Bloomberg Businessweek Middle East 1st Jan 2017 by UMS International

16 — 31 December 2016 businessweekme.com

Algeria…..…..…........DZD 215 Bahrain….......................BHD 1

Egypt……............…...... EGP 10 Iraq……...…..…...... IQD 3200

Jordan....….........….......JOD 2 Kuwait….......…......KWD 0.75

Lebanon..............LBP 4000 Libya…........................LYD 3.5

Oman…….................…..OMR 1 Qatar……….................…QR 10

Saudi Arabia.........…SAR 10 Syria............................SYP 200

UAE...…....…..…........…AED 10 Yemen…..................YER 600

Dr. Brian Etemad, Esq. Tamleek Real Estate Co., CEO

Building 3, Level 7, Emaar Square, Downtown Dubai, UAE | P.O. Box 28156 T: +971 4 279 8888 F: +971 4 279 88999 E: info@tamleek.ae W: www.tamleek.ae

Income Statement 1. Revenue from online advertising: $76,062,000,000 2. Revenue from Google Glass, venture capital investments, Nest thermostats, smart contact lenses, building-size video screens, seawater-based fuel, broadband internet service, delivery drones, internet balloons, self-driving cars, quadrupedal all-terrain robots, Wi-Fi kiosks, energy-generating kites, the world’s most sophisticated artificial intelligence software, possible cure for death:

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COVER ILLUSTRATION BY SJC

Budgeting the moonshot factory p38

“For the last couple of years the US Department of Defense has been trying to get the Gulf states to harden their defences” p14

“There are no excuses for us to stand still or move backwards” p20

“This is the return of the deal making and alliance-building of Qatar” p28

Cover Trail 1 — 15 January, 2017

Opening Remarks There’s a bipartisan way to fix corporate taxes

How the cover gets made

Global Economics Trump may be owning Richard Nixon’s madman theory of diplomacy

Stalled by scandal, a Brazilian development bank turns off the spigot 9 India plays whack-a-mole as it tries to stamp out tax evasion 10 There’s a hitch in the plan to bring back US jobs: The strong dollar 12

Companies/Industries Keeping hackers at bay in the oil-rich Gulf

The guru’s guide to looking good 15

“This issue our cover looks at Saudi Arabia’s Vision 2030 - no pun intended”

“Okay cool. do you know that I have been told I have 20/20 vision?”

“Good for you but I am talking about the plan for the future of their country, not an eye test!”

“Let me try your glasses on to get some perspective on 2030 vision”

European airlines seek safety in numbers, but the plan isn’t taking off 16 “....reallly, okay here you are...”

Politics/Policy Saudi Arabia’s Vision 2030 needs a switch in focus

Mapping the Trump Organization’s world of conflicts 22

Technology 2

If Elon builds it, the crazies will come

See Mario on the tiny screen. See Nintendo everywhere 25 Apple orders its drones to overtake Google Maps 26 Innovation: With 3D glasses, your innards will never look the same again 27

Markets/Finance It’s spending time again in Qatar

A cash shortage hits India’s gold economy 29 A brokerage finds success with Wall Street’s castaways

Trump properties overseas could become terrorist targets 31

Feature The Alphabetization of Google A rigorous new CFO sorts the alphas from the bets

Kiddie Capitalists A camp where preteens get drilled on profit margins

Powder Keg Users call kratom a safe alternative to opioids. The DEA wants to criminalise it

COVER AND COVER TRAIL PHOTO ILLUSTRATIONS BY SJC

16 — 31 December 2016 businessweekme.com

Etc. Imzy wants to be just like Reddit, minus the trolling

Marketing: Skip the beauty counter and order your fragrances online 58 What I Wear to Work: Heather Hubbs does her shopping before acupuncture appointments 59 Food: Meet the chefs moving Indian cuisine beyond bright-orange chicken 60

Workplace: Fewer Realtors see the home office as a selling point 62 How Did I Get Here? Sue Desmond-Hellmann brings years of fighting AIDS to the top job at the Gates Foundation 64

Algeria…..…..…........DZD 215 Bahrain….......................BHD 1

00_coverzx.indd 1

Egypt……............…......EGP 10 Iraq……...…..…...... IQD 3200

Jordan....….........….......JOD 2 Kuwait….......…......KWD 0.75

Lebanon..............LBP 4000 Libya…........................LYD 3.5

Oman…….................…..OMR 1 Qatar……….................…QR 10

Saudi Arabia.........…SAR 10 Syria............................SYP 200

UAE...…....…..…........…AED 10 Yemen…..................YER 600

12/28/16 4:22 PM

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Index People/Companies 10

PQRS

India is struggling with currency chaos

Patanjali Ayurved Paul Ryan PC Jeweller Petrobras Qatar Airways Qatar Investment Authority Ram Rahim Singh Ravi Shankar Rex Tillerson Richard Nixon Ryanair Saudi Arabian Oil Company

15 7 29 9 18 28 16 15 9 9 18 14

Steven Mnuchin

Sheikh Abdulla bin Mohamed bin Saud Al Thani Simon Williams Siraj Al-Malki SoftBank Group SolarCity Sony Sovereign Wealth Fund Institute Space Exploration Technologies Steven Mnuchin Sunil Duggal Sven Behrendt

4 Aer Lingus Ahmed Fitaihi Air France American Airlines

18 21 16 16

12 7 21 31 15 28

DEF

Aer Lingus

Andrade Gutierrez 10 Apple 26 Baba Ramdev 15 Bina Thompson 16 Brad Setser 12 Brazilian Development Bank 9 British Airways 16

Dabur India David Petraeus Delta Air Lines DeNA Deputy Crown Prince Mohammed bin Salman Dilma Rousseff Dogan Sirketler Grubu Donald Trump EasyJet Elon Musk Emirates Enrico Soddu Etihad FireEye Fitaihi Holding Group

15 9 16 26 20 10 31 6 18 24 18 29 18 15 21

GHI GeoEconomica GlaxoSmithKline Goldman Sachs Google Graeme Pitkethly Gurmeet Ram Rahim Singh Haji Husein Alireza & Co. Ltd

Henry Kissinger

28 15 7 26 16 15 20

Henry Kissinger 9 Iberia 16 International Consolidated Airlines Group 18

JKL Jaggi Vasudev Jens Monrad Justin Amash Kaswara Alkhatib Kevin McCarthy KLM Lufthansa Luiz Inacio Lula da Silva

15 15 6 21 6 16 16 9

MNO Manappuram Finance 29 Maria Silvia Bastos 10 MarketsandMarkets 15 Microsoft 26 Mike Pence 9 Mitt Romney 9 MMTC-PAMP India 30 Mohammed al Zarooni 15

29 24 7 16 28

TUV

Microsoft

Mohammed Dardeer Mohit Shrivastava Morgan Stanley MSD Management Consultancy Muthoot Finance Narendra Modi Nawaz Sharif Newt Gingrich Niantic Nintendo Norwegian Air Shuttle Odebrecht

Apple maps is sending in drones

Editorial: Mayank Singh, Group Editor mayank@businessweekme.com Sales & Marketing: Poonam Chawla, Asst GM Sales & Marketing poonam@businessweekme.com; +971 50 144 0703 Art & Design: Steven Castelluccia, Art Director steven@businessweekme.com; +971 4 432 9467 Subscribe: subscriptions@businessweekme.com Address: PO Box 503048, Building 10, Office 346, Dubai Media City, Dubai UAE Web: www.businessweekme.com General enquiries : +971 4 4 329 467 BPA Worldwide Consumer Publication Audit Membership Applied for December 2015

20 15 30 20 29 12 9 9 26 25 18 10

Tesla TJM Institutional Services Tradition Trump Organization Tsai Ing-wen Unilever United Continental Holdings United Launch Alliance UTURN Vladimir Putin

24 30 31 31 9 15 16 25 21 29

WX Willie Walsh Wow Air Xstrata

18 18 29

BLOOMBERG BUSINESSWEEK MIDDLE EAST is published by UMS International FZ LLC and Bloomberg L.P. Articles reprinted in this issue from BLOOMBERG BUSINESSWEEK are copyrighted 2016 by Bloomberg L.P. All rights reserved. Reproduction in any manner, in whole or in part, without prior written permission of Bloomberg L.P. and UMS International FZ LLC. is expressly prohibited. UMS International FZ LLC, a division of United Media Services. PO BOX 503048, Building No 10, Office 346, Dubai Media City, Dubai, UAE. Chief Executive: Sandeep Sehgal Associate Publisher: Ravi Raman Printed by: Emirates Printing Press DUBAI BLOOMBERG BUSINESSWEEK HQ 731 Lexington Ave, New York, NY 10022, United States, www.businessweek.com

AFP (4); COURTESY SUBJECT (2)

ABC

C.H. Venkatachalam Charles Boustany Chess Tag CME Group Colgate-Palmolive Credit Suisse Group

28 20 21 29 24 26

Opening Remarks

Heavenly Tax Reform By Peter Coy

The House GOP has an idea for business taxes that could win bipartisan support

The number of tweets that Presidentelect Donald Trump strings together on a topic seems to indicate its importance to him. His tirade on 4 December against companies that move jobs overseas was an impressive six-tweeter. “There will be a tax on our soon to be strong border of 35% for these companies ...... wanting to sell their product, cars, A.C. units etc., back across the border,” he wrote in the weekend tweetstorm. Trump is right that the US is losing jobs overseas, and he’s right that the broken US tax code is part of the problem. But even the people who should be his closest allies—top Republicans in Congress—couldn’t

stomach his solution of punitive tariffs on imports from selected companies. “I think there’s other ways to achieve what the president-elect is talking about,” House Majority Leader Kevin McCarthy (R-California) told reporters the next day. “I don’t want to get into some type of trade war.” Another House Republican, Justin Amash of Michigan, issued his own tweet: “This would be a 35% tax on all Americans—a tax that especially hurts low-income families. Maybe the slogan should be #MakeAmericaVenezuela.” There’s a better way for a Republican president, and it happens to be called A Better Way. It’s the House Republicans’

Corporate tax rate in the largest OECD economies 42.2%

37.8% 37%

Fran ce

Ita

35% 34%

30% 29.1% 28%

35% 34.4% Aus tralia

30%

ain

Jap

27.5%

UK a ad an

PHOTO ILLUSTRATION BY 731; PHOTO: YOUTUBE; DATA: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT

The US is No. 1!

25%

year they were purchased, rather than bit by bit as they depreciate. Because it taxes based on receipts and outlays as they occur, economists term it a cashflow tax. The Better Way plan ends preferential tax treatment for interest payments, an old but unwise policy that induces companies to take on debt. And it brings the US in line with the rest of the world by applying the tax territorially. Imports are taxed; exports aren’t. That’s fair to trading partners: Imports face about the same tax treatment as domestic products. And while exports aren’t taxed by the US, they can be—and probably are—taxed by the receiving country. (One snag: While economists judge the tax to be equitable, lawyers at the World Trade Organization may feel differently.) A hidden beauty of the Better Way approach is that the US would keep more jobs at home without racing to the bottom of corporate tax rates (chart). The tax would be immune to most strategies that minimise US earnings, such as assigning patents to subsidiaries in low-tax jurisdictions. In fact, the unavoidability of the new tax raises the question of why the House is setting its target rate for it at just 20 per cent, thus losing revenue that could go toward shrinking budget deficits. “Because you eliminate all those disincentives you can afford a higher rate,” says the American Enterprise Institute’s Viard. “The 20 per cent is really very low.” Business groups are enthusiastic that corporate tax reform finally has a shot at happening now that a single party controls the White House and Congress. “It may have been viewed as a dead horse, but that horse is alive and well and ready to run,” Business Roundtable President John Engler told reporters on 6 December. Trump hasn’t fully bought into the House plan. He once wrote in a Wall Street Journal op-ed that President Reagan’s 1986 tax reform act, a touchstone for today’s conservatives, was “one of the worst ideas in recent history.” That’s because it got rid of real estate tax shelters he benefited from. Trump hasn’t embraced the House idea of banning the deductibility of interest payments—no surprise for someone who has called himself the king of debt. T h e n a g a i n , T r u m p m ay l e t Congress take the lead on tax reform. His own plan for business taxes has gone through changes and currently consists— publicly, at least—of just six brief paragraphs on the campaign

y an rm Ge

agenda, encapsulated in red-white-andblue handouts that Speaker Paul Ryan (Wisconsin) brandishes whenever he gets near a microphone. The provisions on business taxation in A Better Way would go a long way toward promoting investment and jobs in the US—by getting the basic incentives right rather than through Trumpian threats and cajolements. And guess what? The core idea in the GOP plan—something called a destination-b ased cash-flow tax—is bipartisan. A version was promoted in 2010 by a Democratic think tank, the Center for American Progress. The clean little secret about tax policy is that it’s not inherently political. Republicans and Democrats do disagree about how much revenue the tax code should raise, but that’s really a difference of opinion over how big government should be. They also have different ideas about soaking the rich. But there’s a surprising amount of agreement on the technical issue of how to raise any given sum of money while minimising distortions of incentives to work and invest. Think of taxation as the engine of government; there’s not a Democratic or a Republican way to fix a car with cracked pistons. “The current system has flaws that don’t make sense under any perspective,” says Alan Viard, a resident scholar at the conservative-leaning American Enterprise Institute. A basic rule of taxation is that a low tax rate on a broad base of income is less distorting—i.e., more efficient—than a high tax rate on a small base. The US breaks that rule. It has one of the world’s highest corporate income tax rates, 35 per cent, but it raises less money from it as a share of gross domestic product than the average of the 35 mostly rich countries in the Organization for Economic Cooperation and Development. US businesses have found ways to avoid taxes by shifting operations or headquarters abroad or by organising into entities that aren’t subject to the corporate levy. The US is also one of the few countries that attempt to tax domestic companies on their worldwide profits. It taxes profits made overseas only when they’re brought home, which induces companies to keep more than $2 trillion stashed abroad. The House GOP plan doesn’t just cut the rate on the corporate income tax—which would leave the flawed structure in place—it repeals it outright. Companies would be allowed to deduct the full cost of new equipment, software, or structures in the

S. K o

rea

23.4% 22% 20%

15.8% 15% 2000

2016

website. In a sign of the looseness of Trump’s approach, Secretary of the Treasury designate Steven Mnuchin has told reporters that in the individual tax plan “there will be no absolute tax cut for the upper class”—even though the plan Trump announced definitely would cut taxes on the rich. Goldman Sachs economists predicted in a 3 December research note that the corporate tax rate will fall to 25 per cent, rather than the House’s 20 per cent or Trump’s 15 per cent. Congress will allow full first-year expensing of capital spending, but it will only partially repeal deductibility of interest, they say. And it probably won’t shift to a destinationbased system that taxes imports and exempts exports, they write, partly because it’s “a novel concept that … may make many lawmakers ner vous about unintended consequences.” Sure enough, Representative Charles Boustany, a Louisiana Republican, told Bloomberg BNA that small businesses that depend on imports “are at risk, and we have to understand the implications.” The US business tax system is so broken that even partial reform would be welcome. But it won’t come easy. Each choice in the tax code involves trade-offs and changes the calculus of winners and losers. Responsible presidential involvement will be vital. This isn’t a topic that lends itself to tweetstorms. <BW> �With Sahil Kapur and Kaustuv Basu

Mu ‘We N As a Be Mor e r p d i n U Global Economics 1 — 15 January, 2017

▶▶The US president-elect ignores 40 years of protocol

▶▶“Beijing does not dictate who the president of the United States speaks to” More than six weeks before his inauguration, President-elect Donald Trump is already carrying out his promise to make US foreign policy less predictable, with a series of moves that are keeping America’s adversaries, as well as its friends, off balance. In the span of a week, Trump slammed China over currency and trade, had an unprecedented phone call with Taiwan’s leader, praised the Philippine president’s violent war on drugs, and promised to visit Pakistan, effectively upending years of foreign

policy. Even when new presidents want to change direction, they’re usually careful to adhere to the strict and deliberately stilted language of diplomacy, which exists to prevent misunderstandings that can lead to unintended consequences. The president-elect is showing “a pretty dramatic departure” from traditional practice, says Aaron David Miller, vice president for new initiatives at the Wilson Center and a former adviser at the State Department. “When I look at what appears to be the

emerging Trump foreign policy, I see a lot of unpredictability when it comes to process,” he says. What most concerns some critics is the possibility that Trump, who claimed to know more about the selfproclaimed Islamic State than the Pentagon’s generals, may be making decisions hastily or without thinking about broader implications. Trump had been doing all this without a nominee for secretary of state to advise him—or to explain his thinking to foreign governments and

ust Nation re a ict ble

The solution to tax evasion in India: Money laundering 10 How a strong dollar hurts manufacturing 12

their advisers behind the scenes. “I’ve never seen anything like that before,” Miller says, “and I worked for half a dozen secretaries of state.” Former Massachusetts Governor Mitt Romney and retired General David Petraeus had been on a shortlist to serve as the top US diplomat, before Trump chose Rex Tillerson, the chief executive officer of Exxon Mobil, on 13 December. Some experts see in Trump’s strategy similarities to the actions of President Richard Nixon and Henry Kissinger, who served as Nixon’s national security adviser and secretary of state. They kept other heads of state guessing about American intentions. “Nixon toyed with the idea that he could affect international relations with his madman theory,” says Nicholas Eberstadt, the Henry Wendt chair in political economy at the American Enterprise Institute. “Donald Trump is in a lot better position to leverage the madman theory than Nixon was.” Trump’s taking a call from Taiwanese President Tsai Ing-wen on 2 December initially prompted a muted protest from Beijing, which sees the island as its territory. The president-elect escalated his criticism of China two days later on Twitter: “Did China ask us if it was OK to devalue their currency (making it hard for our companies to compete), heavily tax our products going into their country (the US doesn’t tax them) or to build a massive military complex in the middle of the South China Sea? I don’t think so!” Lu Kang, a spokesman for China’s foreign ministry, told reporters in Beijing on 5 December that “we have no comment on what motivated the US team to make such tweets.” Speaking of Trump, he added, “We do not comment on his personality. We focus on his policies, especially his policies toward China.” Trump criticised Obama’s slow-andsteady approach when he outlined his foreign policy strategy in April. “We must as a nation be more unpredictable,” Trump said in the speech. “We are totally predictable. We tell everything. We’re sending troops? We tell them. We’re sending something else?

We have a news conference. We have to be unpredictable.” Vice President-elect Mike Pence says world leaders already are finding Trump’s candour a refreshing change from timidity in US foreign policy. “There’s a great sense of e nthusiasm and optimism around the world, because they’re encountering in President-elect Donald Trump a strong leader with broad shoulders who’s going to advance America’s interests,” Pence said on NBC’s Meet the Press on 4 December. Trump adviser and former House Speaker Newt Gingrich was similarly unapologetic. “Beijing does not dictate who the president of the United States speaks to,” Gingrich said on Fox News’s Sunday Morning Futures. Trump’s election in November despite the predictions of most pollsters is one more sign of how unpredictable global events are these days, with populist movements on the rise at the expense of traditional parties. The British vote to leave the European Union fuelled huge swings in global markets, while Italian Prime Minister Matteo Renzi’s bet that he could push through constitutional changes failed, prompting his resignation from office on 4 December. The first sign that Trump is taking a nontraditional approach is the list of phone calls he’s had so far. He complimented Pakistani Prime Minister Nawaz Sharif on being a “terrific guy”—according to a summary provided by Sharif ’s g overnment— and promised to visit the country. President Obama never visited Pakistan, which has a complicated relationship with the US because of its historic support of the Afghan Taliban and the renewal of tensions with neighbouring India over the disputed Kashmir region. Then came a call in which Trump praised Philippine President Rodrigo Duterte for his war on drugs, which has killed more than 3,000 people. He also seemed to invite Duterte—who’s reached out to China, ordered US forces out of the southern part of his country, and told Obama to “go to hell”—to visit Washington, according to a transcript of

the call from officials in Manila. Finally, there was the phone call with Taiwan’s president, which violated 40 years of delicate diplomacy designed to honour the US commitment to “unofficial” relations with the island while maintaining diplomatic ties with China. Trump spokesmen don’t think the call was a big deal. But the foreign policy establishment disagrees. “In dismissing the significance of this exchange, they failed to recognise that process and people are policy when you’re president of the United States,” says Mira Rapp-Hooper, a senior fellow at the Center for a New American Security and Asia policy coordinator for Hillary Clinton’s campaign. “A phone call to interact with a particular figure, especially of this significance, is going to be interpreted as policy.” �Nick Wadhams, with Kevin Hamlin The bottom line Trump seems to be turning unexpected actions and comments into core parts of his foreign policy approach.

