have the values and the brand that people will come back to.” —Zeke Faux and Max AbelsonThe bottom line Wall Street investors have plowed at least $1.7 billion into small-business lending over the past two years.
“Should we let that company just go bankrupt … or should we have these alternatives?”
—Steven Mandis
37
The Bloomberg Sports Business Summit stands as the premier annual event for the industry’s biggest dealmakers. Bloomberg will again gather commissioners, owners, and players to discuss the business of sports and the money behind the game.
SPEAKERSVAL ACKERMAN / BIG EAST CONFERENCETIKI BARBER / THUZIOGARY BETTMAN / NHLMARC LASRY / AVENUE CAPITAL GROUPSTEPHEN PAGLIUCA / BAIN CAPITAL, LLCAMY TRASK / CBS SPORTSMARC A. UTAY / CLARION CAPITAL PARTNERS+MORE
Request an invitation.
Sponsored by:
SEP 4, 2014ALTMAN BUILDINGNEW YORK
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services for its 3.6 million residents, 45 percent of whom live in poverty. The commonwealth has already started closing about 100 schools to help balance the fiscal 2015 budget. “We need to have guards in prisons,” says Sergio Marxuach, policy director at the Center for a New Economy, a research group in San Juan that focuses on economic development. “We need to have public school teachers teaching.” Anything else, he says, “could be fair game.”
Like U.S. states, Puerto Rico can’t file for bankruptcy protection. Governor Alejandro García Padilla signed a bill on June 28 that allows some public corporations, including its power company, to restructure debt outside bankruptcy. The governor described the move as a way to protect general obligation debt, but creditors took it as an affront. Franklin Templeton Investments and Oppenheimer Funds are challenging the law in court.
The Puerto Rico Electric Power Authority, which provides almost all the island’s electricity, may have to choose between paying bondholders and keeping the lights on, Marxuach says. The utility, which carries $8.6 billion in debt, has negotiated with creditors to postpone to July 31 repayment of bank loans due during the month. Prepa, as the agency is known, may have to resort to rolling blackouts in residential areas so hospitals, schools, and businesses
Population
Economy
Debt
OK
CA
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In Over Its HeadPuerto Rico has a population the size of Oklahoma’s and an economy smaller than Kansas’s. It also has more debt, $73 billion, than any U.S. state except California and New York.
can function, Marxuach says. That would “bring home to a lot of people the magni-tude of the crisis we’re going through,” he says. In a state-ment, Juan Alicea Flores, Prepa’s executive director, said: “Prepa will continue to produce and deliver power.”
A rescue from Washington seems unlikely. Only the Federal Reserve has the required resources and authority to undertake a bailout, according to Stephen Myrow, managing partner at Beacon Policy Advisors and a former Treasury Department official. “But there is no indication that the Fed has any appetite to do that,” he says. Pedro Pierluisi, the commonwealth’s single nonvoting representative in Congress, has said he will try to measure the lead-ership’s interest in helping the island. He isn’t optimistic that Congress will act. “I don’t see fertile grounds,” he says. —Michelle Kaske and Brian ChappattaThe bottom line With $73 billion in debt and a credit rating of B2 from Moody’s, Puerto Rico may not be able to issue additional bonds.
mines and oil fields to supply the country’s burgeoning economy, Guo, 47, looks overseas for brands, technology, and financial assets that cater to the nation’s growing ranks of the affluent. “Our focus
going forward is on sectors where the life of China’s middle class can
be upgraded: health, travel, leisure, education, and the Internet,” he says. “We call it marrying China’s growth with global resources.”
Borrowing from the approach used by Warren Buffett’s Berkshire Hathaway, Fosun buys financial companies such as insurers to secure long-term funding it can use to invest in consumer brands and other businesses. Since 2010 it has invested more than $3.4 billion overseas, buying JPMorgan Chase’s 60-story tower, One Chase Manhattan Plaza, in New York, and stakes in French resort operator Club Méditerranée and Raffaele Caruso, an Italian maker of $3,300 suits. “Many people talk about being Buffett in China, but few can pull it off,” says Eugene Qian, Citigroup’s head of global banking for China. “Fosun is the closest in our view.”
At Fudan University, Guo developed an interest in philosophy as China was becoming more open to Western ideol-ogy. After graduating, he worked at the university’s Communist Party Youth League for three years. In 1992, when late Chinese leader Deng Xiaoping called for the nonstate-owned economy to prosper, Guo took up the challenge. “China’s economy and governance had made big strides in openness, and there were a lot of opportunities,” Guo says in a 13th-floor conference room in Fosun’s headquarters facing Shanghai’s Bund waterfront. “So I got together a few friends, some of us graduated, some not, and we decided to take the plunge.”
They started with 38,000 yuan of their own money. Fosun, whose Chinese name Fuxing means “stars from Fudan University,” got its first break in 1993 when it made 100 million yuan selling a diagnostic kit for hepati-tis anti bodies with research help from Guo’s alma mater. The next big oppor-tunity came in the early 2000s as China started privatizing state-owned com-panies. In 2002, Fosun invested in Shanghai Yuyuan Tourist Mart, a jeweler and department-store operator formerly controlled by the city govern-ment. The next year, Fosun participated in the privatization of the company then known as Nanjing Steel Group,
$80b 20%
$40b 15%
$0 10%
2004 2014 7/2004 5/2014
Gross public debt
Unemployment rate
Debt has almost doubled in the past 10 years, while unemployment has yet to return to prerecession levels.
Asset Managers
A Chinese Billionaire Who Buys Like Buffett
� Guo looks for companies that target the country’s middle class
� “I got together a few friends … and we decided to take the plunge”
Twice a week in the winter of 1987, students living in the No. 5 dormitory of Shanghai’s Fudan University would hear a familiar knock close to midnight. A slight, bespectacled philosophy major was making his rounds selling bread door-to-door. The student, Guo Guangchang , earned about 30 yuan ($4.80) a month to help support himself through college. “I had a government subsidy then, but living costs were high,” he says.
Guo has plenty of dough these days. Chairman of Fosun Group, an invest-ment company with assets of $48 billion, he’s China’s eighth-richest person, with a personal fortune estimated at $5.7 billion by the Bloomberg Billionaires Index. In contrast to state-owned companies that typically buy resources such as
39
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Litigation
Recovering From a Bad Judgment
� A pioneering litigation-finance firm overcomes a setback in Ecuador
� At least the case “led lawyers to understand that Burford existed”
Burford Capital, a litigation-finance company, was just getting aloft in 2010 when it invested $4 million in a contro versial pollution lawsuit against Chevron in Ecuador. The transaction quickly began to sour.
Burford’s chief executive officer,
Christopher Bogart, a former executive vice president and general counsel at Time Warner, says his firm benefited from extricat-ing itself swiftly from the pollution suit and has since seen its profits expand. Burford’s for-tunes matter because it’s the largest competitor in a nascent industry that provides capital to law firms and cor-porate litigants in exchange for a share of eventual recoveries. Others jostling in this niche include Bentham IMF, Harbour Litigation Funding, Juridica Investments, Longford Capital, and Woodsford Litigation Funding.
In the Ecuador case, Chevron turned the tables on the main American plain-tiffs’ lawyer, Steven Donziger. In March the oil company convinced a U.S. federal judge in New York that the pol-lution suit had evolved into an extortion scheme involving coercion and bribery. The ruling, which Donziger is appeal-ing, could make it difficult for him to collect on a $9.5 billion judgment he won on behalf of thousands of poor Ecuadorean residents of the rain forest.
Claiming it had been deceived about rampant fraud in the Ecuadorean courts, Burford says that shortly after making the $4 million investment, it managed to offload the stake to an unnamed investor—someone who must have a high tolerance for risk. Even as the firm emerged financially whole, its reputation suffered a blow.
All this unfolded amid skepticism about the small but growing litigation-finance industry. Critics such as the U.S. Chamber of Commerce claim that third-party investments in lawsuits encourage frivolous courtroom hostilities.
Burford, a publicly traded company in the U.K., did not underwrite Donziger directly. Instead, it financed the activ-ities of Patton Boggs, a Washington-based corporate law firm that allied itself with Donziger to help him enforce any judgment won in Ecuador. In the wake of the U.S. court ruling that the Ecuadorean suit had been permeated by fraud, Patton Boggs apologized for its role and paid an unusual $15 million settlement to Chevron. A weakened Patton Boggs agreed to merge with a larger law firm and form what is now known as Squire Patton Boggs. A spokesman for the combined firm declined to comment.
In an interview, Bogart says it’s
Shanghai Yuyuan Tourist MartInvested in 2002 when the department store was privatized and is now its largest shareholder
Nanjing Steel GroupBought into what is now called Nanjing Iron & Steel when it was privatized in 2003
Club MéditerranéeSpent $56 million for 10 percent of the resort operator in 2010
Raffaele CarusoHolds a stake in the Italian maker of $3,300 suits
Folli FollieOwns a stake in the Greek jewelry and handbag retailer
One Chase Manhattan PlazaPaid $725 million for the 60-story tower in downtown Manhattan
Greek commercial real estate projectWorking on an €8 billion ($10.9 billion) development near Athens with Greece’s Lamda Development and Abu Dhabi’s Al Maabar
How Fosun Grew
previously owned by the Nanjing municipal government.
As Fosun’s founders planned their overseas expansion, they consid-ered different business models—from the conglomerate built by Li Ka-shing, Asia’s richest man, to buyout titans such as Carlyle Group and Bain Capital Partners that use leverage to bolster returns. They settled on Buffett’s approach. “We thought of longer-term solutions to fundraising, and then we thought of insurance and the Buffett model,” Guo says. Since then, Fosun has invested in Xi’an-based Yong An Insurance and Peak Reinsurance of Hong Kong. Insurance now accounts for
about 40 percent of Fosun’s assets.
Fosun’s first over-seas deal came in June 2010, when it paid €41 million ($56 million) for 10 percent of Club Med, the resort owner with oper-ations in 40 coun-tries. It has since
amassed minority holdings in com-panies including Folli Follie, a Greek jewelry and handbag retailer, and German private bank BHF-Bank.
Fosun plans to at least double its assets in the next five years and is on the lookout for health-care, tourism, and fashion acquisitions, Guo says. He likes companies with brands that can be introduced on the mainland or exper-tise that can be used to help businesses that serve China’s growing middle class. Club Med, for example, opened its first resort in China six months after Fosun’s initial investment, according to Fosun’s website. It plans to open five resorts in China by 2015, making the country its largest market outside France.
