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Businessweek

November 24 , 2014

Global Economic

p.02

Industries

p.12

Markets

America is Looking for a Few

Keep the Mystery Out of

Ballmer Gives Harvard

Good Welders

China’s Meat

Donation to Expand The Computer Science

p.28

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Chapter 01

National Politics

Contents Global Economics

Chapter 01

Industries / Companies

Chapter 04

Policy / Politics

Chapter 07

Markets / Business

Chapter 10

p.02

Welders, America Needs you

p.12

Keeping the Mystery Out of

Chapter 02

p.06

Chapter 03

Australia is Immune to

Putin’s Speech: A mix of

China’s Flu

Welcome Economic Ideas

Chapter 05

p.14

GM Recalls The Past

Chapter 06

p.16

The Curvy Turncoat in Brazil’s

China’s Meat

Panty War

p.20

Chapter 08

p.22

Chapter 09

In trade Talks, it’s

The paltry choice of

Why the U.S needs way

Contries vs. Compaines

doctors under Obamacare

more foreign students

Ballmer Gives Havard

p.08

p.28

Chapter 11 Mr. Francesco Maolia

p.30

Chapter 12

p.24

p.34

Starbucks Wants to Be Fancy

Donation to Expand The Computer Science

01

Bloomberg

Businessweek

Global Economics

Global Economics

Chaper 01

Welders, America Needs You!

p.02

Chapter 01

Welders, America Needs you

p.06

Chapter 02

Editor Liza Lin, Jing Jin

Australia Is Immune To China’s Flu

p.08

Chapter 03 Putin’s Speech: A mix of

Welcome Economic Ideas and Defiance of the West

On a recent afternoon, 17 students sit in the classroom in Troy, Ohio, doing trigonometry.

For several hours, they figure out tangents and cosines, tapping away at their calculators to find the distance of a line, the degree of angle, or the circumference of a cylinder. Most of the students just graduated from high school; all but two are male. Many of them wear `camouflage hats and Harley-Davidson T-shirts.

Everyone’s in jeans. Muffled sounds of clanging and crackling—molten pieces of metal are being fused together outside—seep through the cinder block walls. This is welding school.

02

The Hobart Institute of Welding Technology has been around since 1930 and is considered one of the top national programs in the trade.

To get in, you need a high school diploma or a GED, plus about $25,000 to cover the cost of tuition, books, and living expenses. For nine months, students learn how to weld structural steel and pipe, spending more than 1,000 hours under a hood practicing the art of fusing different pieces of metal. As they advance, they learn to work with more complicated alloys, such as aluminum, titanium, and stainless steel, always striving for that perfect weld that makes the metal stronger. “A nice weld is work of art,” says Andre Odermatt, Hobart’s president.

Shortage of 290,000 Welders

700

600

500

400

300

200

100

1988

Supply

1994

2000

2006

Demand

2012

Each year, about 300 students graduate from the school. Eighty-three percent have a job when they leave. The average pay for a new Hobart grad is about $17 an hour, or $36,000 a year.

Some students can expect to make a lot more, particularly those learning trigonometry in Hobart’s advanced pipe-layout class. The math will come in handy when they’re welding pipeline along rough terrain or running pipe into a refinery or pump station at unusual angles.

After he graduates in June, Eric Bankson plans to work as a subcontractor for oil and gas companies in Pennsylvania and West Virginia.

He knows a guy who’s making $300,000 a year.

“I figure I can do about half that,” says Bankson, whose sister is getting her master’s degree in nursing. “That’s going to take her six years, and I’ll be coming out of here in nine months making more money.” Not bad considering the national jobless rate for 16 to 24 year-olds is 14.5 percent, and the average salary for 25- to 34 year olds with bachelor’s degrees is $46,900, according to 2012 data from the National Center for Education Statistics.

For the better part of the past 30 years, welding was seen as a dead-end job. When the manufacturing sector began contracting in the 1980s, so did the demand for people who worked with metal. In 1988 there were 570,000 welders in the U.S., according to data kept by the Bureau of Labor Statistics. By 2012, there were fewer than 360,000. But manufacturing has grown faster than the rest of the U.S. economy since the recession ended in June 2009.

For the first time since the early 1960s, makers have added jobs four years in a row. Couple that with the oil and gas boom and the thousands miles of new pipeline being built, and the demand for skilled welders has risen sharply.

Decades of attrition have left the U.S. with welders who largely lack the advanced skills needed today. The average age of a welder in the country is 55; the wave of coming retirements will leave manufacturers at a disadvantage. The American Welding Society estimates that by 2020 there will be a shortage of 290,000 professionals, including inspectors, engineers, and teachers. “We’re dealing with a lost generation,” says Gardner Carrick, vice president for strategic initiatives at the Manufacturing Institute, the

Chapter 01

National Economics

03

Photographer Lussier Photography

Bloomberg

Businessweek

Global Economics

2

04

3

1

Photographer 1.Eric Kayne 2.Lussier 3.Peter Baker

3

Chapter 01

workforce development arm of the National Association of Manufacturers. “For 20 years we stopped feeding young people into the trades, and now we’re scrambling to catch up.”

The assembly line jobs that used to employ most welders have largely been outsourced or automated. Today, the focus is quality, not quantity. Welders work on made-to-order pieces of fabricated metal (metal cut into a certain shape) and alloys, producing the high-value pieces of equipment for any industry from the automobiles to the aerospace. While Hobart graduates are in hot demand, there is still the discussion about the size of the skills gap. Some companies say the reason they aren’t hiring more is that they can’t find enough qualified people. Two Massachusetts Institute of Technology economists offer a more nuanced view. Paul Osterman and Andrew Weaver have produced the first real evidence that while the skills gap exists, it’s not as pervasive as many believe. Of the plant managers at about the 900 U.S. manufacturers they interviewed, 75 percent said they had no long-term vacancies. Only 16 percent reported high levels of long-term vacancies equal to or greater than 5 percent of their workforce. That’s not as big as a lot of people thought. “But it is not zero either,” says Weaver. Figuring out exactly how much this is costing manufacturers is much harder, says Weaver. Several companies say their inability to find skilled welders hurts their bottom line.

National Politics

“Very simply, we have welding jobs and can’t find people to fill them,” says Doug Gregory, marketing manager at BMR Group, the Indiana-based company that fixes industrial equipment for manufacturers in the Midwest.

“We’re having to turn down business because we don’t have the manpower.” At Stillwater Technologies, which makes large pieces of fabricated metal for such things as satellite dishes, the lack of skilled welders has extended the time it takes the company to deliver an order to a client from five or six weeks to almost four months. “That’s costing us about $2 million per year,” says the school president, Michael van Haaren. The company expects to do about $14 million in revenue in 2014.

Small and midsize manufacturers such as Stillwater are often in direct competition with corporations that can pay better wages.

GE Oil & Gas, a division of General Electric (GE) that builds pipelines, hired 55 welders in 2013 and expects to more than double that in 2014. Caterpillar (CAT) is hiring several hundred welders over the next couple of years to work in two plants it’s building in North Carolina and Georgia. The company partners with local high schools and community colleges, donating factory equipment and even helping design curriculums to steer young people toward manufacturing and overcome the stigma of working with your hands. “It’s as much about fixing the perception gap as it is the skills gap,” says Korey Coon, a human resources manager at Caterpillar.

Basic Principle of Welding

Electrode Core Wire

Shielded or Heavy Coating Gaseous Shield

Projecting Sheath Slag Penetration

BASE METAL Weld Deposited

Molten Weld Metal

Crater

05

Bloomberg

Businessweek

Global Economics

Photographer Tim Jones

Chaper 02

06

Australia Is Immune To China’s Flu Editor Leonid Ragozin

For better or worse, investors have come to regard Australia as an economic satellite of China. The gravitational pull exerted by China’s appetite for Australian iron ore, wheat, and other commodities was the main reason the nation of 23 million managed to avoid slump during the global financial crisis. Yet the latest data show that the two economies may be decoupling. For Australia, the timing couldn’t be better: Judging from the most recent numbers on factory output, investment, and retail sales, China may have a difficult time attaining the 7.5 percent annual growth target set by Premier Li Keqiang. Analysts point to Australia’s rebounding jobs market and faster growth as signs that the country is defying the slowdown of its main trading partner. Citigroup’s (C) Economic Surprise Index, which measures the gap between data reports and analyst estimates, gave a reading of 50.3 in March for Australia, up from only 9.3 three months earlier. (A positive reading means economic reports have been coming in above estimates.)

