Cornell Business Review - Spring 2015

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CORNELL BUSINESS REVIEW

Is Direct Primary Healthcare Feasible for America?

An alternative to the healthcare model.

FloraPulse A product that will revolutionize plant research and vineyards.

Revolutionizing Luxury The luxury hotel market is on the rise.

Spring 2015 | Volume V | Issue 2

Solar Power Takes Off

Although historically wildly expensive, solar power is now more than worth it. PG16

Contents Editor’s Letter

03

GOVERNMENT Open Markets, Closed Doors 04

The Impending Impact of the Trans-Pacific Partnership

by Hunter Bosson

A Tale of Two Economies 07

Veritas non Sequitur

by Shohini Kundu

INDUSTRY Revolutionizing Luxury 09

The luxury hotel market is on the rise.

by Paulina Kang

Is Direct Primary Healthcare 12 Feasible for America?

An alternative to the healthcare model.

by Todd Wei

The Future of Food? 14

Rise of the food-technology startups.

by Reed Boehringer

COVER Empires of the Sun 16

Expensive Investments, Cheap Oil, and the Future of Solar Power

by Andrew Billiter

SPOTLIGHT

Wool&Prince 19 Mac Bishop’s quest to create a brand of men’s fashion around wool.

FloraPulse 21 A product that will revolutionize plant research and vineyards.

finance 23 Who Did Well When Oil Tanked?

Smart investing during oil collapse

by Ethan Coy

24 Restructuring Wall Street The danger of “Too big to fall”

by Emma Nelson

INTERNATIONAL 26 Any Hope for Afghanistan

Afganistan’s shaky economic future.

by Dylan Magee

28 Taming Korea’s Giants

Legal Measures Force Conglomerate Restructuring

by Sang Hyun Park

30 The Eurozone Crisis

Greece living on the edge.

by Jeffery Fung

32 EVENTS GALLERY

Cornell sesquicentennial celebrations

CORNELL BUSINESS REVIEW Spring 2015 | Volume V | Issue 2 Susan Jiang Nicholas Piccone BUSINESS MANAGER Nabiha Keshwani DESIGN EDITOR Lillian Chen ASSOCIATE EDITORS Casey Breznick, Jack Henry Kapp & Shohini Kundu EDITOR-IN-CHIEF

MANAGING EDITOR

Andrew Billiter, Reed Boehringer, Hunter Bosson, Ethan Coy, Jeffery Fung, Paulina Kang, Dylan Magee, Emma Nelson, Sang Hyun Park & Todd Wei WRITING TEAM

BUSINESS TEAM Archana Choudhary, Ashini Ganesalingam, Jen Juliano, Nathan Kashdan, Julia Krupski, Rosie O’Regan, Minesh Patel, Kartik Ramkumar, Jenna Roland & William Van Ullen DESIGN TEAM

Alvin Cao, Rosalyn Xu & Julie Zhu

Letter from the Editor It is our honor to share the Spring 2015 issue of the Cornell Business Review with you.

Our members have dedicated countless hours in providing time-relevant content for our 10th issue. Since our inception in the Fall of 2010, the Cornell Business Review has continued to encourage students, faculty, and the Cornell community at large to “Join the Conversation”.

This semester, we have integrated a global perspective to the pertinent issues affecting the business world. Our writers have researched topics spanning oil’s collapse and alternative energy sources, the dynamics between Greece and Germany in the Eurozone conflict, and the toughened regulation of the Korean chaebol system.

As we celebrate Cornell’s Sesquicentennial, the Cornell Business Review had the privilege of speaking with some of Cornell’s most successful alumni who aim to continue Cornell’s relentless pursuit of innovation and change. Our Entrepreneur Spotlight highlights how Mac Bishop has successfully started Wool&Prince, a revolutionary men’s wool fashion line, while Michael Santiago of FloraPulse is aspiring to transform the process of measuring plants’ “thirst” for water.

To further expand our presence on campus and throughout the business community, we have established our website (cornellbusinessreview.com) as a platform to communicate business news pertaining to on-campus events and beyond. The platform has also enabled us to revamp the Newsletter, allowing for a more constant conversation with our readers on more time-sensitive events. Our recent partnership with Seeking Alpha has also proven to be a great avenue to share our articles with a reader base beyond our immediate Cornell network.

We would like to thank the School of Hotel Administration, Charles H. Dyson School of Applied Economics and Management, and the School of Industrial & Labor Relations for their financial support. This publication would not have been possible without the support of our advisor, Professor Deborah Streeter, and our newly established Alumni Board for helping us strategize every step of the process. I would like to extend a sincere thank you to our alumni interviewees Mac Bishop and Michael Santiago for taking time to share invaluable insight into their careers and entrepreneurial journeys. Finally, I would like to thank all the members of our Editorial, Business, and Design Teams–without their diligence, tireless work, and dedication, our success would not be possible.

Thank you for taking the time to read the Cornell Business Review. It is my hope that you will enjoy our publication for many years to come. Happy reading!

Susan Jiang Class of 2016 Editor-in-Chief

3 | CORNELL BUSINESS REVIEW

GOVERNMENT

Above: A summit with leaders of the member states of the Trans-Pacific Strategic Economic Partnership Agreement (TPP) in 2010.

Open Market, Closed Doors:

The Impending Impact of the Trans-Pacific Partnership The largest free trade agreement in history is now being pushed through Congress. Although much of it remains a secret, it stands to fundamentally change the laws, economies, and geopolitics of the Pacific.

A

fter nearly a decade in the works, the largest trade deal in history is on track for ratification. Initiated by the Bush administration in 2008, the Trans-Pacific Partnership (TPP) has evolved, largely in secret, into a vast treaty President Obama seeks to make into his crowning achievement.

In addition to lowering trade barriers, the treaty would normalize regulatory statute between member states and serve as an immensely important geopolitical move to combat China’s building of Pacific riches and muscle. Obama’s concerns that “China is trying to write the

rules for trade in the 21st century” carry near Cold War-era weight, adding to the speed and ferociousness with which the lame-duck President has pushed the trade agreement. Now that Congress has fast-tracked the TPP, support and opposition have skyrocketed. Its magnitude and reach has earned it comparisons to NAFTA and led to high expectations for global political change; but these comparisons and expectations are souring. The Trans-Pacific Partnership will not be perfect; it will have winners and losers, as well as plenty of legal trouble.

But the economic and business benefits

of the TPP outweigh the costs.

The Trans-Pacific Partnership began as a humble trade agreement between Chile, New Zealand, Singapore, and Brunei called the Pacific 4 (P4) Agreement in 2006. The Bush Administration signaled its intention to negotiate a free trade agreement with the P4 countries in 2008, and since then the negotiating ranks have swelled to twelve nations: Australia, Peru, Vietnam, Japan, Mexico, Canada, Malaysia as well as the United States and the original four countries. The twelve countries’ have 40% of the world’s GDP and 26% of its trade, making it the world’s largest trade agreement.

This is not to say that the TPP is solely a business pursuit. The United States has been replaced by China as the top trading partner of Japan, Taiwan, South Korea, and Brazil, and as its economic influence subsides so too does its policy and security clout.

Key to Obama’s “pivot to the East” is American Pacific preeminence, which Obama clearly hopes the TPP will secure. Although the TPP is more than an

CORNELL BUSINESS REVIEW | 4

GOVERNMENT

Although the United States’ manufacturing sector is rebounding and low-skill manufacturing has already been largely outsourced, the TPP’s developing countries are accruing the infrastructure and human capital to compete with American high-skill industry. instrument of American hegemony, its clandestine genesis makes separating the trade from the geopolitics difficult.

Despite the TPP’s incredible importance, negotiations have been overwhelmingly secretive. While key businesses have been given partial access to edits of the agreement, most of the public’s knowledge has come through leaks, notably WikiLeaks drafts released in November 2013 and October 2014. The United States’ trade representative Ron Kirk justified the secrecy on “practical” grounds, maintaining negotiators’ need to “preserve negotiating strength and to encourage our partners to be willing to put issues on the table.”

However, as the agreement nears Congressional approval the TPP’s contents are becoming clearer.

The Trans-Pacific Partnership’s first priority is reducing tariffs and other trade barriers. The United States has been lobbying particularly strongly for reductions in agricultural tariffs, such as a Japanese tariff on pork and beef, while offering cuts in American tariffs on automobiles. The United States has proposed significantly fewer tariff cuts than others negotiating countries, but this is largely the result of the United States already having so few trade barriers relative to other countries. The substantial political and trade components, however, are the TPP’s legal implications.

Like all far-reaching agreements, the TPP offers the opportunity for sweeping reforms, but inevitably commits to little substantial change.

Some key laws, such as those governing intellectual property, will be strengthened in member nations, particularly countries with weaker property rights such as Vietnam. The many rules and 5 | CORNELL BUSINESS REVIEW

conditions would build upon the World Trade Organization’s (WTO) legal protections and improve litigious flexibility.

Pharmaceutical and media companies stand to make the greatest gains from these changes. Big Pharma in particular has won some favorable language, with a provision to extend the process of “Evergreening” to other countries.

Evergreening is a patent loophole which allows pharmaceutical companies to renew patents on drugs if they find new uses for them. While profitable for the firms with patents, such rules inhibit mass production of cheaper medicines, causing global health concerns.

Early hopes for greater consistency in regulatory policy concerning the environment, labor, and state-owned enterprises have been humbled as talks have gone on. Particularly worrisome has been the TPP’s environmental impact; if free trade spurs trade and economic activity, without proper policy solutions global resource consumption will grow unsustainably. Unfortunately, leaked drafts suggest few such solutions.

Many environmental laws, such as those preventing illegal logging, are not compulsory for joining the TPP. Such proposals often lack basic mechanisms for enforcement. Similar to many international agreements, the TPP suffers from passiveness. These flaws are not necessarily fatal; there are provisions for amendments to the agreement and the addition of new members, which gives hope that the TPP might someday grow to become a Free Trade Area for the Asia Pacific. However, the legal teeth that the TPP provide have stirred a great deal of controversy.

The strongest critique of the TPP comes from its inclusion of an Inves-

Currently in negotiations

Announced Interest in Joining Potential Future Members

tor-State Dispute Settlement (ISDS), whereby investors can sue foreign governments in international courts for policy changes that hurt profits. In theory, ISDS is a good idea; one need only look at Russia to realize arbitrary foreign government intervention could deter the very investment that a free trade agreement is meant to promote.

But opponents worry it will entangle governments in litigation with powerful multinational corporations. Elizabeth Warren even went so far as to say that ISDS would “undermine U.S. sovereignty.” Needless to say, Warren, Bernie Sanders, and a whole slew of legislators wary of globalization have criticized what could easily turn into a tool for dismantling important environmental and labor regulations. ISDS cases are already on the rise, with 56 in 2013 alone, giving cause for concern that we could see an explosion of litigation.

Such cases are often settled out of court, but the cost to governments is dangerous. However, despite the doom and

GOVERNMENT

Above: As the Trans-Pacific Partnership has seen its membership and influence grow, more countries have expressed interest in joining its ranks. Major regional players, such as India and China, have remained largely silent on the prospect of TPP membership, but even they may follow if the trade pact proves to be as lucrative as its members hope. For those who dream of the TPP flowering into a Free Trade Area for the Asia Pacific, an all-inclusive Pacific free trade agreement, negotiations are off to a great start.

gloom, the TPP still has a fair number of supporters.

Tellingly, the greatest supporters of the Trans-Pacific Partnership are rural. The USDA has gone to tremendous lengths to show how lowered trade barriers will improve agricultural production, and they have a point: many parts of the world cannot compete with America’s capital-intensive farming.

But this has not prevented Democrats from mutinying en mass. Obama has even resorted to a series of local radio interviews to win support for the agreement with the population most likely to benefit from the TPP. However, after all the rhetoric and radio, the perception and success of the TPP is tied to the aftermath of other historic free trade agreements.

The TPP draws many parallels with NAFTA; they both have winners and losers, and they both have components that are less than free. That free trade agreements should be riddled with exceptions is almost a given; in addition

to the rules and regulations already mentioned, the TPP will looks set to leave currency manipulators alone, and state-owned enterprises will never be banned. Of course, the United States benefits from concessions as well: the agricultural industry that benefited tremendously from NAFTA is still subsidized. Also like NAFTA, American manufacturing is the most vulnerable to an agreement. Although the United Like all far-reaching agreements, the TPP offers the opportunity for sweeping reforms, but inevitably commits to little substantial change.