The sheer diversity of Fosun’s businesses will probably work against Guo’s attempts to achieve scale, accord-ing to Joel Backaler, the author of China Goes West: Everything You Need to Know About Chinese Companies Going Global. Although each business may do well on its own, he says, the “balancing and the portfolio approach to managing their business” require sophistication and experience that Fosun doesn’t have.
To keep Fosun growing rapidly without losing its footing, Guo has turned to tai chi, the ancient Chinese martial art in which practitioners seek to achieve harmony between the oppos-ing forces of yin and yang. Introduced to tai chi by Alibaba Group founder Jack Ma, Guo created an area in Fosun’s Shanghai offices where executives can practice. “Keeping the balance of fast-growing and smooth-growing is always important,” he says. “It’s almost an art.” —Bloomberg NewsThe bottom line Using Buffett as a model, Guo has built Fosun into a $48 billion company and amassed a $5.7 billion fortune.
$56m
Amount Fosun spent to acquire
10 percent of Club Med
“Our involvement in the matter and its public notoriety certainly increased the visibility of litigation finance.”
—Christopher Bogart, CEO, Burford Capital
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By Evan Applegate
Edited by Eric GelmanBusinessweek.com/markets-and-finance
AbbVie makes a fourth bid for Shire. The Chicago-based drugmaker raised its offer by 11 percent, pursuing Shire for new treatments and lower taxes in the U.K.
Salix Pharmaceuticals lowers its tax bill with a merger. The U.S. company will move its base to Dublin after combining with an Irish unit of Cosmo Pharmaceuticals.
Helvetia Holding takes over Nationale Suisse. The company agreed to pay a 26 percent premium for its peer, creating Switzerland’s third-largest insurer.
Aristocrat Leisure of Australia acquires Video Gaming Technologies. The purchase will more than triple the slot machine maker’s presence in North American markets.
Macquarie Group buys International-Matex Tank Terminals. The company claimed the 50 percent of the oil and chemical storage business it didn’t already own.
TeliaSonera expands in Norway. The Swedish mobile provider acquired Tele2’s Norwegian unit, increasing its local market share to 40 percent.
Expedia purchases an Australian travel site. The booking service bought Wotif.com Holdings to boost its business in the Asia-Pacific market.
Archer Daniels Midland diversifies naturally. The corn and grain
processor agreed to buy Switzerland’s Wild Flavors from Hans-Peter
Wild and KKR, adding a business that supplies natural ingredients and
colors for processed foods. The acquisition should allow ADM to take
advantage of increased demand for “healthy” convenience foods while
reducing its exposure to volatile commodity markets.
significant that his firm backed Patton Boggs, not Donziger. “Our business is financing major U.S. law firms, and we rely on those firms not only for the quality of their lawyering but also for their own factual, legal, and ethical analyses of the matters they recom-mend to us,” he says.
Burford reported $40 million in profit in 2013, a 28 percent increase from a year earlier. It has 35 investments, with total commitments of $264 million. While in hindsight he would not have invested in the Ecuadorean suit, Bogart says, “at the same time, our involve-ment in the matter and its public noto-riety certainly increased the visibility of litigation finance and led lawyers to understand that Burford existed and was available to them as a finan-cial resource in large, expensive, and complex cases.”
Burford continues to evolve, Bogart says, from what he calls “basic litigation finance” to “more of a pure corporate-finance business, with our capital being used for a variety of business purposes, not just litigation expenses, and with litigation claims being recognized as the corporate assets they truly are.”
He points to an investment with Rurelec, a British energy- project devel-oper pursuing an arbitration claim against the government of Bolivia for the expropriation of a power plant. Burford monetized Rurelec’s claim by providing the company with $15 million. On June 2, Rurelec announced it had received about $32 million from the arbitration case. The following day, Burford said it had received repayment of its $15 million, plus an $11 million profit.
“We were able to use a pending arbitration claim to obtain innova-tive corporate financing from Burford that lowered our cost of capital and helped our business expand,” Rurelec Chairman Colin Emson said in a state-ment. If Bogart and his colleagues can avoid missteps such as the Ecuadorean case and continue to show returns of the sort derived from the Bolivian one, Burford may yet overcome the criti-cism that the last thing the civil justice system needs is additional incentives to pursue litigation. —Paul M. BarrettThe bottom line A leader in the nascent field of litigation finance, Burford earned $40 million in 2013, a 28 percent increase from 2012.
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The inside story of Dov Charney’s overthrow and t h e c h a o t i c b a t t l e f o r control of American Apparel
By Susan Berfield
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hen I first reach Dov Charney on June 24, he’s scrambling to raise money, find a partner, try anything to get his company back. His handpicked board of directors had ousted him
from American Apparel six days earlier following an investigation
that turned up several instances of alleged misconduct. “They’re con-
cerned that an unconventional leader somehow damages the company’s chances of success. But a contrarian, alternative-thinking CEO can bring creative ideas that advance the company, even the industry,” he says. “Oh wait, got to take this.” He hangs up. Two days later we talk again. He doesn’t say it, but he’s already worked out a deal with Standard General, a hedge fund in New York, which has been buying stock in American Apparel in hopes of influencing the fate of the troubled company.
The conversation continues over the next several days. He’s out-raged, crass, unapologetic, funny, disarming, constantly jumping between conversations, and mostly off-the-record. “It’s my mother, let me take this, I apologize.” “It’s the finance guys, call me back in two minutes.” At one point, there are four people on a call. He puts us all on hold. Later, it comes out that he’s given Standard General control of his stake in the company he founded—and, along with it, control of his future at American Apparel. We speak again. “Just a second, you might be two minutes on hold, just wait. … Excuse me one second. … One second … oh s---, one second, please.”
Just two weeks earlier, on June 17, the eve of the company’s share-holder meeting, Charney, 45, was in a good mood for the first time in a while. For much of the past four years, he’d been in crisis as American Apparel lost $270 million and came close to bankruptcy twice. But the board had stuck by him, sales had increased this spring, and summer promised to be busier yet. Things were finally looking up.
Charney packed samples, ordered an Uber car to get to LAX, and boarded a red-eye for New York. After he landed, he put on a suit and tie and, wearing white American Apparel socks and Common Projects sneakers, sauntered into the office of the compa-ny’s lawyers at 4 Times Square.
The shareholder meeting lasted about an hour. Close to noon, the five board members entered the conference room with Charney, their chairman, for their annual face-to-face meeting. Allan Mayer, a Holly-wood public-relations man whom Charney had put on the board in 2007, gave Charney an ultimatum: Resign voluntarily, give up the voting rights to his 27 percent stake, and receive a multimillion-dollar severance and a four-year consulting contract. Otherwise, be fired for mis-conduct. Among the charges in the termination letter: Charney had the company pay for a few plane tickets for his family; misused company money in other ways; and violated the company’s sexual-harassment policy. According to the letter, the board “recently learned that you presented significant severance packages to numerous former employ-ees to ensure that your misconduct vis-à-vis these employees would not subject you to personal liability.”
The board also cited a case that had received a lot of publicity and had been resolved confidentially. In 2011,
Irene Morales, a sales associate, accused Charney of using her as a sex slave and sought damages of a quarter-billion dollars. An arbitrator dismissed those claims but found the company “vicari-ously liable” for the conduct of another employee who had created a fake blog in Morales’s name. Then the employ-ee posted erotic photos of Morales on it. Charney told some board members and his lawyers that he had photos of Morales and of others accusing him of harassment that showed the women weren’t victims. The board members and lawyers didn’t object to the idea of him using the photos as part of his defense. The photos were sent to several newspapers and websites. But no one imagined that someone would put together a phony blog and post the photos there.
At the June 18 meeting, Charney refused to accept either of the board’s choices. He argued that the business was doing well now, that the supposedly new misconduct was really old mis-conduct, and in any case it didn’t amount to enough to fire him. He noted that since he had renewed his employment contract in 2012, no new sexual-harassment cases had been filed against him. The board listened but was unmoved. An afternoon dead-line was extended to early evening. Charney left the conference room several times to call his lawyer, his parents, some colleagues. Nine hours after the meeting began, he told the board he wouldn’t resign. They had a press release ready. It said Charney had been ousted as chairman, suspended as chief executive, and would be officially fired after a 30-day waiting period, as his contract required. Mayer and David Danziger, a partner at MSCM, a Toronto accounting firm, became co-chairmen.
After the board members left, a secretary escorted Charney out of the building. He walked to the company apartment on the south-ern edge of Hell’s Kitchen. The next day, Charney’s lawyer, Patri-cia Glaser, wrote to American Apparel’s lawyer, calling the board’s
behavior “not merely unconscionable but illegal.” She said the allegations were baseless and involved “ activities that occurred long ago (if at all) and about which the Board and Company have had knowledge for years.”
The board had defended Charney through years of nega-tive publicity and even worse financial problems. Why now? “I know there’s a lot of people who have criticized us very severely for not taking action earlier than we did,” says Mayer. “I get it. But there’s nothing I would do differently. You don’t want to embark on a course of action that will bring down the whole house. That’s destroying the village to save it.”
One theory on the timing is that the company had issued new shares in March to raise cash, reducing Charney’s stake from 43 percent to 27 percent. There could be other reasons: concern about a possible bankruptcy that could force a sale, or additional lawsuits that could hold the company, and the board, liable. “All along they were thinking that anything goes in Charneyville,” says Thomas White, a professor of business ethics at Loyola
Marymount University in Los Angeles. “They only started to worry when they looked up and saw financial disaster.”
After the meeting, the board author ized FTI Consult ing to begin a second, more far-reaching investigation into Charney’s behavior. Charney stayed in New York, desperately
“We’ll evao r n ot
From top: Charney at home in Los Angeles in 2004; the factory
in 2005; Charney at a 2009 immigrants’ rights march in L.A.
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looking for a way to reclaim his position. At first it seemed as if he’d found someone to back him. Standard General began acquir-ing American Apparel shares, then lent Charney $20 million to buy them from the firm. He had to agree to pay 10 percent inter-est and use his stock as collateral. The board on June 28 belat-edly adopted a poison-pill defense to prevent him from gaining control. By then, Charney owned 43 percent of the company. Really, though, Standard General controlled the shares, and the firm wasn’t necessarily backing Charney. “This transaction is not about the founder, nor is it an endorsement of him,” Standard General said in a letter to its investors on July 2. A week later, Standard General and American Apparel reached a deal to bring in new board members, sort out and shore up the company’s finances, and keep the company’s downtown Los Angeles factory open. Charney will serve as a “strategic consultant” while the FTI investigation is under way. His role beyond that, if he has one, will depend on the results.