The Citi index for China has been moving the opposite way, reaching –110.1 in March.

Economists credit the Reserve Bank of Australia with steering the economy through the fading of the China-fueled mining investment boom. The central bank cut borrowing costs by 2.25

percentage points from late 2011 through August last year, to a record-low 2.5 percent, in the process nudging up home prices and building approvals. “Why are we not following China?

Because mining is not the main driver of Australia’s economy in normal times,” says Paul Bloxham, chief Australia economist at HSBC Holdings (HSBC) in Sydney. The RBA’s rate cuts have supported a process of rebalancing in which the housing and service industries are recovering their roles as primary economic engines, Bloxham says: “Australian monetary policy is still effective. It’s still working. ”Despite a cooling China, Australian employers added 80,500 full-time jobs in February, the most since just after the 1991 recession. Companies that have announced plans to expand payrolls include Woolworths (WOW:AU), the country’s largest retailer, and Coles Supermarkets (WES:AU). The positive employment numbers prompted Bill Evans, an economist at Westpac Banking (WBK), to drop his prediction of further rate cuts.

Australia’s links with China tightened over the past five years as exports almost tripled.

Shipments of iron ore, to produce steel for apartment and office construction, made up nearly half of its exports to China in 2012-13.

They’re poised to fall this year, as China’s leadership dials back infrastructure spending and new

supplies of the mineral come onstream, depressing prices. Australia’s central bank remains fairly bullish on China over the long term, however.

In its latest set of minutes, the RBA noted that urbanization, coupled with “likely increases in the size and quality of housing,” will support Chinese demand for steel for years to come.

Australia’s economy may no longer be tracking China’s as closely, but policymakers in Canberra are not heralding a new planetary order.

Chapter 02

Trade

Briefing

Correlations Marriage and Poverty

Ch.1 02

Marriage is hard work, but the alternative might be less attractive, at least financially. A report from the U.S.

Ch.2

Government Accountability Office suggests single people older than 65 are significantly more likely to fall below the poverty line than married people.

06 Ch.3 08

Men

Women

U.S average

20%

48% 15%

of households headed by single women age 50 to 64 have retirement savings, with a median balance of $32,800

10%

71% 5%

of household headed by a married couple with one partner age 50 to 64 have a retirement account, with a median balance of $122,560.

0%

Married

Widowed

Divorced

Never married

Share of U.S population over age 15 that is divorced

10%

0% 1960

2010

07

Bloomberg

Businessweek

Global Economics

Chaper 03

Putin’s Speech: A Mix of Welcome Economic Ideas and Defiance of the West Editor Leonid Ragozin

Tom Bachtell

Illustration

08

Chapter 03

A strange mix of sophisticated economics and old-fashioned nationalism. That may be the best way to describe Russian President Vladimir Putin’s address to Russia’s parliament and government ministers on Dec. 4. He said the West was trying to prevent Russia from getting stronger and that the war in Ukraine was nothing but a pretext for curbing its progress. In his annual speech to both houses of the Russian parliament, Putin promised to respond to the sanctions by liberalizing the economy and coaxing offshore assets of Russian companies back home. Late by six minutes, Putin president entered the gilded St. George Hall of the Kremlin, where about a thousand parliamentarians and state officials were waiting to hear his main speech of the year. As he began delivering it, it became apparent that the Russian president was still dogged by a nasty cough and sore throat, something that was noticed when he traveled to the G-20 meeting in Brisbane last month.

Putin started by thanking all Russians for showing solidarity during a challenging the year, which saw Russian troops invade Ukraine and the relations with the West fall to a historical low. Unlike in his previous landmark speeches, this time he completely avoided talking about domestic enemies, which he had lambasted as the “fifth column” at the time of the Crimean takeover last March. Instead, he recalled the history of Russia’s conversion to Christianity, which began after a Kiev prince he shares a name with—Vladimir the Saint— conquered the Greek trade colony of Khersones in what is now the city of Sevastopol. Putin claimed that for Russians this historic site therefore had the same “sacral and civilizational importance as Temple Mount in Jerusalem for those who profess Islam and Judaism.”

Putin accused Western countries of fomenting the Ukrainian conflict after failing to hear Russia’s concerns about Ukraine’s rapprochement with the European Union. He specifically blamed the U.S. for “directly or discreetly influencing the relations with our neighbors”: “Sometimes we are left to wonder whether we should talk with the governments of certain countries or directly with their American sponsors.” In the Ukrainian case “we were essentially told to bug off,” Putin added. As this segment of his speech reached a crescendo, Putin defended his Ukrainian policy as an issue that is central to Russia’s own sovereignty. “While for some European countries national dignity is a long |for gotten notion and sovereignty is |an unaffordable luxury, for Russia sovereignty is a compulsory condition of its existence,” he said. STORY: For Putin, the Economic Signals Are Looking Worse and Worse He went on by suggesting that Ukraine was nothing but a pretext for the U.S. and its allies to impose sanctions on Russia. “I am sure that without all these events, they would have come up with

some other ways of curbing Russia’s progress.”

He said it was habitual for the West to contain Russia when it “started growing stronger and more independent.” He also accused Western countries of celebrating “terrorists” in the North Caucasus as “freedom fighters” back in the 1990s and encouraging separatism in Russia by “financial and political means, through the media and secret services.” But “they failed like Hitler,” Putin said. He pledged to defend Russia’s freedom and said that the army had sufficient means to answer the challenges.

Dubbing the U.S. antimissile system the greatest threat to international security, he said that Russia had “nonstandard” solutions that will help it counter this perceived threat.

Despite his seemingly bellicose tone, Putin barely mentioned the continuing war in the east of Ukraine and, unlike in previous speeches, never used the term Novorossiya, coined

by Kremlin’s ideologues to describe southeastern regions that want to gain independence from Kiev. “He wants to keep the door to the West open and doesn’t want to take full responsibility of the future of the so-called people’s republics in Donetsk and Luhansk,” explained political analyst Stanislav Belkovsky, speaking on Dozhd TV after the speech. In the second part of his speech, Putin announced plans for economic liberalization as the answer to challenges posed by sanctions and falling oil prices. “Freedom for economic development, social sphere, and civic initiatives is the best answer to both the external constraints and internal problems,” he said. He went on by quoting the early 20th century anti-Communist philosopher Ivan Ilyin on the importance of freedom for all aspects of life in Russia. Putin pledged to relieve business from regulatory pressure and to ban government watchdogs from harassing businesses with never-ending inspections Businesses that have a good track record will be protected from such checks for three years, Putin said. The inspections are a major source of corruption, but also a political tool. Earlier this year, the national sanitary watchdog closed several McDonald’s outlets in what was perceived as a response to U.S. sanctions. Putin also promised two-year tax breaks for startups and promised to create an “investment lift” for companies operating outside the raw material sector. He continued by declaring amnesty for holders of Russian assets accumulated in offshore tax havens over the post-Soviet years, no matter how they have been earned. Dozens of major Russian companies are formally controlled by companies located in Cyprus and the British Virgin islands, used to cover their Russian beneficiaries. The Russian Ministry of Economy has raised its capital flight forecast in 2014 from $100 billion to $125 billion, which means it has doubled compared with 2013.

Putin’s press secretary Dmitry Peskov said later the same day that the amnesty was a

Foreign Economics

one-off chance for Russian businessmen who keep their assets abroad to bring them home.

It is unclear whether the promised amnesty will succeed in luring capital back into the country, which saw its currency slump almost 70 percent against the U.S. dollar this year due to falling oil prices and Western sanctions. Belkovsky, the political analyst, laughed away the suggestion Russian oligarchs might send their assets home, saying several high-profile court cases, such as Yukos, have taught them long ago to stay out of Russia’s jurisdiction.

Speaking about the national currency, Putin lashed out against “speculators” enriching themselves by playing on the weakening ruble.

“The authorities know who these speculators are and we’ve got tools for influencing them. It is high time to use these tools,” he said. While he was delivering the address, the ruble fell from 52.64 to 53.6 against the dollar. It was 33 rubles for a dollar in December last year, when Putin chose to intervene in the Ukrainian political crisis.

Economist Tatyana Stanovaya wrote on the Russian website slon.ru that Putin’s speech goes to show that he “is grossly underestimating the catastrophic devaluation of the ruble and has not proposed any measures to stabilize money.”