Governance

A Development Bank Stops Lending Abroad

▶▶Clients of Brazil’s BNDES got mixed up in Operation Carwash ▶▶“We found a series of problems we need to address”

The construction site at the Dominican Republic’s Punta Catalina power plant should be booming, but work has slowed to a crawl. The same is true an ocean away, at Angola’s Laúca hydroelectric dam, along a river that snakes through canyons in southern Africa. Both are casualties of an ambitious state lending programme originating in Brazil and indirectly linked to the bribery scandal that’s engulfed the state-run oil company Petrobras. Since its founding in 1952, the Brazilian Development Bank, known as BNDES, funded projects at home. Then President Luiz Inacio Lula da Silva

Global Economics month he’s sending a delegation to Brazil to seek resolution. Angola, the largest recipient of BNDES funds, said it tapped other funds for two BNDESbacked hydroelectric plants amid layoffs and work stoppages. The governor of Argentina’s Chaco province came in September to plead his case to Bastos. Last month he asked his provincial legislature for approval to seek funding elsewhere. And the Dominican Republic in October announced it will issue as much as $600 million in bonds to finish the Punta Catalina plant. BNDES has “no intention” to stop supporting engineering work abroad, Bastos says, but will no longer finance the majority of any undertaking. And in the wake of the bribery revelations at Petrobras, builders such as Odebrecht and Andrade Gutierrez have to sign compliance agreements that impose sanctions for impropriety. Representatives of both companies declined to comment for this article. No new funding for engineering projects overseas will be approved before revised rules are issued, which probably won’t be until the end of 2017, Leonardo Pereira, BNDES’s superintendent of foreign trade, told reporters on 25 November. BNDES will resume payouts for only some of the projects abroad already under way, he said. “Contracted projects need to be reevaluated as fast as possible,” says José Augusto de Castro, president of Brazil’s foreign trade association, whose board of directors includes executives from Odebrecht and Andrade. “If something is wrong, correct it and pay a fine. What they can’t have is a lack of definition.’’ One project left in limbo is Caracas’s Metro Line 5, a subway. On a recent afternoon in Chuao, a neighbourhood in Venezuela’s capital that’s still bustling with both private and public works despite a severe fiscal crisis, the work site for a station was cordoned off with razor wire and cement walls. Odebrecht’s logo was almost unrecognisable under the graffiti, and none of the trucks you’d expect to see waiting to load at a temporary cement plant were there for work on the subway. Not so long ago, the plant filled 40 to 50 trucks a day for Odebrecht, says Jose Luis Mato, 40, a manager at the cement installation. “Compared

to the pace they’d been operating at, it’s practically stopped,” he says. “A column here, a wall there. It’s all at a minimum.” �David Biller and Jessica Brice, with Andrew Rosati and Ezra Fieser The bottom line New loans in Brazil for overseas engineering projects won’t be available before the end of 2017, when revised rules will be issued.

Corruption

The Great Indian Tax Dodge of 2016 ▶▶How about flying planeloads of cash to a tax-exempt region? ▶▶“All I want to do is save as much as I can of this money”

Indians are struggling with the chaos unleashed by the government’s 8 November announcement that 500-rupee ($7.36) and 1,000-rupee notes will no longer be legal tender. Indians holding the notes had until 31 December to deposit them in banks. Unusually large deposits will be scrutinised and possibly subjected to taxes and penalties. The policy, aimed at reducing tax evasion by people who do business in cash, is having the opposite effect as people scramble to find ways to launder money, converting old bills to new without attracting government attention. One method relies on high-turnover businesses, such as trading houses or manufacturing companies, which report a lot of cash revenue to the government. Many have seen lower sales since the note ban took effect. These businesses can accept old cash from money- laundering networks, call it revenue, and return a portion, typically 50 per cent of the total, in new 2,000-rupee notes. Ashok, from Mumbai, who wouldn’t disclose his full name to avoid detection, says a lawyer he contacted after the announcement put him in touch with a business in the state of Rajasthan that has operations in apparel manufacturing and jewellery. He says he planned to give the business 200 million rupees in banned notes and expected to get only 100 million back in new currency. The business is

UESLEI MARCELINO/REUTERS

and his successor, Dilma Rousseff, built BNDES into a global lender on a scale to rival the World Bank. Its foreign investments promoted the engineering and construction companies that built Brazil: BNDES would lend money to a local or national government, which would use the money to hire the Brazilian contractors. BNDES grew to become one of the world’s biggest development banks. BNDES stopped funding foreign projects and making loans abroad in May, but it didn’t announce the temporary halt to the public until October. The decision followed a congressional inquiry and criticism that BNDES had made billions in loans to companies that would have had no trouble borrowing from private banks. Also, the corruption investigation known as Operation Carwash revealed that many of the com panies the bank had funded for foreign projects—including construction giants Odebrecht and Andrade Gutierrez—paid bribes to secure domestic contracts from Petrobras. “We found a series of problems we 10 need to address, and that requires discussion because it affects activity, government, people, and companies,” says BNDES President Maria Silvia Bastos. “We’re working to resolve this.” Bastos was appointed in May, amid the impeachment proceedings against Rousseff. Known as the Iron Lady BNDES from her days running one of President Bastos Brazil’s biggest steel companies, Bastos is shifting the bank’s focus to projects that improve the quality of life in Brazil, such as sewage systems. The bank’s withdrawal from overseas projects has left 25 unfinished projects in Latin America, the Caribbean, and Africa. Angola’s president said last

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Global Economics

19m

15m

11m 12/1996 11/2016

This back-of-theenvelope calculation is by Brad Setser, senior fellow at the Council on Foreign Relations

Donald and The Dollar

large enough that it would be able to deposit Ashok’s cash in its bank account without drawing the attention of the government. “All I want to do is save as much as I can of this money,” says Ashok, who didn’t pay taxes on the cash, which he got from selling property. He’s still deciding whether to declare his new notes. A proposed change to the tax law, which passed the lower house of Parliament on 29 November, would levy a 50 per cent penalty on unexplained bank deposits. Other networks bring banned money into the system through the bank accounts of people with tax e xemptions, such as farmers or others who derive income from agricultural activities, says a lawyer who’s part of a money-laundering operation in Mumbai and asked not to be i dentified. Certain tribal communities in northeastern states, including Nagaland, Manipur, and Tripura, are exempted from paying taxes on income from any source, making it easy for them to disguise extra cash. At least one property brokerage was offering to arrange the sale of apartments using banned money in a Mumbai suburb that’s popular with Bollywood movie stars. Upper- and m iddle-class Indian families don’t have to resort to elaborate schemes to hide cash. 103 Members of their household staff can be tapped to deposit their employers’ cash in their own bank 100 accounts. The result is money in the bank, but not so much that it alerts the tax collector. The proliferation of money- 97 laundering schemes has led 11/8/16 11/30/16 to doubts that Prime Minister Narendra Modi’s policy will have much of an impact on tax evasion. “The whales and sharks will break out of this net easily and find a way to pump their money back into the system through organised networks,” says C.H. Venkatachalam, general secretary of the All India Bank Employees Association, a union r epresenting 500,000 bank personnel. “It is not easy to cull out the black money from India’s economy, and the real big players are tough to touch.” �Anto Antony

Donald Trump has vowed to bring back manufacturing jobs, but the dollar’s rise since his election will make US manufactured goods less competitive in world markets. Here’s how: ① A 10% move in the value of the dollar changes the inflation-adjusted trade deficit by about 1% of gross domestic product. ② The Dollar Index is up about 4 per cent since the election, so that’s a hit of 0.4% of GDP, or about $75 billion. ③ The US loses about 5,300 jobs for every $1 billion added to the trade gap. ④ That means the dollar’s rally could cost the US about 400,000 jobs over the next two or three years in the part of the economy exposed to trade. More than half those jobs are in manufacturing.

Exporters, plus companies that compete with imports

�Peter Coy

Sectors that aren’t exposed to trade should add jobs, so overall employment should increase

The bottom line In India, a policy to curb tax evasion has had the unwanted effect of causing money-laundering networks to proliferate.

global-economics

1 — 15 January, May, 2016 2017

Magnet for Hackers ▶▶Gulf nations have become an attractive target for cybersabotage ▶▶“Some of them are in OK shape. Saudi Arabia is not” More than a year after a drowned Syrian toddler washed up on a beach in Turkey, the tiny refugee’s body, captured in a photograph that shocked the world, reappeared on computer screens across Saudi Arabia—this time as a prelude to a cyberattack. The strike in November disabled thousands of computers across multiple government ministries in Saudi Arabia, a rare use of offensive cyberweapons aimed at destroying computers and erasing data. The attackers, who haven’t claimed responsibility, used the same malware that was employed in a 2012 assault against Saudi Arabian Oil Company, known as Saudi Aramco, and which destroyed 35,000 computers within hours. The Middle East, home to almost half of global oil reserves and much of its natural gas, is also a magnet for some of the world’s costliest cyberattacks, PricewaterhouseCoopers said in a March 2016 report. The threat is set to grow as online activity mushrooms

amid the region’s myriad geopolitical conflicts and tensions. “For the last couple of years the US Department of Defense has been trying to get the Gulf states to harden their defences,” says James Lewis, senior vice president at the Center for Strategic and International Studies in Washington, D.C. “Some of them are in OK shape. Saudi Arabia is not.” The extent of the damage isn’t clear, though two people informed of the security breach said it targeted the Saudi central bank, the transportation ministry and the agency that runs the country’s airports. One bright spot is that the Saudis have been able to restore some lost data via back-ups, recovering faster than they did after the 2012 strike, says one person familiar with the clean-up. The central bank, known as the Saudi Arabian Monetary Authority, denied that its systems were breached. The country’s General Authority of Civil Aviation said damage to its networks

was limited to some office systems and employee e-mails. While the assault was similar to the one that hit Saudi Aramco four years ago, the impact was “much smaller” and didn’t disrupt transportation or aviation services, says Abbad Al Abbad, executive director for Strategic Development and Communication at the Riyadhbased National Cyber Security Center. “We will always have a race between those who are exploiting security vulnerabilities and those who are defending against them,” says Wael Fattouh, a Saudi-based PwC partner specialising in technology risk assurance. Cyberattacks in the Middle East threaten more than governments and public facilities–they put economic development at risk. A unified regional online market could expand to include 160 million users by 2025 and add about $95 billion to gross domestic product, according to consultant McKinsey & Co. Saudi Arabia, the United Arab Emirates and other Arab states in the Gulf are leading this growth.

European airline mergers aren't sending profits soaring 16

“The rapid adoption of digitisation in the UAE and Gulf Cooperation Council countries has made the region an attractive target for a wide array of security breaches,” says Mohit Shrivastava, a senior analyst for information security at consultant MarketsandMarkets. Six months ago, FireEye detected cybercriminal strikes on Middle Eastern banks that were launched through e-mail attachments. The California-based cybersecurity company said the attackers appeared to be probing for targets. US officials have said Iran was behind the 2012 attack against Saudi Aramco, and investigators also suspect Iranian hackers of involvement in the November blitz on Saudi government bodies. Iran too has been a victim of cybersabotage. A computer worm known as Stuxnet derailed work at the country’s main uranium-enrichment facilities in 2010, and the Flame virus crippled the Iranian energy industry two years later. Iran suggested that both incidents involved Israel, which doesn’t comment on its reported involvement in cyberattacks. November’s attack in Saudi Arabia suggests that investment alone doesn’t ensure protection. Middle Eastern companies are among the world’s top 10 in terms of buying cybersecurity technology but in the bottom 50 for education and training, according to the PwC report, which surveyed 10,000 businesses, 300 of them in the Middle East. Of 700 executives in GCC countries polled by the Dubaibased Gulf Business Machines this year, about half thought they were incapable of preventing cyberattacks. “It will take more than just the allocation of financial resources to keep ourselves safe from today’s cyberthreats,” Mohammed al Zarooni, acting director general of information and e-government at the UAE’s Telecommunications Regulatory Authority, said at a November conference in Abu Dhabi. “Building human capacity is just as critical.” Jens Monrad, a senior intelligence analyst at FireEye, says he sees positive signs for cybersecurity in the

Middle East, including a growing awareness of the issue and stronger government support. “But this is a complex challenge,” he said by e-mail. “It is important for organisations to recognise their cybersecurity challenges cannot ever be solved with technology alone.” � Mahmoud Habboush, Gwen Ackerman and Michael Riley

The bottom line Gaps in cybersecurity in the region are putting economic development in the Middle East at risk.

Retail

Now Try My Herbal Toothpaste ▶▶Local gurus in India are launching personal care brands ▶▶“All tie-wearing people are sweating”

They have bushy beards, a p reference for loosefitting robes, millions of devotees—and a line of consumer products. Meet the Indian gurus behind the brands challenging some of the planet’s biggest companies. Baba Ramdev, Ravi Shankar, Gurmeet Ram Rahim Singh, and Jaggi Vasudev are among yoga and spiritual leaders lending their names to everything from honey and herbal remedies to toothpaste and clothes. With a ready-made clientele from their vast followers, they’re taking on the likes of Unilever, Colgate-Palmolive, and GlaxoSmithKline in India by tapping surging demand for natural and herbal medicine-based products. The gurus’ products comply with ayurvedic medicine, which is based on a belief that health and wellness depend on a balance of mind, body, and spirit and can include the use of herbal compounds and special diets. The newcomers are snatching market share from larger established s uppliers, who’ve had to develop their own ayurvedic lines. The guru-connected upstarts have already shaken the market. Unilever’s

hold on India’s $11.7 billion beauty and personal care market slipped more than 5 percentage points, from 32.9 per cent in 2010 to 27.8 per cent in 2015, according to researcher Euromonitor International. And local personal care rival Dabur India says its growth is slowing, even as the market is forecast to expand 14 per cent in 2016. “These ayurvedic product sellers are posing a threat to Indian and global players as the product has gained mass appeal,” says Sanjiv Bhasin, an executive vice president at b rokerage IIFL Holdings. Profit margins are shrinking in response, he says: “It has made the existing players enlarge their marketing budgets greatly to try and protect their turf.” The biggest new competitor is yoga guru Baba Ramdev’s Patanjali Ayurved, which offers some 500 products spanning food, nutrition, beauty, and personal care. Formed a decade ago, its revenue will at least double, to more than 100 billion rupees ($1.5 billion), in the year ending March 2017, Ramdev said in November, adding that all Patanjali profits go to charity. Ramdev says he’s an “unpaid ambassador” at Patanjali and that childhood friend Acharya Balkrishna holds 97 per cent of the company’s shares. That helped make Balkrishna India’s 48thrichest person, worth $2.5 billion, according to Forbes. “World-class quality, low price, and giving away [our] entire profit to charity are the three main reasons for the boom seen in Patanjali products,” says Ramdev, clad in his trademark saffron- coloured robe during an interview in New Delhi. Executives at multinational companies believe babas, or holy men, like him “don’t know anything,” he says. “Now all tie-wearing people are sweating. They realise loincloth-wearing people can do many things.” Patanjali had a 1.2 per cent share of India’s beauty and personal care market last year, up from 0.2 per cent in 2011, according to Euromonitor. The company plans to sell refined oil, milk, and textiles, mostly to counter the dominance

Namaste

PHOTOILLUSTRATION BY NADIA MENDEZ

“We will always have a race between those who are exploiting security vulnerabilities and those who are defending against them.” —Wael Fattouh, PwC

Companies/Industries

of foreign-owned businesses, Ramdev says. “Why shouldn’t our country’s money stay here and be used for this country’s service?” he says. Unilever, which first sold soap in India in 1888, has said domestic brands such as Patanjali have been better than multinationals at picking up on local trends. Patanjali is a company “which everybody has been following with a lot of interest—incredible branding created there,” Unilever Chief Financial Officer Graeme Pitkethly said on a 13 October conference call to discuss third-quarter sales. The Anglo-Dutch giant has countered with Hamam soap, which incorporates ayurvedic herbs, and its local unit bought hair care brand Indulekha last December to add a line of hair oil made from only natural ingredients. Patanjali expects to have 500 billion rupees in revenue within the next three years, Ramdev says. India Infoline says the company could grab 35 per cent of both the Indian honey and ayurvedic medicine markets and a third of the market for ghee, a type of clarified butter. Colgate-Palmolive and Dabur would be hurt the most by Patanjali’s expansion, India Infoline says. Ayurveda, as practiced in India, is one of the oldest systems of medicine in the world. “In India, the consumer believes strongly in natural ingredients,” Bina Thompson, Colgate-Palmolive’s chief investor relations officer, told analysts on a July 28 conference call. Colgate has introduced toothpastes with neem, an evergreen medicinal herb, and clove essence and recently began selling a charcoal-infused toothbrush and Colgate Cibaca Vedshakti, which contains natural ingredients including

Sri Sri Ayurveda is beginning to use mass media, point-of-sale advertising, and online retailing. In October the group began selling a range of ayurvedic health drinks under the Ojasvita brand and signed Olympic silver medallist P.V. Sindhu to help promote it in a market dominated by GlaxoSmithKline’s Horlicks brand. “I foresee requirements for pan-India exclusive stores,” says Tej Katpitia, the company’s chief marketing officer. Shreyansh Kocheri, an analyst at Euromonitor, says Ramdev’s and Shankar’s products are benefiting from Prime Minister Narendra Modi’s “Make in India” campaign and also trust in their products. “Consumers have immense trust in both these personalities and hence perceive their products to be of good quality,” Kocheri says. “Consumers are increasingly becoming cautious of the products they consume or apply on their skin. They are on the lookout for natural, herbal, and ayurvedic products which they perceive to be healthy and not have any side effects.” �P R Sanjai and Bibhudatta Pradhan The bottom line Brands tied to local gurus are grabbing a growing piece of India’s $11.7 billion annual beauty and personal care market.