States’ manufacturing sector is rebounding and low-skill manufacturing has already been largely outsourced, the TPP’s developing countries are accruing the infrastructure and human capital to compete with American high-skill industry. General economic gains favor

other countries as well. According to the Brookings Institution, the United States will also benefit less because it already has fewer trade barriers than most countries in negotiations. The countries relaxing tariffs the most tend to see the most economic gains. Nonetheless, comparisons to NAFTA yield the inevitable conclusion that the TPP would lead to more trade; trade between Mexico and the U.S. increased by 506% between 1993 and 2012. The real question is whether we should expect more from a free trade deal.

The Trans-Pacific Partnership is not the agreement that many hoped for, but for a treaty negotiated between twelve vastly different countries, it is about as close as one could expect. Promoting free trade is still a contentious issue but much less so than 21 years ago when NAFTA was ratified. Today the concerns are greater than jobs and investment (both of which seem ready to increase with removed trade barriers), and they have their roots in concerns of the power of governments to care for their citizens. ISDS poses a serious issue, but the beauty of a living document like the TPP is that it does not have to be a grave problem forever. For all the treaty’s flaws, the urgency with which the U.S. is pursuing the TPP is well-founded; we know we cannot afford to watch the rise of Asian trade and Chinese influence from the sidelines. It is time for the nations of the Pacific to open their arms and their markets. Or at least, all except China.

Hunter Bosson is a freshman in the College of Arts & Sciences majoring in Economics.

CORNELL BUSINESS REVIEW | 6

GOVERNMENT

Vertias Non Sequitur:

A Tale of Two Economies Merely 30 years ago, Prime Minister Yasuhiro Nakasone announced his desire to transform Japan into an “unsinkable aircraft carrier”.

Three decades later, Japan cannot plug the holes of that carrier fast enough to keep it from sinking. Is there a lesson the U.S. can take from Japan?

Bull Run to the Brink

1986 marked the onset of the asset price bubble in Japan. The Bank of Japan (BoJ) sought to keep the yen from rising to support its export driven economy through expansionary monetary policy.

Between 1986 and 1987, the BoJ cut the discount rate from 5.00% to 2.50%.

Plunging interest rates encouraged borrowing and capital investments over traditional savings. With easy credit and arcane property tax laws that kept taxes disconnected from valuations, real estate and asset prices entered a phase of hyper-inflation. The bull run, however, was short-lived and ended predictably.

As the valuations soared well above what income levels could support, and new household formations declined sharply due to decades of falling birth rates—demand suddenly vanished and speculations came to an end. The aftermath was ugly; as homeowners surrendered their homes to the banks, banks became stuck with non-performing assets on their books and liquidity dried up.

Sound familiar? In the U.S., the Great Recession was largely the result

tives. Financiers bundled low quality mortgages with high quality ones, issuing new financial instruments such as collateralized debt obligations (CDOs) of dubious quality to unsuspecting investors. Rating agencies were unable to adequately rate such new complex securities. Regulators underestimated the risk associated with such products. With easy money rolling in, banks suspended rigorous checks, doling out mortgages to those who had little ability to pay. When the real economy slowed, banks began foreclosing on their homes, further depressing the housing market. And like Japan, underwater mortgages led to more foreclosures. CDOs became toxic overnight. The banks got stuck with non-performing assets as the liquidity dried up. They stopped lending to each other and the economy nearly grinded to a halt. The only missing ingredient from the Japanese version of this movie is the declining population.

For both countries the burst was preceded by financial deregulation.

Larry Summers, the treasury secretary during the Clinton administration, was

The government has no other choice than to borrow more money to stimulate its economy and support the social security system in Japan. of a similar housing burst. The parallels are striking. Stable growth during the Clinton presidency banished the budget deficit, creating a glut of cash that depressed the interest rates and forced investors to seek higher return alterna7 | CORNELL BUSINESS REVIEW

a strong proponent of self-regulation of banks. The bureaucratic hurdles for any meaningful legislation were also immense, preventing critical policies from being ratified. There was no system in place to stem the degree of speculation

and no system to contain the damages.

Thus, what followed was a series of ad hoc steps by the central bank in absence of any political consensus.

Post-Bubble Economy

In both nations, a banking liquidity crisis followed the crash in the housing market. In Japan, this led to the creation of zombie banks that were full of bad debt. Suffering from a lack of funds, banks could not lend money to businesses. The Japanese government stepped in to recapitalize the banks by borrowing from the BoJ. In the absence of inflation, the BoJ lowered interest rates to near zero levels. Governmental lending to deleverage financial corporations ended with full governmental control and nationalization of four of the largest banks in Japan.

That is exactly what our Fed began doing around eight years ago. In the aftermath of the Great Recession, the U.S. government bailed out AIG and Bear Stearns. Further, under the Trouble Asset Relief Program (TARP), the U.S. Treasury bailed out Fannie Mae, Freddie Mac, General Motors, and Chrysler. As the politics around the bailout became toxic, the Fed took over the process with quantitative easing, buying non-performing loans to recapitalize the banks.

“The Lost Era”?

With large debts on its books, outside investors are reluctant to buy Japanese government bonds. However, the government has no other choice than to borrow more money to stimulate its economy and support the social security system in Japan. The government issues bonds in the open market which are purchased by the BoJ. The BoJ finances such purchases simply by printing money.

Further, in Japan, the combination of a deflating economy and a declining population means that Japan’s own physical security is under threat. With escalating tensions over the Senkaku islands in the South China Sea, it is difficult to see how Japan can defend itself given its declining military size and its

burgeoning national debt.

Expansionary monetary policy through the creation of money in Japan has run into another problem now: negative interest rates for depositors. At this point, it is far more profitable for Japanese citizens to put their money under a mattress than in a bank. Storing money in a mattress leads to Keynes’ “paradox of thrift”—the attempt to increase individual savings freezes up the flow of money and lowers total savings. A lower total savings rate is indicative of a stagnating economy. On the other hand, keeping money in the bank at a negative interest rate also reduces the amount of money people save. With negative interest rates, if there is any anticipation that things will be cheaper tomorrow than today, people will have no incentive to purchase goods today, also reducing the flow of money. Quantitative easing must continue to avert deflation; any austerity at this point will be far more disastrous, yet with aging population and falling birth rates, Japan is caught up in a trap that it cannot break out of.

Currently in the United States, 10,000 baby boomers are easing into retirement each day, while only 10,800 babies are being born. At this rate, in less than 30 years, the U.S. will reach a point at which there is one retiree for every worker—not different from Japan today. To support the current system of Social Security, if the U.S. exercises fiscal policy, the budget deficit growth will only be disastrous. If the U.S. exercises monetary policy in combination with budget deficit, perhaps we will face the same fate as Japan.

Exceptional America

Despite the seemingly matching trajectories of these two disparate economies, there are several determinants that set the U.S. apart from Japan.

The first difference is cultural in how the government and the citizenry responds to a crisis. Evidently, at the beginning of the economic slump, Japan denied any kind of economic decline.

The U.S. on the other hand, recognized the signs of a declining economy and

began efforts to contain economic spillover. Additionally, in terms of assessing risky behavior among citizens, Japanese citizens are more risk-averse than U.S. citizens. For this reason, despite over twenty years of quantitative easing, Japanese citizens still prefer to put their money in the bank rather than investing Two Bubbles

The U.S. and Japanese housing markets and interest rates faced similar bubbles and collapses.

House Prices

200 U.S.

(2000-08)

Japan

(1985-95)

1

11

Years from base date

80

Policy Interest Rates, % 6

U.S.

(2005-08)

-1

0

Japan

(1990-95)

Years from house price peak

+5

0

in capital market. U.S. citizens are less risk-averse and more willing to put their money back in the capital market after signs of economic recovery.

The second difference lies in levels of unemployment. In terms of unemployment, Japan does not have a problem. With a declining population and workers’ ability, the level of unemployment in Japan is quite low. The U.S. labor force by contrast, lags the Japanese workforce in quality and levels of employment. Given its current priorities, the U.S. is unlikely to further invest in its workforce. Thus, American unemployment levels are not likely to improve.

The U.S. also differs from Japan in immigration and foreign investments.

The U.S. has benefitted from immigration and foreign investment, continuing to be a magnet for both. In recent years, with falling birth rates in Mexico and an improving economy, immigration from Mexico has declined drastically. Unless the reduced immigration from Mexico is offset by immigrants from other countries, preferably skilled immigrants, the U.S. may not escape the same trap Japan has fallen into.

Veritas non Sequitur

The United States enjoys two unique advantages: its language, which makes it a destination of choice of skilled immigrants from all over the world, and its openness of culture. Given a choice, a would-be immigrant from China, Russia, India, Brazil or South Africa would much rather come to the U.S. due to its lower language barrier and lower barrier to integration than any other country because of its generally accepting attitude towards foreigners.

If the U.S. economy appears to be resurgent now, it is only due to quantitative easing – the program initiated by the Federal Reserve to purchase toxic debt from financial institutions which injects liquidity into banking directly.

The value of assets on the Federal Reserve Balance Sheet now stands at more than $4 trillion. Quantitative easing, however reaches a point of diminishing return when the supply of liquidity exceeds commercial demand. Japan is at that point, where Bank of Japan is not able to stimulate demand by increasing supply of liquidity. Thus, the U.S. must remember that this resurgence may only be temporary, and find better ways to stimulate demand. America should focus on plugging the holes in its economy by opening its doors to immigrants wider. Without growth in demand, the prospect of Japanese style perpetual stagnation is staring at us directly.

Shohini Kundu is a sophomore in the College of Arts & Sciences majoring in Economics and Computer Science.

CORNELL BUSINESS REVIEW | 8

INDUSTRY

Revolutionizing Luxury The luxury hotel market is on the rise, creating increased competition that will generate a need for luxury hotel companies to refocus their business strategies according to its dynamic market preferences.

Luxury in the Past

Flashback to the United States in the late 19th century, and the term “luxury” might have conjured thoughts such as lavish parties, English-style butlers, and bathtubs. Similar features were provided by select hotels, including New York City’s famous Astor House, one of the first luxury hotels built in the United States. The Astor House catered to a growing class of wealthy individuals during the Gilded Age, when the U.S. economy surged at the fastest rate in history.

John Jacob Astor, the wealthiest individual in the U.S. at the time, built the Astor House in his pursuit to construct a grand hotel in New York’s most fashionable district. The Astor House succeeded in attracting the high society crowd, as it was the first of its kind. Moreover, the hotel housed technological advances of the time—it supplied hot and cold running water to bathing rooms and showers, when even indoor plumbing alone was unheard of. The Astor House’s grand reputation attracted high-profile individuals, namely Abraham Lincoln

and the Prince of Wales.

Other luxury hotels followed soon after the Astor House’s erection. The St. Regis and Waldorf Astoria hotels introduced even more technological innovations, including room temperature regulation. Other luxury hotel innovations helped establish a new era for the elite, such as lavish social gatherings and butler service exclusive to the few who could afford it.

Luxury in the Present: Demand Surge

Back to the 21st century, luxury hotels are quickly responding to a surge in consumer demand. According to Smith Travel Research, the U.S. luxury hotel pipeline in 2015 has increased 25.8%, and luxury hotels under contract have increased 32.2%. International luxury hotels are seeing the same numbers.

The demand for luxury hotels stems from demographic and economic shifts in both the United States and abroad.

The U.S. economy has arguably fully recovered from the 2008 recession, and emerging markets are creating more millionaires. With new emerging

Performance by Hotel Segments 88%

SGD 500 SGD 450 SGD 400

80%

87%

88%

86%

87%

87%

87%

90% 85%

85%

84%

82%

85% 80% 75%

SGD 300

70%

SGD 250 SGD 200

65%

SGD 150

60%

SGD 100

55%

SGD 50 SGD 0

2011 2012 2013 Luxury

2011 2012 2013 Upscale

2011 2012 2013 Mid-Tier

2011 2012 2013 Economy

50%

Occupancy

ADR and RevPar

SGD 350

economies and technological advances making tourism more accessible, people are traveling abroad more than ever.

U.S. Baby Boomers and wealthy international travelers make up majority of the luxury travel market. The Baby Boomer generation is the largest and most affluent age group, making it the most powerful consumer group in the U.S. market. They are known for their youthful attitude, independent nature, and tendency to defy traditional values.

Similarly, international luxury tourism is on the rise. Foreign travelers’ primary motivation is to understand and experience other cultures. Generally, they are most interested in visiting the United States within the next two years.