The economic part of Putin’s speech sounded ambitious and upbeat. He promised to turn Russia into a world technology leader, double the scope of road construction, and ensure that the economy grows at a rate higher than the world average despite the World Bank forecasting zero growth for Russia in 2015.

The day Putin delivered his speech was mired by fighting in the Chechen capital, Grozny.

The authorities said 10 people were killed and at least 20 injured as security forces blockaded groups of militants in a building occupied by government media outlets and in a nearby school.

The first building caught fire during the assault, evoking memories of the Chechen war Putin waged and won in early years as Russian leader.

End

Ch.1 02 Ch.2 06 Ch.3 08

09

Bloomberg

Businessweek

Industries / Companies

Industries / Companies

Chapter 04

p.12

Keeping the mystery out of China’s meat

Chapter 05

p.14

GM Recalls The Past

Chapter 06

p.16

The Curvy Turncoat in Brazil’s Panty War

12

Chaper 04

Keeping the Mystery Out of China’s Meat Editor Liza Lin, Jing Jin

When the yellow liquid in a test tube containing tiny pieces of string beans turns clear, Chloe Fan knows why. A nearby computer screen quickly confirms her suspicion: Pesticide levels in the sample are twice as high as accepted standards. Fan, a Wal-Mart Stores (WMT) food scientist in Guangzhou, runs another test, then has the shipment of beans pulled, stopping a batch of chemical-laced vegetables from reaching customers at the retailer’s stores in China. Hers is a job that can’t be taken for granted. “China has food safety rules,” says Fan, 24, clad in a white laboratory coat and surrounded by beakers and test tubes, “but not all suppliers in China understand and follow them.”

Wal-Mart has learned that lesson repeatedly on the mainland, most recently when authorities earlier this year said meat sold as donkey at its Chinese stores contained fox DNA, triggering a recall by the Bentonville (Ark.)-based retailer.

That wasn’t an isolated occurrence. A seemingly endless string of scandals—from melaminetainted milk that killed six infants and sickened

300,000 others in 2008 to rat meat recently sold as mutton—has made China the Wild West of food safety. Inadequate government oversight also is forcing big Western companies, from Wal-Mart to Nestlé (NESN:VX) to French supermarket operator Carrefour (CA:FP), to put on their sheriff’s hats and take food policing into their own hands. The reason is simple: Western companies that sell tainted products can suffer damage to their reputations and incur legal liabilities, even if they had nothing to do with the manufacturing of the goods. “Many giant retailers have a strong incentive to take actions where state and local governments are not doing what they are supposed to do,” says Ching-Fu Lin, a researcher at the Asian Center for WTO and International Health Law and Policy.

Wal-Mart promised to boost inspections of suppliers after the donkey meat recall and now conducts more DNA tests of meat in China than it does anywhere else in the world. The company already had said last May that it would

Chapter 04

Foreign Industires

Western Companies Get a Stomach Ache in China

Carrefour 2013

Fonterra Co-operative

Wal-Mart 2014

Tesco 2013

Yum! Brands 2013

Group 2008 Furor

Furor

Furor

Furor

Furor

The French supermarket

Fonterra owned 43 pere-

Wal-Mart in January

An undercover investiga-

Yum’s Little Sheep

operator took heat last

cent of China’s Sanlu

recalled its Five Spicec

tion by a Shanghai

Mongolian Hot Pot restau-

year when state-con-

Group when the mainland

donkey meat sold in some

television station claimed

rants, the largest chain of

trolled China National

company was among

of its Chinese stores after

the big British retailer’s

Monglian hot pot eateries

Radio reported that the

many implicated in a

the meat was found to

stores in China were

in China, lost business

scandal involving the

contain the DNA of other

selling meat labeled as

after rival chains were

Lishuiqiao store in Beijing

addition of melamine to

animals, including fox.

mutton that was actually

found to be serving

contained no beef

milk, making watered-

95 percent duck.

chicken, fox, and rat meat

“juicy beef balls” sold in its

down products appear to

masquerading as lamb.

contain more protein. Six children died. 300,000 others became ill.

13

spend 100 million yuan ($16 million) over three years to increase food safety in China after being stung by previous scandals there, including the sale of sesame oil and squid with hazardous levels of chemicals in 2012 and the mislabeling of regular pork as organic the year before. Wal-Mart says that since 2012 it has slashed its number of pork suppliers in China by almost 80 percent, to about 100, to ensure better food quality and more supplier accountability. The world’s largest retailer has two vans making unannounced visits to stores every day to take samples of vegetables, seafood, and meat to check for melamine in dairy products, clenbuterol in pork, and excessive antibiotics in chicken. It does this only in China. Nestlé says it employs more inspectors and scientists to perform quality tests on the milk at its Chinese dairy factories than in any other country. And, unlike in other nations, the company employs full-time staff to visit dairy farms, teaching ways to improve herds through animal vaccinations and special feeds. It will also open a dairy university in China this year to educate milk farmers—its first worldwide.

Carrefour has also set up 50 laboratories in China to test for pesticide residues and excessive food additives, and its shoppers can scan QR codes, which can be read by smartphones, to trace the production origins and expiration dates of produ ards in their manufacturing process.

The U.S. system puts the responsibility of checking for problems mostly on the manufacturer.

This helps to identify food safety breaches early, Chen says. U.S. companies are also required by law to identify potential hazards and develop plans to prevent them.

“It all starts at the source,” says Zhang Jianjun, a food safety officer at a Shanghai wholesale market that sells dried seafood and red dates.

Last year the police busted a supplier in a neighboring market for selling rat, fox, and mink meat as mutton. “Once you have supervision of the source, it’s going to be much easier to regulate and keep food safety incidents to a minimum,” The economics are often behind such food quality lapses. A year ago, thin margins from selling mutton drove one supplier to use fox meat as a substitute. Fur producers were looking to get rid of carcasses, the man said last May in an interview from prison with state-run broadcaster China Central Television. Boiling the fox meat gave it a taste similar to that of lamb and helped fool many buyers, he said. China has too many tiny food businesses for the government to effectively police, and the lack of education among farmers and processors often results in food safety lapses, according to the World Health Organization. There are 500,000 food production and processing companies in China, and about 70 percent of them have fewer than 10 employees, according to market researcher Mintel Group. This compares with 30,000 such companies in the U.S. Estimates peg the number of Chinese inspectors at just

one for every 420 farming households. China was the sixth-largest exporter of food to the U.S. last year, supplying more than two-thirds of the tilapia and apple juice and about half the cod that Americans consume. Chinese food imports increased by about 250 million pounds, or about 7 percent, from 2008 to 2012, according to the U.S. Department of Agriculture. Greater exposure to China’s less-regulated suppliers comes with risks: In the last four years, FDA inspections in China have uncovered cases of dried octopus and raw scallops containing salmonella, jelly beans and gum drops laced with lead, and a producer in Fujian province misdeclaring potentially poisonous puffer fish as monkfish. The FDA plans to expand its two-man team of food inspectors in China to nine over the next 18 months as the number of food exports to the U.S. grows. The agency is encouraging Chinese regulators to move food safety responsibility to food producers, says Christopher Hickey, the FDA’s China chief. “A movement toward industry taking responsibility in food safety and fo r the government to take the role in enforcement of those standards is the most effective way to make sure food is produced in a safe way,” Beijing-based Hickey says.

Bloomberg

14

Chaper 05

GM Recalls The Past Editor Jeff Green

For more than four years, General Motors (GM) struggled to shed the loser image of a corporation that needed a $50 billion taxpayer bailout in 2009 to survive a self-inflicted near-death experience. Now, in the wake of a February recall of 1.6 million Chevrolet Cobalts and other discontinued models, GM’s much-derided status as “Government Motors” has unlikely appeal.