Travel

Europe’s Big Airlines Struggle for Altitude ▶▶After years of mergers, fullservice carriers remain inefficient ▶▶“It is our only chance to survive the competition we face”

On the surface, the European airline industry doesn’t look much changed from 20 years ago: National flag carriers such as Air France, British Airways, Iberia, KLM, and Lufthansa dominate a handful of giant hub airports. Dig a bit deeper, and you’ll see that the market has shifted in a big way. Over the past decade or so, 10 legacy airlines across the region have combined into three huge groups, a consolidation that makes the market look a lot like the US But while restructuring at American Airlines, Delta Air Lines, and United Continental Holdings

Patanjali Dant Kanti toothpaste, one of the herbal items made by guru Ramdev’s ayurvedic products company, is making big inroads against mainstream brands in India

NAIDU: RAJAT GUPTA/EPA/ALAMY

Guru Baba Ramdev at the International Day of Yoga in New Delhi in June

eucalyptus, basil, and camphor. “The positioning is a toothpaste packed with the goodness of natural ingredients to help keep dental problems away,” Thompson said. In October, Dabur India Chief Executive Officer Sunil Duggal described Patanjali’s Dant Kanti toothpaste, which vies with Dabur’s Red brand, as a “fairly formidable player.” A 200-gram pack of Dant Kanti goes for 75 rupees in India on online shopping portal Bigbasket. com. That compares with 74.80 rupees for the same amount of Dabur Red and 97 rupees for Colgate’s Active Salt with neem. “Patanjali has made an impact, and we need to counter that,” Duggal said on an 26 October analyst call. “We are not growing as fast as we could.” Sales at Patanjali have jumped more than tenfold in the past four years as it expanded the number of retail stores selling only its own products to almost 10,000 nationwide, building on a franchise system created for its existing yoga outlets. “This has seen [Ramdev] save on ad expenses and marketing costs compared to larger players,” says Infoline’s Bhasin. And land around the yoga ashrams Ramdev has established will “give him enough room to expand for the next three years.” Following Patanjali’s “spectacular” success, Edelweiss Financial Services expects other spiritual gurus, including Sri Sri Ravi Shankar, Guru Ram Rahim Singh, and Sadhguru Jaggi Vasudev, “to go the Patanjali way,” analyst Abneesh Roy and colleagues said in a report released in March. Sant Shri Asaramji Ashram, Sri Aurobindo Ashram, and BAPS Swaminarayan Sanstha are other organisations that not only cater to the spiritual needs of millions of followers but are also emerging as suppliers of fastmoving consumer goods, according to Edelweiss. Shankar’s Sri Sri Ayurveda is showing “renewed aggression” as it rides on the brand equity of its founder, whose “Art of Living” movement has 370 million f ollowers worldwide.

Companies/Industries

Lufthansa board member responsible for the low-cost carrier, said at the Frankfurt rally. “It is our only chance to survive the competition we face.” A key reason for the European industry’s woes: a surfeit of players, many of them still state-backed. The EU’s top three full-service companies have a combined market share of about 29 per cent, while the big three in the US control 52 per cent, according to researcher CAPA-Centre for Aviation. “Europe has too many airline groups for the size of the market,” says CAPA analyst Jonathan Wober. Low-cost operators have exploited the weakness. The three biggest— Ryanair, EasyJet, and Norwegian Air Shuttle—have become serious contenders for flights in Europe, luring passengers with rock-bottom prices while charging them for expensive add-ons. No-frills carriers in 2015 had 40 per cent of the European market, up from 23 per cent in 2005, and Ryanair’s stock valuation almost matches that of the big three carrier groups combined. “There is no sign that pressure on European carriers will let up,” says Alex Dichter, a McKinsey consultant and former Continental Airlines pilot. “In the long run, the only two outcomes are: You win or you die.” At the same time, the incumbents face challenges on longhaul routes. Government-backed carriers from the Middle East such as Emirates, Qatar for the Lufthansa brand, told the pilots Airways, and Etihad are routing at a rally at Frankfurt Airport on 30 more eastbound traffic through their November. “Help us create our future.” desert hubs, offering white-glove With annual salaries in excess of service on brand-new planes. From €255,000 for Lufthansa’s 2008 to 2014, the three Arabian Lufthansa pilots at a rally during a Gulf carriers expanded their most senior captains, the November strike pilots are among the indusshare of traffic from Europe try’s best-paid. But with Delta’s pilots to India and Southeast Asia from getting a 30 per cent raise, Lufthansa’s 22 per cent to 34 per cent, accordare seeking 20 per cent, and they may ing to CAPA. Meanwhile, the likes of still reject the airline’s offer. Just as Norwegian and Iceland’s Wow Air are important, the pilots strongly oppose moving into more profitable long-haul a plan to more than double the size routes with supercheap flights lacking of Lufthansa’s discount operation, the extras—free meals and checked Eurowings, to about 200 aircraft. They bags—that traditional airlines have fret that the unit will hire lower-paid been reluctant to pull from transatlanpilots in Austria, beyond the reach tic service. of German unions, and that manageLike Lufthansa, Air France-KLM ment will expand it at the expense has expanded its low-cost busiof Lufthansa jobs. “Eurowings is not ness, though even there it has a pair your enemy,” Karl Ulrich Garnadt, the of brands—KLM’s Transavia and Air

Extra Baggage Market value* Pension and post-retirement obligations** US carriers Delta $35.8b $12.6b American $23.7b $7.4b United $22.1b $3.1b European carriers IAG

About six times the company’s net income in 2015

$11.3b $1.9b Lufthansa $6.1b $11.8b Air France-KLM $1.6b $3.2b

France’s Hop!—that date to the era when it was two separate companies. Anger at a plan to cut jobs and funnel more business to those d iscounters boiled over last year as workers assaulted e xecutives, shredding their shirts before the managers climbed a fence to escape. Only at International Consolidated Airlines Group, created in 2011 after British Airways took over Spain’s Iberia, has cost- cutting matched that of US carriers. One possible reason: The company endured five strikes s panning 22 days in 2010 before winning concessions such as smaller cabin crews on long-haul flights and tying some staff bonuses to performance. In 2013 it bought Vueling, a low-cost airline based in Spain, to better compete with the likes of Ryanair and EasyJet. And last year it acquired Ireland’s Aer Lingus, adding another transatlantic hub in Dublin to relieve pressure at London’s Heathrow. Says Chief Executive Officer Willie Walsh: “We’re not afraid to say that we’re proud to be cutting costs.” �Richard Weiss The bottom line Like their US rivals, many European airlines have merged into three giant groups, but they remain far less profitable.

companies-and-industries

HANNELORE FOERSTER/GETTY IMAGES

has led to record earnings in recent years, the Europeans remain far less profitable. Their workforces remain restive and strike-prone, they face a web of restrictions from r egulators in multiple countries, and for reasons of national pride, the airlines in the big groups continue to operate as separate brands—with many of the associated costs. Nowhere is the difficulty of changing course clearer than at Lufthansa, which in late November was able to halt a strike that grounded 4,500 flights only after management offered a bonus topping €20,000 ($21,200) per pilot and a 4.4 per cent raise and dropped demands for concessions on b enefits. The walkout and others over the past three years have cost it more than $500 million, and executives say there’s not a lot more they can give. “Walk with us and stop defending old-fashioned contracts,” Harry Hohmeister, the management board member responsible

Politics/ Policy

Eyes on t

▶▶Saudi Arabia’s economic hopes hinge on modernisation

▶▶“People were shocked, now they have to find a way to survive”

Ali Alireza’s family has been trading in Saudi Arabia before it even existed as the kingdom it is today. The 55-year-old managing director of Haji Husein Alireza & Co. Ltd., which sells vehicles from dump trucks to Aston Martin cars, has shared in a boom that turned the desert monarchy into one of the world’s richest countries. He’s been through three oil-price collapses, but the latest has brought the kind of trauma that neither he nor his forebears have ever experienced. This time, the government isn’t waiting for a recovery. Instead, it’s pushing a roadmap that’s shaken the ultra-conservative nation. “It represents a generational shift, not only in the structure of Saudi Arabia but also in the thinking and culture of the Saudi individual,” Alireza said in his 14th-floor office with panoramic views of Jeddah, the Saudi trade hub on the Red Sea. “It’s something that we have to start teaching at kindergarten level. But it’s almost too good to be true, and that’s the scary part.” The grand design of Vision 2030, which was unveiled in April last year, is to get rid of a business culture tranquilised by oil wealth and stifled by bureaucracy, and replace it with a competitive economy driven by private enterprise. The shock therapy to embrace a Saudi

version of western-style capitalism risks coming too late, but on paper it’s tantamount to a revolution. There are parallels with eastern Europe’s transition out of communism and Britain’s privatisation boom in the 1980s, but in reality the change is unique simply because there’s no other society on earth like Saudi Arabia. It requires a degree of “fundamental adjustment that I can’t find a precedent for,” says Simon Williams, HSBC Holdings Plc’s chief economist for central and eastern Europe, the Middle East and North Africa. He has been going to Saudi Arabia since 1994. “You’re talking about changing the basis of the whole economy, not just of the public sector but of the private sector as well and that’s technically very difficult.” The pressure to change is hitting home, just ask Mohammed Dardeer. The 62-year-old executive at the MSD Management Consultancy said it took a month for Vision 2030 to sink in. Then his phone started ringing. The calls were from companies desperate for advice. For most, sales already were falling and customers disappearing. The government had said little about the payment delays to contractors. Now, Dardeer said, managers wanted to restructure salaries, create performance assessment programmes and set up human Deputy Crown Prince Mohammed bin Salman

resources departments. Companies that had grown too fat in the days of high oil prices wanted to downsize. “People were shocked and now they have to find a way to survive,” Dardeer said at his cramped, unassuming office next to computer stores and a wedding hall in the port city. “None of them had a contingency plan. They didn’t care before.” Now they have little choice, he said: “If you can’t keep up, you will be out.” The modernisation is Saudi Arabia’s boldest since the creation of the kingdom in 1932. When Deputy Crown Prince Mohammed bin Salman, the king’s powerful 31-year-old son, announced his plan to address the plunge in oil revenue, he acknowledged it was “ambitious,” though said it was achievable and “there are no excuses for us to stand still or move backwards.” Based on a week of interviews with businesspeople and consultants in Jeddah, one message was clear: things will be done differently from now on. Companies can no longer depend on government tenders for the bulk of their business. Out are reliance on foreign workers, cushy jobs and state largess; in are metrics and making the numbers add up. As Dardeer put it, those who remain stuck in the past won’t survive. Critics of the blueprint to transform the world’s largest oil exporter say it still lacks specifics on how to achieve the targets. For example, it includes bringing more women into the workforce, without addressing the constraints on them such as being banned from driving. And while the government is reducing spending to deflate a ballooning budget deficit, non-oil industries, the main engine of job creation, slipped briefly into recession.

PHOTOGRAPH ILLUSTRATION BY NADIA MENDEZ

1 — 15 January, 2017

Donald Trump has the world at his feet 22

the prize Kaswara Alkhatib, 48, chairman and chief executive officer of UTURN, an Arabic entertainment network on YouTube, supports Vision 2030, but says the government now needs to communicate the details of how it will work. “Nobody’s talking now for the past six months about where we’re going,” he said at his office in Jeddah. “You can’t just tease me with a vision and be quiet about it.” The Saudi goal is to increase the contribution of small and mediumsized businesses to 35 per cent of the economy from 20 per cent and help bring the jobless rate down to 7 per cent from almost 12 per cent. It will require weaning companies off more efficient foreign labour and training up locals who ordinarily would seek jobs with the state. The government already raised the cost of visas and residency permits for nonSaudis, who make up about a third of the 32 million population, making it more expensive to hire them. Some business owners are holding workshops for staff, others are seeking advice from outside consultants. Many are focusing on revamping or starting HR departments. KPIs -- key performance indicators -- have become the new buzzword. UTURN hired consultants about a year ago to help create performance appraisals for its staff of 70 so that if they need to get rid of anyone they have KPIs to go by. “We want people who are actually able to create, not sitting and waiting for us to tell them what to do,” said Alkhatib, the CEO. The more immediate issue is the effect of plummeting oil prices on the Saudi economy. Growth is set to slow to 1.4 per cent this year, the

worst pace since 2009, according to a Bloomberg survey. The government decided to freeze public-sector bonuses for a year and slash allowances for a year to save more money. Saudis now focus on buying essentials and servicing loans. On a recent Friday evening, there were only four tables occupied at an upscale Japanese restaurant that required booking a few months ago. Some of the city’s residents took the cheaper option of spending the evening on the corniche, which is dotted with play areas, kiosks selling popcorn and soft drinks. There are carpets for prayers and benches to watch the sun set over the Red Sea and the world’s tallest fountain, a Jeddah landmark. Alireza said the brake on spending was as if “the spigot was almost turned off just like that.” Car sales at his company are down 30 per cent this year. Sales of trucks, dumpers, cement mixers, which all depend on a healthy construction industry, sank 55 per cent. “So the private sector is now looking at the same avenues to save and to conserve resources as the public sector,” said Alireza. “It’s shrinking or at least not investing and the public sector is decreasing spending. That’s a recipe for disaster for any economy.” Like the bulk of the Saudi population, Siraj Al-Malki, 30, is going through his first oil crash. He’s discovering how tough business can be after four years as an entrepreneur. He owns five sportswear stores and is chief operating officer at digital marketing company Chess Tag. Dark circles under his eyes betray sleepless nights trying to figure out how to manage losses of up to 35 per cent since March. He needs to make his 40 workers more productive and might have to close one of the stores.

“These are very, very tough times -- it’s a domino effect,” Al-Malki said at his office in Jeddah. “I have to lie in bed for two to three hours just to think about how we can survive. I don’t think even next year will be better.” He’s among the Saudis who support Vision 2030, though wants the government to help with the cultural changes to make it happen. Al-Malki said he’s “not only willing, but wants to hire” and develop Saudis, but the government must ensure a new work ethic is taught in schools and universities. It sometimes takes him up to four months to hire a qualified Saudi. “Let’s say we have interview appointments with 10, two show up,” he said. “This mentality needs to change.” One key source of new workers is women. Before his death, King Abdullah opened the labour market up to them, though they still need the permission of a male guardian to travel. They spend a chunk of their earnings on male chauffeurs, money that leaves the country like a tax on their labour. The goal is to boost female participation in the workforce to 30 per cent. At the Auction House of Fitaihi Holding Group in Jeddah, about 20 male and female employees gathered, surrounded by walls decorated with pieces of diamond trinkets, for a talk about the importance of change. Founder and Chairman Ahmed Fitaihi, 77, dropped by during one session for a quick pep talk. He’s in the process of reducing staff by 30 per cent, all non-Saudis. “Change lies within you,” he told them. “Don’t blame others.” � Donna Abu-Nasr. The bottom line Saudi Arabia has to embrace change in order to give its Vision 2030 plan a chance of success.

Politics/Policy

The Family Business The Trump Organization—run by Trump and three of his children, Donald Jr., Ivanka, and Eric—has dealings with governments and wealthy investors around the world. Potential conflict with ◼ US government ● Foreign governments ▲ Private partners

Trump Tower, New York Trump International Hotel & Tower, Vancouver Trump’s partner in the deal, Holborn Group, is owned by the son of one of Malaysia’s richest real estate investors.

Trump International Hotel Las Vegas is appealing a November order by the National Labor Relations Board to recognise the representation of its employees by the city’s powerful Culinary Workers Union. As president, Trump will be responsible for appointing NLRB members, who serve fiveyear terms.

State-controlled Industrial & Commercial Bank of China is the tower’s largest office tenant. The bank’s lease is up for renewal in 2019.

Trump International Hotel & Tower, Toronto

Trump International Golf Links, Ireland Trump has scaled back plans to build a sea wall after officials raised concerns over potential damage to dunes and a snail habitat.

Trump owes Deutsche Bank, his largest creditor, about

$300m

Cuba Golf executives and advisers for the Trump Organization have traveled to Cuba repeatedly since 2011. As president, Trump will be in a position to persuade the GOP Congress to end the U.S. embargo.

$200m $3m

The course lost more than $10 million in 2015.

Trump lists a single entity on his Federal Election Commission filing in Bermuda: DJT Aerospace.

Chinese investors have expressed interest in the property, which is in receivership.

Trump holds a 60-year lease for Washington’s historic Old Post Office Building, where the Trump International Hotel opened in September. The Trump Organization spent about

on renovations and will pay

Trump Turnberry, Scotland

Trump Tower, Buenos Aires The project requires building permits to go ahead. Partner Felipe Yaryura of the YY Development Group attended Trump’s election night party in New York.

a year in rent to the U.S. General Services Administration. The lease agreement includes a provision barring elected officials from making money off the arrangement.

Trump Hotel, Rio de Janeiro Prosecutors are investigating a $40 million investment in the project by state pension funds, part of a larger bribery probe.

Trump Tower, Punta del Este, Uruguay YY Development is also Trump’s partner in a Uruguay development.

Trump Ocean Club, Panama City Local partner Newland International Properties missed bond payments in 2015, less than two years after emerging from Chapter 11 bankruptcy.

on loans backed by his Washington On his FEC filing, Trump lists hotel and two companies the Doral registered in resort in St. Martin tied to residential rentals. Florida. Trump Towers, Rio de Janeiro Brazilian authorities are also looking into public investments in this office tower project, which Trump is developing with Bulgarian partner MRP Group.

Deutsche Bank is in settlement talks with the US Department of Justice over its sales of mortgage-backed securities. The bank also faces litigation and regulatory probes relating to issues such as currency exchange-rate manipulation.

Politics/Policy

Trump International Hotel & Tower Baku, Azerbaijan

Trump International Golf Links, Scotland Trump lost a fight with Scottish lawmakers to block offshore power turbines within view of the course. At a postelection meeting with British politician Nigel Farage, Trump encouraged him to campaign against wind farms in the UK

Trump Towers, Istanbul Trump earned as much as $5 million in 2015 in royalties from Dogan Sirketler Grubu, the conglomerate developing the property.

Developer Anar Mammadov is the son of the country’s transport minister.

China In October, Trump Hotels Chief Executive Officer Eric Danziger told Chinese media that he plans to open 20 to 30 properties in China, plus more under the Trump Organization’s new Scion brand.

Georgia In 2011, thenPresident Mikheil Saakashvili attended a signing ceremony at Trump Tower in New York for two licensing deals, a tower in the capital of Tbilisi and a casino resort in Batumi on the Black Sea. Trump’s FEC filing lists two companies that appear to be related to the deal.

Trump Towers, Istanbul Trump earned as much as $5 million in 2015 in royalties from Dogan The state-owned Bank Sirketler Grubu, the conglomerate of China holds part of a developing the property.

$950m

Taiwanese American businesswoman Charlyne Chen presented a letter stating she had ties with the Trump Organization when she met the mayor of Taiwanese city Taoyuan in September to discuss hotel projects. Trump reversed decades of US policy by taking a call from Taiwan’s president on 2 December.

Trump World, South Korea Daewoo, which built Trump Tower in Manhattan, developed six Trumpbranded condo towers in Seoul, Busan, and Daegu.

loan Trumpbacked World, by a South Korea Manhattan office tower atDaewoo, 1290 Ave. whichof the built Trump Tower has a Americas. Trump in Manhattan, 30 per cent stake in the developed six Trumppartnership that owns branded condo towers in Seoul, the property.

Trump’s FEC filing lists two companies that may be related to his former kosher vodka and energy drink businesses in Israel.

Busan, and Daegu.

Trump Tower, Manila

Trump’s FEC filing lists two companies that appear to be related to business in Egypt.

GETTY IMAGES (5); DATA: FEDERAL ELECTION COMMISSION FILINGS AND BLOOMBERG NEWS REPORTS

Taiwan

Trump’s FEC filing lists companies possibly related to a development project in Jeddah, Saudi Arabia’s secondbiggest city.

Trump has to make interest payments on hundreds of millions of dollars in loans, and the value of his real estate is highly sensitive to interest rates, which are set by the Federal Reserve. Once he takes office, he will have the power to fill two vacant seats on the Fed’s Board of Governors. He may also replace Chair Janet Yellen, whose term ends in 2018.