Asia features the largest growth in international travel. China and India are the top luxury hotel hotspots. Chinese and Indian travelers are forecasted to make up most of the global tourism market, as their countries’ GDPs recently have seen the most growth. Outbound foreign travelers to English-speaking countries tend to consist of younger international professionals who have learned English; older international travelers, not as fluent in English, tend to travel within their home country.

Changing the Definition of Luxury

Baby Boomers and wealthy internationals maintain unique values that differentiate their perspectives of luxury than the wealthy elite of the Gilded Age in the United States. Now, physical goods such as a limousine, the latest iPhone, or a private jet to the Bahamas might easily come to mind at the thought of luxury. However, experience products have become increasingly significant to today’s travelers—how you are viewed by society when you ride in a limousine, the efficiency of the latest iPhone, or relaxation at the sunny, tropical beach to which the private jet would travel.

Future Implications for Luxury Hotels

Luxury hotels will need to reposition themselves according to its current standing and its dynamic consumer market. With the surge of luxury hotels,

INDUSTRY Luxury Hotels Across the Globe St. Regis Bora Bora Offers exclusive island accommodations, complimenting its well-integrated architectural design with bespoke service including its 24-hour butler service.

Armani Hotel Dubai Matches luxury fashion designer Giorgio Armani’s sophisticated Italian style, from zebra wood panels to stone floors.

Ritz Carlton Tokyo Occupies the top nine floors of the tallest skyscraper in Tokyo, which provides a 360-degree panoramic view of Tokyo including Mount Fuji and Tokyo Tower.

The Taj Mahal Palace Mumbai Serves as a grand historic landmark in Mumbai and has served many notable figures including kings, presidents, and princes.

the luxury market will become highly competitive. The rise of Baby Boomers and wealthy internationals will introduce new market preferences. Therefore, hotels will need to develop innovative

products and cater to their new guest segments.

To cater to Baby Boomers, luxury hotels will need to introduce and emphasize their products that center on experience and customization. Baby Boomers’ youthful attitude draws its cohorts to authentic and adventurous travel experiences, while their independent nature attracts them to customization in their travel itinerary. In other words, guests are not spending as much time in the hotel room. Thus, luxury hotel companies should rearrange their priorities; rather than focusing on maintaining the highest quality hotel rooms and amenities, they should develop unique, flexible travel packages and tours. They should additionally work towards implementing technological advances, which was an evident contributor to the success of luxury hotels in the Gilded Age. To successfully market to wealthy international consumers, luxury hotel companies should also craft innovative travel experiences; however, other factors such as the property’s individual location and the foreign consumer’s culture must be considered as well.

Global luxury hotels should particularly look into the Chinese market, the largest portion of international luxury travelers.

As more Chinese people begin to learn English, Chinese tourists will feel more confident exploring and experiencing the destination. Therefore, luxury hotels should focus their business strategies more on the destination’s attractions, rather than on hotel rooms and amenities. Hotel managers will also need to pay attention to the international traveler’s specific cultural and language requirements. Luxury hotels should provide products specific to its target market. For example, package tours, in-room coffee and tea makers, and buffet-breakfasts cater to the Chinese traveler’s needs. These amenities provide a level of comfort for international tourists who are exploring an unfamiliar country.

Shangri-La Hotels, based in Hong Kong, demonstrates the multitude of opportunities in the Chinese market

for luxury travel. Thanks to its business strategy catered to its Chinese target market, the Shangri-La Hotels is the fastest growing luxury brand and widely known as the most popular hotel brand in China. Shangri-La’s expansion has followed its Asia-based consumers’ rising interest in international travel. While most of its hotel inventory is located in China, Shangri-La has expanded outside of Asia with newly developed properties in Europe, the Middle East, and Africa.

The company’s hotels also provide its guests with a “home away from home,” experience, with services such as Mandarin-speaking staff who welcome their guests with hot tea. Shangri-La has even introduced technology into its marketing strategy, which has generated a user-friendly experience for hotel guests.

The company uses a company account on WeChat, a popular mobile messaging platform in Asia, to allow guests to make reservations, check their reservation status, and learn more about the company.

Shangri-La will likely maintain or even increase its high growth rate. Evidently, Shangri-La is quick to adapt its business strategy in a dynamic market, and virtually all its developing hotels will be located in China and India: the two fastest-growing countries in the world.

Taking a Step Back

From the Gilded Age to the 21st century, society’s definition of luxury has gone a long way. Economic forces, demographic shifts, and technological advances have all contributed to changes in market preferences and a growing luxury consumer market. Hotel companies are taking advantage of this surge in demand by building more luxury properties worldwide. However, implications of supply increase include elevated competition, forcing hotels to constantly monitor and alter their services based on societal trends. Luxury hotels that introduce products providing guests with unforgettable travel experiences and cater to the guests’ individual values are likely to succeed in the future.

Paulina Kang is a sophomore in the School of Hotel Administration.

CORNELL BUSINESS REVIEW | 10

INDUSTRY

Is Direct Primary Healthcare Feasible for America?

Beneath Obamacare lies another possible alternative to the healthcare model.

S

upport for other healthcare models has been appearing in the background since the signing of the Patient Protection and Affordable Care Act. As a relatively new healthcare model, Direct Primary Healthcare’s goal is to improve the quality of basic primary care and lower patients’ medical bills. The model is quite simple: patients pay a monthly fee directly to their health care provider for unlimited access to a set of services.

In this regard, insurance companies are virtually removed from the financial relationship of the patient and doctor.

in favor of Direct Primary Care is the greater attention directed towards the patient. Without an insurance company, doctors can spend less time filling out paperwork or checking insurance cards and more time caring for their patients’ health. Doctors typically generate income based on the number of patients they see due to the pay-per-visit setup; however, since doctors are paid over a period of time, DPC puts less emphasis on the quantity of visits and more emphasis on the quality.

Proponents of DPC argue that the overall pairing of DPC with a high Benefits deductible plan will be cheaper than The benefits of direct primary care traditional health almost appear too good to be true. plans. Currently, Number of workingPatients pay a flat monthly rate, similar some health plans age adults who to their monthly cell phone bill, dihave a pay-per-visit needed care but rectly to their doctor to satisfy all their fee represented skipped due to cost basic health care needs. The access to a through copayprimary care doctor includes same-day ments, but DPC appointments, regular checkups, cuts patients would Didn’t visit a doctor and burns, infections, flu shots, skin pay a fixed rate exams, blood tests, and more. of less than $100 This plan is also qualified under per month for Didn’t fill a Section 1301 of the Affordable Care Act: unlimited access prescription “The Secretary of Health and Human to primary care.

Services shall permit a qualified health Direct Doctors plan to provide coverage through a qualInc., a practicing Skipped ified direct primary care medical home direct primary care recommended care plan that meets criteria established by service operating in the Secretary.” This criteria has not been Rhode Island, charges just $10 a month announced yet but because direct prifor children under 21, $50 a month for mary care does not cover major health adults between the ages of 21 and 44, conditions, which are required under and $75 a month for adults between the the “minimum essential health benefits” ages of 45 and 64. outlined in the ACA, the Secretary will According to the IRS, a high most likely require patients to enroll in a deductible health plan has a maximum high-deductible wraparound health plan out of pocket deductible of $12,900 for to cover chronic illnesses and surgeries. a family of four in 2015. Based on the One of the core benefits argued pricing from Direct Doctors Inc., that

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same family would pay roughly $1500 a year for direct primary care. This means that a DPC and high deductible plan would save thousands of dollars annually compared to a $20,000 preferred provider organization (PPO) plan under ACA. There is also the claim that DPC encourages people to go and see their doctors more often when they are sick.

According to a CNNMoney report using Direct Primary Healthcare’s goal is to improve the quality of basic primary care and lower patients’ medical bills. data from the Commonwealth Fund, around 43% of America’s working-age adults in 2012 did not visit a doctor or receive other medical services due to the cost. Not seeing a doctor can worsen an individual’s symptoms and overall health, which may require more expensive medication or serious procedures in the future. One of the goals of DPC is to keep people out of emergency rooms by tending to their basic health needs first.

If doctors and physicians can prevent an illness or injury from worsening, it will save time and resources spent on future care.

Disadvantages

Although the benefits seem great, DPC comes packaged with lingering issues.

Physicians practicing DPC can offer same-day appointments and hold longer visits because they are allowed to see fewer patients under this model. As more Americans obtain health insurance, this poses a potential problem where many people may experience longer wait times just to find an available doctor. As a result, there will be a consistent shortage of physicians available to see their patients at any given time. A 2015 study by the Association of American Medical Colleges predicts a 46,000 to 90,000 shortage of physicians by 2025,

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There is a chance that if DPC succeeds and primary care physicians earn a decent wage, it could help reduce the national physician shortage mandate. It will make trusting an alternative model that has not been fully integrated into the ACA and IRS much more difficult.

Other Concerns

A combination of DPC and a high-deWe have already seen the complications when it came to adopting Obamacare.

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An average American family’s insurance plan has increased in cost annually for over a decade.

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Annual Cost for Family of Four with PPO Coverage

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Looking Ahead

ductible wraparound plan could potentially be cheaper if it ever achieves the scale necessary to make it viable.

However, insurance companies are likely to resist DPC at all levels since it is a threat to their revenue and profit. Obtaining a high deductible plan or some type of insurance product may become more difficult or expensive in the future if there is greater competition between insurance companies and direct primary care plans.

The Secretary of Health and Human

$20,7

which means DPC would exacerbate the growing issue.

In addition, if there is a low supply of physicians coupled with a higher demand for direct primary care and more patients enrolling in the plan, costs will certainly rise. DPC allows people unlimited access to primary care, which means patients will not hesitate before visiting their physician because it does not cost anything extra. Therefore, medical centers need to find ways to cover increasing costs, and one of the most likely methods would be to raise prices.

The less than $100 monthly rate may experience price hikes over the years if demand for DPC grows.

Another concern is how DPC would fare in the industry. Not many people are aware of “concierge medicine”, the generic term for practices such as DPC, and those that are already enrolled in a plan may be reluctant to switch to a much less established health model. We have already seen the complications when it came to adopting Obamacare, which is a government

Services has yet to establish criteria for DPC to be considered as a valid health plan. Even if it were valid, the IRS currently prohibits people with high deductible plans paired with Health Savings Accounts from having a second health plan. Furthermore, direct primary care is not currently considered a “qualified medical expense”, so employees cannot pay their DPC physicians with their HSA funds. In order to avoid the legal implications and extra costs, people may find it simpler to just buy a traditional PPO health plan.

Only a handful of insurance companies have adopted primary care, including Qliance, Michigan Employment Benefits Service (MEBS), Keiser Group, and Medlion. Qliance claims to have saved 20% on its average cost of care compared with traditional health providers.

Despite all of this, if DPC does capture success and doctors are making decent wages, there is a chance that it will attract more primary care physicians, reducing the national physician shortage.

Patients may experience better quality services and even be healthier. The rise in monthly costs may also eventually stabilize and lower people’s medical bills as well, but all of these perks hinge on DPC’s growth.

Ever since the transition to a full implementation of the Affordable Care Act, DPC has not been a prominent government priority. Also, given the current state of fragmentation of DPC plans, there is no central lobbying group for DPC. However, in order for concierge medicine practices such as DPC to be successful, the lingering issues that can inhibit its growth such as increasing costs and legal framework under the ACA need to be ironed out. If it does, there is a chance that DPC can succeed but as of right now, it does not appear quite ready to be administered on a national scale.

Todd Wei is a sophomore in the College of Arts & Sciences majoring in Statistics.

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The Future of Food?

Current agricultural and food consumption practices are unsustainable, and so a new wave of food-technology startups are hoping to reform the way the world eats.

by government expenses from smokers’ healthcare costs and from war, making obesity one of the most expensive manmade burdens that society currently encounters. Not only do individuals considered to be obese cost about 43% more to care for, the reduction in their relative productivity is also estimated to cost the United States economy over $4.3 billion annually. The Journal of Occupational and Environmental Medicine determines this indirect cost of obesity by considering factors such as increased healthcare costs, additional medical claims, absenteeism, common disability and premature death.

Firms such as Monsanto, whose market cap exceeds $56 billion, have found success in developing effective solutions to some current agricultural problems by creating pesticides Hampton Creek Mayonnaise NUTRITION FACTS

Serving Size 1 Tablespoon (14g) Serving Per Container about 32

E

very five years, the United States Department of Agriculture releases a report compiled by the Dietary Guidelines Advisory Committee that establishes the national recommendations that form the basis of our federal nutrition policies. Although these suggestions are likely to be irrelevant and inconsequential to the daily lives of most Americans, this report contains important implications and highlights very serious concerns regarding the current state of food and agriculture in our country, as well as in the world.