Company lawyers are counting on its 2009 bankruptcy arrangements as a bulwark against litigation that grows more ominous by the day following GM’s admission that it knew of faulty ignition switches more than a decade ago and failed to fix the problem. Whether or not the GM legal strategy holds up, the recall mess has revived the company’s reputation for unreliability and created a crisis for Mary Barra, its new chief

executive officer and the first woman to lead a major auto manufacturer. The carmaker took a $300 million charge in its first quarter for various recalls, including a new one announced on March 17, covering 1.55 million newer models such as Buick Enclaves and GMC Acadias that have faulty air bags and Cadillac XTS sedans with brake flaws that may result in overheating or engine fires. The company also named GM veteran Jeff Boyer to the newly created position of vice president of global vehicle safety. Detroit has had better months. For the moment, the balky ignition systems pose the most serious legal threat to GM. If bumped or weighed down by a heavy key chain, the switch can shut off engines and power systems and disable air bags, the

company has acknowledged. For drivers, having the car go stone dead in 60-mph freeway traffic is nothing short of terrifying. For plaintiffs’ lawyers, the scenario translates to courtroom gold.

The manufacturer so far has linked 31 crashes and 12 deaths to the defects found in certain smaller Chevrolets, Pontiacs, and Saturns made from 2003 to 2007. In cold statistical terms, a dozen deaths over a decade doesn’t sound like a disaster. Some 30,000 people die every year on America’s roads; manufacturers in the U.S. have recalled 38 million cars in just the past two years. None of the defective GM models are in production anymore, so the universe of ignition-related fatalities should be limited. What’s the big deal, then?

First there’s the dismaying fact that GM has

731

Companies / Industries

Illustration

Businessweek

Chapter 05

Company Issue

GM’s 2014 Recalls 2.6 M Ignition switch (Cobalt, Ion, G5, HHR, Soltice, Sky)

1.3 M Steering (Cobalt, Malibu, Ion, G6, Aura)

1.2 M Ch.4

Side airbag wiring (Acadia, Traverse, Enclave, Outlook)

303,000

12

Instrument panel (Express, Savana)

Ch.5

172,000

14

Axle (Cruze)

1.4 M

Ch.6

Others* 16

acknowledged that some employees have known about the ignition flaw since 2001 and didn’t fix it. “The process employed to examine this phenomenon was not as robust as it should have been,” the company has said with exquisite understatement. Having quietly settled a couple of ignition defect lawsuits over the years without admitting liability, GM had already turned over thousands of pages of internal documents to plaintiffs’ lawyers, some of which show worried discussions about the problematic switches among engineers.

Combine consumer deaths with an admitted failure to act promptly—the fatality list is bound to grow now that trial lawyers are advertising for cases—and you’re looking at allegations of a coverup: Which top executives knew what, and when did they know it?

GM refuses to answer inquiries about how many suits have been filed since the recall, but you can bet the figure will grow in coming weeks. The U.S. Department of Justice has begun a criminal investigation to supplement probes by the U.S. Department of Transportation and various congressional committees. The dirty laundry will come out. Not to worry, say Wall Street analysts and attorneys sympathetic to GM. The company’s bankruptcy restructuring buried pre-2009 liabilities, including those related to product defects, in the same grave that contains the remains of the “old” GM. The “new” GM got the productive assets and operations, free and clear. In a March 12 research note, JPMorgan Chase (JPM) analyst Ryan Brinkman predicted the financial costs of the ignition-related recall would be “de minimus,” a mere trifle. Harvey Miller, GM’s lead outside bankruptcy lawyer, says the liability shield will hold. The time to litigate pre-2009 claims, Miller insists, “has long passed.” Well, maybe. The prospect of showing corporate deceit—and the accompanying potential of punitive damages— has plaintiffs’ lawyers preparing a frontal assault on the Chapter 11 defense. On March 14, Bob Hilliard, an injury attorney in Corpus Christi, Tex., filed a proposed class action in federal court seeking $6 billion to $10 billion for the lost value

of cars affected by the February recall. Hilliard separately represents the families of two teenagers who died in a 2006 crash of a Chevy Cobalt in Wisconsin. He alleges that the company improperly failed to disclose the extent of its potential liability in Chapter 11 proceedings.

If you are aware of potential exposure to litigation and you don’t reveal it, that’s fraud,” he told Bloomberg News. “I’m going to go back to that bankruptcy judge and say, ‘You have to undo this, the liability of the old GM, because it was the new GM’s continued coverup after the bankruptcy that allowed people to be hurt or killed.’ ” Hilliard’s small firm, Hilliard Muñoz Gonzales, is advertising online for more pre2009 cases; so are larger plaintiffs’ firms such as Lieff Cabraser Heimann & Bernstein in San Francisco. This kind of litigation tends to snowball, as Toyota Motor (TM) discovered in 2009 and 2010. After years of unexplained crashes, the company recalled more than 10 million vehicles because of floor mats that could get tangled with accelerator pedals and defects with the pedals themselves. The recalls led to lawsuits alleging another problem: that some Toyotas hurled themselves into walls and trees because of a software flaw. In its defense, Toyota suggested that many of the complaining drivers had stamped on the accelerator when they meant to hit the brake. Government investigations found no Toyota software bug, but the suits kept coming. Last year, without conceding wrongdoing, the company agreed to pay $1.6 billion to settle litigation related to the reduced value of its autos. Then, after a federal judge in Santa Ana, Calif., signaled he’d allow jurors to assess conflicting evidence on the software issue, Toyota agreed in December to begin talks with plaintiffs’ attorneys to resolve claims tied to injuries and deaths. (Not coincidentally, the Hilliard and Lieff Cabraser firms were involved in the litigation against Toyota.) On March 19, it reached a $1.2 billion settlement with Justice, the largest criminal penalty levied on an automaker in U.S. Adam Epstein, a lawyer turned boardroom adviser, sees GM as even more vulnerable than its Japanese rival. “In the case of Toyota,” he

says, “the specter of operator error muddied the waters for plaintiffs. With GM, like Ford (F) Pinto, there is a defect of which the manufacturer had considerable prior notice and elected not to act. The GM ignition matter is to the plaintiffs’ bar what the iconic poster of Farrah Fawcett was to teenage boys in the 1970s.” Apart from any potential courtroom damages, GM faces the likelihood of long-term reputational harm.

Consumers don’t care whether the company’s attorneys can plausibly argue that Chapter 11 makes it immune from older lawsuits, Epstein argues. “If the social media complex pillories GM for the ignition issue,” he says, “the finer points of bankruptcy law won’t matter.” Toyota, which historically has enjoyed a far stronger reputation than GM for reliability, suffered from the recalls. After the complaints surfaced, its U.S. retail market share fell from 16.3 percent in 2008 to 12.4 percent in 2011, before rebounding to 13.5 percent last year.

Barra, who became GM’s chief executive on Jan. 15, has said that while she is “personally sorry,” she didn’t know the details of the ignition problem until Jan. 31. If that’s true, it’s truly scary. An engineer by training, she served in the senior executive positions the whole time lower-level employees were fumbling around with the deficient switches? People at her level were kept in the dark? Barra now faces the dual challenge of fending off a litigation onslaught and convincing the marketplace that the new GM really is a different company making better cars. It won’t be easy, and as a holdover from the sclerotic old GM, she’s not ideally suited to proclaim that a better day has dawned on the Detroit’s largest manufacturer. “There’s no way she’s going to come out of this looking like some kind of hero,” says Dave Sullivan, an industry analyst with AutoPacific. “The best thing is to be honest and upfront and hopefully put this to bed as quickly as possible.” Expecting a quick fix, though, seems naive.

15

Bloomberg

Businessweek

Companies / Industries

Chaper 06

The Curvy Turncoat in Brazil’s Panty War Editor Christiana Sciaudone

16

Chapter 06

Apparel

Up Against the Monolith

Ch.4

116

12

1,048

Ch.5 14 Ch.6

Hope

16

Victoria’s Secret

Hers is the face and form that sold thousands of thongs. For seven years, Gisele Bündchen placed her 5-foot-11 frame at the service of Victoria’s Secret, helping fuel demand for the company’s panties and bras. Now the Brazilian supermodel is taking on her former employer and on her own turf. Images of Bündchen sporting her line of lacy underthings are plastered on billboards and buses in major Brazilian cities.

Gisele Bündchen Intimates is the product of a three year old collaboration with Hope, the Brazilian maker of intimate apparel. In May, the family-owned company will inaugurate a Gisele Bündchen Intimates store inside a luxury mall in São Paulo. That happens to be the same month Victoria’s Secret will open a shop inside São Paulo’s Guarulhos International Airport, its first in Brazil. The Victoria’s Secret’s Brazilian debut is emblematic of its corporate parent’s cautious approach. By opening a small outpost in a major international airport, alongside Salvatore Ferragamo (SFER:IM), Tory Burch, and Emporio Armani, L Brands (LB), the Columbus (Ohio)-based parent, is targeting the customers who probably already know Victoria’s Secret.