“They control the shares. I’m a bystander,” Charney says by phone in one of six conversations we have over two weeks. “My first issue is to save people’s jobs, put the company into a stable financial situation. And then we’ll evaluate whether or not I’ll be the janitor or the CEO or the consultant. … I believe Standard General will treat me fairly.”
From the beginning, Charney called himself a Yiddish hustler. He left Montreal for high school in Connecticut, left Tufts University to start a wholesale T-shirt business in South Carolina, and left the South for Los Angeles after his first company ran into finan-cial trouble. There he connected with the Korean community that dominated the fast-fashion business. American Apparel got off the ground in 1998, and among its first tag lines was: “Two Koreans and a Jew making T-shirts.” An ad features a black-and-white drawing of Charney with a full head of hair and protohipster glasses.
For five years, American Apparel was a wholesale business. It, and he, had already come to public attention, though. The New Yorker profiled Charney and his efforts to create perfect-fitting T-shirts; Charney took the reporter, Malcolm Gladwell, to a strip club where the dancers modeled new styles. In late 2003, Charney opened his first store, on Sunset Boulevard in the then-seedy
neighborhood of Echo Park. The clothes would be logo-free and sweatshop-free; the advertising, sexually free, or at least that’s how he thought of it. “He built an incredibly important brand,” says Ilse Metchek, president of the California Fashion Associa-tion. “In terms of influence in the U.S., it’s as valuable as Gap.”
Today the American Apparel factory—the largest garment manufacturer in the country—is located in a seven-story, 800,000-square-foot, almost century-old, salmon-colored build-ing. It has a banner proclaiming: “American Apparel is an Indus-trial Revolution.” Some 3,300 workers produce about a million pieces every week—T-shirts, leggings, dresses, shorts, socks, and underwear in 31,000 styles, sizes, and colors.
American Apparel has 249 stores in 20 countries; last year sales were $633 million, almost one-third of which came from wholesale. Its factory workers make an average of $12 an hour, generous by industry standards. A company slogan printed on
the cafeteria wall says: “We may not be politically correct—but we have good ethics.”
Marty Bailey, a taciturn Southerner who worked for years at Fruit of the Loom, is the head of manufacturing. An office near his used to belong to Charney. Guards showed up the day after Charney was fired and stood by his door for the next 48 hours, according to four executives who were not autho-rized to speak on the record. The security code was changed, and a camera was installed nearby. John Luttrell, the chief financial officer, became the interim CEO. The first few days he walked around the floor with security guards of his own.
Bailey has been told by Mayer not to discuss any of this. “This is our corporate floor,” he says, giving a tour on June 30. “The, uh, CEO’s office is here. The general counsel. Everyone else.” Bailey keeps walking.
Mayer, the co-chairman, does the talking for everyone. His spe-cialty is crisis management, and his clients have included the Los Angeles Dodgers and Universal Studios. He’s known Charney since 2004, when the first story about the chief execu-tive who couldn’t keep his pants on was published. In his office at PR firm 42 West in L.A., where he’s a princi-pal partner, Mayer has a small sculp-ture of a man on a horse with a sword and a lance: a white knight.
He’s had time to think about why American Apparel has such an outsize reputation. “I think it’s the tension between the transgressive part of the brand and the idealis-tic part of the brand that gives it its special place in the culture,” Mayer says. “If you took out the sex, it would be kind of boring. And if you took out the idealis-tic component—our commitment to the sweatshop-free, made-in-USA philosophy—it would just be sleazy. But you put them together, and you have something that’s interesting. It’s edgy, but it’s also strangely wholesome at the same time.”
Several months after the Echo Park store opened, Charney gave a now infamous interview with Claudine Ko, a reporter for Jane magazine, during which he masturbated, with her consent, while carrying on a conversation about business. He engaged in oral sex with an employee with Ko nearby, too. “It all started there,” says Roy Sebag, a managing partner at Essentia Equity who later invested in American Apparel and still speaks with
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Charney. “Then he was the douche bag of the year. Everyone loved to hate American Apparel.”
By the middle of 2005, Charney, then 36, had opened 53 stores in five countries, which had sales of $250 million. He had 4,500 employees. He was also facing two sexual-harassment suits, which he said were bogus. One case was dismissed in arbitration. The other, brought by an ex-employee named Mary Nelson who accused Charney of creating a hostile work environment, made its way to court. Documents revealed that American Apparel had agreed to settle for $1.3 million without admitting liability. In exchange, the company could issue a press release saying an arbitration judge had dismissed the claims. The case eventually ended up in confi-dential arbitration.
By 2006 the company had begun requiring employees to sign a document acknowledging that American Apparel is a “sexually charged” workplace, hoping to protect itself from what Charney and his lawyers considered shakedowns. “One of the things you learn when you do crisis management is that where there is smoke, there isn’t always fire,” Mayer says.
If there’s one thing that everyone agrees on when it comes to Charney, it’s this: The guy works like crazy. One time, Charney took a deep interest in the lighting in the stores and studied bulb temperature and the Kelvin light scale. “The company is his whole life,” says Eric Beder, an analyst at Brean Capital. “He’s not into possessions or the money. I talk to CEOs who love their jobs but have a life. Not Dov.”
American Apparel went public in 2007, and Charney’s stake turned out to be worth $580 million. Afterward, Charney had to hire a real CFO, whom he later called “a complete loser” in a Wall Street Journal article. Charney apologized; the executive left. With the cash infusion, American Apparel opened more than 100 stores in 2007 and 2008.
One of Charney’s confidants on the board was Robert Greene, author of the best-selling 48 Laws of Power, which is about the art of manipulation. Charney hired him as a personal consultant, but Greene says the CEO didn’t follow all of his precepts. He was a volatile leader, says Greene. “There’s nothing in my book really about that. It’s not about being chaotic and yelling at people, which he would do.”
Charney describes himself as unconventional, and some employees found the chaos and freedom in the workplace thrill-ing. Charney often invited new executives and visiting employ-ees to stay with him for a few weeks, sometimes to get a feel for company culture. That included holding weekly videoconfer-ence calls with managers from home, sometimes in bed, occa-sionally shirtless. He put his mobile phone number on the com-pany’s website and would answer no matter who called. Young women regularly sent him nude photos. “Dov is very intense. He’s very charismatic. And anybody who is so passionate and so totally devoted to what he’s doing can be attractive. So he’s always been subjected to a lot of temptation,” says Mayer.
American Apparel, which boasted about its immigrant work-force, went through an immigration audit in 2009. It had to lay off more than half of its factory workers. Another thousand quit for fear of being swept up in immigration raids. The dis-ruption led to delayed shipments and an expensive hiring and training program.
The company lurched from crisis to crisis. Sales slowed, the financial situation deteriorated, and each loan carried higher interest rates. At one point, Charney personally guaranteed the leases on some prime retail space for stores. Investors and their chosen executives came and went. Charney would welcome them enthusiastically, then quickly come to the conclusion they didn’t fit in. He’d make it impossible for them to stay, according to five executives familiar with Charney’s management style.
Then, in 2013, the company built an automated distribution center outside Los Angeles in La Mirada that was supposed to save $5 million a year. But delays, software problems, and insufficient training hampered operations; some orders were comically con-fused. One customer received a box with nothing but packing tape.
Charney moved into the facility in August. He had someone bring a mattress and a hot plate; a shower was installed. He slept with a walkie-talkie on his chest and, depending on who’s telling, at least one young woman. Charney regarded his moving into the distribution center as a sign of his great commitment. The board saw it as a sign of Charney’s insane management style.
The problems at La Mirada cost the company at least $15 million. A $13.5 million interest payment—money American Apparel didn’t have—was due in April.
This February, Greene and Mayer took Charney out to dinner at a steakhouse in Los Angeles’s Koreatown. They spoke to him about bringing in some senior executives. Charney was the CEO and the president. There was no chief operating officer, no chief technol-ogy officer. The company never had official designers. The two weren’t trying to ease him out, only trying to free Dov to be Dov. Charney seemed to like that idea. There was another possibility: selling the company. People familiar with American Apparel say Luttrell, the CFO, favored that, though he said the opposite pub-licly. Charney wouldn’t even discuss it.
Once again, pressing financial matters arose. Charney agreed to let the company sell more shares, diluting his stake, in the belief the company would grant him additional shares later. It was difficult to sell the stock, says Beder, whose firm helped manage the offering. “Part of that is because of Dov.” Charney now had
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a 27 percent stake, and for the first time since the company went public, he was vulnerable. But he didn’t seem to know it.
All spring, Charney concerned himself with rooting out inefficien-cies. For a while he was reviewing almost every check American Apparel issued. That wasn’t making Luttrell too happy. In May, Charney forced out his general counsel, Glenn Weinman. Charney said it was because Weinman cost too much. Weinman declined to comment on the matter.
Soon the board received unpleasant news about two lawsuits—a potential payment of $700,000 to settle with Morales and new information in a suit accusing Charney of assault. In November 2012, Michael Bumblis, a store manager in Malibu, had accused Charney of rubbing dirt in his face because Charney was displeased with the store’s condition and performance. Bumblis’s lawyer, Ilan Hei-manson, says he informed the company of evidence of the confron-tation beyond the accounts of witnesses. The stores had security cameras, and Bumblis had access to the video. Among the details in the complaint was a phone call Charney had supposedly made to Bumblis about his store’s poor sales. “Get your f---ing s--- together, fag. Where is your f---ing creativity? Get some f---ing girls in bikinis to stand on PCH [Pacific Coast Highway] and have them wave a f---ing American flag. Are you a fag? Do you not want to see girls in bikinis? Are you banging that girl you were with in Vegas? What’s her name?” American Apparel’s lawyer said in a filing that Bumblis was a poor-performing employee who was dismissed and that his story is “entirely contrived or wildly exaggerated.”
That case could bring other complications. Heimanson asked a Los Angeles court to try the case rather than send it to con-fidential arbitration, as American Apparel requires in all such matters. The judge ruled that the documents all American Apparel employees have to sign are “unconscionable,” according to legal filings. The agreements forbid workers from filing claims against the company, talking about the company, or sharing any infor-mation about the personal life of the CEO. If they do, they risk being sued for $1 million. The company is appealing the ruling. If it stands, “we’ll be able to shine sunlight on the backroom deal-ings of American Apparel and Dov Charney,” says Heimanson.