The academics and scientists behind this report place a significant amount of importance on the impact that the domestic and global agricultural infrastructure has Monsanto market cap on the environment.

According to Tim Gore of Oxfam, an international organization dedicated to finding solutions for poverty and injustices around the world,

$56b

climate change is actually expected to have the most noticeable effect on our food, the prices of our food, and the availability of the different types of food available. The effects of climate change on future food prices and availability are a result of the current environmentally harmful and unsustainable methods of food production. In fact, the National Academy of Sciences recently reported that the production of livestock accounts for about 20% of greenhouse gas emissions worldwide, leading scientists to conclude that the consumption of meat could be solely accountable for substantial increases in our global temperature and the variety of consequences that would result.

In addition to environmental harm, the report also outlines the public health concern associated with the costs of obesity. Obesity and related health issues like diabetes cost governments around the world over $2 trillion dollars annually, according to a recent publication by McKinsey. That cost is only surpassed

Amount Per Serving Calories 90

Calories from Fat 90

Total Fat 11g Saturated Fat 1g Trans Fat 0g Cholesterol 0mg Sodium 65mg Total Carbohydrate 0g Dietary Fiber 0g Sugars 0g Protein 0g Vitamin A 0% Calcium 0%

%Daily Value 17% 5% 0% 3% 0% 0%

Vitamin C 0% Iron 0%

INGREDIENTS: Non-GMO Expeller-Pressed Canola Oil, Filtered Water, Lemon Juice, White Vinegar, 2% or less of the following: Organic Sugar, Salt, Apple Cider Vinegar, Pea Protein, Spices, Garlic, Modified Food Starch, Beta-Carotene

and genetically modified organisms that increase the efficiency of agricultural production. However, many industrial agricultural companies, including Monsanto, are beginning to face increasing pressure from organizations like People CORNELL BUSINESS REVIEW | 14

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Increasing Demand But Diminishing Workforce 70%

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for the Ethical Treatment of Animals (PETA), the World Wildlife Foundation (WWF), the Organic Consumers Association, and the Union of Concerned Scientists to pursue more ethical and sustainable business practices. All in all, the growing tension between consumers and the enormous businesses responsible for originating the majority of the food produced, along with recent technological advancements, have inspired entrepreneurs and venture capitalists to take a keen interest in disrupting the food industry.

These new start-ups are seeking long-term success in discovering innovative and socially conscious ways to eliminate the burden that food currently has on our environment and on our bodies. Furthermore, when projected population growth, longer life-spans, and the continued development of emerging economies is considered, the need for more efficient processes of producing and delivering food becomes increasingly imperative.

Hampton Creek is a food-technology startup based in San Francisco that aims to understand the science behind plants, nutrition, and our bodies in order to create affordable products that significantly reduce the negative impact created by the current state of food production. For example, modern egg farms, which produce over fifty billion eggs each year in the United States alone, require about thirty-nine calories of external energy to produce one calorie of consumable food for humans.

Meanwhile, Hampton Creek has engineered a process that requires only two calories to create that same calorie of consumable food. Additionally, Hamp15 | CORNELL BUSINESS REVIEW

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ton Creek’s final egg product has no cholesterol or saturated fat, two things that are most negatively associated with the consumption of traditional eggs.

Although Hampton Creek currently offers only two products, a mayonnaise substitute and a cookie dough substitute, they have recently raised over $120 million from leading venture capital firms such as Khosla Ventures and Founders Fund in an effort to expand their team, product offerings, and research and development capabilities. Hampton Creek has also drawn interest from prominent angel investors like Marc Benioff, founder of Salesforce, Jerry Yang, founder of Yahoo, and Eduardo Saverin, a co-founder of Facebook, all of whom presumably see the value in Hampton Creek’s ability to contribute to the solution of our growing nutrition problems.

Another venture-backed food-technology startup is Soylent, which focuses on creating a simpler and more effiHampton Creek is a foodtechnology startup based in San Francisco that aims to understand the science behind plants, nutrition, and our bodies in order to create affordable products. cient source of nutrition in the form of lab-created, powdered meal-replacement shakes. Their goal is to minimize the effort required to receive optimum nutrition, a mission founded on the notion that consumers typically spend far too much time and money trying

to create nutritionally sufficient meals, when what is really needed to sustain life is actually quite simple. A healthy meal can in fact be created in a laboratory with very little environmental effect.

Many “foodies” have criticized Soylent for their utilitarian view of food and for their taking the joy out of an often complex cultural aspect with historical significance. However, their product is undoubtedly a healthy, convenient and environmentally conscious alternative to many of the quick, easy, and often unhealthy meals that tend to be favored by the modern consumer. Soylent’s current product is sold as a subscription, selling at $85 per week for 28 meals. This cost breaks down to merely $3 per meal, making it substantially cheaper than the average lunch at Chipotle and on par with fast food chains such as McDonalds, yet much healthier than either. Therefore, if Soylent were to be adopted by the masses, it would significantly increase the health and productivity of the global workforce, while simultaneously eliminating the environmental woes of modern agribusiness.

Though already profitable, Soylent recently raised over $20 million from Andreesen Horowitz and Index Ventures to advance their pursuit of making nutrition cheaper and more accessible, while also changing the way in which consumers think about the nature and consumption of food, itself.

While it is tough to speculate about the future of either of these companies, the problems to which they can help contribute solutions are undoubtedly colossal in nature. And although it may be difficult to envision Hampton Creek’s plant-based products or Soylent’s meal-replacement shakes being the way in which society receives its vital nutrients, the pursuits of these start-ups seem to be, at the very least, a necessary start to push the sustainable production and consumption of food in the right direction.

Reed Boehringer is a junior in the School of Industrial & Labor Relations.

COVER

Empires of the Sun Expensive Investments, Cheap Oil, and the Future of Solar Power

By Andrew Billiter

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n 2007, in response to widespread discontent over Apple’s refusal to divulge any details about the company’s carbon footprint, Steve Jobs penned a letter promising greater transparency and a shift to more sustainable practices across the corporation. In the years since, Apple has rapidly transitioned from dragging its feet on environmentalism to leading the pack in sustainability efforts, with strict energy usage guidelines, data centers entirely powered by renewable energy, and the removal of toxic materials from its products. Even with this impressive pedigree, the tech giant’s announcement in February of the largest private investment in solar power in history was unprecedented in its scope and ambition.

Spearheaded by CEO Tim Cook, Apple finalized a contract to purchase $850 million of solar energy from the Arizona-based company First Solar. Out of this agreement, Apple will receive 130 megawatts of power, tripling its current solar intake and providing enough renewable energy to power all of its stores and offices in California. Just two weeks after Apple’s statement, Google announced a $300 million investment in Solar City—more than doubling its previous investment of $280 million—to help subsidize residential solar panel projects. While some might cynically view these twin investments as just efforts to cash in on a lucrative tax credit, the moves

by Apple and Google are just the latest indicators of

a trend that energy analysts have been tracking for years: solar power, once the single most expensive source of renewable energy in the world, has become increasingly better, cheaper, and profitable.

The Cost of Sunshine

For an energy source that draws its power from the most constant and reliable source imaginable, solar power has historically been wildly expensive, but in recent years the cost of solar has dropped dramatically.

The price of solar plummeted a stunning 90% from 2006 to 2012, its meteoric descent captured in a graph which AllianceBernstein analysts Michael Parker and Flora Chang have dubbed “the Terrordome”.

Where it was once patently unaffordable, solar power is now poised to become the cheapest source of renewable energy as well as achieve price parity with conventional energy sources like coal and natural gas. Unlike its competitors, solar power is purely a technology, not a resource. As such, the cost of solar drops as the underlying technology matures, and the issues that traditionally hounded the solar industry, such as inefficient solar panels and high production costs, have been improved through years of research and development. While extracting various sources of fossil fuels, such as shale oil, have also been made affordable through technological development, they are still a finite resource and thus subject to the

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vagaries of supply and demand. And while solar panels are themselves dependent upon a natural resource, polycrystalline silicon, the raw silicon from which it is produced is, by mass, the eighth most common element in the universe.

The availability of solar power is thus limited by just the number and efficiency of solar panels; its cost, therefore, is completely reflective of the development of the underlying technology. Solar panels in 2000 achieved a conversion efficiency of 11%, while the comparable figure today is roughly 20% and is projected to grow at an average rate of 0.3% per year.

Manufacturing costs for solar panels have also diminished as supply chains have been made more efficient and the cost of inputs such as silicon have decreased. Even so, the biggest impediment to large-scale adoption of solar panel has historically been very high up-front costs of purchase and installation.

Even so, the biggest impediment to large-scale adoption of solar panel has historically been the very high up-front costs of purchase and installation. To avoid these issues, Google’s investment will subsidize the installation on individual New Generating Capacity of Energy Source by Year Other Wind

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homes in return for maintaining ownership of the panels and collecting a monthly rent. Google’s expanded presence in the market could encourage further investment by firms and banks, providing attractive financing to offset the steep initial capital requirements.

Additionally, there are large tax benefits in place for investing in solar energy. Currently, there is a 30% solar investment tax credit (ITC) from the federal government; however, this is slated to expire in 2016. Energy analysts at Deutsche Bank have projected that, with the current subsidy in place, solar power will achieve grid parity (in other words, be at least as cheap as competing energy sources) in 47 states by the end of next year. While it is unlikely that the credit will be renewed by the current Republican-controlled Congress, even if the credit drops to pre-extension levels of 10%, the same Deutsche Bank analysis concluded that solar will still achieve grid parity in 36 states.

The End of Oil?

The recent crash in oil prices has led to renewed scrutiny of the future of renewable energy, and has led some to question whether the return of cheap oil will undo the gains made in sustainable energy. While a long-term plunge in oil prices is desirable to many, the unavoidable fact is that the current plunge will eventually be reversed. As the United States quietly became the world’s largest oil producer, its need for oil imports dropped significantly and left crude oil exporters with their characteristically huge supply and newly shrinking demand.

The supply shock that followed sent prices plummeting, but OPEC’s decision, led

by Saudi Arabia, to maintain existing

output levels rather than give up market share allowed prices to continue to fall. In turn, American producers have curtailed or even suspended operations, but even so, American oil stockpiles have nearly reached maximum storage capacity.

Even if the ongoing oil crash was permanent, it’s important to realize that oil and solar do not quite compete in the same market. Oil cannot be used to effectively power cities, but electricity can be used to power cars, and, now that its effectiveness has been proven, solar is increasingly becoming an attractive energy source, whether to supply an urban power grid or an electric vehicle charging station. With the present rates of adoption and investment in solar power, oil, no matter how cheap it may be, cannot kill or even blunt its momentum. Moreover, the greatest existential threat to the American solar industry didn’t come out of an OPEC refinery, but rather from solar panel factories in China. Bolstered by immense subsidies from the Chinese government, manufacturers flooded the market with solar panels sold at rock-bottom prices below the cost of manufacturing, undercutting American manufacturers and contributing to the spectacular failure of the government-subsidized solar company Solyndra in 2011. In the ensuing

SOLAR POWER AT CORNELL

Left: A Googlefunded Solar City project. The two companies have partnered in a $750 milliion deal to bring solar energy to homes across the United States.

trade war, the Department of Commerce began imposing tariffs on Chinese panels, culminating with the imposition of additional anti-dumping and antisubsidy duties on Chinese panels in December 2014, as well as anti-dumping duties on Taiwanese panels. Protected from the threat of foreign undercutting, the American solar industry remained competitive and continues to grow at historic rates.

An Industry’s Future

According to projections by the International Energy Agency, by 2050 solar could be the dominant single source of energy on Earth, providing up to 27% of the world’s electricity. However, IEA Executive Director Maria van der Hoeven acknowledged in the same report that solar power is “very capital intensive: almost all expenditures are made upfront [and] lowering the cost of capital is thus of primary importance for achieving the vision in these roadmaps.”

The bright future of solar power depends on the cooperation of governments and businesses maintaining policies favorable to the industry, and current or similar incentives need to be kept in place in order to fully realize solar’s potential.

The existing trend, though, bends in

the direction of support for the solar industry, through capital investment, such as Google’s move with Solar City, or the increasing adoption of solar arrays as meaningful sources of power.