Trump World Golf Club, Dubai The Trump Organization has a licensing and management deal with Damac Properties Dubai for a golf course and luxury villas under construction. Another Trump-branded golf course, designed by Tiger Woods, is under development nearby with Damac.

Trump Towers, India Two licensing deals are proceeding— one in Mumbai with Lodha Group and another with Panchshil Realty for two towers in Pune. Trump met with his project partners, who have ties to the Indian government, at Trump Tower in New York after the election.

Trump International Hotel & Tower Lido, Indonesia Trump Hotels has plans to open two properties in Indonesia. Trump received up to $10 million last year in royalties from Jakarta’s MNC Group.

Century Properties Group, whose CEO, Jose E.B. Antonio, has been named by President Rodrigo Duterte a special envoy to the US, paid Trump as much as $5 million to use his name on a tower set to open next year. Antonio’s son Robbie is a resident of Trump Tower in Manhattan.

Reporting: Max Abelson, Stephanie Baker, Ben Brody, Argin Chang, Peter Flanagan, Dorothy Gambrell, Michael Keller, Lorcan Roche Kelly, Caleb Melby, Blacki Migliozzi, Mira Rojanasakul, Blake Schmidt, David Voreacos, and Hui-yong Yu

politics-and-policy

1 — 15 January, 2017

▶▶Are business rivals behind online attacks on Elon Musk? On 2 September the conservative web magazine the Federalist published an article titled “Elon Musk Continues to Blow Up Taxpayer Money With Falcon 9.” The author was identified as Shepard Stewart. Two days earlier, the Stewart byline appeared on a piece on the Libertarian Republic website called “Here’s How Elon Musk Stole $5 Billion in Taxpayer Dollars.” Two days before that, the Liberty Conservative site carried a Stewart article headlined “Elon Musk: Faux Free Marketeer and National Disgrace.” Funny thing, though: Shepard Stewart isn’t a real person. “Definitely a fake,” says Gavin Wax, e ditor-in-chief of the Liberty Conservative. A chagrined Wax says the “Stewart” character “went

totally dark on us after we published him.” Wax discovered that a photograph “Stewart” uses online appears to be an altered version of a former Twitter executive’s LinkedIn headshot. Musk attracts an unusually large and varied number of shrouded online attacks, including phony op-ed pieces, websites with shadowy backers, and individuals who hide behind aliases. “These are tools used by those who don’t have facts on their side,” says Sarah O’Brien, a spokeswoman for Tesla, the electric car maker Musk co-founded and runs. The Liberty Conservative has taken down its Stewart article, as has the Libertarian Republic. The Federalist site still has its piece up. Editors with the

latter two didn’t respond to e-mails and phone calls seeking comment. Musk inspires strong admiration and criticism for his i ndustry-disrupting companies: Tesla; SolarCity, a solar panel installer he co-founded; and Space Exploration Technologies, better known as SpaceX, a rocket company he founded. On 17 November shareholders approved Tesla’s $2 billion acquisition of SolarCity. These diverse business interests mean Musk has numerous rivals. “It seems like he’s got a lot of people who don’t like him,” says Brian Walsh, a partner with Rokk Solutions, a Washington, D.C., communications firm. Walsh ticks off coal companies and utilities uneasy about SolarCity

PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (2)

▶▶Critics say the Tesla CEO “gets subsidy after subsidy he doesn’t need”

Apple is sending in drones to take on Google Maps 26 EchoPixel’s virtual reality tech is a medical marvel 27

and automakers and dealers concerned about Tesla. This spring, Walsh’s firm worked for United Launch Alliance, a joint venture of Boeing and Lockheed Martin, and helped persuade Congress to let ULA buy Russian-made rocket engines, over SpaceX’s objections. During the lobbying fight, a website called Who Is Elon Musk? maintained a steady drumbeat of criticism of SpaceX, as well as Musk’s other companies. A video on the site, titled American Swindler: The Elon Musk Story, accuses him of “lining the pockets of Democratic and Republican politicians with millions of dollars in donations.” (Musk has given about $515,000 to politicians and political groups since 2003, according to the Center for Responsive Politics, a nonprofit research group.) “That’s not us,” Walsh says of the website. “I don’t know who it is.” A United Launch spokeswoman says, “It would be inappropriate for ULA to comment on a site not related to our company or industry.” The site identifies its sponsor as the Center for Business and Responsible Government, “a nonpartisan organisation dedicated to highlighting cronyism and its effects on American taxpayers and policy.” But there’s no trace of the centre anywhere online or in the brick-and-mortar world. A similar website called Stop Elon From Failing Again lists its sponsor as a conservative advocacy group called Citizens for the Republic. Diana Banister, a PR executive who serves as CFTR’s executive director, says the site singles out Musk because “he is the epitome of a businessman who gets subsidy after subsidy he doesn’t need.” It’s impossible to tell who’s ultimately paying for CFTR’s campaign against Musk, as the organisation is a so-called 501(c)(4) social welfare group, which under federal law doesn’t have to disclose its supporters. Banister says contributors to CFTR are “small donors, mostly” and “nothing competitive

“People tell me I shouldn’t talk about the fake rockets because it makes me sound crazy”

with” Musk. Asked whether oil companies antagonistic toward Tesla might be behind the website, Banister says: “We reached out to them [for donations], but they haven’t responded.” One online antagonist allegedly tried the bizarre approach of impersonating Musk in pursuit of inside information about Tesla. On 3 August, Tesla’s chief financial officer, Jason Wheeler, received an e-mail from ElonTesla@ yahoo.com requesting more detailed nonpublic data than had been released earlier that day when the company disclosed its second-quarter results. After some digital sleuthing, Tesla filed suit in September in California state court against Todd Katz, a longtime online critic of Tesla’s financial management who admits to using the aliases Elon Madoff and Enron Musk. Katz worked as CFO for Quest Integrity, an oil industry service company. He was part of an effort by the fossil fuel business to undermine the electric car company’s push for cleaner transportation, Tesla alleged. Without admitting or denying he’d sent the e-mail, Katz, who’s left his job at Quest, said in court papers that Tesla’s suit should be dismissed because the message in question was too “goofy” to be believed. In counterclaims, Katz accused Tesla of unlawfully hacking his Twitter account to “publicly embarrass and silence him, and discourage other critics.” Another online critic of Tesla’s, who posts under the name Keef Leech and Keef Wivaneff (“with-an-f”), is actually Australian Keith Leech, a retired computer engineer who says he’s “a bit of an obsessive.” He’s spent more than a year collecting photos of crashed Teslas from junkyards that he says show evidence of a defective suspension system. He says he’s filed about 100 complaints based on the photos with the National Highway Traffic Safety Administration. On the Tesla Bears Club, a site for short sellers, Leech has posted a “Tesla Hall of Shame” compiling his NHTSA complaints. He says he recently bought Tesla puts, another way to bet on a company’s stock dropping. Leech says he’s never driven a Tesla. On 8 June, an auto site called

the Daily Kanban reported on the suspension complaints, igniting broader coverage. On 10 June, NHTSA said it was conducting a routine “review” and to date hadn’t “identified any safety issue with Tesla suspensions.” Musk said on Twitter that most of the NHTSA complaints were “fraudulent” and that “one or more people sought to create the false impression of a safety issue.” Tesla’s stock dropped 7 per cent on 9 June and 10 June. Spokesman Bryan Thomas says NHTSA doesn’t have anything new to say about the Model S suspensions. Leech, who continues to file Tesla complaints, also insists that SpaceX’s success in landing rockets back on earth is a hoax, videos of the landings notwithstanding. “People tell me I shouldn’t talk about the fake rockets,” he says, “because it makes me sound crazy.” �Paul M. Barrett The bottom line Elon Musk attracts a wide array of real and fake online antagonists criticising his work on electric cars, rockets, and solar panels.

Video Games

Super Mario Slides Back in the Game ▶▶Nintendo stock tumbles following Mario for iOS release ▶▶Aim of launch to “remind people what was fun about Mario”

For most of its history, Nintendo has kept a tight rein on its popular characters. Even as free smartphone games pulled casual players away from its living room consoles and portable DS hardware, mustachioed plumber Mario and the rest of Nintendo’s stable stayed exclusively on the company’s own systems. While years of declining sales failed to convince executives that this was the wrong strategy, Pokémon Go appears to have persuaded them. At its peak shortly after its release in July, the monster-catching smartphone game, made by developer

The Pokébump

Technology

Niantic using characters Nintendo made famous, accumulated more than 40 million daily users in a couple of weeks and pushed Nintendo’s stock up 121 percent that month. In September, not s urprisingly, Mario creator Shigeru Miyamoto said the company mascot was coming to iOS. “We want as many people as possible to be able to enjoy playing as Mario,” he said. Super Mario Run, released on 15 December, is an old-school side-scrolling adventure built around saving a princess. To simplify controls for s martphones, the plumber is always moving from the left to the right side of the screen, and players must tap to grab coins, stomp enemies, and leap over pits. It’s a decent metaphor for Nintendo’s broader s trategy. Far ahead, No. 1 Sony and No. 2 Microsoft battled for holiday shopping dollars with upgraded versions of their PlayStation 4 and Xbox One consoles, respectively. Nintendo can’t afford to stop moving. Particularly as the new game saw Nintendo stock slide by 11 per cent in its launch week as negative reviews poured in. Meanwhile Nintendo’s next console, the Switch, won’t be out until March. For Nintendo, whose hit characters have all been around for at least 20 years, retro is good. Its most soughtafter console this year isn’t 2012’s Wii U but the miniature version of 1985’s Nintendo Entertainment System (NES), equipped with built-in storage and an HDMI port for use with today’s TVs. The $60 US version of the NES Classic Edition, loaded with 30 mostly great games (Pac-Man, Donkey Kong, The Legend of Zelda), sold out immediately after its release last month. Nintendo says it’s working to address the undersupply and is beginning to close the gap in Japan. Two new Pokémon games for Nintendo’s portable 3DS system sold a combined 3.7 million copies in less than two weeks, the

pay for other Nintendo products, the plumber will have done his job. �Bruce Einhorn and Yuji Nakamura

Nintendo stock price, in yen 30k

The bottom line Nintendo’s first experiment with smartphone games requires a steep-forsmartphones $10 fee for the best stuff.

15k

Robots

Apple Is Bringing Drones to a Map Fight 0 1/1/16 12/5/16 DATA: BLOOMBERG

company said on 30 November. Super Mario Run, Nintendo’s first serious experiment with selling games without hardware, doesn’t hew to the model that built the $37 billion mobile game business. Most mobile megahits, including Pokémon Go, make money from in-game ads. They’re free to play, but as they get tougher, players become tempted to pay real-world bucks for special in-game items. Super Mario Run has no ads, and the free version is essentially a demo; players who want the best stuff must pay a one-time fee of $10. “Not many will pay to unlock the full game except for the core Nintendo fan base,” David Gibson and Aya Haruyama, analysts for Macquarie, wrote in a 16 November report. The mobile Mario game,co-developed with social media company DeNA, may be better thought of as a marketing tool than a revenue source. The Macquarie analysts estimated that more than 1 billion people will play the free version of Super Mario Run in the next three years, especially once it’s available for Android and in China. Even the free version may help draw people to other Nintendo-branded mobile games, hardware, and coming branded attractions at Universal theme parks, among others. The goal is “to remind people what was fun about Mario,” says Daniel Ahmad, an analyst for researcher Niko Partners. If that leads them to

The NES Classic Edition ships with 30 retro games built in

▶▶The company quietly won FAA approval for flying data collectors ▶▶“There’s a huge data-quality issue there”

More than four years after the disastrous launch of Apple Maps, the company is still trying to erase the stigma that followed the app’s early wave of glaring errors, including a grocery store marked as a hospital and an incorrect airport address. As recently as August, Craig Federighi, Apple’s senior vice president for software engineering, was rehashing the issue. “I don’t think we initially appreciated all the kinds of technology we would need,” he told Fast Company magazine, assessing the trouble his team had updating the mapping software. “There’s a huge data-quality issue there.” Since its initial flop, Apple has made its Maps more reliable and faster to respond to street changes. Like Google, the company has added features for navigating public transit and incorporated outside services such as Uber. Now, according to people familiar with the matter, it’s trying to leapfrog Google Maps in the accuracy department, using new indoornavigation features and an army of drones. The idea is that flying robots can capture and update map data faster than fleets of camera-rigged minivans. In Seattle, Apple is assembling a team of robotics and data-collection experts, with at least one hire from quadcopter-crazy Amazon.com, to figure out how to zoom drones around street signs, track construction zones, and monitor other changes to roadways, says a person familiar with its efforts. The team is also working on adding

“There are simply more details of the driving experience in Google Maps and their neat feature to predict traffic in the future.” ——Ben Bajarin, Creative Strategies

views from inside airports, museums, and other buildings to its mapping software next year, as well as a new feature that would advise drivers on lane changes, a second person says. Apple declined to comment. In September 2015 the company filed for an exemption for commercial drone flights from the Federal Aviation Administration, documents obtained by Bloomberg show. In March the FAA approved Apple’s use of “an unmanned aircraft system to conduct data collection, photography, and v ideography,” according to one of the documents. They also show the company has committed to FAA prohibitions, which the agency is hoping to eventually loosen, on flights over people and buildings and a requirement that drones remain in sight of the operator. Apple acquired startup Indoor.io last year to help develop its interior mapping project, says a person f amiliar with the matter. Apple confirmed buying Indoor.io but declined to say why. In 2013 the company bought WiFiSlam, another startup with expertise in indoor navigation. For Apple and Google, digital maps are important sources of data. Google was the early mover—its Maps app was available for iPhones five years before Apple’s—and Google Maps’ higher overall user base has helped it remain the better product, says Ben Bajarin, a principal at researcher Creative Strategies. “There are simply more details of the driving experience in Google Maps,” he says, “and their neat feature to predict traffic in the future.” Drones and indoor mapping may offer Apple an inroad to augmented-reality technology, Bajarin says. Firsthand video of a condo, hotel, or foreign city has obvious appeal. But ultimately, he adds, the most important input will come from users. “The more people Apple has using Maps, the better every element of the experience can be.” �Mark Gurman and Alan Levin

The bottom line Apple, using drones and data from indoor sources, is working on a plan to take on Google Maps.

Technology

Innovation EchoPixel Form and function

Innovator Sergio Aguirre

EchoPixel’s software stitches together data from CT scans, MRI machines, and ultrasounds to generate 3D images that medical professionals and patients can examine and manipulate using 3D glasses and a stylus.

Age 40 Title Founder of EchoPixel, a four-year-old, 18-employee medical-imaging startup in Mountain View, California.

1. Origin Aguirre, who has a master’s degree in electrical engineering from the University of Monterrey in Mexico, first tried to use 3D imaging for oil exploration but found more data available in radiology and other medical fields. He founded EchoPixel in 2012.

Equipment The system has a desktop PC equipped with EchoPixel software and cameras that track a user’s head movements. Wearing 3D glasses, viewers can see an exact replica of the subject’s anatomy and use an accompanying stylus to digitally manipulate parts of the body projected on the screen.

27 Customers EchoPixel has about 20 paying subscribers, including Stanford and the Cleveland Clinic.

Cost The company charges $25,000 a year for a subscription to its software, or $22,000 a year with a longer-term contract. 2. Use EchoPixel pitches its technology as a way to diagnose diseases, plan surgeries, and educate patients. For doctors, it can also take the guesswork out of converting 2D scans to 3D actions.

Next Steps “This interactive virtual reality really facilitates understanding,” says Ken Merdan, a senior research and development fellow at medical-device maker Boston Scientific. “When you are looking at something complex— and anatomy is complex and hard to understand—it’s easier to grasp in a short time frame.” The US Food and Drug Administration has approved EchoPixel’s system, and the company says it’s working on refinements that will eliminate the need for 3D glasses, letting people view its images on standard mobile devices. �Michelle Cortez

Markets/ Finance 1 — 15 January, 2017

▶▶QIA is making investments again after the oil price slump ▶▶“This is the return of the dealmaking and alliance-building” It’s not just Ivan Glasenberg who’s regained his appetite for dealmaking. Qatar, the world’s largest exporter of liquefied natural gas, is investing alongside the billionaire’s Glencore in an $11 billion deal to buy 19.5 per cent of Russia’s Rosneft. The Qatar Investment Authority is also part of a group of investors that on 8 December agreed to take a 61 per cent stake in the UK gas-distribution business of National Grid. The sovereign wealth fund is also interested in putting money into Italian lender Banca Monte dei Paschi di Siena, Il Sole 24 Ore reported. Qatar–known for making trophy European investments ranging from

Credit Suisse Group to London department store Harrods during the days when oil was trading at more than $100 a barrel–scaled back as crude prices slumped and the government reshuffled the fund’s management in late 2014. Under Sheikh Abdulla bin Mohamed bin Saud Al Thani, the QIA, as the fund is known, has been boosting its focus on real-estate assets in Asia and the US as it seeks to diversify from energy production. “This is the return of the dealmaking and alliance-building of Qatar that we haven’t seen for a few years,” says Sven Behrendt, managing director of GeoEconomica. “It is quite a surprise to see them back in this role after

the fall in oil prices and a few quieter years while the QIA was being restructured under new management and expected to be more measured and sophisticated in future.” The investment boosts ties between Doha and Moscow after coordinated efforts aimed at bolstering crude prices. OPEC member Qatar played a key role in securing an agreement by the oil-producers group to cut output by 1.2 million barrels a day. Moscow joined the fray late last year, saying it would reduce output by a further 300,000 barrels a day. Lower oil prices have sapped government revenue in both Qatar and Russia. Qatar, the richest country in the world

Wall Street’s last stop is a small shop in Chicago 30

PHOTOGRAPH ILLUSTRATION BY LA CHINA M

The challenge of securing Trump’s overseas towers 31

The Wealth of Nations

$800 $700 Mumtalakat Holding Company

State General Reserve Fund (Oman)

Qatar Investment Authority

SAMA Foreign Holdings (Saudi Arabia)

Kuwait Investment Authority

Qatar’s public fund is still behind some of its GCC rivals

Abu Dhabi Investment Authority

on a per-capita basis, issued $9 billion bonds in May to help fill a budget gap estimated at 3.4 per cent of gross domestic product last year, while the administration of Russian President Vladimir Putin is selling assets to raise money as the economy struggles to cope with sanctions imposed by the US and European Union. “Putin clearly needs to show that Russia is still open for business and can attract big foreign investors to support the economy,” said Behrendt. “While Qatar may see this as an opportunity to get some influence in Moscow.” Qatar also has an investment in London-based lender Barclays and carmaker Volkswagen. The wealth fund also played a pivotal role in Glencore’s $29 billion takeover of Xstrata in 2012 after demanding the Swiss commodities trader boost its offer for Xstrata, in which it had built a stake of more than 10 per cent. The QIA has about $335 billion of assets making it the 14th largest sovereign wealth fund in the world, according to the Sovereign Wealth Fund Institute. Qatar is also considering investing in a $100 billion global technology fund formed by SoftBank Group and Saudi Arabia, people familiar with the matter told Bloomberg in October. If QIA puts up half the funding for Rosneft, which pumps almost 5 million barrels a day, the investment will be its third-biggest position in a listed company after Qatar National Bank and Volkswagen, according to data compiled by Bloomberg. Its 9 per cent holding in Glencore would slip into fourth. It’s not the fund’s first Russian foray and comes amid expectations of warmer relations between Putin and US President-elect Donald Trump. Qatar agreed to buy 24.9 per cent of the St. Petersburg airport in July. It committed $2 billion to the state-run Russian Direct Investment Fund in 2014. Kuwait Investment Authority, Saudi Arabia’s Public Investment Fund, and the UAE’s Mubadala have also made commitments to the Russian fund. Qatar “must be trusting oil to stay above $50 to $60 during Trump’s presidency,” said Enrico Soddu, head of

$600 $500 $400 $300 $200 $100 0

SOVEREIGN WEALTH FUND INSTITUTE, JUNE 2016, LARGEST FUND FOR EACH NATION ONLY

data and research at London-based Sovereign Wealth Fund Center. “You also need to consider that the deal is not signed yet, so if Russia doesn’t keep to its OPEC cut pledge then it may not happen.” �Matthew Martin and Mohammed Aly Sergie. The bottom line Qatar’s sovereign wealth fund is once again ramping up investments around the world after a dip in recent years.