Charney’s termination letter also faults him for alleged financial
misconduct. “You authorized payments to induce employees to sign release agreements that were aimed at protecting you from personal liability for your misconduct,” the letter says. Two former company executives say that was American Apparel’s out-in-the-open, frequently used legal strategy. Employees had to re-sign their arbitration and confidentiality agreements when they got raises; if they left the company, they received sever-ance in exchange for promising not to sue or disparage Amer-ican Apparel. Everybody knew this, and everyone signed, they say (including these two executives).
The board also mentions some unauthorized expenses for employees and family members. Nickel-and-dime stuff, say three people with knowledge of Charney’s spending. Charney behaved as if American Apparel was still his company and didn’t always distinguish between the personal and the professional. The amounts they’re aware of aren’t enough to be fired over, they say.
FTI Consulting’s probe into Charney’s conduct began on June 19 and could conclude by early August. Standard General has said the board it wants to install will determine Charney’s fate once it’s seen the conclusions. “I’m reminded of that quote from Nietzsche,” says Mayer. “ ‘The consequences of our actions take hold of us, quite indifferent to our claim that meanwhile we may have “improved.” ’ That may well be Dov’s epitaph.”
On July 9, Standard General announced its deal with American Apparel. It will provide as much as $25 million to the company and will create a seven-member board that will include experi-enced retailers and turnaround and corporate governance experts. Standard General will keep one seat for itself, says David Glazek, a partner at the firm. Mayer and Danziger will keep their seats, too. The new board, in turn, may bring in outside help to run the company. “We look for good businesses with bad balance sheets that can be fixed,” says Glazek. “Chaos has a cost. We want to institutionalize things.”
Glazek says Standard General wants to keep the company’s busi-ness model, too. But it’s made no commitment to the company’s founder. “Dov found a lifeboat, but he’s still surrounded by sharks,” says Lloyd Greif, an investment banker in Los Angeles. Meanwhile, Charney can’t help himself: In recent days, he was spotted at an American Apparel store in Manhattan. � —With Matt Townsend
Charney at the company’s lawyers’ office in New York
on June 18, soon after learning he was being dismissed
Two 55-gallon cisterns collect all the Florida rainwater Speronis needs for drinking, bathing,
Photographs by Dana Lixenberg
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Daniel BooneIn the
In Cape Coral, Fla., a city of snowbird retirees and strip malls off the Caloosahatchee River, there’s a part of town that never quite recovered from the real estate bust. Foreclosure notices spill from the mailboxes of homes lining the city’s shallow canals and gather in trash drifts by the front doors. Weeds run riot in the yards of properties built for no money down in the flush days and then abandoned when they went underwater.
Even amid the eerie detritus, the small ranch-style duplex that Robin Speronis moved into in January 2013 is a little unusual. For one thing, Speronis, an energetic 54-year-old widow with cropped blonde hair and stark blue eyes, never had the city turn on the power or water. She set two 55-gallon plastic cisterns on either side of the entranceway and attached gutter downspouts to collect rainwater. She perched a small solar charger on a win-dowsill with wires snaking inside to a battery that in turn powers a few lights and a laptop. Wireless Internet is siphoned from a nearby Tire Kingdom. Inside, a propane lantern hangs from an unused light fixture in the dining area. Speronis is living off the grid—no power from the city, rainwater her only source for bathing, drinking, and sewage—in the middle of her tumble-down subdivision. It has caused a national furor.
Speronis first took an interest in detaching from the system during the years she spent caring for her husband, Zenny, who suffered from a neurodegenerative disorder. As his condition worsened, she turned to homeopathic treatments and other unconventional regimens: raw foods, colloidal silver, an avoid-ance of refrigeration and air conditioning, a focus on the pro-motion of regular bowel movements. It was a struggle to explain to the people around her, but she provided for Zenny without doctors, pharmaceuticals, or any medical assistance until his death at 84 in 2010. She self-published a book about “freeing” him from the health-care system and “home deathing him naturally.”
Speronis had worked as a real estate agent and a massage therapist, but most of her savings went to making her husband comfortable in his last days. This included the earlier purchase in 2009 of a $495,000 waterside home on a palm-lined street in Cape Coral. Speronis knew she didn’t have the money to make the mortgage payments, so she engaged in what she called a “stra-tegic default.” Using her knowledge of the real estate industry to delay foreclosure, she stayed afloat by selling off her possessions.
After the lender finally took the house in April 2012, Spero-nis underwent a radical ascetic conversion. She surveyed what remained of her things and asked, “Do I really need this? Is this of value to me?” She got rid of everything, from her BMW con-vertible to her wedding album, and attempted to establish a fully self-reliant existence. In June of that year, she bought an RV and moved onto a rented property in a nearby wooded area. She stayed for seven months, teaching herself to live without most modern conveniences. “I had never even gone camping,” she says now, “but nothing was hard. Every time I did something it was easier than I thought it was going to be. I thought, ‘I can do this. I can do this myself.’ ” Eventually the land flooded in the Florida rains, and Speronis stopped paying her rent. She was evicted and returned to Cape Coral—but not to the grid.
In a new home off Del Prado Boulevard, which she bought from a friend, Speronis removed and sold the oven, refrigera-tor, and air conditioning units, even the ducts. The house was already off the electrical grid. An earlier resident had been stealing municipal power, and the city had cut the lines and removed the meters. Speronis subsisted primarily on a year’s supply of dried and canned food she’d bought while she had the RV. She drank and bathed in rainwater, filling a four-gallon, solar-heated camp shower. Her only connection to city services was the sewer: She flushed waste down the toilet, again with rainwater. “I
What happens when you want
grid won’t let you go? By Theodore Ross
Cul-de-Sac
to get off the grid, but the
can go weeks or a month without spending a penny,” she says.In true American fashion, Speronis began writing about her
experiences as a pioneer of the subdivision. She started a blog called Off the Grid Living in Southwest Florida—One Woman’s Story. One day last November, Liza Fernandez, a reporter for WFTX, the local Fox affiliate, decided to do a story on her. Near the end of the broadcast, Fernandez noted that Speronis’s rudi-mentary setup violated “most codes and ordinances” in Cape Coral and that “anyone caught living in such a home could be forcibly removed.”
Speronis appeared unfazed, even a little excited at a chal-lenge to her lifestyle. “If my father in heaven wants me to be the test case for something,” she said, firmly, “I’ll be the test case for something.” Town officials were watching.
“The desire to ‘get off the grid’ is anchored deep in the American psyche,” says Nick Rosen, author of Off the Grid: Inside the Movement for More Space, Less Government, and True Independence in Modern America. From Daniel Boone’s sturdy self-reliance on the Western frontier to Henry David Thoreau’s individualist morality at Walden Pond, to be alone and discon-nected is to be an idealized version of an American. An instinc-tive yearning to slip the chains of society has certainly been felt by anyone who’s ever gotten a big utility bill, but, as Rosen notes, “It’s very unusual to do it in a city.”
Estimates of the national off-the-grid population are vague,
hovering between 180,000 and 250,000, almost entirely in rural settings where public utilities—and government oversight—are in short supply. Climate-change concerns spur many, as does an interest in a simpler, low-tech lifestyle. Disaster preppers and militiamen see it as a hedge against impending social collapse.
Not everyone who wants to go off the grid can. Assembling the right equipment and supplies can cost tens of thousands of dollars, but money isn’t the only limiting factor. Sometimes the grid just won’t let you go. Lawsuits with homeowner associa-tions are commonplace, as are disputes with local government. James and Frances Babb, residents of Clarkson Valley, Mo., for example, have been battling authorities for years over permits to install solar panels that the city has refused to grant, citing construction and fire safety issues.
The day after the Fox segment on Speronis aired, an officer from the Cape Coral code compliance division knocked on her door, rousing her two dogs, Suzie, a chihuahua, and Faith, a mixed breed. Speronis didn’t answer. The officer, taking note of the water barrels and severed power lines, stuck a placard on the door declaring the property unfit for human habitation. “Any person entering this property without official authoriza-tion,” it read, “is subject to removal and/or arrest.”
Speronis’s “test case for something” quickly escalated. Fox continued to run segments on her, gleefully accusing the city of retaliating against her after seeing its report. City representatives offered a series of unconvincing denials, first saying they believed
“Nothing was hard. Every time
50
Rainwater shower ②
Solar-powered battery ①
Camp toilet ③
I did something it was easier th
the home was vacant, then citing an open compliance violation—mulch blocking the municipal right-of-way—and finally a “citizen complaint.” Records, however, show the complaint had come from a city employee who had watched the show and alerted his colleagues.
Cape Coral argued that it had nothing against Speronis going off grid, only with how she’d done so. “There are an awful lot of alternatives out there that meet code,” says Frank Cassidy, the city’s code compliance division manager. “The problem is that she is not using those methods.” He ticked off a litany of municipal resources for cisterns, composting toilets, retrofit grants, equip-ment, housing assistance, and programs to sell excess solar power to the grid. “The city has the health, welfare, and safety of all its citizens to consider,” says Rana Erbrick, the city council member for Speronis’s district. “But there also comes a point where you gotta do what you gotta do to protect the integrity of the system.”
Statements like that inflamed the citizens of Cape Coral, many of whom were rooting for their local nonconformist. Strangers began to stop her on the street or honk in support as they drove past her yard. While the city had certain aspects of the law behind it, all local residents saw was a widow living alone in a poor part of town getting steamrollered by the government. Speronis’s battle caught the eye of the national media, from the environ-mentalists of Treehugger, a popular website, to the libertarians of Glenn Beck’s The Blaze. Producers from Doomsday Preppers, a reality show on the National Geographic Channel that “explores the lives of otherwise ordinary Americans who are preparing for the end of the world as we know it,” contacted her but chose not to film her. “Guess I wasn’t crazy enough,” Speronis says.
Speronis turned out to have a knack for publicity. She
① “Electrical service disconnected in this occupied dwelling. Automobile batteries being used for limited electronic equipment—inadequate service for occupancy.”
② “Shower baths, bathtubs, laundry not functional due to no water/sewer service.”
③ “ Toilet and all other plumbing fixtures not operational due to no water/sewer service.”
④ “No water/sewer service—no functioning plumbing fixtures or facilities. No fixtures being able to be maintained in safe, sanitary, working condition.”
⑤ “Coleman outdoor style propane lantern being hung in kitchen within 6" of ceiling—fire hazard.”
⑥ “Coleman propane stove and ... propane fuel containers being used indoors and not properly vented.”