Looking at the industry as a whole, thanks to increased efficiency and lower up front costs, investment in solar has increased as the energy savings, pollution reduction, and overall ROI are deemed increasingly attractive and cost-effective.

Apple and Google realized the potential of solar power and made investments that were unprecedented, even by the high existing standards set by these leaders of corporate sustainability. While other companies may not have the resources to make large-scale investments in solar power, the moves by Apple and Google set an example showing the attractiveness of solar power: renewable energy isn’t just responsible business anymore—it’s good business overall. Apple and Google may have been among the first movers in the new solar environment, but the industry’s continued maturation will draw increased investment and adoption and will come out of the fringes of the energy market and be cemented as a mainstream source of energy in the future.

Cornell has also jumped on the solar bandwagon, albeit gradually.

Under President David Skorton, the existing solar infrastructure at Cornell has been expanded to provide 1% of all university power since the completion of the Snyder Road Solar Farm in Lansing last September.

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Additionally, according to Cornell’s Sustainable Campus website, “Under current regulatory limits, Cornell has the capacity to utilize the electricity from 3 to 5 additional remote-netmetered renewable energy projects,” which would account for at least 6% of the University’s electricity supply if all are utilized.

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andrew Billiter is a sophomore in the Dyson School of applied Economics and Management.

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Entrepreneurship Spotlight

Wool&Prince

Mac Bishop’s quest to create a brand of men’s fashion around wool.

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ac Bishop is the founder of Wool&Prince, an online menswear brand that makes wool button-downs that naturally resists odors and wrinkles while being 6 times more durable than cotton. Mac grew up in Portland, Oregon and graduated from Cornell University’s Dyson School of Applied Economics and Management in 2011. He began developing Wool&Prince after Cornell and initially raised funding through a Kickstarter campaign when he wore a wool shirt for 100 days to prove its efficacy. Mac currently works from the Brooklyn Fashion + Design Accelerator, where he is continuing to build the Wool&Prince brand.

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What was your inspiration for the “NoWash Shirt”? Did you consider how this product could help those without the resources to have a large professional wardrobe?

Mac Bishop: With the initial Kickstarter campaign, wearing the wool shirt for 100 days straight without washing was definitely gimmicky, but it got the attention an entrepreneur can only dream about. I prefer to call it the Better Button-Down because, believe it or not, you do have to wash the shirt eventually.

In terms of people without the resources to have a larger professional wardrobe, I was not really thinking about that because the shirt is priced at $128. If someone wants to go to Costco, he can probably buy five button-downs for the price of one of our Better ButtonDowns. The way I think about it is that we are selling a high quality shirt. If you buy one of our shirts, you don’t have to buy the two, three, or four other shirts that you would have had to buy. From an environmental standpoint, this is a big plus.

If you are looking to simplify your wardrobe, live a more minimalist lifestyle, and look good while at it, our shirts are the perfect option. You look in a guy’s closet – even my closet before I started Wool&Prince – and see ten, fifteen, twenty button-down shirts. But now, I have four or five button-downs. I don’t even own all of the Wool&Prince shirts. Having less stuff is a liberating feeling.

There is generally a lot of materialism and overconsumption in the U.S. I like the idea that someone who buys one of our shirts knows it will last him a lifetime, instead of buying five cheap button-downs that will fall apart and wear down after a year or two.

In terms of fashion, as opposed to convenience, what are some reasons why someone would prefer to wear the same shirt for 100 days?

MB: When I was wearing the same shirt for 100 days in a row, it kind of just became a uniform. I really liked the simplicity of it. Friends joked, “Hey man, nice shirt. Haven’t seen that one before” If you look at Steve Jobs, for example, he had his “uniform” – a black turtleneck and blue jeans. I have read a couple of articles about it: perhaps he had so many decisions to make, he didn’t necessarily want to make a fashion decision everyday, or it was about creating a distinct personal brand.

How did you come up with the name “Wool&Prince”?

MB: After Cornell, I worked at Unilever in their shopper-marketing department.

I was not too happy there and was constantly brainstorming business ideas.

I always kept going back to the idea of making the wool shirt cool again. I knew that wool shirts performed well, but they didn’t have the market share they deserved. So I knew that the company had to be built around wool itself.

As for the name, 30 Rock’s Season 5 finale gave me the initial idea to play with a tongue-in- cheek logo/ name/tagline. In the episode, Jenna was selected as the celebrity face of wool by the Wool Counsel—a stiff, conservative group marketing wool (not a real organization). The organization imposed a “morality clause” on Jenna, and I really liked how they played with the heritage and elitism of wool. I thought a little humor could be a good way to break the stigmas of wool (itchy, grandma’s sweater, etc). From there, I started toying with royal terminology as inspiration, “Prince and Wool,” “Wool King,” amongst others before I settled on Wool&Prince.

Wool&Prince’s Kickstarter campaign back in May of 2013 had a goal of $30,000 but ended up with 2,354 backers and $314,241. Why did you originally

choose to use Kickstarter for funding, and what do you think contributed to the success?

MB: Kickstarter was really just a way to validate the idea of a wool shirt that looked and felt like cotton, but performed like wool. The media loved the 100 day shirt concept and the story went viral. Jay Leno and David Letterman even gave us shout out.

Pendleton Woolen Mills is a sixgeneration privately owned textilemanufacturing company owned by your family. Pendleton also controls about 85% of the American wool button-down market. How did your family business inspire you to start Wool&Prince?

What is the relationship between the two companies (i.e. Is the wool from Wool&Prince’s shirt from Pendleton)?

MB: Good question. The shirt that I wore for 100 days is actually a Pendleton shirt. I started wearing that shirt with the idea that Pendleton would help me weave fabric. I met with my dad, his cousin, and the head of sales, and pitched my 100 day shirt idea and that I saw potential in the wool shirt market for a more contemporary, slim-fitting, business casual shirt.

Pendleton’s minimums were too high, but they suggested that I talk to Pendleton’s overseas resource to get connected with a factory in Asia.

Wool&Prince operates independently of Pendleton. That being said, I am essentially competing with my family business, which is really not the long-term goal. I hope Pendleton and Wool&Prince can be more involved down the road.

Wool&Prince has a group of men around the world who wear the shirts to test the no-wrinkle, no-odor properties.

How are these “Field Testers” selected?

MB: For the Kickstarter, I got 10-15 guys to wear various wool shirts that were already on the market, whether it was a Pendleton shirt or a vintage shirt I found from a thrift shop, just to get

their insights and feedback. The results were positive with that initial “Tester” concept. I really liked that concept as a branding and messaging platform for Wool&Prince.

In terms of selecting the guys, our initial “Testers” and what you see on the website today, are a mix of friends and friends of friends. Eventually I would like customers of Wool&Prince and people I don’t personally know to be Field Testers. This is our strategy to build user generated content on Instagram and Facebook.

How did you come up with the idea of Wool Peddlers– the pop-up tricycle shop?

MB: I wanted to experiment with having a physical location somewhere, so I thought that the concept for a Wool&Prince Pop-Up Shop was something that I could test the retail market with. Having a physical store is like having a kid in terms of the responsibility – I don’t want either right now! Naturally, a mobile (rolling) shop made sense, something that didn’t always have to be open.

We just participated in a holiday market in New York City and are currently looking for a store to house Wool Peddler as a merchandising fixture.

What advice could you give to students trying to move from the idea stage to developing a viable business plan?

A concept that really stuck with me is called minimum viable product (MVP), as described in Eric Ries’ book “The Lean Startup”. You basically want to validate your idea as quickly and inexpensively as possible. I think that concept resonated with me because I was on a shoestring budget while starting Wool&Prince.

People spend too much time in the idea stage and begin to lose interest.

My advice is to jump in and start doing.

It seems simple, but it is not. Don’t be afraid to try things; you’ll get better and learn from your mistakes.

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Entrepreneurship Spotlight

FloraPulse

A product that will revolutionize plant research and vineyards.

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ichael Santiago is on the executive team for FloraPulse - a water-stress sensor that measures how thirsty plants are to make better quality wine. Michael grew up in Puerto Rico and is currently a Mechanical Engineering PhD student at Cornell.

His team won first place in the Spring 2015 Johnson Shark Tank competition and is working to commercialize the product and revolutionize the agricultural industry.

What was your main reason for doing graduate work at Cornell? Were you drawn to the many resources offered for entrepreneurial students?

Michael Santiago: When I came to Cornell, I had no idea about entrepreneurship or even what the word meant. I came here because Cornell has lot of resources for research. I’ve had amazing advisors here. Then over time, I discovered the entrepreneurship side of Cornell.

How did the idea for the FloraPulse water-stress sensor originate?

MS: It is a long, but fun story. My advisor Professor Abraham Stroock was interested in the properties of water. He came up with this idea to make a sensor to study the properties of water under tension, imagine water molecules stretched like a spring. And then through serendipity, he met up with Professor Alan Lakso who works in viticulture and horticulture at Cornell.

They figured out that the same sensor could be used to measure the water stress in plants. In other words, how thirsty a plant is. Seven years later we are finally close to getting data in plants.

What is the biggest challenge you have experienced with developing these sensors and how did you overcome it?

MS: The biggest challenge was working on technology that I was very unfamiliar with. The sensor was built using silicon microfabrication technology.

Our group had little experience with

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microfabrication. So we were expected to make new technology using things we didn’t really understand. In order to work on it, I would just read and read and read and ask a lot of questions.

What Picasso said is true: “good artists copy, great artists steal,” you find what other people have done and then build up from that.

Can you speak about your experience with the Johnson Shark Tank event and how you believe FloraPulse differentiated itself from the other companies?

MS: The Johnson Shark Tank event was very fun. It was my first pitch event. I looked at it as an opportunity to develop the idea and get some feedback to see if we were on the right track. Since I am not a business major, we really needed to prove ourselves and give a good first impression.

There were a lot of good teams and strong competition, but what I think

Above: Laboratory prototype of the water-stress sensor. The sensor’s front end fits in the plant’s vascular system, providing a direct connection to the plant’s pulse and measuring how much water it needs.

made the difference was the sheer amount of effort we put into it. We made sure to find and practice what the best people do, copy that, and make it ours.

We looked at the best pitches and best slides and emulated those to give us the extra edge.

Aside from the $1,500 grant you won from the Johnson Shark Tank event, what avenues of funding have you been exploring?

MS: Right now the sensor itself is a research project so we are funded by the U.S. Department of Agriculture because this technology can really be helpful to save water and improve quality in crops. Once we go commercial, we will need to find other avenues of funding.

That is why we are pitching and talking to people to hopefully obtain seed investments in the future.

As FloraPulse’s commercial product launches by the end of 2015, what will be your main target market (any specific vineyards, farmers, locations, etc.)?

MS: The first market, a crucial market but one we are not going to make much money in, is the plant research community. They have never had a tool able to measure water stress in plants in this way so they are very excited about this. We will likely make little money selling to them, but it will instead be a way for us to test the sensors as part of the development of the product.

The first commercial market is vineyards in Napa Valley. These vineyards are the most open to new technology, whereas if you go to older wine regions like France and Italy, they will be more hesitant.

In terms of particular Vineyards, we have talked to a few companies. One of

them is E & J Gallo Winery, the world’s largest wine producer. They would be one of the first to try it. Gallo comes to Cornell every year to hire food science majors and a few chemical engineers so we definitely have some good connections because of Professor Lakso.

Given that California is the most important agricultural state, and is currently in its fourth year of drought, how do you foresee FloraPulse making an impact there and in future drought crises? Do you see FloraPulse having large social implications?

MS: Right now, it is totally speculative.

We believe we will be able to help out a good bit, especially as water gets more expensive and scarcer. The idea currently is that people have been wasting water and that is partly because it is cheap and partly because the technology is not quite there.

Water scarcity is a big problem so the solution will be a combination of technologies and policies. We believe our sensor will be an important key to solving this issue. The way it would work is through deficit irrigation: irrigating just enough to get more produce per unit water used.

We cannot imagine the amount of time and energy invested in creating and commercializing FloraPulse. Because there is no other product on the market quite like FloraPulse, how do you begin to strategize the pricing point of the product?

MS: We are working on it; it is always a work in progress. There are two ways you can look at it: bottom-up and topdown. With bottom-up, you evaluate how much it costs and then charge a little bit more. I think the smarter way to look at pricing is how much value you produce for your customers through the top-down approach.

What we are looking at right now is how much more revenue vineyards would make by using these sensors and then we take a cut from that.