Although the $6.7 billion brand has more than 1,000 stores in the U.S., there are just a handful abroad—in Canada, the U.K., and the United Arab Emirates. “When they enter international markets, they use a test-and-learn model,” says Danielle McCoy, an analyst at Brean Capital in New York, noting that the company usually teams up with a well-established partner and expands only after demand has been proven.

L Brands and Dufry, the duty-free

concessionaire that will operate the Victoria’s Secret store in São Paulo, declined to comment, as did Bündchen’s twin sister, Patricia, who acts as her spokeswoman in Brazil.

Hope is already a household name in Brazil, where it operates 117 stores, also called Hope.

The company is counting on its alliance with the former Victoria’s Secret Angel to catapult it into lingerie’s big leagues, and has plans to open Gisele Bündchen Intimates stores in London, New York, Los Angeles, and other major cities in 2015. “We still have lots of room for growth in Brazil,” says Fabio Figueiredo, Hope’s director of expansion, but “we want to be a global brand.”

Hope also plans to increase the number of countries where it sells its wares this year from 18 to 40. Hope and Bündchen introduced her Intimates line in 2010, offering python-print corsets for 189 reais ($80), hot pink and black lace camisoles for 78 reais, and nude garter belts for 50 reais. Most of the items, like those that carry the Hope label, are manufactured at a company-owned plant in the northeast state of Ceará. Figueiredo says that because Brazilian shoppers expect new styles to be introduced each month, just 5 percent of his inventory is sourced from China.

Hope’s own stores generate 35 percent of revenue, a proportion the company intends to nudge higher through the addition of 50 stores this year, all in Brazil. A second Gisele Bündchen Intimates store is also a possibility. Figueiredo declined to provide any financial information, saying only that the company has set a goal of doubling sales within five years. Hope expects

Victoria’s Secret’s entry to step up the competition. Brazilian underwear sales grew 8.2 percent last year, to 13.1 billion reais, outpacing the 7.7 percent increase for all clothing, according to preliminary numbers compiled by Iemi Inteligência de Mercado, a local market-research company. This year lingerie sales should increase by 9 percent, Iemi estimates. Hope is banking that its Bündchen venture will raise its profile outside Brazil. It’s happened before: Her partnership with Grendene helped the little-known maker of Ipanema-brand flip-flops sell $1.16 billion of sandals last year. That, along with multimillion-dollar ad deals with everyone from Procter & Gamble’s (PG) Pantene hair care line to couture designer Chanel, made Bündchen the top-grossing supermodel seven years in a row, according to Forbes. Last year she earned $42 million. Tying with a celebrity like Bündchen, “if you’re small and unknown, is going to put you on the radar in a way that not many other branding and marketing tactics would,” says Leslie Farnsworth, chief executive officer of FrogDog, a Houston-based marketing strategy consultant.

End

17

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Politics/Policy

Policy/ Politics

p.20

Chapter 07 In trade Talks, it’s Contries vs. Compaines

Chapter 08

p.22

The paltry choice of doctors under Obamacare

Chapter 09

p.24

Why the U.S needs way more foreign students

Chaper 07

In trade Talks, It’s Countries vs. Companies

20

Rising Complaint Cumulative investor-state arbitration cases world wide

518

94

2002

2012

consent or a third party) that are empowered to Beginning in the 1950s, trade negotiators overrule a nation’s highest authorities. The panevolved an elegant solution to a vexing problem: els have come under attack from environmental the risk that poor countries would seize the groups, labor unions, and developing nations oil fields, mines, and factories of Western corpoincluding Venezuela, Ecuador, and South Africa. ration that operated within their borders.

Fearful of nationalization or other harsh treatment, Opponents point to several disputes currently in arbitration where corporations are invoking multinationals were holding back on investment. treaties for protection from local laws. Philip Everyone lost. The answer was to include lanMorris International (PM) has brought a case guage in treaties specifying that disputes in Hong Kong Challenging Australia’s plain-packbetween investors and governments would be ing law for cigarettes. The tobacco company settled by independent arbitrators, not courts says the law prevents it from marketing its brand, in the country where a disagreement arose. That in violation of a treaty between Australia and gave corporations confidence that their projects Hong Kong. Sweden’s Vattenfall, which operates were safe and helped unleash trillions of dollars’ nuclear plants in Germany, is seeking compensaworth of crossboder investment. Today there tion for the country’s planned phaseout of are about 3,000 treaties between countries that electricity generation from nuclear power, which provide for such arbitration. it says breaks the countries’ bilateral investment Yet that fix is now the subject of a bitter distreaty. Lone Pine Resources, a U.S. company agreement between corporations and that has licenses to produce natural gas from governments that’s impeding progress on two of beneath the St. Lawrence River in Quebec, the biggest free trade treaties ever, both involvwants to be compensated by Canada for a moraing the U.S.: the trans-Pacific Partnership torium on fracking in the province. Lori wallach, (TTP) and the Transatlantic Trade and Investment director of Global Trade Watch, a Ralph Nader Partnership(TTIP). The problem is that to organization, has called the arbitration system many people, arbitration look profoundly under“a quiet, slow-moving coup d’état.” Democratic mocratic. Countries that sign the treaties give Senator Sherrod Brown of Ohio, a prominent awa a lot: The arbitration panels are unelected arbitration critic, said in an e-mail that the “mere tribunals of three experts (usually layers, one threat of costly litigation” can have a chilling chosen by each side and one picked by mutual

Chapter 07

National Politics

Settling Disputes With Arbitration 1998

2003

2010

2011

2012

2012

$725m

$525m

$800m

Billions

$223m

$5.1b

U.S vs. Loewen

MEX vs. Corn

PER vs. Renco

AUS vs. P.M.I

CAN vs. L.P.R

GER vs. Vattenfall

The Canadian Furneral

The U.S. companies

Renco claims that

The cigarette maker is

The U.S. energy

The Swedish nuclear

home company chal-

separately challenged

Peru’s escalating

challenging Australia’s

company is challeng-

power company has

lenged a Mississippi

a Mexivan tax on

demands for a clean

paper packaging low.

ing Quebec’s 2011

challenged Germany’s

state court ruling that

beverages made with

up of lead and zinc

The company says

moratorium on frack-

decision to speed the

it had engaged in

high fructose the

smelters forced its

the law prevents it

ing for natural gas. It

phaseout of nuclear

predator practices.

corn syrup.

Doe Run Peru subsidi-

from marketing

wanted to drill in bed

plants in the after-

of the St. Lawrence

math of Fukushima.

Status Pending

Status Pending

ary into bankruptcy.

Status Dismissed on

Status Total awards:

procedural grounds

$186 million

Status Pending

Status Pending

21

effect on legitimate regulation, such as on the tobacco. To see how arbitration can squeeze a country, consider the case of a lead and zinc smelting operation in South America called Doe Run Perú. The Peruvian government demanded a costly waste cleanup. U.S. billionaire Ira Rennert, who owned Doe Run Perú for more than a decade through Renco Group, said the government’s escalating cleanup demands forced the unit into bankruptcy in violation of the U.S.-Peru trade promotion agreement of 2006.

Renco asked a panel of arbitrators to force Peru to pay it $800 million. It also said the country, which once owned the operation, should be liable for any damages arising from a pending lawsuit in federal court in St. Louis alleging that it sickened more than 700 Peruvian children.

The case is ongoing.

The voices of opposition are becoming harder to ignore. In January, in response to criticism of the arbitration clauses now standard in nearly every agreement, the European Commission announced a halt to negotiations with the U.S. on the arbitration provisions of TTIP, the ambitious effort to open more trade and investment between the U.S. and the European Union.

The commission reaffirmed it was committed to including arbitration in the treaty, but said it wanted a 90-day break for “public consultation” to hear people’s views. A high-profile campaign by opponents could complicate talks long after the listening period ends.

For the U.S. government and other backers of arbitration, a bigger blow came in mid-March when the German government—which has been

a staunch supporter of investor-state dispute settlements—said it decided to push for excluding it from TTIP. “Special investment protection rules are not necessary in an accord between the USA and EU,” the German economy ministry said in a statement. It said the rules were unnecessary because “both partners have adequate legal protection” for foreign investors in their courts.

The Germans said they’d OK a treaty if the final text addresses their concerns on arbitration.