India

A Cash Crackdown Hits Gold Pawners ▶▶Indians struggle to find valid currency to repay their loans ▶▶“We are reorienting our strategy to push digital transactions”

Abin Baby, an unemployed teacher from the town of Thodupuzha in the southern Indian state of Kerala, was in a bind. He needed money to cover some emergency expenses, but since he was out of work, he couldn’t easily get a loan from a bank. So in August he took a 14-gram gold bangle and used it as collateral for a six-month loan of 27,500 rupees ($402) from Muthoot Finance, one of the leading providers of gold-based loans in India. Such loans are a primary way to borrow money in rural India, where

gold is an especially popular gift at festivals and weddings and millions of poor people don’t use the banking system. The interest rate on Baby’s loan was 18 per cent. Not having many options, he decided getting the loan was worth the expense. The transaction happened “quickly and smoothly compared to the banks,” he says. The gold-loan business has suddenly gotten bumpy. Prime Minister Narendra Modi’s decision last month to invalidate all 500-rupee and 1,000-rupee notes has Indians scrambling to get their hands on valid currency. Because almost three-fourths of payments for gold-loan interest and principal are made in cash, as opposed to, say, bank transfers, the shortage of legal tender is hurting lenders. Modi’s move, known as demonetisation, is designed to crack down on tax evasion by forcing people to tender their cash to the bank, where it can be recorded. “Demonetisation will be a blow” for the gold-loan business, says Payal Pandya, an analyst with Centrum Wealth Management in Mumbai, who estimates the companies may have to slash projections of loan growth for the year by 5 percentage points to 7 percentage points. The stock price of Manappuram Finance, a lender that has 66 tonnes of gold in collateral, dropped 25 per cent in the 15 trading days following Modi’s announcement, while Muthoot’s fell 16 per cent. Loan repayments declined in urban and rural areas, says V.P. Nandakumar, Manappuram’s chief executive officer. A shortage of cash is putting the squeeze on India’s $40 billion market for jewellery: Transactions will shrink as much as 30 per cent because of the shortage of notes, according to a 23 November report by Ambit Capital analysts. Modi’s timing is especially bad for PC Jeweller, a New Delhi-based manufacturer and retailer. The company gets more than 90 per cent of its revenue from wedding-related sales, according to Chief Financial Officer Sanjeev Bhatia, and the currency shortage is taking place in the midst of wedding season. “Whatever sales we should have been doing at this point of time—perhaps we are doing 40 per

Markets/Finance

cent of that,” Bhatia told analysts on a conference call on 24 November. Almost all of India’s gold is imported, and successive administrations concerned about its impact on the country’s currency and trade balance tried for years to weaken gold’s prominence in the economy. Starting in the fiscal year ended March 2009, India’s consumer price index rose by 8.9 per cent or more a year for five consecutive years; gold imports increased in turn, from $17 billion in 2008 to $56 billion in 2012, putting pressure on the c urrent-account deficit. In response to that soaring demand, the government of Modi’s predecessor, Manmohan Singh, raised taxes on imported gold three times in 2013, to 10 per cent. The country remains the world’s second-largest gold consumer after China—it now has more than 20,000 tonnes of the precious metal. To reduce people’s need to buy gold as an inflation hedge, Modi’s government in November 2015 introduced an eight-year bond offering a redemption price linked to the price of gold. The bonds, says the finance ministry, eliminate the risk and cost of storing the precious metal. The government also exempted individual holders of these bonds from taxes on their capital gains. In March, after Modi’s finance minister, Arun Jaitley, announced a 1 per cent excise duty on gold ornaments made and sold in India, angry jewellery shop owners responded by shutting their doors in protest for most of March and part of April. The biggest bullion refinery, MMTC-PAMP India, shut operations from May to September because of weak demand. According to the World Gold Council, Indian consumers’ demand for gold in the third quarter of 2016 fell 28 per cent from the same period a year earlier, to 195 tonnes. Centrum’s Pandya says the disruption may be short-lived. Muthoot and Manappuram are already shifting many transactions online, eliminating the need for cash payments. Within a year, 70 per cent of Muthoot’s transactions will be digital, says Managing Director George Alexander Muthoot. Smaller rivals “will be hit more by the cash ban, as they don’t have access to digital channels for d isbursals and repayments like us,” he says. “We are reorienting our strategy to push digital transactions as much as we can.” Manappuram has introduced a service allowing

borrowers to get loans quickly over the internet, using gold they’ve stored in its vaults. The company hopes to convert one-third of its gold-loan customers to the online system within 18 months. Gold, says CEO Nandakumar, “is seen as the poor man’s credit card.” �Bruce Einhorn and Anto Antony The bottom line India’s government wants the economy to be less reliant on cash and especially gold, which many Indians use to store their wealth.

Wall Street

Where a Greying Herd Still Thunders ▶▶A broker builds a business around the people banks have been firing ▶▶“The market for talent has been the best I’ve seen it”

After a quarter-century at Morgan Stanley, Arthur Main was let go from his job and found himself—like many finance types who came of age in the ’80s—on the wrong side of a generational divide. He’s a relationships guy in a tech-driven business. And so, at 54, he’s working at one of the last stops on Wall Street: a small Chicago trading firm called TJM Institutional Services. He considers himself lucky. “Being my age is a hindrance for a lot of people,” Main says, keeping his eyes fixed on the charts and chat boxes arrayed across his computer screens. “They don’t continue to learn, they don’t embrace technology. They try to fit that square peg in the round hole, and their skill set doesn’t apply anymore.” From the ninth floor of a modest office building wedged between a 7-Eleven and a

shoe-repair shop, TJM is making a name for itself as a refuge for the finance sector’s greying castaways. The idea is that by using their wits, experience, and connections, they can still get hedge funds and pensions to trade with them in niches where computers have yet to take over. For Main and others like him, it’s a shot at staying in finance as they finish their careers. “Everyone we’re hiring is coming from a bank,” says Steve Beitler, TJM’s chief executive officer. “The market for talent has been the best I’ve seen it, because they’re all getting fired.” Post-crisis regulation and s hrinking bond-trading revenue have compelled banks to cut costs. Electronic trading platforms have also taken a toll. In the past five years, the biggest global companies have culled almost 10,000 trading and investment banking jobs, according to research firm Coalition. Older, higher-paid traders and sales people have been especially vulnerable. Beitler and his partner, Thomas Murphy, are taking advantage. In the past three years, TJM has doubled in size, with 160 people working as contractors. It’s added brokers in government bonds, equities, and currencies and opened outposts in New York, Florida, and London. To keep costs low, TJM offers little more than a workstation and a phone. New hires must come with their own clients. If they don’t generate commissions in a given month, they don’t get paid. No departments produce research or issue corporate bonds to get investors to call. The trade-off is that brokers get to keep as much as 75 per cent of their commissions, more than at bigger rivals such as Cantor Fitzgerald or Jefferies. For Main, it’s a far cry from his days at Morgan Stanley, where he catered mostly to proprietary traders who invested the bank’s own money.

ILLUSTRATION BY CAROLINE DAVID

Gold bracelets on sale in Hyderabad

Markets/Finance Banks had to walk away from such trading because of financial regulation. In May 2012, when he got a plaque for his 25th anniversary, the clerk who handed it to him joked that the last person who received one was d ismissed. Four months later, he got the call: It was his time. “It was pretty devastating,” Main says. “But it’s worked out OK.” For the past few years, his speciality has been contracts on Eurodollar rates, which is the interest paid on US currency held at foreign banks. Because of their complexity, they’ve largely resisted the move to trading on electronic screens. About three-quarters of Eurodollar options are still bought and sold on the trading floor, according to CME Group, which operates the Chicago Board of Trade. Main tries to give his clients insights they can’t get elsewhere. He’s built a database of large options trades, which helps him divine the intentions of big players and generate trading ideas. For those making a go of it alone after a lifetime at a big investment bank, having strong relationships is just the start. A broker who helps match buyers and sellers of, say, corporate bonds can’t count on calls from clients eager for a slice of the next hot offering. “A lot of salespeople thought the job was easy,” says Franco Mancini, an ex-Goldman Sachs broker who works at Tradition, an independent bond-trading shop. Once on the outside, “the phones stop ringing completely,” he says. Many can’t hack it, says TJM’s Murphy. And success can often mean earning far less. “People used to making $800,000 a year have a hard time adjusting down. Their consumption changes, they have to sell their house, pull their kids out of private school,” he says. The difference between a good day and a bad one can be vanishingly small. In mid-September, Main lost a commission to a competitor who bested him on price by 0.0002 percentage point. If Eurodollar trading eventually moves to screens, Main can’t say whether he’d want to stick around after that. He might join one of his client’s firms or start a business outside finance. “I wouldn’t say it’s bad,” he says. “It’s progress, like the horse and buggy going away. You adapt, or you die.” �Hugh Son The bottom line TJM gives former Wall Street stars a desk and a phone, but they have to drum up their own business.

Terrorism

Who’ll Pay to Protect Trump’s Towers? ▶▶The US president’s name will be on skyscrapers around the world ▶▶“A normal crowded place that becomes a high-risk place”

As Donald Trump prepares to assume the presidency, luxury towers from Istanbul to Manila that bear his name have become de facto emblems of the US government, making them potential terrorist targets. Figuring out how to protect them—and who should pay—is a complex ethical and legal dilemma. “If a terrorist is looking for a symbolic American target to hit that’s relatively accessible, tall buildings with the new president’s name emblazoned on them would be very attractive,” says Matthew Bryza, a former US ambassador to Azerbaijan and a senior fellow at the Atlantic Council. “It would be very expensive to protect them as well. It’s worrisome.” The security question will persist regardless of what measures Trump takes to step back from his business, which he plans to announce this month. If he hands management or ownership of the business to his grown children, the Trump name would likely remain on skyscrapers in cities that are already on high alert for terrorist attacks. Trump has acknowledged that his election makes his name “a hotter brand,” but he hasn’t publicly addressed how the buildings should be protected. “It’s asking for trouble,” says Richard Painter, who was George W. Bush’s White House ethics lawyer. “We have to have protection for those buildings.” Foreign governments may have to expand security at Trumpbranded properties unless the Trump Organization or its partners pay for enhanced protection, he says. The US Constitution bars officials from accepting gifts or payment from foreign governments, but whether such heightened protection would be considered payment is unclear. “Will it be US taxpayer money or foreign g overnment money?” Painter asks. “Foreign government funding raises constitutional

issues.” Painter adds that an attack on a Trump-branded building could even draw the US into a military conflict. Amanda Miller, vice president for marketing at the Trump Organization, says the company doesn’t comment on its security measures. The CIA and the FBI likely will be examining the threat against Trump properties, says Chris Phillips, the former head of the UK’s National Counter Terrorism Security Office. “They’re landmark targets,” he says. “You suddenly have a normal crowded place that becomes a high-risk place. Most of the properties will be in places where you can’t get people away.” Colin Clarke, a terrorism expert at the Rand Corp., adds that “al-Qaeda is into symbolic attacks. Then you have the added bonus of having Trump’s name slapped on these buildings and all his divisive rhetoric on Muslims.” While Trump’s US properties face a heightened risk, the overseas buildings pose a thornier problem. Trump doesn’t own his foreign properties outright, apart from three golf courses in remote parts of Ireland and Scotland. Real estate developers pay him a licensing fee. In some cases, his company also manages the property, but in others, including in Turkey and the Philippines, Trump’s role ends with the fee. In Turkey, Trump has a licensing agreement with Dogan Sirketler Grubu to brand two towers in Istanbul with offices, apartments, and a mall. With Turkey on high alert after a wave of terrorist attacks, including June bombings that killed 41 people at an Istanbul airport, armed guards and scanners were already in place outside Trump Towers. The election hasn’t led to heightened precautions, according to a senior official at Dogan who asked not to be named. “We don’t put the name Obama on buildings all around the world,” says Painter, the former ethics adviser. “Trump needs to get his name off buildings outside the US for the next four years.” �Stephanie Baker, with Benjamin Harvey and Caleb Melby The bottom line Trump buildings, which don’t have the security of US embassies, could be seen as attractive symbolic targets for terrorists.

markets-and-finance

Egypt Country Report By Meenakshi Rohatgi

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EGYPT THE WINDS OF CHANGE

To turn the countryâ&#x20AC;&#x2122;s fortunes around, the government has mapped out a bold plan

Egypt Country Report

Egypt is set on a new course, one it is hoped will safely navigate the economic uncertainty that has marred the country’s fortunes over the last five years. A much-needed reform programme aims to restore financial stability and investor confidence, while at the same time, increasing employment opportunities. In short, it’s a bold plan to set the country back on track. Since the 2011 uprising that ended Hosni Mubarak’s three-decade old autocratic rule, and the ousting of his successor two years later in a military coup, political turmoil in Egypt has brought economic woes. Add to that an increase in terrorism within its borders and a series of high-profile airline disasters, and there has been a sharp decline in visitor numbers and foreign investment. Tourism had been the mainstay of the Egyptian economy generating not only revenue, but jobs. Its contribution to GDP was 11.4 per cent in 2015. Yet recent events have taken their toll and, according to Egypt’s statistics agency Capmas, tourist numbers were down 41.9 per cent in July 2016, compared to the same period in 2015.

To turn the country’s fortunes around the government has mapped out a bold plan to bolster the ailing economy and restore confidence in its once booming tourism industry. Central to the strategy is major infrastructural improvement and a focus on wooing foreign investment back to its shores. The country has strengths in its favour which can still be tapped – such as a sizeable population with a young, skilled workforce, competitive labour costs, a large domestic consumer market and its proximity to important global markets. As part of a slew of new measures, the government has announced reforms to the tax system and a reduction in red tape with the aim of improving the ease of trade for the international investor. The country's leadership is also eyeing cooperation with international partners to modernise Egypt’s economy, capitalising on a massive population of 91 million which, at almost 25 per cent of the wider Arab population, presents a formidable workforce for construction and development. Megaprojects announced include a new capital for the country, major

The economy is gradually improving with annual rates of GDP growth reaching 4 percent in 2014/15 and 2015/16, up from an average of only 2 percent during the period 2010/11-2013/14 WORLD BANK

Investments from the travel and tourism industry are expected to bounce back to 12.3% of GDP in the next 10 years

EGYPT

91.51m $330.8b 4.2% Population

GDP

GDP growth Data: World Bank

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expansion of roads, rail networks and airports, and a landmark development plan for the historic Suez Canal. New developments and a focus on reviving interest in tourism translate into high hopes for the industry. The prediction is that by 2026, international tourist arrivals could total 15,738,000, generating expenditure of EGP103.7bn, Mohamed Kassem, Chairman & CEO, World Trading Company (WTC), says the infrastructure projects are vital to the overall health of the Egyptian economy. “All these roads, ports and airports are the foundation upon which industrial and agricultural activities are built.” He added that these will create jobs in the construction and contracting sectors which are much needed. As domestic investment grows, foreign investors have also announced a slew of projects to take advantage of the renewed sense of optimism in the country. Global developers are also no stranger to mega-projects in Egypt and are readying themselves to tap into the opportunities predicted to open up. Although cautious business leaders believe there’s some way to go to revive the economy, the overall sentiment remains positive. This has been fuelled by the government’s bold recovery plan, which has gone hand in hand with vital IMF support, announced last year. In August, the IMF gave its support to the government’s economic reform plan to the tune of a $12 billion loan package under the Extended Fund Facility (EFF) Programme. It’s a a significant shot in the arm for the country’s financial future. The package, which targets the weak spots in the economy, aims to maintain a flexible exchange rate scheme to bolster competitiveness and attract outside investment, while at the same time allowing the Central Bank of Egypt (CBE) the space to rebuild its international reserves. As part of the IMF deal, government revenues will be bolstered by a new VAT system which was introduced in August. Its goal is to protect the country’s most vulnerable and exempt staple foods needed by the poorest in society from taxation. The package also hopes to stimulate growth with a raft of wide-ranging structural reforms for business. These include streamlining industrial licensing procedures, facilitating access to finance for small and medium-sized enterprises, and new insolvency and bankruptcy procedures. Job intermediation schemes and specialised training programmes for young people are also on the agenda, as is a vital push to support women in the workforce with

Real GDP 20

16.6 14

11.4

2014/15

2015/16 (prel.)

2016/17 (Proj.) Data: IMF

the availability of public nurseries to be increased and the safety of public transportation improved. IMF Managing Director Christine Lagarde stresses that the package is absolutely centred on the Egyptian people. “The programme is by the Egyptian government, for the Egyptian people, and to help the Egyptian economy.” Following on from the IMF plan, the CBE announced in November that it would allow free trade of the country’s currency to reverse negative fluctuations which were suffered by keeping the Egyptian pound fixed to the US dollar. And while the floatation is predicted to increase the cost of imported goods and materials, it is expected to make properties more affordable to foreign buyers.

Creating a vastly improved infrastructure and logistical network is now seen as key to enticing foreign investors back to the country and as such, is a top priority for the government which recently invited private real estate firms to participate in PPP bids (public-private-partnership) to stimulate the sector. And with confidence building, a host of new investments has followed suit. From residential high-rises and housing for the middle-income bracket, to luxury hotels, multiple new projects have already been announced as various developers chalk out their expansion plans in the country. The Suez Canal development project also spells good news for more foreign investment and increasing interest in Egypt. The Suez Canal Zone, or SCZone, once completed will span 461 square kilometres, almost two-thirds the size of Singapore. It will be the biggest expansion of the stretch since 1869, set to raise its capacity and shorten the time it takes to sail the 193-kilometre route between the Red Sea and the Mediterranean. The plan includes a second canal, a new 35-kilometre channel and also widening and deepening of the original canal. This will allow two-way traffic and reduce transit time.

The total contribution of travel & tourism to GDP was EGP259.7bn (11.4% of GDP) in 2015, according to the World Travel & Tourism Council (WTTC).

It’s an important expansion which brings huge opportunities in mining, agriculture, logistics, tourism and renewable energy.

“Policies supported by the [reform] programme aim to correct external imbalances and restore competitiveness, place the budget deficit and public debt on a declining path, boost growth and create jobs, while protecting vulnerable groups.” IMF

Egypt Country Report ê

Globally, Egypt is 39th among 190 economies ranked for ease of starting a business. This is a significant jump from last year’s position at 131. World Bank Doing Business 2017 report.