For example, in a good vintage year vineyards will make about 25% more

revenue. We believe our technology will help vineyards fine-tune about 50% of a good vintage year. If they make an extra $3,000 per acre with our technology, we can charge about $500 per acre - for now.

As we enter into other markets, we hope to push down the price when the triedand-true MEMS (Micro-Electronic Mechanical Systems) technology becomes more mature.

What is your ultimate goal with FloraPulse? For instance, do you plan on selling the company, licensing the technology, expanding into related fields, etc.?

That is a really good and tough question.

Right now, we are really focused on getting the sensor out there. I think the ideal case is that we would work on

entrepreneurship, such as eLab mentors and a few other people who have succeeded. It is very challenging to go back to that humble beginning because we are students at a good institution and have degrees so we think we can do anything, and we can! But it takes some time.

What advice would you give to student entrepreneurs who are looking to collaborate with, or get advice from professors?

MS: That is a hard question but I think there is a repeatable formula. The way it works is that people who are successful (people you want as mentors) want to help but they want to help someone who is going to be successful anyways. What you have to do to get really good people

What Picasso said is true: “Good artists copy, great artists steal,” you find what other people have done and then build up from that.

this for a few years and really get the technology out there. Once everything has matured, maybe we will get more experienced people running FloraPulse.

I am still learning about all these things, and I am still making up my mind on this.

What was the hardest part of turning your invention into a business, and what advice would you give to students coming from a non-business background who are looking to commercialize their innovations?

MS: Good question. There are things you know, things that you know you don’t know, and things that you don’t know that you don’t know, and those are the things that can really destroy your chance.

I would advise against being overconfident in a new field and just to go at things with a very humble spirit.

That is what we are trying to do. That is also why we have decided to work with people who have experience in

to work with you is demonstrate that you have what it takes and that you are working really hard.

What I do when I work with these guys is I come up with as much good information as I can by myself and then ask them for a few things. A week or two later, I come back to them and tell them how I took their advice. They want to see that their advice is used well and that you produce a lot of value out of that.

What is one thing you learned through the development of FloraPulse that you wish you knew as an undergraduate student?

MS: What I have learned through FloraPulse, and also just through graduate school, is how many resources we have available – it is insane! We have all the resources available online, but also in person; people are always willing to help. You may think it is a dog-eat-dog world and people are out to get you, but there is a surprising number of people who are very excited to help out.

22

FINANCE

Who Did Well When Oil Tanked?

Oil’s collapse caught many by surprise, but has also created numerous opportunities.

N

avigating the financial markets is all about predicting the future.

Yet very few of the brightest minds in finance foresaw the precipitous crash in oil prices that began late last year.

Not even Carl Icahn, one of the most respected fund managers in history. He entered the fourth quarter of 2014 riding big bets on energy companies such as Transocean, an offshore drilling contractor, and Chesapeake Energy and Talisman, both oil and natural gas producers.

When the price of crude tumbled, Icahn Enterprises lost $478 million in the final quarter of the year, resulting in an annual loss of $221 million, according to Forbes. This was the first down year for Carl Icahn since the financial crisis.

But there were winners. Brown graduate Zach Schreiber’s PointState Capital made $1 billion from betting against oil, and managed to return 27% after fees in 2014, a year in which the average hedge fund returned 2%.

For decades, the supply and demand infrastructure of the world oil markets was almost entirely dictated by the international oil cartel OPEC. On November 27, 2014, OPEC announced it would not institute a supply cut, turning a steady decline in oil prices into a rout.

At the same time, American producers were flooding the world oil market, too.

It was expected that OPEC would cut supply to arrest the slide, as had always been the case in the organization’s history. The decision not to had a devastating impact on American energy producers, who are burdened with high amounts of debt, and decreasing demand for their services. According to Reuters, there were $72 billion in leveraged loans outstanding in the U.S. for energy companies at the end of October.

23 | CORNELL BUSINESS REVIEW

Speculators are drawn to the oil market because oil prices are very volatile: relatively small shifts in supply and demand have dramatic effects on price. Zach Schreiber’s bet against oil was motivated by his belief that oil producers in the central U.S. region would keep building supplies, thus leading to a collapse in price, Bloomberg reports.

Stanley Druckenmiller’s former star trader made a bet just as profitable as his mentor’s British pound trade.

But now many investors see oil as an opportunity. Cornell graduate Seth Klarman ’79 is the CEO of The Baupost Group and provided the lead gift for the construction of Klarman Hall, a new humanities building attached to Goldwin Smith Hall. His Boston-based series of investment partnerships (he prefers not to use the term hedge fund) are known for investing only when they find a bargain. According to Bloomberg, cash accounted for 40% of Baupost’s portfolio at the end of 2013. In 2014, Klarman found bargains, and they were in the energy industry. In his annual letter to investors, Klarman wrote, “Baupost wasted no time in redirecting additional investment team members into the energy area to sift through the carnage.” According to Bloomberg, Klarman invested further into companies including Cheniere Energy Inc. and Antero Resources Corp.

Private equity firms, or firms Carl Icahn

which purchase companies in leveraged buyouts, struggled in the immediate aftermath of oil’s collapse. When oil was expensive, private equity firms wanted to benefit from the American shale boom, and according to Joel Moser of Aquamarine Investment Partners, a firm that has invested in the sector for decades, “[All] sorts of folks who would never have dreamed of oil and gas piled in, often loading companies with debt.”

According to The Economist, Carlyle Group’s earnings were negatively impacted by its stake in SandRidge Energy, “a debt-laden oil-and-gas exploration company, which lost 58% of its value over the quarter and has just announced that it is mothballing most of its drilling rigs.”

Investment bankers who earned enormous fees from helping companies raise debt are now earning fees helping firms restructure their debt. In an interview on Bloomberg Television, Blackstone Group’s restructuring head Tim Coleman said, “We’re probably looking at 80 names that are, in some form or another, struggling. We have a lot of new assignments, both on the debtor side and on the creditor side.”

In addition, private equity firms see opportunities to use their own money in the energy sector. Blackstone’s CEO and founder Stephen Schwarzman said in December that the collapse in energy would be a “wonderful, wonderful opportunity for us.” In fact, Blackstone is raising its first energy-focused credit fund, hoping to capitalize on some opportunities that arose from the steep drop in asset prices. Blackstone plans that the fund will grow to between $2.5 and $3 billion. The fund hopes to invest in liquid distressed securities across the energy sector.

Icahn Enterprises Final quarter loss

$487m Annual loss

$221m

PointState Capital makes

$1b

Returns 27% after fees.

Zach Schreiber

FINANCE

The art of investing is finding value that other investors cannot see.

By launching credit funds and private equity funds, firms like Blackstone seem to signal that they have an insight about the recovery of the energy sector that others do not understand. However, oil continues to be under pressure because of continued supply and a strong dollar; oil is priced in dollars, so when the dollar rises, oil becomes more expen-

sive for non-dollar buyers. If the dollar continues to appreciate, the oil trade will become even trickier.

Mark Vaselkiv, who manages T. Rowe Price’s nearly $10 billion high yield fund, believes that “we are probably only in the second inning of this correction. We don’t see prices getting back to where they were a year ago.”

Mr. Vaselkiv believes the progression of the boom in the American oil industry

Restructuring Wall Street Mergers have created big banks that are systemically riskier, which following the financial crash, are becoming unprofitable due to the work of regulators.

T

he by-product of nearly 1200 mergers, JPMorgan Chase & Co. is in the business of expansion. In 2000, J.P. Morgan & Co. merged with the Chase Manhattan Corp and later with Bank One in 2004, thus creating an industry behemoth with tentacles spread across all sectors of investment and retail banking. In an era before the repeal of the Glass Steagall Act, a bank of this size and market exposure would be inconceivable. This trend of financial consolidation, however, culminated in the financial crisis of 2008 when giants such as Bear Stearns, Lehman Brothers, and AIG came tumbling down. Seven years later, the questions remain: in a future banking crisis, is J.P. Morgan too big to fail or too big to bail? Does size matter

to the investors or the Federal Reserve?

According to a recent report from Goldman Sachs, J.P. Morgan could be worth up to 25% more if split up. The proposal would take the firm in its current state and create a “New Chase According to a recent report from Goldman Sachs, J.P. Morgan could be worth up to 25% more if split up.

Bank” for its consumer banking transactions and maintain a separate investment banking function. New Chase would command $650 billion in assets, a fraction of the immense balance sheet of $2.6 trillion assets that J.P. Morgan currently controls. This hypothetical New

followed Warren Buffett’s idea of “innovators, imitators, and incompetents” sequence. With money flowing into the sector once again, it will be interesting to see who the real innovators are.

Ethan coy is a sophomore in the Dyson School of applied Economics and Management.

Chase could conceivably be valued at $100 billion based on capital projections and the performance of industry rivals, such as Wells Fargo.

Despite recent debate over the size and stability of J.P. Morgan, CEO Jamie Dimon remains resolute that the current model is working. The fundamental theory that has spurred relentless consolidation in the financial industry is the notion that as firms grow, new lines of business and markets grow, creating opportunities to cross-sell products and serve clients for all their financial needs.

“The synergies are huge, both expense and revenue synergies and some, not all, disappear on the various schematics of a break-up,” said Dimon. These “synergies,” however, are largely a product of separate transactions within the investment bank and commercial bank according to Goldman analyst Richard Ramsden and therefore do not require the union of these two business practices in order to experience success.

But the real question remains: whose problem will it be if the principle of “too big to fail” fails again?

Certainly not Jamie Dimon’s, who in the case of a J.P. Morgan bankruptcy would most likely join the ranks of the Lehman Brothers top executive team that escaped their company’s complete meltdown rather unscathed. Dick Fuld, the former CEO of Lehman, who has been called the “most hated man in America”, would be the first to speak to the hardships, legal battles, and lost billion-dollar fortune he experienced following Congress’s public vilification from his $19 million compound in Sun

CORNELL BUSINESS REVIEW | 24

Valley, Idaho. No, if J.P. Morgan were to fail, it would be the American taxpayers who would pay the price for the company’s failure. Through loss of jobs, a possible bail-out, and forfeiture of financial stability, the people that would truly be affected by another “too big to fail” failure, as the United States saw in 2008, currently have no say in the debate that may shape the American economy for years to come.

In 2008, J.P. Morgan stood as one of the healthiest institutions during the financial crisis. The company participated in the Troubled Asset Relief Program (TARP) at the request of the Secretary of the Treasury because it had agreed to acquire Bear Stearns and that company’s toxic mortgage-backed securities. In the wake of this meltdown, Congress passed numerous policies in the form of the Dodd-Frank Act in order to more strongly regulate the financial sector to compensate for the weak regulatory environment pre-2008. A main tenet of this program is the efforts of the Federal Reserve to increase the amount of capital held at big banks in order to offset risky transactions and liabilities. Under a newly proposed regulation, J.P. Morgan and other similar-sized banks will need to meet an 11.5% ratio between core equity capital to total risk-weighted assets. Thus, J.P. Morgan’s book-value will be negatively impacted by this new change because the increased level of capital requirements will diminish J.P. Morgan’s ability to earn greater return.

This issue does not solely apply

profitability of banking roughly in half.”

Recent actions within the industry have supported Geithner’s claim—shrinking bonuses, revenue growth stagnation, and risky trading, and billions of dollars in legal settlements have negatively impacted financial conglomerate’s profits.

For instance, Morgan Stanley recently paid $2.6 billion as a settlement over their risky trades involving mortgages.

And, this is just the beginning. Attorney General Eric Holder has imposed a new deadline on the Justice Department to come up with new civil or criminal prosecutions against Wall Street for risky sales of mortgage-backed securities in the years leading up to the financial crisis.

The profitability of many firms before the financial crisis were the result of risky trades that increased leverage while maximizing returns. In 2006, the value of 41% of assets increased from trading in the nation’s leading banks, but according to the International Monetary Fund in 2013 this number has shrunk to 21%. Therefore, regulators have fundamentally changed how Wall Street is run. Mike Mayo, a proponent for the J.P. Morgan break-up, argues, “You are hard-wiring a change into the banking industry. When we look back 10 years from now, we are going to say the biggest impact was from capital rules.”

The J.P. Morgan debate has emerged because of its underlying problem of defining what exactly is the purpose of a well-run bank. Are banks solely driven by profits? Jobs? Or should there

Seven years later, the questions remain: in a future banking crisis, is J.P. Morgan too big to fail or too big to bail?

to J.P. Morgan, but rather the entire financial industry. The new limitations on banks in a post-crash world “have substantially reduced the amount of risk they can take,” according to former Treasury secretary Timothy Geithner, who went on to add that the Dodd-Frank measures have “cut the 25 | CORNELL BUSINESS REVIEW

be consideration for mitigating systematic risks to the public and investors?