The Vattenfall Challenge to Germany’s nuke moratorium may have brought home the pitfalls of arbitration,s says Pia Eberhardt, a researcher with Coporate Europ Obervatory, which tracks corporte lobbying of the EU. In an e-mail, the press offiece for EU trade policy said Europe would make sure the investment provisions “ fully enshrine democratic principles.” Australia and Malaysia are leading similar opposition to strong arbitration provisions in the TPP, a 12-nation trade and investment pact.

The U.S. can’t afford to drop arbitration from the big Pacific and Atlantic trade deals, because that would send the wrong signal for future agreements, sats Sean Heather, vice president for global regulatory cooperation at the U.S. Chamber of Commerce. China, which is beginning to negotiate investment treaties with the U.S. and Europe, could argue that its pacts shouldn’t have to include arbitration, eitgher.

That would leave investors in China relying on their governments to intervene with the Chinese government, or, worse, depend on fair treatment in Chines courts. Some of the opposition to investor-state arbitration is clearly

overheated. It’s one thing for a company to make an outrageous claim against a government and quite another to win. Compaies win or settle about half their caes. (Notably, they’ve never won against the U.S.) The arbitration agreement the U.S. wants to include in the Atlantic and Pacific trade pacts wouldn’t give companies a free pass to pollute or break foreign laws. And companies couldn’t claim that any law or regulation they dislike constitutes a “taking” of their property for which they deserve compensation.

Arbitration hearings and documents would be open to the public. Still, lots of people have trouble with the idea of giving anyone as much poer as the arbitrators have. “They’r supreme court justices for the world,” says Gus Van Harten, a professor at York University’s Osgoode Hall Law school in Toronto. “They don’t judges, and know you are.”

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Politics/Policy

Chapter 08

Insurance

Ch.7 20 Ch.8 22 Ch.9 24

Chaper 08

The Doctor is Out of Network Editor Charles Kenny

23

Ben Rosenthal was treated for prostate cancer four years ago and had gallbladder surgery the year before that. A former manager at a market-research firm in Los Angeles, Rosenthal, 57, paid for his own health insurance. Last fall, when his plan was discontinued because it didn’t meet standards set by the Affordable Care Act, Rosenthal bought the best insurance coverage he could find, a top-tier “platinum” policy from Blue Shield of California that costs $792 a month. He figured it would provide access to top hospitals. Then in February he learned the plan wouldn’t cover the hospitals where he was used to being treated. Rosenthal is one of millions of Americans who have purchased insurance under the Affordable Care Act and are discovering that many of the new plans offer the narrow network of doctors and facilities.

“If I had anything happen, I wouldn’t want to go to a hospital that I’m not familiar with and with doctors I don’t know,” he says. Since the ACA created marketplaces for private health plans last fall, insurers expecting to lure customers with low premiums have fashioned smaller networks of medical providers. By cutting out expensive hospitals and negotiating favorable rates with doctors in exchange for sending more patients their way, insurers can keep premiums down. The Blue Shield’s new network includes 43 hospitals in Los Angeles County, about 64 percent of what its standard coverage offers, the spokeswoman Lindy Wagner says in an e-mail. In addition to having fewer options, buyers are making decisions about which plans to buy based on incomplete

or misleading information, says Karen Pollitz, senior fellow at the Kaiser Family Foundation, a health policy research group. “Consumers have a very limited ability to shop in advance and evaluate provider networks,” she says.

Before Obamacare, the market for individual health plans was too small for most insurers to bother creating provider networks separate from those they offer large employers. If you bought a plan on the private market, you had access to the same doctors and hospitals the insurer’s large, employer-based plans offered. That changed as insurance companies created offerings for price-conscious shoppers on healthcare. gov and state exchanges. For insurers, controlling costs has become more important since the ACA barred denying coverage or charging higher rates to people with preexisting conditions. Reducing choices can lower costs by 5 percent to 7 percent, estimates Craig Hasday, chief operating officer at Frenkel Benefits, the New York brokerage. “On the exchanges in many states, the narrow networks are the only networks that are available,” he says.

Many consumers say they don’t mind the limitations. A recent Kaiser Family Foundation poll found that 37 percent of respondents prefer cheaper plans with the fewer doctors and hospitals over broader, more expensive coverage. Younger people and those without insurance through employers were more likely to be satisfied with more restrictive plans.

People can have trouble determining if their doctors or hospitals will be covered. Plans on healthcare.gov and state marketplaces are

required to include links to directories that show which providers accept the insurance. But the information is often missing, wrong, or difficult to navigate, says Oliver Kharraz, chief operating officer of ZocDoc, an online appointment booking company. ZocDoc tried to verify the accuracy of hundreds of directories by calling doctors listed as in-network providers. About half the listings were wrong, Kharraz says. The California exchange, one of 15 state marketplaces that operate independently of healthcare.gov, created a central directory on its website but took it down on Feb. 6 because of errors.

The White House plans to identify networks that prevent people from receiving timely care, and will ask insurers to add more providers before allowing them to sell in the marketplaces, according to a March 14 letter from the Medical Centers for Medicare and Medicaid Services.

The insurance industry is resisting federal efforts to review health plans’ lists of doctors and hospitals. Creating a new network can take a year or more, and companies that currently are designing plans for 2015 won’t have time to tinker with them, Dan Durham, executive vice president of America’s Health Insurance Plans, the industry’s lobbying group, wrote in a Feb. 25 letter to the administration.

Pressures on insurers to keep premiums low—state regulators can reject plans that are priced too high—may mean patients will have to learn to live with restricted choices. “The industry’s had to find ways to cut costs,” says Hasday of Frenkel Benefits. The result, he says, is “much less transparent for the consumer.”

Bloomberg

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Politics/Policy

Foreign Students Population Map

U.S.

Chaper 09

24 Editor Charles Kenny

Why the U,S needs way more foreign students As Washington wonders how to encourage democratic reform in places like North Korea, Myanmar (formerly Burma), and Iran and shore up new democracies in the Middle East and Africa, a not so obvious answer is: invite their kids to study in the U.S. About one in five of the 3.3 million foreign students worldwide who were enrolled in college outside their home countries in 2008 were in the U.S. according to a study by Michel Beine and colleagues at the University of Luxembourg.

Foreign-educated students have an outsize impact when they go home. In 2013, scholar Marion Mercier of the Paris School of Economics looked at the backgrounds of more than 900 presidents and prime ministers in developing countries since 1960. She found that leaders who had spent time abroad as military attachĂŠs or for military training were more likely to endorse policies restricting democracy after they came to power. Those who had studied overseas earlier in their lives were more likely to embrace democracy, including former President

Chapter 09

Education

China

29%

235,597 students

India

12%

96,754 students

South Korea

9%

70,627 students Asia

Taiwan Japan Vietnam Nepal

Ch.7

Hong Kong

20

Thailand Indonesia Saudi Arabia

Ch.8

5%

44,566 students

Turkey

22 Ch.9

Middle East

Iran

24

Kuwait Nigeria Canada

3%

27,357 students

Maxico Brazil U.K

Europe

Germany France Spain Venezuela Colombia Other

18%

145,652 students 25

Ricardo Escobar of Chile and former Polish Prime Minister Marek Belka. Of course, the record is far from perfect: Syria’s Bashar al-Assad studied ophthalmology in the U.K. But overall, Mercier’s work suggests studying abroad can be a powerful positive force for democracy.

Even those students who don’t become government leaders when they return from overseas can affect the political leanings of their home countries. Antonio Spilimbergo, the economist at the International Monetary Fund, found that countries with large numbers of citizens who’ve studied in democratic nations, including the U.S. and the U.K., are more likely to have democratic governments than countries where few citizens have studied overseas. It’s not unreasonable to conclude that China is increasingly open culturally and economically in part because the country sends hundreds of thousands of students abroad each year, who come back with greater expectations for their lives than they had before they left. Migrants don’t have to return home to have an impact on

democracy. In 2013 researchers at Germany’s Institute for the Study of Labor published a study on voter behavior in, of all places, Moldova, the central European country and former Soviet republic sandwiched between Romania and Ukraine. The study found that in the Moldovan villages, votes for communist party candidates decline as the number of villagers emigrating to western Europe rises.

Villages that send more emigrants to Russia see the opposite pattern. A 10 percent rise in westward migration from a village reduces the communist vote share by six percentage points.