Hubs being developed in and around the existing canal are Port Said, Ismailia and Ain Sokhna. Port Said is to be an industrial zone focused on intermediate activities connected to ports and logistics including agribusiness, textiles, automotive assembly and parts, pharmaceuticals and other general manufacturing. Ismailia would include renewable energy generation and testing and ICT research, while Ain Sokhna is set to centre on intermediate and heavy industries such as petrochemicals and building materials. A new residential community on the site, Qantara West, would focus on light industry and logistics. The government also announced that companies operating within the SCZone would be entitled to a host of attractive operating conditions such as 100 per cent foreign ownership, 100 per cent foreign control of import/export activities, exemption from customs duties and sales tax on imports, and fast-track visa services. As well as the Suez project, the government has also announced plans for a new Egyptian capital to be built 45 kilometres east of Cairo, at a total cost of $45 billion. The new capital is designed to be developed over 700 square kilometres and accommodate five million people. Intended to be the new seat of government, the city would

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“The main areas of reforms include business licensing and insolvency frameworks; public financial management, including state-owned enterprises; energy sector and subsidy reforms; and labour market reform to create jobs and increase labour market participation, especially among women and young people.” IMF

include smart villages, a 5,000 seat conference centre, technology parks, solar energy farms, banks, financial institutions and industrial zones. All in all, it is hoped that efforts to boost the economy and overhaul the country’s infrastructure will woo back millions of tourists by the end of 2017. As the country refocuses on improving foreign direct investment, hopes are high in the hospitality sector. Security measures have also been stepped up and tourism firms are readying themselves for an influx of visitors as a slew of new hotels set to open includes five new Hilton hotels and the Nile Ritz-Carlton. Mixed-use development projects including shopping malls, premium golf clubs, wellness centres and resorts are adding to the diversified tourism offering. Meanwhile, according to World Travel & Tourism Council (WTTC) figures, employment from the tourism sector is set to rise to 3,471,000 jobs by 2026 (11.2 per cent of the total). Completing the picture for positive change, the banking sector in Egypt has mostly managed to stay on course, even during the roller-coaster turns of the economy. The country remains largely unpenetrated and banks have opportunities to expand from the traditional centres of Cairo and Alexandria. Only 14 per cent of the adult population owns or shares an account at a formal financial institution, according to a 2014 survey by the World Bank and Gallup – leaving a large, untapped market ripe for development. As part of the government reforms, measures such as reducing red tape also aim to help the banking sector. The CBE has devalued the Egyptian pound by five per cent and increased interest rates to contain inflationary pressures. And as part of the IMF package, the new monetary policy will focus on containing inflation and bringing it down to mid-single digits over the medium term. This will be achieved by controlling credit to government and banks as well as by strengthening the CBE’s capacity to forecast and manage liquidity, improving transparency and communication. The CBE also aims to help SMEs by making it easier to get business loans and asking the banks to increase their SME lending to 20 per cent by the year 2020. Other planned reforms include fiscal transparency and regularly reviewing the operational performance of the economic authorities. It is expected that as the landscape stabilises, the banking sector will also be able to tap growth opportunities as Egypt looks towards the financial future with renewed confidence.

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Palm Hills Developments

‘F

rom a customer’s stand point, real-estate continues to be one of the most preferred safe stores of value’ Yasseen Mansour, Chairman of Palm Hills Developments shares that the company has set a “very high” target to achieve revenues of EGP 7 billion. So far, the company has had impressive 9 months’ results, achieving 18 percent y-o-y growth in new sales, which touched EGP 5.4 billion. The company is looking for regional expansion opportunities, while also expanding their pipe-lined launches on the outskirts of Greater Cairo, in line with the government’s direction to increase the urbanized area from 6.5 percent up to 11 percent to 12 percent. Q) Tell us about Palm Hills Developments’ plans regarding expansion and growth. What is the current demand scenario in real estate? YM: Forty percent of Egypt’s population is below the age of 20 and this chunk is fueling the demand for the next 20 years. There is an annual urban demand of around 280,000 units, 25 percent of which is being catered for by us and our peers – which is around 70,000 units. The delivered annual supply doesn’t even come close to half of that. This emphasizes the ample appetite and opportunity to bridge the demand supply gap. We have a portfolio of 26 projects nationwide, which spreads over a land bank of 27 million square meters -- inclusive of 5 million square meters in Saudi Arabia held for sale. Our projects include primary homes in West and East Cairo, as well as second homes in the North Coast by the Mediterranean. Driven by our integrated development mission, 757,000 square meters of our land bank has been ear-marked for commercial and retail development. For us, the year 2016 has been the year of many successful launches. This includes the Capital Gardens project in Sarai development, partnering with Madinet Nasr Housing and Development (MNHD) in East Cairo. In this project, 700 apartments were offered in December 2015, which were fully sold-out by Feb, 2016. In addition, we launched Palm Hills New Cairo (PHNC) last November. The project is in East Cairo and spread over 2.1 million square meters in partnership with New Urban Communities Authority (NUCA) on a revenue sharing basis. First tranche of phase 1 was launched for sale in November 2016, comprising 157 standalone units which were fully sold out in almost a week. Mirroring the government’s direction to increase the urbanized area from 6.5 percent up to 11 to 12 percent, we’re expanding our pipe-lined launches on the outskirts of Greater Cairo in the east as well as west. Here the end users are looking for better quality of housing supply, convenience, more breathing space and proximity to education and business hubs. We’re also eyeing some regional expansion opportunities. Q) What is Palm Hills Developments doing to drive investments? What are the sales and revenue targets for the company? YM: At Palm Hills Developments, we primarily target Egyptians, whether residents of Egypt or GCC. We do have a representative

sales office in Dubai which targets Egyptian expats whose purchase power has enormously increased on the heels of the recent floatation of EGP. Egypt marketplace has proven very attractive for gulf investors as clearly evidenced in Emaar Misr and Al Burouj. In addition, there are almost no restrictions over foreign investments in the sector, apart from maybe Sinai. We have had a very high target to achieve revenues of EGP 7 billion. So far, we had impressive 9 months’ results where we have achieved 18 percent year-on-year growth in our new sales recording EGP 5.4 billion. Our EBITDA also grew by 18 percent reaching EGP 700 million. We do have high expectations re-closing the year on a very high note. Q) What is your opinion on the floatation of the Egyptian Pound? How will this affect the real estate sector? YM: It is a step towards the right direction in letting the market decide on where the exchange rate should be. A flexible exchange rate regime is much sought after by foreign investors, especially in a country like ours, when we can’t afford pegging EGP against the US dollar on the back of the dwindling inflows of foreign currency income. Regarding the implications of the floatation on the real-estate sector, the construction cost surged horrifically by roughly 30 percent, stemming from steel prices which almost doubled reaching EGP 10,000 up from EGP 6,000 per ton, while cement prices also surged to EGP 830 up from EGP 600 per ton. Add to that the increase in labor and fuel cost (almost 30 percent), as well as the cost of imported earth-moving equipment. However, we try to curtail the implications on best effort basis by conducting bulk deals re-acquisition of raw material as well as through value engineering and also expediting construction work and delivery of units. From a customer’s stand point, real-estate continues to be one of the most preferred safe stores of value. Despite the banks certificates issued at luring interest rates of 16 percent and 20 percent, most of the certificates resulted from redemptions of previous ones at lesser rates, while fresh money put in certificates didn’t exceed 20 percent, which leaves a quite decent ample for real-estate sector hedging against devaluation. Q) How do you see national mega projects such as the Suez Canal Development, affecting the sector? YM: It’s undeniably a remarkable feat economically and politically. The $ 8.2 billion project expands the Suez Canal capacity to 97 ships per day up from 49 at present, which is planned to more than double the annual revenues to around $ 13.5 billion by 2023. The massive development planned around it will have an enormous positive effect. We’re expecting to see numerous logistics hubs, warehousing outlets as well as residential developments and new urban communities supporting such commercial activities, driven by the concept of an Integrated City Cluster Framework.

Google Prototype communications rig for Project Loon, Google’s “balloon-powered internet”

Return By Max Chafkin

and Mark Bergen

Photographs by

Justin Fantl

The company makes

so much money,

it never had

to worry much

ns to

about financial

discipline.

Then the new

Earth

CFO showed up

Teller

financial officer. Porat, who was born in England but grew up in Palo Alto, led Morgan Stanley’s technology banking division during the first dot-com boom, served as an adviser to the Treasury Department during the bailouts of Fannie Mae and Freddie Mac, and became Morgan Stanley’s CFO in 2010. She joined Google in May 2015 with a mandate to bring discipline and focus to a company so awash in cash that it never needed much of either. She instituted rigorous budgeting and, according to people familiar with Alphabet’s operations, forced the Other Bets to begin paying for the shared Google services they used. Projects hatched with ambiguous timelines of 10 or more years in some cases had to show a path to profit in half the time. At most big companies, such financial controls are standard operating procedure, and Alphabet’s investors are pleased. Its stock is up 35 per cent since Porat joined. But within the Other Bets, Porat’s tenure has been controversial, earning her an unflattering nickname: Ruthless Ruth. “She’s a hatchet man,” says a former senior Alphabet executive. “If Larry isn’t excited about something,” the executive continues, referring to CEO Page, “Ruth kills it.”

An antenna designed to receive i nternet service d elivered by the Loon balloons

Critics, including more than a dozen former top Google executives who spoke on the condition of anonymity because they signed nondisclosure agreements, describe a company having trouble balancing innovation and its core business, search advertising. Over the 12 months ended in September, Google’s ad business accounted for 89 per cent of Alphabet’s revenue, or $76.1 billion. As one ex-executive puts it, “No one wants to face the reality that this is an advertising company with a bunch of hobbies.” “Google is not a conventional company,” Brin and Page wrote in a letter to investors when their company filed to go public in 2004. “We do not intend to become one.” The document, titled “ ‘An Owner’s Manual’ for Google Shareholders,” is legendary in Silicon Valley, epitomising an attitude known at the company’s Mountain View headquarters as “googliness.” In the letter, Page and Brin noted that Google would never focus on short-term profitability and would instead invest in employee perks, such as giving free meals to staff and encouraging employees to spend 20 per cent of their working hours on projects of their choosing. The “Owner’s

TELLER: COURTESY GOOGLE

arlier this year, Astro Teller, a ponytailed scientist and science fiction writer, gave a TED Talk. It was a first for Teller, but not for X, or Google X, as the research lab he runs used to be known. The lab has been a fixture on the conference circuit for years. In 2011, Sebastian Thrun, X’s founder, took the TED stage and predicted that driverless cars would put an end to traffic fatalities. In 2013, Sergey Brin, Google’s co-founder, showed up wearing X’s wearable computer, Google Glass, and argued that face-mounted devices were a natural successor to the smartphone. In 2015, Chris Urmson, the technical lead of X’s autonomous vehicle programme, argued that driverless cars should operate with no human oversight at all. By February 2016 it was Teller’s turn. “I have a secret for you,” he began, with a self-assured smile. “The moonshot factory is a messy place.” The comments seemed aimed at a growing sense, among some on Wall Street and within Alphabet, the parent company of Google and X, that Teller was wasting money on crazy experiments. Google spent lavishly to market Glass—the devices were delivered by sky divers at their launch—but the product flopped and was off the market by early 2015. The self-driving car ran into setbacks both literal (fender benders) and figurative (a handful of top Google engineers defected to start their own autonomous vehicle company). Overall, the Other Bets, the belittling term that Alphabet uses to refer to X and other business divisions not named Google, lost about $3.6 billion in 2015, roughly twice what they’d lost the year before. At TED, Teller attempted to reframe X’s failures as part of an overall strategy that would ultimately lead to breakthrough successes. He cataloged a handful of unsuccessful experiments— robotic vertical farms, giant cargo blimps—before moving on to one of the more promising endeavours, Project Loon. “We’re trying to make balloon-powered internet,” he said. Loon has long been a favorite of Google founders Brin and Larry Page, according to several former Alphabet executives. The initial plan, they say, was to send 100,000 balloons into the stratosphere—enormous, house-size weather balloons outfitted with transmitters. That massive fleet, plus blimps, drones, and underground cables, would form an all-encompassing worldwide broadband network surpassing anything offered by the t raditional telecom companies. “This could bring online as many as 4 billion people,” Teller said at TED, as a wide-angle video of a balloon floating past snow-capped mountains played behind him. He declared the company’s early tests a success. “We’re going to keep going.” The audience applauded. Six months after Teller’s rousing speech, Loon’s Mike Cassidy stepped down as project leader. Around the same time, Urmson, the self-driving car engineer, left Alphabet, as did David Vos, the head of X’s drone effort, Project Wing. Vos’s top deputy, Sean Mullaney, left the company as well. Other recent departures: Craig Barratt, chief executive officer of Access, its telecom division; Bill Maris, the CEO of its venture capital arm, GV; and Tony Fadell, the CEO of smart- thermostat company Nest, who was also working on a reboot of Google Glass. That project, now called Aura, also lost its leads of user design and engineering. The architect of this reorganisation— known as “Alphabetisation” at the eversunny Google—was Ruth Porat, the new chief

The Cash Machine And The Other Bets Google Search, Android, Gmail, Maps, YouTube, Cloud, Pixel phone

NEST Smart-home devices: Thermostats, smoke detectors, security cameras

Manual” noted that Page and Brin, who still control Alphabet through a complicated stock structure that gives their shares more voting power than those owned by investors, intended to invest in lines of business well beyond internet search. “Do not be surprised,” they wrote, “if we place smaller bets in areas that seem very speculative or even strange.” What made all this made $26.8b* possible, of course, was money. Behind the quirky, countercultural ethos was a wildly profitable business, with the potential to swallow entire industries. Whereas traditional advertising companies had tried to target audiences based on demographic profiles, Google’s search ads could be aimed at people already interested in a particular product. Its pioneering pay-per-click pricing scheme, AdWords, meant advertisers

Over the years, Google’s speculative bets have included the purchases of YouTube and Android, as well as forays into software, hardware, entertainment, telecommunications, and media. In the mid-2000s, Page and Brin decided to create a sort of digital Library of Alexandria by scanning every book ever printed. This was the company’s first “moon shot,” as Google Vice President Marissa Mayer (now CEO of Yahoo!) put it to the New Yorker in 2007. Partly by design and partly because Page, who became CEO in 2011, is conflict-averse, these new businesses evolved into fiefdoms. Each was dominated by an inspired executive—almost always an engineer—who’d hatched an idea, won the support of Page or Brin, and been provided with vast resources to pursue it. There was so little oversight at X, an early employee recalls, that CFO Patrick Pichette was once unable to enter the building and had to wait outside in the rain. Teller says this is the Google equivalent of an urban legend but doesn’t dispute that access to X is tightly controlled. “I’m sure someone has had a badge problem at some point,” he says. There was a rationale to this corporate fragmentation. The side projects, known then as “autonomous business units,” often

VERILY Google Glass, but for contact lenses ACCESS Offers Google Fiber broadband services, now working on wireless internet access

X Moonshots: Internet balloons, delivery drones, self-driving cars, etc. SIDEWALK LABS Wi-Fi kiosks in New York City JIGSAW Tech incubator overseen by former CEO Eric Schmidt DEEPMIND Artificial intelligence software, including a bot for the board game Go CALICO Trying to find a cure for death

Mock-up of X’s energygenerating Makani kite

paid only for ads that worked. The result revolutionised media and advertising, and gave Google a revenue stream that seemed almost limitless. Googlers have a name for its ad business: the “cash machine.” At the time of its IPO, Google was taking in almost $400 million every three months. In its most recent quarter, Alphabet generated $18 billion in revenue and about $5 billion in profit. But Brin and Page were never particularly enamored of any of this—or rather, they were focused on the business only insofar as it made even lost $3.8b* more ambitious technological efforts possible. A former Google engineer recalls meeting Page in the late 1990s. “Are you interested in—” the engineer started to ask. “Yes,” Page said, cutting her off. “We’re interested in everything.”

*OPERATING INCOME FOR YEAR ENDED 9/30/2016

competed directly with Google’s advertising partners, and it seems hard to imagine that a conventionally organised company would have been able to, for instance, start services such as Google Fiber (home broadband) and Project Fi (a cell phone carrier) while also trying to persuade big telecom companies to embed Google software in their devices. But the fragmentation created a lot of overlap. At one point in 2016 the company had two music subscription services, YouTube Red and Google Play Music; two venture capital groups, GV and CapitalG; two mobile operating systems, Chrome OS and Android; and two advanced research labs, X and ATAP, which Page created in 2014 when he hired the former Defence Advanced Research Projects Agency director, Regina Dugan. (Dugan left Google earlier this year for Facebook.) All that duplication created tension in part because, former Google employees say, Page tends to ignore employees he’s unhappy with. “Larry’s version of canning someone is to make it as unpleasant as he can,” says a former executive. Eric Schmidt, Google’s former CEO, and Bill Campbell, a board member and mentor to Page, helped smooth out

these conflicts. But Schmidt, now executive chairman, started spending more time lobbying for Google in Washington, and Campbell fell gravely ill. (He died of cancer this year.) In addition to causing internal confusion, the lack of structure made Google’s moonshots harder to explain to the world. Many former X employees blame overexuberance on the part of Google’s marketing division for the hostile reception that greeted Google Glass. With the encouragement of Brin, who ran X at the time, Google struck a partnership with Diane von Furstenberg to put Glass on runway models during New York Fashion Week in the fall of 2012. The following year, Glass was featured in a 12-page photo portfolio in Vogue. The hype heightened the sense of disappointment when Glass was released in 2013. It flopped, earning terrible reviews and prompting physical confrontations between early adopters and, for example, fellow bar patrons who didn’t appreciate having a tiny camera trained on them. The term “glasshole” entered the Silicon Valley lexicon. Teller hesitates when asked what to make of Glass’s failure. “I think we were right to try,” he says, after a long pause. “It wasn’t obvious at that time whether something like Glass should be attached to Google from a brand perspective or not. That’s

secrecy—staff members at X who caught wind of it began calling the unit, derisively, Google Y. Page called it Javelin. The Javelin team kicked around ideas, including a plan to m ass-produce skyscrapers and another to create a “smart city,” which became Sidewalk Labs, a startup run by Dan Doctoroff, the former CEO of Bloomberg LP. But a secondary purpose of Javelin, according to two people who worked on the unit, was to solve the fiefdom problem once and for all. Page’s idea was to establish “a federation of Googles,” one of the people says. He wanted standalone companies so that budgets, business models, and branding could be planned and executed independent of Mother Google. Without any warning, on the afternoon of Monday, 10 August, 2015, Page released a letter to investors and the public. He introduced Alphabet, a new holding company. Google and the Other Bets would be subsidiaries, each with its own CEO. “Alphabet is about businesses prospering through strong leaders and independence,” he wrote. “The whole point is that Alphabet companies should have independence and develop their own brands.” Alphabet would also begin reporting Google’s earnings separately

Liquid fuel made from seawater. The fuel was too expensive to produce, and X canceled the project

something we learned.” He notes that although Glass was marketed to the public as the Explorer Edition, many people assumed it was a finished product. Teller established procedures to avoid similar debacles, including a formal process by which aspiring project leaders would be required to have a credible business case as well as a working prototype in order to continue. “It was a primordial soup where there was all this stuff bubbling, but it was extremely unstructured,” says Obi Felten, whose business card identifies her as “head of getting moonshots ready for contact with the real world.” (Titles at X tend to be extremely googley.) X began paying bonuses to executives who killed their projects before expenses spiralled out of control, and it halted development on at least one that had already been greenlighted. The effort, known internally as Tableau and championed by Brin, had been a plan to create gigantic TV screens. As X retrenched, Page went into an exploratory mode of his own. Starting in 2014, he began handing off day-to-day responsibilities at Google to Sundar Pichai, a longtime product executive, and assembled a small, internal think tank. The group operated in

each quarter, meaning that investors would finally know how much money X and the Other Bets were losing and exactly how profitable the Google cash machine was. At the end of the letter, Page attempted a joke. “Don’t worry,” he wrote, “we’re still getting used to the name too!” Alphabet’s earnings reports have laid bare just how healthy Google was under Pichai. In addition to double-digit revenue growth in its ad business over the past year, Google has unveiled a promising new assistant to compete with Amazon’s Echo and has beefed up its cloud-services division. “More information is always better for investors, because you hate to invest in black boxes,” says Dan Niles, founding partner of AlphaOne Capital Partners, an investment management firm that holds Alphabet stock. But, Niles adds, “the real key is that they brought in Ruth Porat.” Almost no one saw the change coming. Most senior executives found out that morning. “It was mind-blowing,” says Rich DeVaul, who serves as “director of rapid evaluation and mad science” at X. He’d helped start Loon and, by 2015, was in charge of vetting moonshots, which means he has the Google equivalent of topsecret security clearance. He talked with Brin and Page most