Following the 2008 financial crisis, it would seem that the latter objective has been emphasized through the work of regulators, however, if profitability still remains a driving force for banks, why is upper management and the Board of

Directors clinging to this large model despite opportunities to unlock hidden potential in a smaller structure?

Despite disappointing fourth quarter earnings, billion dollar settlements with foreign-exchange regulators, and systemic long-term issues dealing with the mortgages inherited from the Bear Stearns deal, Dimon remains convinced that banks like J.P. Morgan should continue to operate on a global scale. Where once there was specialty in the finance industry, J.P. Morgan has co-opted the Wal-Mart business strategy, where bigger is better and quality seems to be of little concern. And that’s where the real risk comes from in a bank of this size; this lack of supervision and coordination creates opportunities for risky deals and potential losses.

Change is coming to Wall Street.

This change started the moment Bear Stearns declared bankruptcy in March of 2008 and will most likely culminate in the path that J.P. Morgan will take moving forward in 2015. Wall Street has stagnated since the crash. The desire to keep banks in check and hold them responsible for the risky practices that led to a taxpayer bailout of the nation’s richest institutions has driven regulators and even Wall Street titans like Sandy Weill, former CEO of Citigroup, to call for the end of the “too big to fail era”. The division of J.P. Morgan into smaller and simpler units would not only increase returns, but also unleash new jobs and reduce systemic risks to the economy.

It’s unclear if J.P. Morgan, in its current ever-expanding mode, will ultimately be the victim of its own unsustainable growth. Unfortunately, like the shock wave that hit that the American economy in March 2008, we won’t know the true scope of the damage inflicted by a J.P. Morgan implosion until it actually occurs.

Emma Nelson is a sophomore studying Economics with a minor in Mathematics in the College of Arts and Sciences.

INTERNATIONAL

Any Hope for Afghanistan?

As Afghanistan faces economic turmoil during one of the most chaotic times in the country’s history, the hope of the country lies on President Ghani’s revolutionary economic plan paired with the honing of its saving grace- the goldmine of resources lying below the war-stricken surface.

W

ith the number of U.S. troops in Afghanistan decreasing by tens of thousands each year since 2011, the once stable war economy that was headed by over $130 billion donated by countries across the globe since the Taliban’s fall in 2001 is on the edge of a cliff ready to plummet into another period of rampant corruption and depression.

After the controversial election of President Ashraf Ghani Ahmadzai took the country by storm, the time is now for this war-stricken nation to claw its way out of the trenches on its own.

Sitting on estimated trillions of dollars of untapped resources, such as lithium, iron, and copper, this country must effectively hone its goldmine in order to create a true self-sustaining economy that is vital to a future of prosperity.

This development must be enacted amidst one of the most chaotic times in Afghanistan’s history, however, as the country must not only shield itself from the impending attack of the Taliban with the country’s underpaid police and military force, but also actively avoid another civil war whilst striving against all odds to keep the downward trending Afghanistan’s Dependence on Foreign Aid

$12b

$4b

2002

GDP

Total Aid Disbursement

2008

$0b

economy afloat.

For the past decade, billions in foreign aid pumping into the Afghan economy kept the country artificially stable. The deflation of this bubble is the main reason why Afghanistan’s economy is on the verge of collapse today. With a budget deficit of nearly $750 million and security costs of roughly $650 million, the thought of paying the Afghan military’s 350,000 soldiers adequately is impossible without more funding. The Afghan National Security Force (ANSF) alone requires $6 billion a year. To make matters worse, according to a Washington Review report, the ANSF’s projected budgetary needs for the next decade will Afghanistan budget deficit amount to $10 billion per year, which simply cannot be accomplished due the reduced aid over the next decade from the U.S. and the rest of NATO. The only hope for Afghanistan hinges on the so-called “transformation decade” years following the troop withdrawal (20152024), which seeks to make the Afghan economy fully self-sufficient by 2024.

This is far easier said than done, however, due to the projected 50% reduction in the number of American troops by the end of 2015–down to 9,800. This cut in the number troops is in preparation for a total withdrawal in 2016 which would lead to the economic collapse that many experts see rapidly closing in.

Despite the continual trend towards total U.S. military extraction, the Afghan military is not gearing itself to fill the

$750m

upcoming security void. At a time when it should be strengthening, the Afghan military is weakening due to economic instability. The Taliban is on the verge of attack, during this time of desperation, which could be the first major conflict there since they were last in control in 2001. Not only is the Taliban a major fear in the eyes of the Afghans, but so is the rise of the Islamic State, or ISIS, as President Ghani has warned of possible attacks in the near future after the U.S. extraction is nearly complete. With the poorly paid troops in Afghanistan needing to shoulder the load more than ever, there is no telling how they would be able respond when the number of troops drops down to 5,500 by December.

One major concern is Afghanistan’s reliance on foreign aid. In fact, 97% of Afghanistan’s $15.7 billion GDP comes from foreign aid. This means that the Kabul government will have a much lower budget in the upcoming years and could potentially need a $537 million bailout to keep the economy afloat in the short-term, according to the World Bank. The fact that the Afghani government is only expecting only $1.8 million dollars in tax revenue—which is less than the value of the Taliban-controlled opium crop—is also unsettling.

The Taliban, which will soon harness more economic resources and leverage than the government, has the resources to take hold of the country once again.

A recent seizure a few months ago in Ghazni, a direct gateway to Kabul, resulted in the deaths of 100 people. This attack is evidence of the Taliban’s ability to regain territory and their willingness to shed blood to do so. There was also a report of a possible coalition between a leader of the Taliban and ISIS, which can easily spell doom on the underpaid military force of the Afghanis.

With all the worries about the impending attacks emanating from the diabolical Taliban and ISIS duo, the question remains: is there any hope for Afghanistan? This question largely weighs on the shoulders of the recently elected President Ghani, who was part of the first democratic transfer of CORNELL BUSINESS REVIEW | 26

Where the Riches are Hidden

Iron: £285.4b Copper: £185b Niobium: £55b

Cobalt: £34b Gold: £17b Molybdenum: £16.2b Rare Earth Elements: £5b Asbestos: £4.2b Silver: £3.6b Potash: £3.4b Aluminium: £3b Graphite: £0.4b

power in Afghanistan’s history. After the controversy over a U.S.-brokered deal between he and the runner-up, Minister Abdullah Abdullah, President Ghani has sought to revolutionize the country’s economic system, stomp out corruption, and make peace with the Taliban insurgents. In his economic plan published prior to the election, he states his intentions to create jobs and restart the economic market by harnessing the Afghan capital from the clutches of the corrupt businessmen and to establish an office of which all public land is concentrated. The president then plans to enforce a law that would make all the land distributed in a legal manner to create thousands of more jobs. This is to be done by “developing 10 or 20 years programs to train the human power so the society will be benefited and an independent country will be progressed”. This process will be incited by a government-fueled program to help the millions of jobless youth cultivate a specialization in trades such as carpentry in order to take advantage of new opportunities that are aimed to lead to a future prestigious live in the framework of a market economy. The president then seeks to efficaciously utilize all the international aid remaining for the public good. After concocting a social model from the West, he will work towards defining it for the landlocked country in order to make a transit hub for the entire region. Lastly, he plans to harness the goldmine of resources the country sits on and use them to complement it with the provided aid to create a truly

27 | CORNELL BUSINESS REVIEW

Lapus Lazuli: £0.4b Flourite: £0.4b Phosphorous: £0.4b Lead & Zinc: £0.3b Mercury: £0.3b Strontium: £0.2b Sulphur: £0.1b Talc: £0.1b Magnesium: £0.1b Kaolin: £670m Lithium: Large deposits found

groundbreaking economy that has never before been done, which is the foremost beacon of hope for Afghanistan.

The preeminent critique that President Ghani presented about the current Afghani economic system is the lack of sustainability. Without a self-sustaining economy, all of the aforementioned solutions would be rendered useless once the international aid lessens. This is why the future of Afghanistan hinges heavily on the extraction of natural resources.

Experts at the United States Geological Survey consider the country the “Saudi Arabia of Lithium” due to the projected

principles and rules… for the conclusion of such big contracts for the exploitation of mines” paired with a proposal to have “all the contracts… concluded in a very transparent and accurate way.” All of the income generated from the mines will then be deposited into a government account, which will be closely monitored for fraud. The president wants to halt exports of raw materials when creating employment opportunities to fulfill the country’s needs and heighten national income in a self-sustaining manner.

This will help rectify the stagnant labor market. With the potential to generate over one million jobs in the goldsmith and jewelry sector alone without the need for large factories and high capital investment, it is clear that industrial mining is the saving grace for the Afghan economy.

If the Afghans are able to hone the seemingly limitless amount of resources at their disposal, the country’s economy could successfully transform into the profitable and sustainable infrastructure that President Ghani has dreams of.

Still it will ultimately be up to Ghani to succeed on this historic revolution amid

The once stable war economy...is on the edge of a cliff ready to plummet into another period of rampant corruption and depression. $1 trillion dollars of lithium throughout the barren terrain. The additional $421 billion dollars of iron and $273 billion dollars of copper that lies beneath the surface also could be the defibrillator that the economy needs. Combined with the $16 billion dollars recently pledged by international donors at a conference in Tokyo earlier in the year, the odds for a gradual and manageable transition into the transformation period have increased considerably.

President Ghani’s plan to hone these resources is heavily focused on creating contracts with private companies that would disavow any fraudulent, corrupt activity. This involves “transparent

countless security attacks and governance problems that keep these resources–and the trillion-dollar payout–underground. If the president can successfully implement his plan, however, he could put Afghanistan on the path to a future that only a select few deemed possible just months ago.

Dylan Magee is a freshman studying developmental sociology in the College of Arts & Sciences.

INTERNATIONAL

Taming Korea’s Giants:

Legal Measures Force Conglomerate Restructuring Toughened regulations against South Korea’s family-run conglomerates will bring a sea of change to the nation’s economy through the growth of domestic businesses and service industries.

T

aking the first-class seat on her plane to Seoul late last year, Cho Hyun-Ah ‘99 would not have known that an unopened bag of macadamia nuts would cost her a job and a prison sentence.

Early February, in a rare display of severity, a Seoul district court sentenced the daughter of Korean Air’s chairman to a year in prison for her tantrum over the way macadamia nuts were served to her on a plane. If this has been any indication, being rich is no longer an excuse for escaping the pains of ordinary life in South Korea. With the government’s hardened stance against the family-run conglomerates, known as chaebols, the nation is committing to more responsible forms of corporate governance. Now that restructuring is underway for the nation’s top economic players, the country will see either major improvement in

lax corporate governance proved to be increasingly problematic. The Asian financial crisis in 1997 left the four biggest chaebols with debt five times their equity, forcing them to cut off their subsidiaries. The Daewoo Group, once the second largest conglomerate in Korea, filed bankruptcy with $50 billion worth of debt due to poor financial management. The economy achieved a narrow recovery only after a $58 billion bailout from the IMF. Most importantly, the chaebols’ economic dominance and all-toofriendly relations with the government have perpetuated inequality within the nation. Chaebol-government collusion has allowed the conglomerates to hold most of the nation’s capital despite distributing their vast wealth to only the select part of the population that they employ. According to data compiled by CEO Score, the ten biggest conglomerates accounted for only 4% of employment in the country in 2013.

As Un-Chang Chung, a former South Korean premier, once remarked, such issues constitute “a more serious matter than relations with North Korea.”

The Chaebol Problem

its economy or catastrophic change.

The Classic Debate

Chaebols have played the leading role in the story of South Korea’s economic success. Once a war-torn nation, the country now stands as the world’s thirteenth-largest economy, owing its success to the work of industrial giants such as Samsung and Hyundai. Handpicked by the government, family-run firms benefited from cheap loans and preferential market access, gaining enormous influence as they turned the once-fledgling economy into an export powerhouse. Just four decades after the Korean War, the country emerged as the model Asian tiger, with chaebols driving the center of this growth.

Of course, such a feat did not come without setbacks. As these family-run conglomerates grew in power, their

For decades, the country’s leadership has faced difficulty reconciling the chaebols’ vital role in the nation’s economy with the myriad problems associated with their structure. Despite restructuring efforts following the 1997 financial crises, including the appointment of outside directors and elimination of inefficient subsidiaries, the dominance of conglomerates in the nation’s economy remains largely intact. The top ten chaebols generate 80 percent of Korea’s GDP, with Samsung accounting for more than 28 percent of it alone. Meanwhile, economic polarization has long remained a pervasive problem within the nation.