The study indicates the experiences of those who go overseas students and émigrés alikeinfluence the political views of friends and family members they keep in touch with back home.

Given so much evidence, you’d think Washington would be making it as easy as possible for the college kids from abroad, particularly those from developing nations without strong democratic traditions, to live and learn in the U.S.—and then go home and tell

their fellow citizens all about it. While record numbers of foreign students are studying in the U.S., the country is losing market share as more students choose other countries. From 2000 to 2009, the U.S. share of all students studying abroad dropped from 23 percent to 18 percent, largely because tougher immigration policies have made it harder for them to get visas. The U.S. government currently spends $243 million a year to help subsidize about 3,000 foreign students (as well as 4,000 U.S. students studying in foreign countries). That’s not a lot by Washington standards, and it’s far cheaper than other U.S. efforts to make friends overseas—about $20,000 less per enrollee than the Peace Corps, and about 0.2 percent of the price tag of the military’s effort to promote security and democracy in Afghanistan and Iraq in 2011. The return on investment is certainly easier to measure: The Department of State tally of government officials worldwide who studied in the U.S. includes some 30 prime ministers and 40 presidents.

End

A QUEST FOR PERFECTION

Bloomberg

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Markets / Business

Markets/ Business

Chapter 10

p.28

Ballmer Gives Harvard Donation to Expand The Computer Science

28

Chapter 11

p.30

Mr. Francesco Maolia

Chapter 12

p.34

Starbucks Wants to Be Fancy

Chapter 10

National Politics

Chaper 10

Ballmer Gives Harvard Donation to Expand The Computer Science Editor Isaac Arnsdorf Alex Nussbaum

29

Harvard University will increase its faculty in computer science, the school’s fastest-growing major, by 50 percent with funds from Steve Ballmer, Microsoft Corp.’s biggest shareholder and former chief executive officer.

The gift will support 12 new teachers, increasing the size of the computer science faculty to 36, said David Parkes, area dean for computer science at Cambridge, Massachusetts-based Harvard. The school didn’t provide the value of Ballmer’s donation. Demand for technology and programming courses has risen sharply at Harvard as smartphones, tablets, laptop computers and other devices have become integrated into all facets of life. Ballmer, who graduated from the college in 1977, said he began the discussions with Harvard President Drew Faust the day he retired from Microsoft that led to the gift.

“It’s clear to me that Harvard really could build the computer science department for the future,” he said in a telephone interview. “This is a oncein-a-lifetime chance to seize the day.” Ballmer made a return visit to Harvard and toured Allston, the Boston neighborhood across the river from the main campus in Cambridge, where the school is building facilities for computer science.

New classrooms in Allston will allow more space for faculty to interact with students as they work on projects, Parkes said.

“This building will change how we teach,” Ballmer has donated to Harvard in the past.

He and Microsoft co-founder and former CEO Bill Gates gave $25 million in 1996 for engineering programs and construction of the Maxwell Dworkin Laboratory that now houses the

computer science faculty. The building bears the maiden names of the executives’ mothers. The University of Oregon said yesterday that Ballmer and his wife Connie, a 1984 graduate, are giving $50 million to the Eugene-based college. The gift will pay for scholarships, a health promotion program and a campaign to raise awareness of the university. At Harvard, Ballmer roomed down the hall from Gates, who dropped out before graduating to found Microsoft. Bill Gates later persuaded his former classmate to leave Stanford Graduate School of Business and join the company. Ballmer, 58, succeeded Gates as Microsoft CEO in 2000. He bought the Los Angeles Clippers basketball team in August for $2 billion, and teaches business classes at Stanford. He is the 33rd-richest person in the world with a net worth of $22 billion, according to the Bloomberg Billionaires Index. Harvard is in the second year of a campaign to raise $6.5 billion, a record goal in higher education. The university said in September that it had collected commitments of more than $4.3 billion. Harvard has the biggest endowment in higher education, valued at $36.4 billion. Computer science is located in the School of Engineering and Applied Sciences, whose portion of the fund is about $879 million. Computer science is Harvard’s fifth-largest concentration, or major, and its introductory class, called CS50, is the biggest at the University with about 700 students per semester, Parkes said.

The popularity of CS50 is such that faculty at Harvard’s biggest Ivy League rival, Yale University, voted earlier this month to bring the

course to the New Haven, Connecticut, campus at the beginning of the next school year, the Harvard Crimson reported Nov. 9. Harvard faculty members are still considering the contract, Parkes said. Harvard’s engineering school was founded in 1847 and became the separate, degree-granting unit in 2007. Over the past seven years, undergraduate enrollment at the school has tripled, Parkes said. More students are studying computer science for its sake.

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Markets / Business

30

Chaper 11

Mr. Francesco Maglia Editor Charles Kenny

Photography Gianluca Giannone

Chapter 11

Artisan

Ch.10 28 Ch.11 30 Ch.12

For most of us, an expensive umbrella is seen as something of an extravagance: the sort of thing that a man invests in once he has ticked everything else off his “to buy” list. But to a certain type of man - the type who aspires towards sartorial elegance in all matters it is far more important than that. After all, what good are a pair of Northampton-made shoes, a bespoke Savile Row suit and a briefcase cut from the finest Italian calf-leather if, at the first sign of rain, you’re forced to duck for cover underneath an InjuryLawyers4U golf umbrella?

One man providing a particularly elegant solution to this problem is fifth-generation “ombrellaio”, Mr Francesco Maglia. From a small workshop on the southern outskirts of Milan, he presides over one of Italy’s last traditional umbrella makers - a business that began in Pavia with his great-great-grandfather, the first Francesco Maglia, some 160 years ago. His shop is completely festooned with umbrellas: propped up against walls, neatly arrayed on racks and stands, and lining workbenches in various states of assembly. Lining the walls is a small fraction of what Mr Maglia claims to be the world’s largest collection of umbrella-themed postcards and photographs. One depicts the scene at Hyde Park Corner at the end of WWI, of a victorious crowd completely submerged under a sea of

more resistant.

The hand-stitching renders the umbrellas

34

black umbrella canopies; another shows the interior of James Smith & Sons, the famous umbrella shop that has stood on London’s New Oxford Street since 1857.

The French call him “Le roi du parapluie”, the Germans, “der König der Schirme”. Both mean the same thing: the king of umbrellas.

Standing at an imposing six and a half feet tall, bedecked in an eclectic array of tweeds and sporting a snow-white, Santa Claus beard, Mr Maglia - the fifth man in five generations of umbrella makers to bear his name - suits this regal appellation rather well.

31

Bloomberg

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Markets / Business

32

Photography Gianluca Giannone

Chapter 11

Artisan

1

2

3

5

4

1

Double Canopy

2

The rib

Helps prevent strong winds

This is a weak point. Often

from turning it inside out

made from steel, aluminum or fiberglass

3

5

End rib

4

Reflective material

Fiberglass adds protection

Make it easier to be seen

at the ends

on a rainy day

The shaft Provides a strong hold

Interview It’s strange to find your workshop here, on the outskirts of Milan.

The company moved to Milan in 1876. We were in Corso Genova, in the town centre, until 11 years ago. The town loved us. Such a historical company! We received so many gold medals.

But we couldn’t find a place to park a truck to bring in our supplies. We had to move.

Why buy an expensive umbrella?

Why choose a Mercedes over a Fiat? Our customers crave culture; they are pleasure people.

The kind of people who buy a beautiful pair of shoes and want something equally beautiful to protect them from the rain.

When did you first realise that you wanted to be a part of the family business?

It was never a choice; I always wanted to do it.

I can still remember visiting the workshop just to watch my father work when I was a child.

How much has changed in that time?

The world is changing. Does Ombrelli Maglia need to change with it?

Your nephew is the sixth Francesco Maglia.

Do you expect him to take the helm?

No! Absolutely not. It’s very important to maintain our traditions and standards. We can’t compete on price terms with China - they can produce an umbrella for 80 cents! But they can’t compete with us in terms of quality.

I am 71 now. Francesco the sixth is 22 - he is the son of Giorgio, my youngest brother. There is still time. I can teach him how to deal with customers, and my brother can teach him the technical skills. But in the end, it’s his choice.

And in 20, 30, 40 years, will we still have a culture to support this kind of business?

Back then there were more than 110 umbrella makers, just in Italy. Now, we are fewer than 10.