PATRICK T. FALLON/BLOOMBERG

weeks. And yet, he says, “I had no idea they were going to do that.” At many of the Other Bets, the change was seen as a violation of googliness. Two years earlier, for instance, Google had spent $3.2 billion to buy Nest, explaining the acquisition as part of a plan to create an ambitious hardware division led by Fadell, the former Apple engineer known for building the original iPod prototype. According to two people close to Nest, the company was initially promised wide latitude to create products, as well as a budget that would allow it to lose as much as $500 million for each of the next five years. Fadell told Bloomberg News when he departed in June that he’d begun thinking of leaving at the end of 2015, shortly after Alphabet’s formation. People familiar with his thinking say he blames budget constraints imposed by Porat that limited Nest’s scope. Another person close to Nest disputed the $500 million figure. Google Fiber, which Brin had a big hand in starting, was also targeted for cuts. The service won solid reviews, and its CEO, Craig Barratt, a former semiconductor entrepreneur, was given control over a half-dozen other Google projects known as Access and Energy. Barratt’s sprawling portfolio included green power operations, projects to develop wireless routers for homes, and a plan to lay fiber-optic cable in s ub-Saharan Africa. “Craig thought he had a chance to be like Buckminster Fuller and reinvent the world,” says a former Googler. Alphabetisation reduced Early version Barratt’s domain to Fiber, which of a delivery drone, Project Wing he tried to expand, announcing plans to bring Google’s internet and cable-TV service to more than a dozen cities. But seeking permits to lay fiber is time-consuming and digging holes expensive. Former employees say Page became frustrated with Fiber’s lack of p rogress. “Larry just thought it wasn’t game-changing enough,” says a former Page adviser. “There’s no fl ying-saucer shit in laying fiber.” In October the company announced that it was dismissing around 130 staffers and halting the expansion of the fiber network in eight cities. Barratt resigned that same day. These changes have prompted many in Silicon Valley to accuse Page of bowing to investor pressure—in other words, of acting like a CEO of a normal, publicly traded company. “It definitely looks like a more conventional company,” says Randy Komisar, a partner at Kleiner Perkins Caufield & Byers. “It’s the classic GE conglomerate model,” he says, comparing Page to Jack Welch, famous for turning General Electric around by shedding research divisions and slashing costs. To Wall Street ears, that might sound like a compliment, but it surely isn’t meant as one. Komisar describes Porat’s focus on expenses as a positive development, but adds, “I just hope that Larry and Sergey keep financial discipline from swallowing innovation.” Alphabet declined to make Porat, Page, or Brin available for an interview, but in October, during the company’s most recent earnings call, Porat defended Alphabet’s increasingly rigorous approach to innovation. “As we reach for moonshots,” she said, “it’s inevitable that there will be course corrections along the way.” She spoke of “taking a pause” in some areas of business to “lay the foundation for a stronger future.” During the third quarter of 2016, Alphabet spent $3.6 billion on research and development—an enormous amount of money and 11 per cent more than Alphabet’s R&D outlay in the same period in 2015. The Other Bets lost $865 million. Those would represent massive commitments to new businesses at any company other than Alphabet. In an interview at X’s headquarters, where Page’s and Brin’s offices are also located, Teller is emphatic that Alphabet is still an engineer’s paradise. Wearing several earrings, two hair

Porat scrunchies, Rollerblades, and a shirt with a pattern that improbably combines paisley and plaid, Teller describes a “delicate balance” between discipline and freedom, disputing the contention that the Other Bets have been subjected to unwanted scrutiny from Porat and denying that they’re losing steam. “You can’t flog people into innovation,” he says. “But you can’t just take your hands off the wheel, either.” Cuts to X have in many cases been necessary, he says, citing as a case in point Google’s recently shuttered robotics division. Code-named Replicant and run by Android founder Andy Rubin, the division comprised 11 companies that Google acquired in 2013. After taking over Replicant from Rubin, who left at the end of 2014, Teller disbanded it. “There’s not going to be a robotics group,” he recalls telling his new staff. “You’ll define yourself by the problem you’re working on. Robotics is a tool, it’s not a problem.” (Alphabet put the largest piece of Replicant, Boston Dynamics, up for sale last year. The company, which develops bi- and q uadrupedal all-terrain robots, has yet to find a bidder.) Teller has added a full-time CFO for X, Helen Riley, a veteran Googler who worked under Porat during Alphabetisation. Porat meets with Teller regularly and serves alongside Page, Brin, Schmidt, and Alphabet’s chief legal officer, David Drummond, on a committee that decides whether to approve or kill a moonshot. “Let me draw you a picture we frequently draw for ourselves,” Teller says, swiveling his chair to face a whiteboard and grabbing a magic marker. He writes “progress,” draws a line through it, and then writes the word again above a dollar sign. The point, he says, is to pursue innovations that are worth the money. The flying saucers will have to pay for themselves. “If you work for me, you better understand that,” he says. The Loon project, which is now being led by Tom Moore, a former vice president at the satellite company ViaSat, is still alive. “If you want to work on the great, big, hard problems,” says DeVaul, the Loon co-founder, “I don’t know of anybody else in the world who takes those problems as seriously as we do.” By his description, Loon’s progress has been remarkable. Two months after joining Google in 2011, DeVaul was tracking and recovering helium balloons in California’s Central Valley, several hours east of Mountain View. Not long after, he added the payload, a tangle of wireless equipment packed into a small Styrofoam beer cooler. “Harmless science experiment,” a note on the outside read. “If found, please contact Paul.” The note included a phone number with a San Francisco area code. Paul was Paul Acosta, one of six Loon engineers. Today, the Loon labels have more formal language, and there are phone numbers with a dozen different country codes on each device. The team—more than 100 strong, according to a former employee—works in a laboratory complex that includes an enormous darkroom, where the used bladders are cut up and photographed on a 65-foot light table so inspectors can look for microscopic tears. In another room, air traffic controllers monitor the dozen or so balloons in the air. In a picnic area just outside, X engineers pick at seared tofu, while a few feet away, whirring drones take off and land, and self-driving cars shuttle in and out of a parking garage. Nothing out of the ordinary by Googleplex standards. “If we’re working on a really huge problem,” says Teller, “that motivates people to come here, and it motivates them to stay. That’s very real. That’s not a marketing thing for Google. It’s why this place works.” <BW>

A week at summer camp for aspiring capitalistsâ&#x20AC;&#x201D;age 5 and up.

By Peter Robison

One day this summer, to occupy our two boys and maybe teach them something about money, my wife and I set up a sidewalk lemonade stand. She put out a chipped red table that had been hers as a girl and helped our older son, who’s 5, carefully letter “LEMONADE” and “50¢” onto construction paper. When neighbours stopped by, our younger boy, 3, would splash juice from Costco into a plastic cup as his big brother slowly counted change. The customers often let them just keep the dollar, and by afternoon’s end, they had collected $8. Our 5-year-old later got awww-that’s-cute laughs explaining how they’d managed such a haul: “I don’t give change.” So much of parenting feels rushed. For once, I thought, here was a memory that would have a satisfying, Rockwellian glow. Until the following week, when I met Chuchi Arevalo. The founder of a youth business academy popular with professional parents in the suburbs of Washington, D.C., he told me, in so many words, that my sons’ effort was an entrepreneurial embarrassment. A Georgetown MBA and former banking consultant, Arevalo has developed a curriculum for children as young as 5, and it starts with an introduction to the lemonade stand—which he views as a vehicle for lessons in strategy, operations, and finance. “It’s not just, hey, winging it,” Arevalo told me, wearing tan slacks and a blue polo. Operators of successful stands, he explained, have a marketing plan: fliers, social media, partnerships with school sports teams. They know their supply costs and gross margin. And they diversify into new revenue categories. “Could you have cookies or bananas or fruit or something that allows you to sell more stuff?” he asked. “By the way, what are you going to do in the winter? You’re not going to sell cold lemonade—what about hot chocolate?” I tried to decide if Arevalo was a dynamo of American capitalism or an innocence-stomping robot. His company is called Spark Business Academy. I’d seen its course descriptions in a flier of D.C. summer camps, next to the more typical fare of art, music, and sports. His blurbs had pictures of grade-school moguls in suits talking on cell phones and promised to teach children such things as “cultivating an entrepreneurial mindset” and “building a stock-market portfolio.” Arevalo offered to let me sit in on his flagship Future Millionaires Bootcamp, a weeklong, $495 course in budgets, investing, entrepreneurship, business ethics, and leadership. On the first day, at a whitecolumned Baptist church on a leafy corner in Arlington, Virginia, the parking lot filled with Volvos and Priuses as parents dropped off their children. Younger kids, age 6 to 10, filed upstairs, where a Ph.D. candidate at George Wa sh i n g to n Un ive r s i t y put them to work devising business plans. Some drew pictures of their products—it

was August, and ice cream was a recurring theme— while others filled out forms with estimates for prices, cost, revenue, and profit. “What’s our mission statement?” asked a sandy-haired fourth-grader. Older kids, age 11 to 16, gathered downstairs, in a choir room filled with long tables. Arevalo took the lead. He blitzed through the financial milestones of life. Credit cards. FICO scores. Student loans. Investment portfolios. Even, perhaps, managing a company and solving difficult business problems. “Leading practices—that’s important for you to know,” he said at one point, the first of many times during the week he lapsed into corporate-speak. To entertain the group of about a dozen teenagers, who could have been at the pool or making mischief or otherwise enjoying summer, Arevalo didn’t joke or play the guitar. Instead, he tapped calculations into a spreadsheet projected onto a large screen, as if he were at a banking conference. I got the sense he hadn’t changed his style much from a previous job, when he was an in-house instructor at consulting firm PwC. The class remained tomblike as he broke down the factors that affect a FICO score and showed how to build retirement savings through the magic of compounding. When Arevalo observed that Facebook once turned down a $1 billion offer from Yahoo!, an 11-year-old with glasses asked how much the social networking giant was worth. “Great question!” Arevalo said, segueing to an explanation of market capitalisation (and the answer, based on that day’s stock price: $359 billion). The mention of a company with some relevance to their lives seemed to perk the kids up. But as the day went on, I began to inventory the various ways it’s possible for a teen to slouch: the lean-back, the head-ondesk, the Leaning Tower of Pisa, and my favourite, the Linebacker—one kid who sat sideways, with elbows on knees, as if poised to spring up at the first opportunity to flee. Arevalo was born near Madrid in 1971. After studying economics at the University of West London, he moved to Washington and got a post as a research assistant at the International Monetary Fund. He joined PwC in 1999, the same year he earned his graduate degree from Georgetown, and settled in Arlington with his wife and

Small pupils, big appreciation

As cl I cou ways for a

their two sons. One year, Arevalo helped bring a chess club to his sons’ school, and that got him thinking: Why weren’t there any classes about money management in a country famously addicted to credit? Arevalo worked up a syllabus in his spare time, and in 2013 he e-mailed a proposal for a basic finance class to Beauvoir, a private grammar school on the grounds of the Washington National Cathedral. Beauvoir is a feeder for St. Albans School and the National Cathedral School, college preps that count Kennedys and Rockefellers among their alumni. While Beauvoir offered math, robotics, and Mandarin, it had never taught finance, says James Gilroy, director of auxiliary programmes. The school hired Arevalo to teach his first class, called Money Matters, to 13 students in January 2014. He quickly expanded to other schools, thanks to word of mouth in the elite parent set. In Washington and its suburbs, it’s like the Great Recession never happened. Almost a quarter of D.C. households now earn more than $150,000 a year, compared with 8 per cent in 2000. Five of the 10 wealthiest US counties are D.C. suburbs; the city is chockablock with lawyers, government contractors, and consultants. Tasting-menu restaurants have proliferated, even in Shaw, the district that burned in the 1968 race riots, and a Washington Post article this year gave a name to a new phenomenon: the $1,000 date night. Area schools are notorious pressure cookers, as high-achieving parents push their children to begin their own ascent. “Lifestyles have changed a lot,” says Maura Schauss, managing partner of Washington Wealth Advisors, a suburban Virginia money manager that’s hired Arevalo for classes with clients’ kids. “But you can still teach children the value of money.” Another customer, Natalie DeGraaf, likes to joke that on her street in Alexandria, everyone has a security clearance. DeGraaf, a biosafety expert with two master’s degrees, and her husband, a lawyer, sent their 10-yearold daughter to one of Arevalo’s classes last year. Afterward, DeGraaf was pleasantly surprised when her daughter began listening intently to news about Apple on National Public Radio. Three years after founding Spark, Arevalo left PwC this year to work full-time on building the company. He now employs 15 instructors to teach 85 after-school classes and 10 weeks of summer camp at 45 schools, mostly in the D.C. area, plus a few in New York. At Future Millionaires week in Arlington, Arevalo started camp as he always does, by destroying a timehonored financial tradition: a child’s first bank savings

lass went on, unted the many s it’s possible a teen to slouch

Arevalo account. In the era of quantitative easing, he said, historically low interest rates make stocks a better long-term investment. Somehow, Arevalo’s almost pathological inability to speak at a kid’s level came off as charming. He asked questions that forced them to do math in their heads and casually deployed microeconomics terms like price elasticity of demand. At one point, he put IRS Form 1040 on the screen and explained it line by line. Whytni Kernodle, a lawyer who spent almost $1,000 for her two sons to attend the camp, told me that she’d mentioned Future Millionaires to a Parisian friend—who teased her that in France, such a thing would be picketed. But Kernodle said Arevalo provided an experience her sons didn’t get from their other summer pursuits, which included trips to Morocco, Ghana, and a camp in Malibu, California. “I find it incredibly difficult to set limits,” Kernodle said. She worries that children these days rarely see their parents handling physical money, let alone doing much in the way of labour to generate it. “The work they see us doing is reading, writing, talking on the phone,” Kernodle said. “So the value is abstract.” Eventually, Arevalo broke through to even the most skeptical campers. When he divided them into teams for a finance quiz most adults would probably flunk, they clapped and pounded the tables. Just about everyone could name the main US stock exchanges, calculate an investment’s rate of return, and explain the concept of portfolio diversification. On the last day of camp, Arevalo brought doughnuts and pizza and led one last debate, about the ethics of Mylan’s decision to raise prices sixfold on its lifesaving EpiPen. Or, as he put it in a note to parents, “Campers practiced stakeholder management by seeking to strike a balance between the company’s duty to increase shareholder value (and profits) and its duty to its customers.” When it was time to say goodbye, Volvos and Priuses again filled the parking lot. Another parent, Patricia Harrison, later told me she spent the rest of the summer evening discussing the ethics of the Mylan controversy with her son Colin, 15, instead of more typical fare such as sports, apps, or video games. The talk only ended when Colin got up from the dinner table, saying he had

IS KRATOM 48

A DEADLY

DRUG BY BRYAN GRULEY

Or 49

A Life-Saving Medicine?

ADVOCATES BELIEVE THE POWDER HELPS PEOPLE KICK OPIOIDS WITHOUT RISK OF ADDICTION. WHEN THE DEA TRIED TO CRIMINALISE IT, THEY FOUGHT BACK

FOR DAYS, SUSAN ASH WOKE AROUND NOON, ATE A BOWL

of cereal, and went back to bed. That was all the living her pain would allow. Her neck hurt, her hips hurt, her knees and feet and toes hurt. “I felt like I’d been electrocuted,” she recalls. Her doctor in Portland, Oregon, diagnosed her with fibromyalgia, possibly caused by past car and bicycle accidents. She tried physical therapy, acupuncture, and chiropractic care, to no avail. In 2008, at 38 years old, she sublet her apartment and moved to Norfolk, Virginia, where she’d grown up. “While all my friends got married and had kids,” says Ash, a delicate blonde, “I was at home living with my parents. And I was sick.” To counteract her aches, she took three or four 30-milligram extended-release morphine pills a day, plus immediate-release ones as needed. Eventually her new physician decided she didn’t have fibromyalgia, but Lyme disease. Since it was diagnosed so late, the doctor told her, it would likely afflict her for the rest of her life. By then addicted to morphine, Ash added Dilaudid, a semi-synthetic opioid, to her regimen, then shifted to oxymorphone, another addictive opioid. Then, she says, “I lost all control.” She started snorting crushed oxymorphone pills off a makeup mirror to get a faster, stronger high. She’d use a month’s ration in three weeks, then endure a week of withdrawal. Once, after her prescription ran out, she wrote on Facebook that she’d lost it, hoping someone would get her some pills. A woman she didn’t know suggested she try kratom, a green powder derived from the crushed leaves of an eponymous tree indigenous to Southeast Asia. Ash scoffed. “I didn’t care about a plant,” she says. “I was like, ‘Just send me your drugs.’ ” Eventually, though, she ordered some kratom capsules online.

THE GLOSSY GREEN LEAVES OF THE KRATOM TREE, PART

of the coffee family, have been consumed for centuries in Indonesia, Malaysia, Thailand, and neighbouring countries. Farmworkers believed that chewing the leaves gave them energy during long, sweltering days, and that larger amounts helped treat coughing, diarrhea, chronic pain, and opium addiction. The tree’s name is pronounced KRAY-tom, KRAHtom, or krah-TUM, depending on the speaker, while its consumable form is variously referred to as kakuam, biak-biak, mambog, ithang, and ketum, among other names. A premium variety, maeng da, is widely translated as “pimp grade.”