Propane lantern ⑤
Camp stove ⑥Disconnected sink ④
an I thought it was going to be.”
51
found a real estate litigator named Todd Allen to take her case pro bono. Allen had made a name for himself in 2011 when he showed up at a Bank of America branch with a sheriff’s deputy, two movers, and a gaggle of TV cameras and tried to foreclose on it. (The Daily Show With Jon Stewart interviewed him.) The Ruth-erford Institute, a right-wing libertarian organization in Virginia, took up her cause as well, offering to serve as legal consultants and pay court costs. “It’s like these cases where people want a couple of chickens in their yards and the cities say that’s illegal,” says John Whitehead, the organization’s founder. “I believe in freedom of property. Why would any government agency be concerned?”
Speronis cut a defiant figure in TV and radio interviews. “Cape Coral needs to be afraid of me,” she said. “I’m not afraid of them.”
The arrival of national forces seemed to harden Cape Coral’s resolve. In January the city amended the original violations, citing Speronis for 36 code and ordinance infractions, from an improperly installed electrical system to insufficiently heated water. At a hearing that month, a special magistrate dismissed 33 of them, largely because the city lacked evidence. Code offi-cers had never been to the property, thereby making it difficult to argue, for example, that the house had faulty wiring when no one had inspected it. The magistrate did find Speronis in viola-tion of regulations that required city water to flow through her pipes, even if she had an alternate water supply—the rainwater. It was, literally, against the law to disconnect from the water system. “Reasonableness and code requirements,” the special magistrate declared, “don’t always go hand-in-hand.”
Speronis was given three months to bring the house up to code or risk fines, foreclosure, and even imprisonment. Allen vowed to appeal and also began work on a case against Cape Coral for malicious prosecution.
City representatives periodically proclaimed their interest in an amicable resolution. “Our primary objective is voluntary compliance through education,” says Cassidy, the compliance manager. “Every house has a story, and we try to find that story to guide them to compliance. We don’t like hearings or esca-lating remedies.”
But Speronis had confirmed at the magistrate’s hearing that she was flushing waste into the sewer with rainwater without paying to use the system, and the city moved against her. A few days after the hearing, city officials showed up at her house, dug up the front yard, and capped her access to the sewer. Then they filed a complaint against her with the Florida Department of Health, alleging that she was creating a health hazard by spread-ing her waste on the lawn. The charge was untrue. Speronis used a camp toilet with detachable bags that she tossed into the city garbage system—which was a code violation, but not one the city had alleged. The state health department investigated, cleared Speronis, and said the city had committed its own violation and created a “sanitary nuisance” by capping the line.
City officials began to leak information on Speronis’s troubled past to the press. Speronis had a 2009 felony conviction stemming from the theft of a real estate client’s home deposit money. She attributes this to a banking error caused by the stress of caring for her sick husband, but she pleaded guilty, gave up her real estate license, and was placed on probation. More damning for her image was a 2007 animal cruelty conviction for failing to provide her dogs with adequate food and water. Speronis says the animal welfare people didn’t understand her natural methods.
The dogs, which Speronis describes as “my children,” became a pressure point the city could exploit. Animal control tried on eight occasions to take the pets, but Speronis hid them with one of her neighbors—a group that tends to view her as a benign eccentric. Speronis made friends with a group of retired men who met early each morning at a nearby Burger King, where employees allowed Speronis to use the bathroom without pur-chasing anything. The men all concede that Speronis “liked the fight” and the publicity. But they also objected to the city’s harsh tactics. “She ought to be able to do what she wants to do,” says one of them, Robert Goodridge.
When animal control failed to find the dogs, the city contacted the Florida Department of Corrections, arguing that Speronis’s failure to cooperate constituted a probation violation. She per-mitted an inspection by her probation officer, who found both dogs to be in adequate health and declined to act.
And then there was the issue of who owned the house. Sper-onis maintains that a friend had essentially given it to her—the sale was recorded with the county for $10—because it was vacant and in disrepair and he didn’t like her living in the woods. The friend, a s emiretired landscaper named Ronald Mayo, emerged to dispute that, telling police that Speronis had forged his name and a notary seal on the title transfer documents. “She was a friend, and I was letting her stay there,” Mayo says. “I gave her a small piece of paper to go to the county to represent me with the property. Next thing I know, she sold the AC units.”
Speronis denies this account. “Men like Ron, they don’t understand me,” she says. “They think I’m doing this because I can’t make ends meet. But it’s fun. I want to do it.”
In late March, Speronis met me at her front door dressed in faded blue jeans and a bright yellow blouse. She looked thin. Most of her food stores had been depleted, save for a few sacks of oatmeal and some canned beans. The “survival seed” garden she had attempted on the front lawn had failed and was now a dusty wreck. She interspersed Zen pronouncements about dispelling “negative energy” in the house and “having beauty around me” with the slightly manic broadsides of a libertarian true believer. “I’m here to make a point—to bring justice,” she said. “You can’t just declare someone outside of the system and kick them out of their house.”
A little more than a week later, officials from the code com-pliance division, building department, and animal control along with several police officers descended on Speronis’s house with an inspection warrant. As with the sewer-capping incident, much of what they were looking for arose from details Speronis pro-vided at the magistrate’s hearing: the solar panel, the lantern, a camp stove in the kitchen, the camp shower, and other off-the-grid fixes. The officials found 37 new code violations.
During the inspection, Speronis says, she berated one of the police officers: “I’m that much of a threat? A 54-year-old widow living by herself? How can you sleep at night?”
“Better than your dogs,” the officer responded.“The most hazardous issues were the use of the stove and the
propane lantern inside, as well as the recharging of the battery,” says Cassidy. “If she ends up blowing herself up or catching fire in that house, then it’s not, ‘why are you picking on this woman?’ It’s ‘why didn’t you do something about it?’ ”
Animal control took both dogs to the county shelter for examination. They returned the chihuahua, Suzie, but kept the
“Reasonableness and code requiremenspecial magistrate declared.
52
older dog, 14-year-old Faith, and leaked photos to local media outlets that showed her without any fur on her hindquarters. “I don’t care how this lady lives,” says Glenn Johnson, operations manager at the county animal welfare department. “She has to take care of her animals by law. She can’t just do what she wants.”
Speronis contends that Faith lost her coat years earlier in the care of an incompetent veterinarian. “It’s evil,” she says, breaking into tears. “It’s like when they capped my sewer. I was upset because the intention was not public safety or welfare, but to do harm.”
In April, Speronis fired Allen, her attorney, when he suggested that some of the city’s complaints about the house and the dogs had merit. “I subscribe to the way she wants to live, and the gov-ernment is trying to restrict her in ways that don’t make sense,” he says. “But I’m concerned that she is trying to fight the fight just to fight it.”
On May 14, Speronis was arrested on a misdemeanor animal cruelty charge. The city attorney persuaded a judge to hold her without bail under a 2011 law intended to keep violent probation violators behind bars. Known as the Widman Act, it was named after a police officer shot and killed by a probationer with a felony warrant. It was being applied in this case against a woman who may or may not have given her dog a skin condition.
Speronis languished in jail for more than a month, including a week in solitary confinement, after she refused to be tested for tuberculosis. “They have no right to take my blood,” she said during a phone call from custody. “The health-care system wants to control my body, and that’s evil.” She turned down the services of a public defender and declined to accept a plea
nts don’t always go hand-in-hand,” the bargain that would not have included prison time. “I want a jury trial,” she said. She also told me she preferred isolation to the “drama” of the general population. “I have a 10-by-14 cell and my own shower that I can use twice a week. There’s peace and quiet.” She used the time alone to begin writing another book about her experiences. “It’s amazing what happens when you stand up for your principles, your values. I have no regrets.”
It can be hard to take such pronouncements from Speronis at face value. While she is likable, articulate, and vulnerable, her blend of cheerful defiance and messianic libertarianism can read either as inspirational or delusional. Maybe the nature of the fight was bound to produce a protagonist with flaws: Those who crave disconnection the most may often carry the most baggage, and only a zealot will fight the government indefinitely.
On June 16 the city abruptly dropped the animal cruelty charges, saying it lacked proof. Speronis was released from jail and given back her dog. She returned to the house, vowing not to make any changes. “They can fine me all they want,” she says. “I’m not going to let them dictate the way I live.” On July 4, Roger Desjarlais, the manager of Lee County, which encompasses Cape Coral, e-mailed Speronis an apology of sorts: “I’m hopeful you will not judge the entire Lee County organization based on your experience with our Animal Services department. … We hope that you, Faith and Suzie are doing well.” That said, the conflict with the city will surely continue. For now, Speronis is home, off the grid, and outside the law. �
53
Sper
onis
’s ho
use
in C
ape
Coral, where supporters honk as they drive past.
This Is
Not
A
Grocery
Bag
By Akash KapurPhotographs by Chiara Goia
54
It’s
A
Future
HighwayA chemist has found a way
to turn India’s litter problem into much needed roads
55
56
MA
DU
RA
I RO
AD
: CO
UR
TE
SY
RA
JA
GO
PA
LA
N V
AS
UD
EV
AN
or as far as the eye can see, there’s stinking, smoking, untreated garbage. It’s concentrated in the munici-pal dump, in the South Indian city of Madurai, but not contained by it. The surrounding fields are also piled with trash. Stray dogs nibble at mounds of
rotting food. The trees are denuded and covered with shred-ded plastic, the blue and pink and yellow bags like some kind of sinister confetti.
The road to the dump, and beyond it to Madurai’s airport, is like a Hollywood vision of dystopian ruin: lifeless, black, choked with human refuse. And that’s why Rajagopalan Vasudevan’s enthu siasm is so jarring. As he makes his way through the rubbish, he’s like a child on a treasure hunt. “Wonderful resource,” he says, admiring a jumble of plastic bags, jerrycans, and torn food packets. “With all this plastic, I could lay the whole road to the airport.”
It is difficult to exaggerate India’s garbage problem. Jairam Ramesh, the nation’s former environment minister, has said that if there were a “Nobel prize for dirt and filth,” India would win it. As much as 40 percent of the country’s munici-pal waste remains uncollected, according to the Organisation for Economic Co-operation and Development. Of the waste that is collected, almost none is recycled. Most of it sits in open dumps such as the one in Madurai, leaching into the soil and contaminating groundwater. Some of it is burned, releasing dioxins and other toxic chemicals into the air.