In addition to a shrinking middle class, poverty remains double the OECD average, while top corporate executives hold wealth in multiples of billions.

The main area of vulnerability in the Korean economy lies in the relative weakness of its domestic businesses. The CORNELL BUSINESS REVIEW | 28

Top 10 Korean Chaebol

by Total Assets Samsung Group Hyundai Kia Automotive Group SK Group Hanwha LG Group Lotte Kumho Asiana Group Hyundai Heavy Industries GP GS Group Doosan

$317.5b $128.7b $85.9b $75.7b $69.6b $54.9b $43.9b $42.8b $39b $32.7b

manufacturing giants’ dominance in over two-thirds of the country’s business activities has deterred the growth of small and midsized companies (SMEs) and service industries. Especially in light of recent evidence of a slowing manufacturing sector and loss of market share to low-cost Chinese competitors, the need for vibrant SMEs and greater vitality in the nation’s economy is gaining increasing importance.

With the tradeoff between the nation’s growth and inequality, collusion between the government and chaebols has been a main challenge in restructuring the economy. The government’s lax regulation of the nation’s chaebols has long secured their dominance in the economy. As recently as 2008, former President Lee Myung-Bak pardoned Samsung Group chairman Lee KunHee from a three-year prison sentence on charges of embezzlement and tax evasion.

Taking the hardline

Ever since the 2013 presidential elections, political consensus has gathered against the chaebols’ unsound management practices. President Park Geun Hye’s introduction of large inheritance tax bills in particular signaled a major step forward in restructuring the chaebols. By creating incentives to streamline corporate structure using holding companies, the tax bill is expected to contribute greatly to unraveling cross shareholdings and forming more transparent ownership.

The government has shown much promise in the legal front as well. The recently-passed Conglomerates Ethical Management Special Law bans members of the powerful business families 29 | CORNELL BUSINESS REVIEW

from working if convicted of a crime.

In February 2013, The Supreme Court confirmed a four-year embezzlement sentence for SK Holdings Chairman Chey Tae-won, marking the longest sentence for a chaebol boss. The imprisonment of Cho Hyun-ah, followed by her resignation as an executive, also came in a perfect time to demonstrate the toughened stance against criminal actions by chaebol executives.

A critical transition

Reforms targeted at chaebols will be important especially as Samsung, Hyundai, and other major conglomerates restructure to hand over power to the third-generation. Transparency will likely be a major objective in upcoming reforms with increasing market demand for accountability. In January, Hyundai failed to sell $1.25 billion shares in a logistics affiliate after failing to specify how the proceeds would be used to restructure the group. According to Park Yoo-Kyung, a director in APG Asset Management specializing in corporate governance, chaebols’ failure to provide more transparency with such details can lead to “rampant speculation in the market.”

At the World Economic Forum in 2014, President Park championed measures that will foster a “creative economy” by promoting innovation and entrepreneurship. As restructuring takes place within the vast conglomerates, it is important that the administration follows up on its promise by easing off from its manufacturing heavyweights and freeing

up capital for its domestic businesses. Increased investment in R&D will help nurture the nation’s SMEs and reduce the income gap by supporting more sources of employment. Without sufficient efforts to develop its domestic businesses, however, greater restrictions on chaebols may only dwindle the nation’s overall economic output and hurt its long-run performance.

Korea’s economic future will depend on how persistently the government tackles the dual challenge of promoting better corporate governance and growing domestic businesses in years to come. With recent legal developments, Korea is well on its path to leveling its economic plane field. Yet, Korea will need to proceed with caution as it undertakes this pivotal transition. Chaebols are cornerstones to the modern Korean economy. Upcoming reforms must improve transparency, prosecute wrongdoings, and dole out profits, but one thing they must not do is permanently atrophy the giants’ formidable potential.

Sang Hyun Park is a sophomore majoring in Economics in the College of Arts and Sciences.

Chaebol Chairpersons Registered as Directors of Affiliates

INTERNATIONAL

The Eurozone Crisis A seemingly never-ending standoff between Greece and Germany.

Beginnings of the Eurozone

Something that was meant to be a unification of several European nations has now turned into a situation filled with turmoil and confrontations. In 1949, the first predecessor of the European Union – Council of Europe – was formed as a result of World War II in order to improve cohesion and cooperation in Europe. Fast forward to 1992, and the Maastricht Treaty officially formed the European Union, granting EU citizenship to its members and introducing the single European currency in 1999. With 28 members in the European Union and 18 of those members in the Eurozone (countries that adopted the Euro), Europe seemed set for a period of stability and peace. Essentially, the Eurozone is only a monetary union in which each member’s monetary policy–regulations affecting money supply–is controlled by the European Central Bank.

However, with the interdependency that came with the Eurozone, there were also problems that eventually led to what was known as the Eurozone Debt Crisis. The loss of independent monetary policy led to low interest rates and borrowing costs for all members as the ECB were determined to help struggling Germany improve its GDP growth.

Countries such as Spain took advantage of this opportunity and eventually assumed excessive debt, creating housing market bubbles along the way. The enormous build-up of debt, spending, and “What the Greek election will show is that there are warning signs…in the Eurozone [and] less rapid growth…”

David Cameron

inflation led to increases in imports and trade deficits in many countries.

In 2008, when the global financial crisis hit, borrowing costs skyrocketed, and a credit crunch ensued. Countries such as Portugal, Spain, and Italy struggled to survive the recession. However, throughout the entire time, Germany controlled its debts prudently and became an exporting nation, all while keeping labor costs relatively constant.

As a result, Germany became one of the healthiest economies in Europe and even had to lend its excess money to other European nations in order to keep the Eurozone afloat.

Greece’s Struggle Amidst the Eurozone Crisis

Of all the nations that were struggling throughout the Euro crisis, Greece was hit the hardest. As a rule of thumb, Eurozone debt for a nation is not to

in Europe as they vehemently opposed spending cuts and tax increases. Despite the assistance, Greece’s private markets could not recover enough to help Greece solve the problem on its own and the nation’s position only got worse.

A second bailout eventually came to pass in 2012 as the Eurozone members again agreed to hand another €130 billion in bailout funds to Greece. Along with that, private sector holders of Greek bonds also accepted a 50% write-down on the debt, which eased the country’s problems by reducing Greece’s sovereign debts by around €100 billion. However, all this did not come without a price and Greece had to agree to the key condition of cutting its spending by €325 billion.

Such measures were bound to provoke even more protests and conflicts in the country, which was already struggling to contain its unemployment rate of 20%.

In early 2015, Greece appointed a new Prime Minister, Alexis Tsipras, who promised citizens of his nation that he would fight for an extension of existing funds and to get rid of the austerity measures that were negatively affecting the poor, foreign immigrants, and the

As the never-ending situation with Greece lingers on, there still has been no ultimate solution to the increasingly despairing Greek debt levels. exceed the debt-to-GDP ratio threshold of 60%. By late 2009, Greek debt had breached the limit and reached 113% of GDP. To make matters worse, Greece’s most important industries such as shipping and tourism were hit especially hard due to their sensitivity to changes in the business cycle, and the government attempted to keep their economy alive through increased spending and debt. In an attempt to soften the blow, the Eurozone collectively decided to launch a €110 billion rescue bailout loan to Greece after it agreed to a series of austerity measures, steps taken to reduce government budget deficits. Ensuing protests and anger in Greece in response to such measures caused further conflict

overall social structure of Greece. This worried many around the world as anticipation of further conflict and the inability to reach a resolution between Germany and Greece became increasingly prevalent. David Cameron, Prime Minister of the UK, said at the time, “What the Greek election will show is that there are warning signs…in the Eurozone [and] less rapid growth…”

Many feared a “Grexit” was now truly a realistic possibility to end the entire situation. Germany and Greece were initially at a standstill as Tsipras was adamant on removing austerity measures that he claims to have harmed Greece’s economy. However, after some time, Tsipras has softened his stance CORNELL BUSINESS REVIEW | 30

INTERNATIONAL

Left: Alexis Tsipras, standing in the Greek presidential palace after becoming Greece’s newly appointed prime minister.

and the two parties have finally been able to agree on a four-month extension of Greece’s second bailout. Germany has also forced Greece to introduce and adhere to additional measures, such as cracking down on tax evasion and reforming the pension and savings system. Even after all this, there are still doubts about Greece’s ability to pay off the remaining debt and survive without further financial aid.

Moving Forward: Path for the Eurozone

As the never-ending situation with Greece lingers on, there still has been no ultimate solution to the increasingly despairing Greek debt levels. Some Eurozone members such as Spain are even suggesting that a third bailout might be inevitable to provide Greece with more flexibility.

One thing is for certain. Germany and Greece should do their utmost to prevent the Eurozone from splitting up.

A breakup would lead to huge ramifications, a loss of credibility, and price instability. From the Eurozone’s perspective, a Greece default would have severe repercussions. A Grexit would set a precedent for other similar-minded nations like Spain and Italy, which are both 31 | CORNELL BUSINESS REVIEW

borrowing funds from the Eurozone, to pull back on its own austerity measures and create further unnecessary chaos in Europe. Germany would not benefit either, being a large provider of the loans to Greece. From Greece’s point of view, a Grexit may seem attractive to patriots who do not believe their nation should suffer economically and socially in order to adhere to Germany’s austerity requests. Living within its own means in itself involves a huge, arduous adjustment; its disappointing GDP performance and astounding 25% unemployment rate completely overshadow the primary budget surplus that Greece has recently achieved. On top of that, the private sector and the Greece taxpayers, even with eradication of tax evasion, would not be able to make enough payments to cover any significant portion of debt anytime soon.

To improve the situation, Germany and the rest of the Eurozone should focus on solutions that aim to spur economic growth. For instance, investment by European Union nations into other member economies, particularly into the struggling ones, would be beneficial to everyone in the long run.

Though this may go against the instinct of the healthier individual countries and

their people, in a union, each country heavily depends on the performance of the other union members. As such, the short-term costs of investing can have long-term gains in terms of growth, GDP, and economic stability.

Lastly, a long-term viable solution for preventing similar crises from arising in the future is a European fiscal union, as opposed to the current European monetary union. Again, although countries like Germany may be unwilling to accept the idea of sharing fiscal risks and debt, this will ultimately benefit the entire Europe and better unite countries by creating a more economically balanced environment. It could more effectively unite European nations ,as measures such as controlling government spending of all nations–which was the cause of the crisis to begin with–and using German cash reserves and taxes to pay for Greek welfare benefits will alleviate the burdens on nations like Greece while also making good use of Germany’s surplus revenues. Capital fungibility amongst the Eurozone members would increase the economic competitiveness of Europe as a whole by making it easier to do business across the entire Europe and facilitating the flow of investments within the continent. However, with this movement, Europe must be careful not to discourage government spending when necessary at acceptable levels while also encouraging investment and capital inflows, as money flows into the economies.

Striking such a delicate balance is easier said than done, but Europe is moving in the right direction with the Treaty on Stability, Coordination and Governance and the Fiscal Compact, which is to be incorporated by 2018.

Jeffrey Fung is a sophomore majoring in Economics in the College of Arts and Sciences.

EVENTS GALLERY

October 9, 2014

Sesquicentennial chalking on Ho Plaza Cornell University celebrates the 150th anniversary of the charter that established the university on April 27, 1865. Throughout the past a decade and a half, Cornell has revolutionized higher education by providing an institution where “Any person can find instruction in any study.� Big Red celebrations illuminated select cities

across the world in 2014-2015. This photo showcases a special sesquicentennial chalking on Ho Plaza.

- Susan Jiang PHOTOGRAPH BY cornell photos

CORNELL BUSINESS REVIEW | 32

33 | CORNELL BUSINESS REVIEW

EVENTS GALLERY

October 17, 2014

The Sesquicentennial Grove Dedication The 1,700-square-foot Sesquicentennial Commemorative Grove sitting on the top of Libe Slope was created to commemorate Cornell University’s 150-year history. The grove features a walkway engraved with key historical events and benches carved with quotes from beloved Cornellians. The formal dedication ceremony was on October 17, 2014 as part of the Trustee Council Annual Meeting and Homecoming weekend.

- Susan Jiang PHOTOGRAPH BY Cornell Photos

CORNELL BUSINESS REVIEW | 34

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