Of those that continue to follow tradition - those which have not outsourced to China - we are, perhaps, three.

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Bloomberg

Businessweek

Markets / Business

34

Chaper 12

Starbucks Wants to Be Fancy Again Editor Liza Lin, Jing Jin

Once upon a time, Starbucks was seen as something for the caffeinated elite. Drinking the products carried the suggestion of a certain social status, a willingness to pay up for better coffee than was available at a rest stop on the interstate. Today, with more more than 21,000 stores, Starbucks is usually the coffee you find at a rest stop on the interstate, at the grocery store, and almost everywhere else.

That trajectory, from minor luxury to ubiquitous commodity, ceded the high-status, high-priced coffee game to a new generation of independent boutiques and small chains. On Friday, Starbucks will take a major step back into the elite coffee business with the opening of its first “roastery-café” in Seattle’s Capitol Hill neighborhood. The desire to reclaim lost cachet is clear.

Craig Russell, executive vice president of global coffee, says Starbucks is trying to “elevate the brand.” Instead of serving such familiar varieties as Pike Place, the new cafe will exclusively roast and serve an ultra high-end Reserve line of coffee. The facility itself, a former car showroom,

is an airy 15,000-square-foot space decked out in rich woods and copper accents. Visitors can watch green coffee beans being poured into a giant copper vat, roasted brown, and then sucked through tubes along the ceiling and into transparent coffee silos for use in the drinks.

Gone are the cramped tables of a typical Starbucks, replaced by bar stools and a view of brew paraphernalia. Gone, too, is the term barista that Starbucks helped put into wide circulation; the workers who prepare your order here are instead known as “coffee masters.”

At a separate bar, these skilled artisans hold coffee information sessions for curious customers. Even the classic green mermaid logo has vanished, replaced by a sans-serif R topped by a star. Over the next five years, the company plans to open 100 of these Reserve cafes around the world. The new wave of shops will serve the small-batch beans such as Colombia Montebonito and Sumatra Peaberry Lake Toba.

Starbucks expects to produce 1.4 million pounds of Reserve coffee in the Seattle roastery during

the first year, and Reserve facilities will be added to beef up the output, including one planned for Asia in 2016.

Starbucks is considering opening Reserve cafes in “hip urban areas” such as Chicago, Washington, New York, and Los Angeles. There’s no shortage of regular Starbucks in these places, not to mention the next-generation the coffee upstarts that Reserve imitates.

“We’re always trying to stretch and let customers know that we offer a spectrum of experiences,” Russell says. The company has referred to Reserve as a “coffee forward” endeavor, but the independent cafes and small high-end chains have already successfully explored how to brew a better cup. Blue Bottle, an Oakland (Calif.)based chain of high-end cafes in the Bay Area, Los Angeles, and New York, has amassed $45 million of venture capital since late 2012, a sign that investors envision a significant market.

Starbucks doesn’t want to lose out on those who consider coffee an art and are willing to cough up cash for it. With Reserve, a 32-ounce

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coffee will fetch as much as $8, and customers can partake in a flight of three coffees with a custom food pairing for $15.

The high-end push is particularly important as Starbucks tries to counteract slowing samestore sales growth, which came in at just 6 percent across the Americas region in the last fiscal year. The new cafes, Starbucks Chief Executive Officer Howard Schultz promised investors in October, would “combine the beauty and romance of super-premium micro-lot coffees with moments of connection and discovery.”

It’s a tall order—and something of an acknowledgement that the normal Starbucks experience has become light on romance.

Just don’t expect those moments of connection to happen quickly. Reserve staff will be trained to prepare coffee using a wide variety of methods, including French press, pour over, and Kyoto drip. The siphon coffee makers used at Reserve locations need about seven minutes to complete one order. The workers are also trained to make elaborate latte art and are expected to socialize with customers, rather than barking out a name and handing over a cup.

Seattle’s independent cafes and roasteries don’t seem worried about their new competition; some suspect that Reserve will help them.

“Starbucks has the best resources of any coffee company in the world, and they are able to cre-

ate an experience that’s really visible to coffee drinkers all over,” says Chelsey WalkerWatson, owner and director of retail at Slate Coffee Roasters, which prepares beans for its cafes at a facility in the shadow of the coffee giant’s corporate headquarters. As WalkerWatson sees it, the people exposed to highend coffee by the fancy Starbucks shops will probably become more curious about cafes such as hers. Others take reassurance from Starbucks’s previous ill-fated attempts to tackle high-end markets. In 2009, the company opened 15th Ave Coffee and Tea in Seattle, a move that many derided as mimicking the local coffee makers. The company eventually rebranded that location as a Starbucks. “The thing is, I don’t see these stores as competition. People are still going to frequent quality mom-and-pop stores,” says Ian Peters, co-owner of Empire Espresso in Seattle. “I’m still going to find the cool independent shop doing something new.”

End

Bloomberg

Businessweek

Illustration Tane Williams

Fashion

36

Tiffany vs. Costco: Which Diamond Ring Is Better?

Editor Claire Suddath

Costco Wholesale (COST) sells 10-pound boxes of frozen sausage, 2-gallon jars of pickles, and diapers by the thousands. It also sells Tiffany engagement rings. No, not rings from Tiffany & Co. (TIF), the upscale New York jewelry store, but diamonds placed high on a silver band and held in place with six prongs—which look identical to the classic Tiffany engagement ring setting. In February, Tiffany filed a multimillion-dollar trademark suit against Costco that seeks to determine whether “Tiffany” has become the Kleenex of diamond rings or if it refers specifically to the store famous for blue boxes and Audrey Hepburn’s breakfast.

Unlike Wal-Mart Stores (WMT), which sells diamond rings for only a few hundred dollars each, Costco’s rings regularly run as much as $40,000. (Tiffany & Co. rings with the Tiffany setting start at $11,000 and go up and up.) In 2011, Costco’s website even offered a 6.5-karat ring for $1 million. People who can spend that much money on a piece of jewelry aren’t usually the sort to accessorize at Costco. Yet some are the type who can’t resist a good deal. The assumed benefit of a Costco ring is that even at $40,000, you’re getting higher-quality diamond than you’d be able to afford at a more prestigious store.

“We’d looked at Jared (SIG) and Shane Co. and we saw nice things, but Costco’s diamonds were

above and beyond what we could afford elsewhere,” says Julie Huezo, 32, an insurance underwriter from Olympia, Wash., whose husband gave her a $6,500 Costco ring in 2010.

“For the price we paid, I don’t care where it came from,” she says. Not everyone is so open-minded. On a Weddingbee.com message board thread about Costco engagement rings, most of the commenters said that while they weren’t against them, they weren’t really for them, either. “I love Costco for grocery items, but I have never even thought to look at their rings,” one poster wrote. Another said she thought about shopping there, but “I was concerned everyone would ask where we got the ring.” “A diamond is a diamond,” says Russell Shor, a senior industry analyst at the Gemological Institute of America, the premier rating and certification agency for diamonds.

“If you have a stone from a top jeweler with the same grade as the discount place, they’re basically the same thing.” Good Morning America tested this theory in 2005, when it appraised both a Tiffany diamond and a Costco diamond.

As it turned out, the $16,600 Tiffany cut was valued at only $10,500, whereas the $6,600 Costco version was actually priced 17 percent under its appraised value of $8,000. As with any other name-brand product, Tiffany’s

reputation raises the price of its jewelry. “If you want someone to present the diamond on a pretty cushion and have the box from a prestigious brand, then you’re paying a premium for that experience,” Shor says. “Or you can have someone swipe your credit card, hand you a diamond, and tell you to get out. Your choice.”

It’s this prestige that Tiffany claims Costco was trying to co-opt by referring to some of its products as Tiffany rings. “We now know that there are at least hundreds if not thousands of Costco members who think they bought a Tiffany engagement ring at Costco,” the company wrote in its initial complaint. For its part, Costco claims that “Tiffany” is a generic term for the type of setting that Tiffany’s founder, Charles Tiffany, popularized in 1886. It’s now so commonly known that the term “Tiffany setting” even appears in the dictionary. Of course, Costco rings don’t come with perks such as free cleanings, and they’re packaged in a red and beige box instead of the genteel Tiffany blue.

Costco doesn’t even resize rings for customers.

But it does sell bouquets and corsages in bulk.

WIDEN YOUR WORLD

Gene Leonard PHOTOGRAPHER: MICHAEL DAR