Much of India’s garbage is made up of plastic—a scourge of the nation’s new consumer economy. The country’s Central Pollution Control Board says more than 15,000 tons of plastic waste are generated daily. Although the nation’s per capita con-sumption of plastic is low compared with that of the U.S., it’s expected to double over the next five years as India continues to develop. This poses huge environmental, social, and eco nomic challenges. As the Supreme Court of India recently observed: “We are sitting on a plastic time bomb.”
Vasudevan sees an opportunity. A professor of chemistry at Thiagarajar College of Engineering, near Madurai, he insists that plastic gets a bad rap. Rather than an incipient environ-mental calam ity, plastic, in Vasudevan’s opinion, is a “gift from the gods”; it’s up to humans to use it wisely. And he’s devised a way to transform common plastic litter—not only thicker acrylics and bottles but also grocery bags and wrappers—into a partial substitute for bitumen in asphalt.
In recent years his method has been gaining recognition. He’s become known as Plastic Man and travels throughout India instruct ing engineers how to apply it. The college holds a patent for his technique but often licenses it for free. To date, more than 5,000 kilo meters (3,000 miles) of plastic roads have
been laid in at least 11 states. The Central Pollution Control Board and the Indian Roads Congress, two leading govern-ment bodies, have endorsed the method.
Almitra Patel, one of India’s leading experts on garbage, who has advised several state governments on their waste policies, considers Vasudevan’s technology a “win-win-win.” It consumes an unwanted and mostly nonrecyclable resource; it results in stronger roads; and because it replaces as much as 15 percent of more expensive bitumen in the mix used to lay roads, the technol-ogy also holds the potential to lower the cost of infrastructure.
She adds that one of the chief advantages of Vasudevan’s method is that it can accommodate the multilayered wrappings often used to pack snacks such as chips and cookies. These wrap-pings (typically consisting of a layer each of plastic, polyester, and aluminum) make up an increasingly large volume of waste in the country. They’re just about impossible to recycle, but they can easily be shredded and reused in Vasudevan’s roads.
“It’s really a wonderful situation,” Patel says. “I think it is an absolutely transformational technology that could clean up India overnight.”
Another advantage of Vasudevan’s method is its simplic ity. It requires no significant technical knowledge and no large invest-ments or changes to existing road-laying procedures. His whole operation is a good example of the Indian method known as jugaad, or “frugal innovation.” Jugaad makes a virtue of neces-sity: It extols the work-around, the shortcut that uses (and some-times improves on) limited resources. “I do it all the Indian way,” Vasudevan says. “What is the use to spend thousands of rupees when we can do it much more cheaply?”
Vasudevan, 69, spent the first few decades of his career induct ing students into what he calls “the wonders of chemistry” before turning his attention to plastic in 2001. He’s very much the pro-fessor—voluble, digressive, a little distracted. He laughs easily and is self-deprecating. “Because of waste,” he jokes about himself, “a waste has become useful.”
His laboratory sits amid the heavy granite buildings and dusty playing fields of Thiagarajar College. Students drive around on scooters, the boys in jeans and T-shirts, the girls in two-piece salwar kameez outfits that signal modernity. The lab building is unimposing—more of a shack, with cracked concrete floors and asbestos roofing. It’s astonishingly low-tech. The inside smells of tar. It’s here that Vasudevan has arranged a demonstration of his plastic-to-pavement technique.
As one of his students, a young man named Ramalinga Chandrasekar, prepares the demo, Vasudevan sits at a table, in the draft of a rattling floor fan, and opens a Tupperware
Spread in an even layer,
as shown in Madurai in 2013
Stir in tar Add gravel Shred grocery bags and other
low- quality plastic
Bake at 302F so mixture
coats gravel
Vasudevan’s Plastic-to-Pavement Recipe
F
57
box containing shredded plastic and a few pieces of plastic- coated granite. He runs a couple of stones through his fingers, caressing them like gems. “Feel it, feel it,” he says, praising the glossy, slippery finish.
Chandrasekar sets up a gas burner on the floor and places a black cast-iron pot, like a rounded wok, on the stove. He throws a few granite pebbles in and starts stirring with a sawed-off PVC pipe. As Chandrasekar stirs the stones, Vasudevan checks their temperature with a handheld infrared thermometer—virtually the only sophisticated piece of equipment in the lab. (It costs less than $150.) Chandrasekar explains that the optimal temper-ature for the mix is about 150C (302F). Lower than that, and the plastic doesn’t melt evenly; higher, and it can release toxic gases.
When the temperature is just right, Chandrasekar throws in a couple of handfuls of shredded plastic. Vasudevan looks over his shoulder. “It’s not well done. It’s not well done,” he mutters, picking up a metal slotted spoon to stir the mixture himself.
In the early days, Vasudevan says, he would mix plastic directly into liquid tar, stirring until the plastic melted. He found, however, that while the method worked with small samples in the lab, it was difficult to stir the large quantities of thick, viscous tar used on an actual road. When he began experi menting with what he calls the dry method—in which the plastic is melted directly onto the stones—he found that the plastic adhered better and more uniformly. This reduced air pockets in the tar and limited water penetration—contributing to stronger roads. He estimates that he conducted more than 400 experiments before getting his technique right.
It takes another minute, but the plastic begins to coat the stones to his satisfaction. Chandrasekar adds a ball of bitumen; it dissolves and flattens, like a black omelet. When the stones are dark, covered with tar, Vasudevan scoops them out and holds them under my nose. “You see, you see?” he asks, triumph antly. He is a proud cook. “What a beautiful coating.”
After he perfected his method, Vasudevan recalls, he faced difficulty getting it implemented. It wasn’t until 2004, when he got a chance to display his work in front of the chief minister of Tamil Nadu, the state in which he lives, that he
achieved a breakthrough. She was impressed and directed that 1,000 kilometers of plasticized asphalt should be laid in the state, the first of the 5,000 kilometers since completed.
Yet for all the progress he’s made, solving India’s garbage problem requires more than a technological solution. In a country where throwing garbage onto the roads and littering in public areas are acceptable behaviors, it’s going to require a social transformation. “With respect to the technology it has been proven already,” Vasudevan says. “Culture is now the most important part.”
The shed is in a residential area of Madurai. It overlooks a canal clogged with plastic bags—a familiar, dismal sight. Vasudevan has brought me to the offices of a small women’s asso ciation, a self-help group that has in recent years been collecting and recycling plastic waste. The blue-tiled room is stacked with bags containing colorful shreds of plastic. On a wall, a gold frame contains images of a mosque, Ganesh, and Jesus, side by side. It’s in places such as this, Vasudevan says, that the most im-portant work on India’s garbage crisis is being done.
Gurusamy Bodhilakshmi, secretary of Naganakulam Panchayat-Level Federation of the SHGs (self-help groups), explains how the women buy plastic from a network of local businesses and homes and how they conduct awareness drives in schools and colleges. They are trying to build a local market around plastic, so it is treated as a commodity rather than as garbage. The group has had some success. It collects plastic from about 8,000 households. It buys plastic at 7 rupees a kilo (12¢ per 2.2 pounds) and sells about 1,000 kilos a month, at 30 rupees a kilo, to government agencies that use it for roads. Many of the group’s members make a modest living off the enterprise.
Bodhilakshmi’s words are encouraging, but the scale of the challenge is daunting. Although 8,000 households work with her group, many more are indifferent or even hostile to their efforts. Bodhilakshmi says many families, especially among the better-off, are unwilling to recycle or think about what happens to their waste. For them, garbage is a problem of the poor.
“The upper classes have everything. They have servants to attend to their needs, so they don’t bother with anything,” she says. “Though we are doing work that is sacred, some people look down at us as if we are doing dirty work. They speak dis-respectfully to us.”
Vasudevan interjects. “What I always say is, let us just ignore the upper classes and the middle classes,” he says. “They are the biggest obstacle. Let us start with people like this, who are more sincere, and once these people are successful, the move-ment will spread.”
He says that in his college, he’s often the only one who will bend down and pick up a piece of litter from the ground (“even though I am a dean,” he adds). Other staff and students think it’s beneath them. They just throw garbage onto the floor and expect someone else to pick it up. When he tries to correct his students, they tell him that others will mock them if they start picking up waste. “Humility is essential if we want to solve this problem,” Vasudevan says. “Without humility, nothing can be done.”
The women of the self-help group line up and show off a folder with news clippings about their work. Then they give a demonstration of a cleaning machine they use to remove dust and debris from plastic. As plastic bags whip around in the machine, Vasudevan talks about the economic barriers that stand in the way of large-scale adoption of his method, such as inefficient markets for plastic and contractors who may not believe it’s in their best interest to build more sustainable roads.
“I have to discover a technology not only to change the use of plastic,” he says, running his hand through his thinning hair and smiling, “but also to change human minds.” �
Vasudevan
“What is the use to spend thousands of rupees when
we can do it much more cheaply?”
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I’m sitting in a small office in Chicago, typing on my laptop and talking on my cell phone. There’s a built-in desk, a monitor on the wall, shelves to one side, and a highly ergonomic chair. Colorful striations, meant to evoke a library’s rows of books, decorate the space. The door and one wall are frosted glass, turning the people walking
by into soundless, blurry ghosts. It’s all very new and sleek but also cozy, as if the designers were channeling the aesthetic of a boutique hotel, which, I’m told, they were. On one of the shelves near the floor sits a pair of brown wingtips. I have no idea why they’re there, because this isn’t my office.
In fact, it isn’t really an office at all. It’s a Susan Cain Quiet Spaces unit, a floor model in the show-room at Steelcase, an office design company. In theory, corporations will install the units for recharging, having a private conversation, or just working in undisturbed quiet. It’s been designed in particular for the inward-focused, deliberate, some-times solitary types who make up one-third to one-half of the pop-ulation and for whom the open-plan office is a particular hell.
The Quiet Spaces’ namesake, Susan Cain, is a former corporate attorney and author of the best- selling Quiet: The Power of Introverts in a World That Can’t Stop Talking, a manifesto for wall-flowers. She delivered a popular 2012 TED Talk on the same topic, a jeremiad against modern soci-ety’s mindless celebration of the extrovert: We equate volubil-ity with intelligence, certainty with judgment, and charisma with good leadership. “Our most important institutions—our schools and our workplaces—they are designed mostly for extroverts, and for extroverts’ need for lots of stimulation,” she said in her talk. Introverts “feel at their most alive and their most switched-on and their most capable when they’re in quieter, more low-key environments,” she explained.
Does that sound like your office? It doesn’t sound like mine. In the prototypical modern workplace, desks are spread around
open floors or clustered in pods. The theory
is that this encourages collaboration and creates the chance inter-actions among colleagues from which breakthroughs emerge. And of course, these layouts also allow more workers to be econom-ically squeezed into less space. As a result, Cain says, the quiet and calm necessary for deep thinking, and the solitude that nour-ishes the introverted mind, are obliterated.
In the audience at Cain’s TED Talk was James Hackett, Steelcase’s chief executive officer at the time. The two met after-ward and talked. “He’s this big, burly ex-football player, and he’s an introvert,” Cain recalls. The company was already trying
to figure out ways to bring flexibility to the open-plan office. According to James Keane, Hackett’s suc-cessor, it’s a matter of “letting people be actively involved in thinking about how they want to spend
the next couple of hours. Do you want to be in the cafe? Do you want to be in a private space? Do you want to be in an open space? Do you want to take a walk for an hour and come back when you’re feeling more energetic? You know, giving freedom back to people to make those choices.”
Steelcase invited Cain to speak at the company’s offices in Grand Rapids, Mich. “I thought of them as allies from that first meeting,” she says. Together, they set out to design places where the Albert Einsteins and Eleanor Roosevelts—both introverts, Cain says—could do their best work.
There’s some irony in this. Steelcase was founded in 1912, and one of its first products was the Modern Efficiency Desk. As Nikil
Saval writes in Cubed: A Secret History of the Workplace, the tradi-tional desk had been a Wooton roll-top, “a massive, high-
backed, grandiose affair riddled with cubbyholes and with foldout wings that seemed to reach around and clasp the sitter in warm embrace.” The Modern Efficiency Desk was smaller and
barer. It was built not for the one-room countinghouses of the 19th century but for the expansive corporate bullpens of the 20th, where clerks sat out in the open in rows while their supervisors stalked the aisles peering over their shoulders. In the century since Steelcase invented a desk for the open plan, the American office has only grown more open. Today, with
Etc. Workplace
OP
EN
ING
PA
GE
: PH
OT
OS
ON
CO
RK
BO
AR
D: A
LA
MY
(2
)
PRIVACY IS “THE BIGGEST GAP BETWEEN WHAT WORKERS HAVE
AND WHAT THEY WANT”
1958: No More Walls
German brothers Wolfgang and Eberhard Schnelle come up with the Bürolandschaft
(“office landscape”) concept. It replaces private offices with
free-form, flexible desks, a communal break room, and a
few mobile partitions.
1967: Opening Up
DuPont is the first American company to realize that a flexi-
ble office is a cheaper office. But the open plan doesn’t
muffle telephone calls or type-writers, and “some crucial
values for the performance of work were lost.”
1968: The First Cubicle
Robert Propst, a researcher at furniture company
Herman Miller, creates the Action Office II. It has three movable, disposable walls
at obtuse angles, sitting and standing desks, and push-
pins to add décor.
The writer working productively—and
alone—in Flow, one of the Susan Cain Quiet Spaces for Steelcase
OUTSIDE THE BOXIn this year’s Cubed, Nikil Saval charts the rise of the modern open office plan. —Belinda Lanks
61
“I’ve seen various companies trying to go beyond everyone just having head-phones, adding a lounge or library where people can do more quiet, focused work,” she says. She suggests creating multiple smaller spaces that are built for something like a private call or a two-person conver-sation, freeing up conference rooms for bigger meetings.
I spent an afternoon in Chicago trying the Steelcase spaces, collecting my
thoughts in Be Me and chatting one-on-one in Green Room. I closed the frosted-glass door in Studio and decom-
pressed. I even got some work done in the officelike Flow. Keane, Steelcase’s CEO, is having a Flow unit built to function as his own office, along with a Green Room for meetings. If a company really wants to join the Quiet Revolution, as Cain’s new con-sulting firm is called, it’s going to need to order a lot of these rooms. Otherwise
it risks having a bunch of quietly seething introverts. And the units aren’t cheap: They start at $15,000, for Flow, compared with a couple thousand dollars for a typical cubicle setup.
Cain says she h o p e s o f f i c e s install enough so everyone, not just introverts, can use the spaces when-ever they need to. Still, she con-cedes, “there are economic realities
that I’m sympathetic to.” According to an analysis released on July 1 by Reis, a real estate data firm, even as companies begin to hire again, many aren’t expanding their office spaces. “It is likely that newly created office jobs are taking up under- utilized space,” the report suggests.
Cain won’t be installing Susan Cain Quiet Spaces in the offices at Quiet Revolution. “It is a big old house on the Hudson River, and it’s lovely, with common spaces and private spaces,” she says. “And you can go and sit on the porch and look at the river with your laptop.” �
Etc.
TH
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BY
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“flat management struc-ture” and “radical trans-parency,” even CEOs have put their desks in the bullpen.
This is despite a growing body of research that underlines the open plan’s drawbacks. A 2013 study in the Journal of Environmental Psychology, based on a survey of 43,000 workers, found that the idea of open plans improving morale and productivity has no basis in the research lit-erature. A 2000 paper looked at physiological and mental effects from being subjected to three hours of simulated office sounds. Among other things, the 40 female participants gave up faster on a set of unsolv-able brainteasers—their willpower presumably sapped by simply having to endure the noise. Research by Anne-Laure Fayard, a management professor at New York University, showed that while workers in open-plan offices do indeed talk to each other more, those conversa-tions are superficial, because the conversants know neighbors can listen in. Workers at one company told her, “We say hi to more people, but there is no space to go and have a real con-versation.” Steelcase’s own surveys found similar concerns. “Privacy has been the No. 1 issue for the past five years,” says Chris Congdon, Steelcase’s director of research communica-tions. “It’s the biggest gap between what workers have and what they want.”
The Susan Cain Quiet Spaces aim to close that gap. Unveiled in early June, the series includes five rooms: Be Me, Flow, Studio, Green Room, and Mind Share, most of which are on display at the company’s showroom in the Merchandise Mart in Chicago. Studio has a low chaise, a plush rug, and a basket of rolled-up yoga mats in one corner. In Be Me, a daybed takes up one side of the space, encouraging reclining, even napping. Green Room, designed for introvert-friendly small meetings, has a sectional sofa; according to Cain, introverts prefer to converse obliquely, not face-to-face. All the rooms are fronted in frosted glass— the opacity can be customized for privacy.
Fayard says efforts such as these are growing more common.
1980s: Tiny Cubes Workers are hemmed into cube farms, arranged in “six-packs.”
By the 1990s, cubicles had shrunk as much as 50 percent; by 2006 the average size is 75 square feet. “One wonders to what extent the extrav-agant growth of the American bath-
room … is a reaction against the shrinking of cubicles.”
1993: Virtual Failure Los Angeles ad agency
Chiat/Day eliminates walls, desks, and cubicles.
Instead, workers are handed a cell phone and laptop
and told to work together in a conference room.
The experiment backfires: Employees stop showing up.
2005: You’re Stuck Here Google sets the Silicon
Valley standard in Mountain View, Calif., where
employees move among meeting rooms, quiet librar-
ies, and tents. That flexibility, combined with food and ame-
nities, discourages them from ever leaving.
2014: Office Goodbye Party
“Contingent laborers”— freelancers, temps, etc.—will
soon comprise 40 percent of the workforce, according
to one Intuit study. Saval says cubicles, corner offices,
and white-collar jobs could shortly cease to exist.
Doing yoga in Studio and recharging with a quick lie-down on the
daybed in Be Me
Etc. Fashion
TOE THE LINEElegant sandals that aren’t too sexy for the morning commute
A st
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llish
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ont D
iane
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AP
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BY
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RG
IY B
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UK
F
OR
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OO
MB
ER
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US
INE
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WE
EK
Balance long skirts
with a
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Audr
ey sa
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Brushed-mirror double-strap sandals Jimmy Choo, $695 Cropped silk pants Trademark, $148
Flat two-tone sandals Salvatore Ferragamo, $795
Interlocking strap sandals Trademark, $195 Cropped chinos J.Crew, $89.50
Ankl
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ork
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trous
ers
“Ask people what their
favorite app or game is.”
—Randi Zuckerberg, CEO, Zuckerberg Media
“ ‘How’s your day?’ If I get a sigh or an eye
roll, I attempt to lighten the mood.
If I get a smile, then we’re off to a
great start.”—Orly Adelson, president,
ITV Studios America
Survey
THE END OF THE AWKWARD ELEVATOR
RIDEEnough about the weather. Successful charmers
share their best close-quarter conversation starters By Arianne Cohen
“I notice something unique and find
out about it, whether it’s great shoes or
a bunch of paperwork. It’s very easy to bring
attention to something in their world and enjoy the resulting
conversation.”—Michael Serruya, co-CEO,
Kahala Franchising
“ ‘What made you most excited
today?’ The question makes
people stop and think, and their responses give me insight
to help them consider
tomorrow with a new set of eyes.”
—Kathy Bloomgardenchief executive officer,
Ruder Finn“I’m often wearing a chef coat, so I’m easily identifiable.
I always ask, ‘Where are you eating
tonight?’ If they don’t have plans, I say, ‘Can I make you a
reservation at one of my restaurants?’ ”—Daniel Boulud, chef,
Daniel
“ ‘Where do you live? Where did you grow up?
What do you do?’ With a few simple
questions, we’ll know each other better.”
—Rich DeVos, owner, Orlando Magic
“I see whether the person has had a chance to
exercise that day. It’s a relatable
topic that people enjoy discussing.”
—Jonathan Tisch, chairman, Loews Hotels & Resorts IL
LU
ST
RA
TIO
N B
Y G
OL
DE
N C
OS
MO
S
“I find out where they are from and how they arrived.
This frequently gives way to a frustrating story about traffic
or airlines and, for me, a segue into the
benefits of business aviation.”
—Rene Banglesdorf, co-founder, Charlie Bravo Aviation
64
65
The Critic
Jepsen—instead of well-known acts like Perry or Rihanna.
This year, musi-cians such as Harris are trying to game the system by throwing in
the word “summer” and crossing their fingers. A few weeks ago on the Spotify Viral 50, which tracks the most-shared songs in the U.S., Harris’s Summer was joined by
My Sweet Summer, a ska anthem by the Dirty Heads, a band from Huntington Beach, Calif., and Feels Like Summer, a rock-lite offering from the New York band Panama Wedding. This isn’t a completely novel tactic—it was first used for ’60s tunes such as Summer in the City, Hot Fun in the Summertime, and Billy Stewart’s funky cover of George Gershwin’s classic Summertime. DJ Jazzy Jeff and the Fresh Prince also borrowed that title in ’91 for their biggest hit. The Boys of Summer (’84) by Don Henley remains the greatest of such songs, Summer Girls (’99) by LFO, the worst.
The new Summer could be the first of its ilk to come out on top as the official (unofficial?) Song of the Summer. Like
many recent winners, it’s by an unknown artist who managed to produce something upbeat, emi-nently danceable, and uncontroversial enough for the corporate bar-becue. Spotify’s Cook adds that it’s the most-played song outside America, where weeks of vacation and elec-tronic dance music are
taken for granted. Here in the U.S., its main rival is the song that’s been topping Billboard’s chart going on seven weeks. Fancy, a chandelier-swinging ode to wasting money, is by a female rapper named Iggy Azalea. She’s very tall, very blonde, and from Australia, where it’s currently winter. �
Etc.
IS STUCK IN YOUR HEAD
Musicians get crafty in an attempt to win this season’s chart war. By Kurt Soller
LOVE THE WAY YOU LIE
Analyze your hires With personality
tests, Then watch them
all quit.
Honda is so cool!Says this
unconvincing guy.Wait, he’s seen
one, right?
Everyone’s lying And trying to rip
you off. This book is cranky.
BUSINESS
BOOK HAIKU
There’s never been a less subtle contender for Song of the Summer than Calvin Harris’s Summer. The track, No. 8 on the Billboard Hot 100 as of this writing, has only eight distinct lines, which repeat for nearly four minutes. It’s a lot of time to devote to a story as old as
Grease. “When I met you in the summer/To my heartbeat sound/We fell in love/As the leaves turned brown,” sings Harris, a 30-year-old DJ from Scotland. The tune is set to the same crashing electronic beats that cemented him as a hitmaker for Rihanna, Ellie Goulding, and others who’ve dominated warm-weather air-waves the past few years.
Pop musicians have capitalized on summertime vibes since the 1960s, when the Beach Boys released surfy tunes ready-made for family road trips. (Record sales have typically spiked when school’s out, at least since 1940, when I’ll Never Smile Again, a complete downer by Tommy Dorsey, was Billboard’s No. 1 for 12 lazy weeks.) The ’80s first saw one song rule
the season—Every Breath You Take (’83), followed by When Doves Cry (’84)—but the modern conception of a Song of the Summer was born in the ’90s. That was the era of MTV countdown shows, hits such as Baby Got Back (’92), Macarena (’96), and the sweet sound of boy-band-era Justin Timberlake. Now that music has migrated to the Web, the competition has gotten more intense: Billboard started a Song of the Summer chart in 2010. That year, Katy Perry’s California Gurls slayed it.
“People identifying the Song of the Summer has to do with the fact that artists are now breaking online, rather than on radio,” says Shanon Cook, trends expert at the streaming music service Spotify, which has seen an uptick in Song of the Summer hunting by its users. And so the past few champs have bubbled up from relatively obscure artists—LMFAO and Carly Rae
ARTISTS ARE THROWING IN
THE WORD “SUMMER” AND
CROSSING THEIR FINGERS
Harris’s Summer came out in March
LFO, Rihanna,
Sir Mix-A-Lot, a
nd
Perry have won
previous summers
Azalea’s Fancy is currently
topping charts
66
Etc.
THIS MAXI PAD WILL GIVE YOU CONFIDENCE
The art of wooing female shoppers with empowering ads By Caroline Winter
Advertising
PH
OT
O IL
LU
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RA
TIO
N B
Y J
AC
I KE
SS
LE
R A
ND
PE
TE
R B
. SA
MU
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S
DATA: YOUTUBE
GIRL POWERThe genre’s most-viewed ads on YouTube in the last 12 months
share of income than their husbands is up 16 percent in the last five years,” McCann says. There’s no data yet on whether the
ads drive sales.In April 2013, Unilever’s Dove
scored the year’s largest viral hit (more than 134 million views)
with its Real Beauty Sketches, which featured women surprised at how positively their looks are described by strangers. The P&G shampoo Pantene has tried
three female empower ment ads since November, includ-
ing Labels Against Women, in which ladies with shiny hair encoun-
ter sexism at home, at work, and in the streets. A CoverGirl video simply argued, “Girls can.” And even companies without female-centric products have gone the same route: Verizon showed a young girl admonished for pursuing technol-ogy and science, and Snickers created the con fusingly titled You’re Not You When You’re Hungry, in which starv-ing construction dudes accost women with positive comments. “Society [should] … make way for gender-neutral introductions, free from assumptions and expectations,” one yells.
“We’ve always been telling women, ‘You can do it,’ ” says Bonnie Uhlman, co-author of Hustle: Marketing to Women in the Post-Recession World. The recent glut may be linked to Sheryl Sandberg’s advice for women to “lean in.” “Sandberg brought attention to the fact that the words we say to girls are important,” McCann says.
That hasn’t stopped bloggers from complaining that the empowerment videos are gimmicky or condescend-ing. One Slate headline recently said: “We’re Wasting Our Best Filmmakers on Tampon Ads.” But widespread criticism still drives viewership, and Always is on track to break P&G’s social media records. The ad is honest, Elrod says, and “people like sharing that sort of thing.” �
When adults are asked to “run like a girl,” they break into a wimpy jog, a l l h a i r tosses and flail-ing arms.
Pre pubescent girls put to the same task pump their arms and give their all. So goes the latest viral ad-of-the-month, created for Procter & Gamble’s Always sanitary pads. Running like a girl, explains one tiny heroine in a red dress, means “run as fast as you can.”
To direct the three-minute video, the brand hired Lauren Greenfield of the 2012 wealth-porn documentary The Queen of Versailles. Greenfield “is a woman in a male-dominated field and tackles female societal issues,” says P&G spokeswoman Tonia Elrod. “Together, we are hopefully inspiring girls to fight negative stereotypes that impact confidence during puberty.”
Pantene: Labels Against Women
Dove: Patches
CoverGirl: Girls Can
Always: Like a Girl
Snickers: You’re Not You When You’re Hungry
GoldieBlox: Princess Machine
Dermablend Professional: Camo Confessions
Verizon: Inspire Her Mind
46m hits
2m hits
About a dozen drugstore brands have tried a similar tack, as online video virality becomes its own marketing metric. “A female empowerment story will take off because the trend has gone mainstream,” says Nan McCann, co-founder of M2W, the Marketing to Women Conference. “Many brands, of course, can see the value of hitching their wagons to that star.” The strategy is savvy, not only because posting online is much cheaper than running traditional commercials (though some brands supplement with TV spots), but also because of the target audience’s growing spending power. “The number of women in the U.S. earning a greater
67
PH
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AM
AN
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LO
OM
BE
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BU
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SW
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Etc.What I Wear to Work
Interview by Arianne Cohen
JYOTHI RAO
45, executive vice president and general manager for women’s,
kids’, and strategic brand alliances, Gilt, New York
Do you get a Gilt discount?I do, and it’s fabulous. And dangerous. I spend far too much of my paycheck shopping on the site.
Is your hair blown-out?I have my hair profes-sionally blow-dried once a week. I think having your nails and hair done can do wonders for looking professional.
How long does it take you to get ready in the morning?Forty-five minutes, with several interruptions from my 3-year-old. She waits to help me put my lipstick on.
Any advice for others? Black-and-white is an easy go-to combination to wear at the office. There are ways you can make it look powerful and sexy and not as predictable.
How do you dress for work? I try to keep things polished, but I want to have an edge.
You have a 13-word title! What’s your job?I oversee all aspects of the business that touch women’s and kids’ prod-ucts, so it’s merchandising, marketing, and business development decisions, as well as PR partnerships and customer experience.
What’s your day?It ranges from budget meetings to event planning and shoots. And then all the sexy, fun stuff like fashion shows. We love throwing parties for our brands and for celebrities. I’m an extreme extrovert, so I really enjoy it.
CARTIER
What’s today’s edge?The dress has a mix of flirty and soft in the skirt, and then has this modern mesh portion on top that feels strong. The shoe is a very classic shape, but the metal hardware gives them a little rock ’n’ roll feel.
SAINT LAURENT
MAWI
JASON WU
1. “Focus on the job you’re doing and do it really well.” 2. “Treat everyone with whom you work as a colleague, including your subordinates.” 3. “Always conduct y
ours
elf w
ith in
tegr
ity.”
1996-97 Law clerk, the Honorable
Timothy Lewis, Third Circuit Court of Appeals
1997-2000
Associate, Zuckerman Spaeder
2000-01 Associate counsel to
President Bill Clinton
2001 Associate,
Latham & Watkins
2001-07 Assistant U.S. attorney and deputy director,
Enron Task Force, U.S. Department of Justice
2007-09 Partner, Latham &
Watkins
2009-10 Principal deputy
associate attorney general, DOJ
2010-11 Principal deputy counsel
to President Obama
2011-14 White House counsel
to Obama
Richland High School, Richland, Wash.,
class of 1989
University of Washington,
class of 1993
Georgetown University Law Center, J.D.,
class of 1996
Etc. How Did I Get Here?
Blo
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be
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1); A
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); A
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3)
KATHRYN RUEMMLERFormer White House counsel; soon-to-be partner, Latham & Watkins
WORK EXPERIENCE
LIFE LESSONS
EDUCATION
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“Living through those independent counsel years,
and the surrounding controversy around the presidency, was quite
significant.”
“I got the clerkship because I took a Greyhound
bus there. That was striking to the judge with
whom I interviewed.”
Delivered the prosecution’s
closing arguments in the
securities fraud trial of former
Enron CEOs Kenneth Lay
and Jeffrey Skilling
A courtroom sketch from the Enron
trial
With fellow prosecutor
Sean Berkowitz in 2006
Ruemmler (far right) at a White House meeting with health insurance executives
“That’s how you give something real lift in the
White House: You get everybody in the building
focused on [the issue], instead of just being in a silo.”
“It’s one of those jobs— there’s no playbook.
Everyone has to do it with their own personal style.”
“Most of my classmates had
parents who were lawyers, judges, senators. I was
unencumbered. Ironically, it made
me be more of myself.”
“I love to close because it’s the opportunity
to try to tie the whole case together and explain
it in a way that’s a compelling narrative.”
“It’s near the Hanford nuclear site, where the Manhattan Project
was based. Both my parents worked in ‘the area.’ I didn’t think
about becoming a scientist. I wanted to be a lawyer since I
was about 10.”
68
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