KRATOM-K’S WEBSITE CONTAINS SUCH DISCLAIMERS AS “THESE PRODUCTS ARE NOT INTENDED FOR HUMAN OR ANIMAL CONSUMPTION” They came in an unmarked zip-lock bag. Ash took six, and within 45 minutes, she says, her pain and withdrawal symptoms had become manageable. It didn’t deliver much of a high, but soon she was regularly using the stuff after her oxymorphone ran out. Finally, she decided to switch to kratom altogether. Several times a day, she brewed the powder into tea or ate it dry despite its dirtlike taste, washing it down with water. Her pain and opioid cravings subsided, her energy returned, and her mind cleared. “I was like a different person,” she says. Ash became such a fervent believer that last year she founded the American Kratom Association to promote the product and represent its users nationwide. At the time, kratom or at least one of its active ingredients was banned in Indiana, Tennessee, Vermont, and Wisconsin. Several more US states were considering restrictions, concerned that the substance was yet another addictive, grey-market high. Kratom was also prohibited or treated as a controlled drug in at least 10 countries, including Australia, Malaysia, Poland, and Thailand. Backed by donations, Ash spent her first year as head of the AKA lobbying legislators in Alabama, Florida, Georgia, New York, and North Carolina, arguing that kratom was a safe alternative to legal and illegal opioids, which had caused more than 28,000 overdose deaths in 2014, according to the Centers for Disease Control and Prevention. But as she was hopscotching state capitals, officials at the US Food and Drug Administration and the US Drug Enforcement Agency were preparing an unwelcome surprise. One morning last August, as Ash was packing up to move back to Portland with the idea of reclaiming her independence, someone sent her an article saying that the DEA was planning to place kratom on its list of Schedule I narcotics—the

Kratom gained popularity in the US over the past decade or so, as its availability spread online and in head shops. Two or 3 grams of powdered extract steeped in hot water or whipped into a smoothie offers a mild, coffee-like buzz; doses double or triple that size can induce a euphoria that eases pain without some of the hazardous side effects of prescription analgesics. Preliminary survey data gathered recently by Oliver Grundmann, a pharmaceutical sciences professor at the University of Florida, found that American users are mostly male (57 per cent), white (89 per cent), educated (82 per cent with some college), and employed (72 per cent). More than 54 per cent are 31 to 50 years old, and 47 per cent earn at least $75,000 a year. In the US, the kratom business consists mostly of retailers who buy raw leaf product from overseas farmers or a distributor. There are also wholesalers who package and encapsulate the stuff, though some retailers contract this out themselves. A recent survey by the Botanical Education Alliance, a business lobby group, counted about 10,000 vendors with annual revenue slightly over $1 billion. At the CBD Kratom shop in Chicago, Andrew Goth, a 28-yearold salesman with earlobe expanders and a Harry Potter–style lightning-bolt tattoo beneath his Adam’s apple, describes having shoppers twice his age who rely on kratom to relieve joint and back pain. “Customers who take two or three OxyContins or Percocets can’t be productive throughout the day,” he says. “On kratom they can.” Goth uses it to aid his recovery from addiction to cocaine and alcohol. Along a brick wall, facing a portrait of Bob Marley, shelves of glass jars display strains with names like Green Cambodian, White Borneo, and Super Indo. Foil packs of 10 0.55-gram

PHOTOGRAPH ILLUSTRATION BY CREDIT TK

agency’s equivalent of the FBI’s Ten Most Wanted list. The DEA and FDA had determined that kratom posed an “imminent hazard to public safety” on the order of heroin and LSD. Once on Schedule I, kratom would be regulated more strictly than opioids such as oxycodone, which is classified as a Schedule II drug. These drugs also have a high potential for abuse, but they have an accepted medical use for treating pain. The finding gave the DEA the authority to declare kratom illegal in as little as 30 days. Using, selling, distributing, and marketing it would be subject to felony prosecution, prison, and fines. Just like that, Ash and her fellow devotees might face the choice of becoming criminals or going back to the opiates they maintained had poisoned their lives. She postponed her return to Oregon, set up her laptop and iPad in her parents’ dining room, and went to work, convinced the DEA was targeting a potential antidote to the overdose plague—a substance that had all the benefits of powerful opioids, without the dangers.

PREVIOUS SPREAD: PHOTOGRAPHS BY CAROLINE TOMPKINS; RIGHT: COURTESY AMERICAN KRATOM ASSOCIATION

ASH AT A D.C. RALLY IN SEPTEMBER capsules sell for $7.95, raw powder is $1 a gram, potential dangers to consumers who may believe and 2-ounce Bali Liquid Gold Shots go for $9.95. that they are consuming a safe, regulated product Kratom can also be found at convenience stores when they are not.” The organisations asked the and kava bars (kava, a derivative of a South Pacific FDA to “deter further marketing of kratom under plant, is a trendy alcohol substitute), but the bulk the mistaken belief that it is a legitimate product.” is sold via Craigslist and online retailers such as The letter may have been motivated partly Kratom-K and Kratora Quality Ethnobotanicals. by kratom’s growing sales. But supplement comSome of these sites include legalistic and panies are also sensitive to the perception that occasionally disingenuous disclaimers. “These their business is lightly regulated and rife with products are not intended to diagnose, treat, empty health promises and half-baked science. cure, or prevent any disease,” Kratom-K’s As it stood, the FDA classified kratom both as a website says. “These products are not intended supplement, like protein powder, and as an unapfor human or animal consumption.” The site also proved drug. The industry groups believed the advises visitors, “Don’t go stocking your sideagency wasn’t giving kratom enough scrutiny. board full of Green Thai kratom if you’re quest“We became aware it was being sold as a dietary ing after relaxation. However, do stock it when in hot pursuit supplement, and that raised red flags,” says Steve Mister, presof stimulation power.” ident and chief executive officer of the Council for Responsible The underpinnings of kratom’s stimulation power are Nutrition. “If it’s going to be in the marketplace, the FDA needs broadly known in the scientific community, though virtu- to enforce the law to protect the integrity of the law.” ally all research into the drug has been restricted to animals. The 1994 statute governing dietary supplements requires Kratom works a lot like morphine. It contains two key alkaloids marketers to prove that new products or ingredients will be —mitragynine and 7-hydroxymitragynine—that bind with pro- reasonably safe, upon which the FDA conducts a 75-day vetting teins called Mu receptors, a class of opioid receptors in the that’s far less rigorous than the review pharmaceutical makers brain and spinal cord. Once activated, a Mu receptor acts like face. The agency doesn’t approve supplements per se, but if a dimmer switch, dulling pain signals from around the body. it identifies problems, it can take steps to get products off the When someone takes morphine and other opioids, these recep- market. Some supplement makers skip the process, hoping the tors also trigger neural pathways that can prompt the brain FDA won’t notice, and as of July 2013, no kratom marketers had to turn off breathing—the primary cause of overdose death. informed the agency about their products, even though tonnes For reasons that aren’t clear, kratom’s alkaloids avoid those of the leaf were coming into US ports. According to Fabricant, some importers would mislabel kratom as incense, potpourri, perilous trails. “Ain’t that cool?” says Edward Boyer, professor of emergency or cosmetics, or mark packages “not for human consumption,” medicine at the University of Massachusetts Medical School. even though their websites said otherwise. The supplement businesses found a receptive audience in “There’s a lot of super sexy research you could do with this.” Some investigation is taking place abroad—in 2014, scientists in Fabricant, who’d joined the FDA in 2011 after working as a vice Japan reported creating a kratom derivative 240 times as effec- president for the Natural Products Association, another suptive at pain relief as morphine. In the US, Boyer and researchers plement lobbying group. He’d already been highlighting safety at the University of Mississippi are seeking a patent on methods concerns about kratom at trade show presentations before of treating addiction withdrawal using kratom extract. If the the letter arrived. Seven months after he received it, the FDA drug were on Schedule I, they would be required to get a DEA issued Import Alert 54-15, which raised “concerns regarding license and ensure, among other costly steps, that their supply the toxicity of kratom in multiple organ systems.” The alert was safe from theft. directed field agents to detain packages arriving from Canada, Scientists disagree on whether kratom is addictive, but it Indonesia, and Malaysia that they suspected of containing the has been observed in animals that its alkaloids also attach product. It didn’t cite evidence to support the toxicity claim. to the Kappa opioid receptor, which creates an aversion to At the time, the DEA seemed less worried than the FDA. opioid cravings. Absent formal research on humans, feel-good The DEA had listed kratom as a “drug of concern” for several stories like Ash’s vie with case studies such as one published by years, but spokeswoman Barbara Carreno told the trade publithe Wisconsin Medical Society, which describes a 37-year-old cation Natural Products Insider in March 2014 that kratom had teacher who admitted herself to an addiction clinic because “not been a big enough problem in the US to control.” That she couldn’t cold-turkey kratom. Boyer recalls one patient who posture changed several months later. On the afternoon of 16 mixed leaf powder into a solution and injected it. “If that’s not July, 2014, according to the Palm Beach Post, 20-year-old Ian problematic drug use,” he says, “I don’t know what is.” Mautner drove to an overpass in Boynton Beach, Florida, left his Isuzu Trooper, removed his sandals, and threw himself to his THE US GOVERNMENT DIDN’T PAY MUCH ATTENTION TO death on Interstate 95 below. Police found packets of kratom in kratom until July 2013. That month, three advocacy groups sent his vehicle. Lab tests showed mitragynine, as well as prescripa one-page letter to Daniel Fabricant, who was then the direction antidepressants, in his blood. He hadn’t left a suicide note. tor of the FDA division that oversees the dietary supplement Ian’s mother, Linda Mautner, blamed her son’s death on industry, which has annual revenues of $30 billion or more. kratom addiction, telling the FDA that her son had ingested The letter was co-signed by the heads of the United Natural the leaf frequently, causing him to suffer from weight loss, Products Alliance, the Council for Responsible Nutrition, and vomiting, constipation, and hallucinations, among other probthe Consumer Healthcare Products Association, organisations lems. He had dropped out of college and entered rehab, but representing dietary supplement producers and marketers such relapsed the month before he died. as Herbalife, Bayer, and Pfizer—but not, notably, any kratom Five weeks later, the DEA asked the FDA for a recommenvendors. “Given the widespread availability of kratom,” the letter dation on whether to name kratom a controlled subsaid, “the dietary supplement industry is concerned about the stance. In most cases, federal law requires an eight-factor

FDA analysis before the DEA can list something on one of its five Schedules. Cough and anti-diarrhea treatments reside at the low end of the spectrum, Schedule V, whereas Schedule I drugs have “no currently accepted medical use and high potential for abuse.” Officials for the FDA and DEA declined to be interviewed for this story, but DEA spokeswoman Carreno says her agency sought the FDA study in part because some states and other countries had begun regulating kratom. “The plant was particularly concerning amidst an opioid crisis,” she adds. The import alert had helped to identify a rise in kratom shipments, and to expose that many were entering the country clandestinely— something that figures in the DEA’s calculus of whether a substance should be legally controlled. The FDA was also getting complaints that kratom had made some consumers ill, and that they were having withdrawal symptoms when they tried to quit. In September 2014, the US Marshals Service executed the FDA’s first formal seizure of kratom, confiscating more than 25,000 pounds of raw leaf valued at $5 million from a Southern California importer. “We have identified kratom as a botanical substance that poses a risk to public health and has the potential for abuse,” said Melinda Plaisier, the FDA’s associate commissioner for regulatory affairs. “This action was taken to safeguard the public from this dangerous product.” BY THEN, ASH WAS LIVING AT HER PARENTS’ RED-BRICK CAPE

PHOTOGRAPH ILLUSTRATION BY CREDIT TK

Cod house along the Lafayette River in Norfolk, collecting $1,100 monthly disability payments, using kratom every day, and mentoring painkiller addicts on how to make the transition from opioids. “These were broken people, and this is the s cariest time in their whole lives when they finally make a decision to get off of opioids,” she says. “I was literally helping little old ladies who didn’t want to take oxycodone anymore.” Ash was also keeping tabs on the state legislatures that were considering kratom bans. The Botanical Education Alliance

(then called Botanical Legal Defense) had begun l obbying against restrictions on behalf of kratom businesses, and Ash decided to start an association that would represent consumers. A vendor staked her the $373 in fees that she needed to register the group, which she called the American Kratom Association, and she launched the organisation’s website in February 2015. A former volunteer park ranger and self-described hippie chick who has seen the Grateful Dead 37 times, Ash had worked for forest preservation nonprofits in Utah and Oregon. Advocacy came naturally to her. In the next year and a half, she told her story to lawmakers in five states. She says many officials knew little about kratom and tended to lump it in with addictive synthetics such as so-called bath salts. She once testified at a legislative hearing in Florida that also included remarks from Linda Mautner; Ash says she empathised with Mautner but believes there were reasons other than kratom for her son’s death, while Mautner says kratom proponents “were very angry with me, because I exposed it.” Despite Ash’s lobbying efforts, Arkansas and Arizona passed bans, the fifth and sixth states to do so. In Washington, as lawmakers pressed regulators for action on the opioid epidemic, the FDA and DEA were building a case against kratom. They compiled research showing that calls about kratom-related illnesses to poison centres had risen tenfold since 2010. Reports from forensic labs about trafficking and abuse were up, too. Shipments amounting to 12 million kratom doses had been confiscated or detained at the border. And the DEA counted at least 30 worldwide deaths since 2009 as kratom-related. By early 2016, both agencies viewed kratom use not as a vehicle for recovery from opioid abuse, but as a precursor to relapse. The FDA analysis sought by the DEA still wasn’t done in May, when DEA Acting Administrator Chuck Rosenberg decided— without the FDA objecting—to criminalise kratom immediately. Scheduling a narcotic typically takes years, but in 1984 Congress let the DEA proceed faster with drugs the agency says pose an “imminent hazard” to the public. In the past two years, it

GOTH AT CBD KRATOM IN CHICAGO

has used the procedure to put the synthetic cannabinoid MABCHMINACA (multiple overdoses, four deaths) and the opioids acetyl fentanyl (39 deaths) and U-47700 (15 deaths) on Schedule I. The DEA issued its formal notice about kratom on 30 August, calling it “an increasingly popular drug of abuse readily available on the recreational drug market.” By law, the DEA’s final ruling wasn’t subject to court review. Nor did it require public comment. “I had a lot of panicked people on my hands,” Ash says. From the Queen Anne table in her parents’ dining room, with the family mutt, Dash, snoozing at her feet, she started working the phone, e-mail, and social media. “We are now facing our darkest hour,” she wrote on AKA’s Facebook page on 3 September. The challenge was close to hopeless. The DEA had never changed its mind about scheduling a drug on an emergency basis. And once a substance is on Schedule I, it’s almost impossible to dislodge, as marijuana supporters know; the agency this summer rejected the most recent bid to de- schedule weed, even as legal US sales of medical and recreational marijuana are projected to reach $7 billion this year. Within a week, the Botanical Education Alliance and Ash’s association hired a lobbyist, a public-relations company, and the Washington law firms Venable and Hogan Lovells, where Rosenberg had once been a partner. Ash also went on what she calls “a fundraising rampage.” Donations and $20 membership fees poured in, including a $100,000 gift from a retailer. In a few weeks, the association’s bank account swelled from $30,000 to $300,000. By December, it would reach $430,000. More than 130,000 supporters signed a whitehouse.gov petition seeking to stop the DEA. At a rally near the White House on 13 September, demonstrators in “Kratom saved my mom”

fatalities the DEA had cited also involved alcohol, narcotics, or underlying medical conditions—something the DEA’s own accounting acknowledged in all but one instance. Nine fatalities in Sweden that the agency had listed, for example, could be traced to a product, Krypton, that was laced with the synthetic opioid tramadol, which in large doses can inhibit breathing. Other deaths had been complicated by heroin, fentanyl, and in one case a gunshot to the head. More than 200 of the 660 kratom-related calls to poison centres had also involved alcohol, narcotics, or benzodiazepines, Hogan Lovells said. “Never before has DEA invoked its emergency scheduling authority to take action against a natural product with a long history of safe use in the community,” the letter read. It was signed by David Fox and Lynn Mehler, former lawyers in the FDA’s Office of Chief Counsel. According to Ash, the letter cost her organisation $180,000. It appears to have been worth it. September ended without DEA action. Then, on 12 October, the agency shocked the kratom community by withdrawing its emergency plan. Instead, it would allow six weeks of public comment before taking any action. Spokesman Russell Baer told Scientific American that the DEA still believed kratom was dangerous, but said “we don’t want the public to believe we are simply a group of government bureaucrats who don’t care about their safety and health.” DAVID DERIAN LEARNED OF THE TURNABOUT IN A TEXT

message. “I couldn’t stop crying for about an hour,” he says. Derian, 43, started using kratom about six years ago, after enduring more than a decade of addiction to opioids prescribed for chronic back pain. In September, the company he founded, INI

PHOTOGRAPH BY CLAYTON HAUCK FOR BLOOMBERG BUSINESSWEEK

“I was literally helping little old ladies who didn’t want to take oxycodone anymore,” Ash says T-shirts flogged the petition and served kratom tea. Disabled military veterans and others posted “I Am Kratom” video testimonials on social media. On Capitol Hill, Representative Mark Pocan, a Wisconsin Democrat, received an e-mail from a friend in Colorado who relies on kratom to neutralise various ailments. After reading the DEA decision and deciding that the agency had used what he calls “a nonprocess with a lot of pretty shaky science,” he invited Ash to D.C. for a chat. Eventually he and Matt Salmon, a Republican representative from Arizona, recruited 49 House members to co-sign a letter urging Rosenberg to delay a final decision and allow for public comment. In a separate letter, six university researchers argued that a ban would jeopardise their promising work on kratom derivatives. The public backlash surprised the DEA, which rarely gets such outcry over decisions not involving marijuana. As Pocan says, “This is hardly the tie-dye psychedelic crowd. These are people in their 30s, 40s, 50s with serious diseases and conditions who had to go to pain meds and got addicted.” The kratom advocates’ law firms also sent letters to the DEA. Hogan Lovells’s 35-page missive included an extra 51 pages of testimonials from kratom users. “This is LIFE and DEATH for hundreds of thousands of Americans,” wrote an unnamed 39-year-old woman who said she was s uffering from muscular dystrophy and back pain. “This plant has brought nothing but good into my life and if it’s ripped away, I fear for my very life.” Point by point, Hogan Lovells’s letter attacked the government brief that sought to make kratom the legal equivalent of LSD. The firm argued that no reports in scientific journals had ever attributed a death solely to kratom use, and that all of the

Botanicals, became the second kratom marketer to formally seek FDA acceptance of its products as dietary supplements. (Another company’s application was rejected by the FDA last year.) In preparation for the submission, INI stopped selling its kratom offerings, which it sells under the brand Lucky Botanicals, and started commissioning scientific studies. “We wanted to become part of the solution and not add to the problem,” Derian says. He calls working with the FDA “refreshing and exciting,” adding, “they’ve been nothing but helpful.” If the DEA continues its tactical retreat, Derian plans to start selling a kratom product called Mitrasafe. “I’d like to see this industry as regulated as the dietary supplement industry,” Ash says. “Nothing’s being sold in the US that can compare to how unregulated this industry is. I know there are some bad people out there.” For now, the FDA is still working on its eight-factor analysis, and the DEA must pore over the more than 22,000 public comments it received. It’s not clear when the DEA will take its next step, but it could be to resume the emergency scheduling, launch a lengthier review, or leave kratom alone. Earlier this year, Ash tore the meniscus in her right knee while walking in heels. Doctors prescribed oxycodone for the pain. She says she gave the pills to her mom, to dole out in strict accordance with the prescription. “They just didn’t do what I, as an addict, expected them to do,” she says. When the oxy was gone, she went back to kratom. Now, Ash wonders what she’ll do if kratom is outlawed. “I don’t have very good choices,” she says. She moved back to Portland in October, and on stressful days, she feels a familiar craving. “If I could just take opiates,” she says, half-joking, “like in the good old days.” <BW>

THE NEW INDIAN CUISINE

THE DEATH OF THE HOME OFFICE

GATES KEEPER

Etc.

Media

he discussion site Imzy promises to be— you ready?—“a community as welcoming  / conscientious / creative / intellectual / opinionated / fanatical / diverse / curious / active /passionate / goofy / funny / tough / adventurous / interesting / obsessed / quirky / generous / playful / artistic as you are.” The internet isn’t often a place you’d call welcoming or conscientious these days, so a forum like this seems anachronistic at best; no one would question that it’s naive, not even the founders, Dan McComas, 42, and his wife, Jessica Moreno, 43, who started it in October. They learned just how rough things can get online when they worked for Reddit, the eighth-mostvisited site in the US. Originally, all McComas, an independent web developer obsessed with Christmas, wanted to do was set up a secret Santa exchange for the news and discussion platform’s users. In December 2009, he built a separate forum, Redditgifts, that lets people sign up for a randomly assigned gift sent through the mail. (Reddit was cool with it, though it didn’t have ownership.) “It was an idea I didn’t put more than five minutes of thought into, and then thousands of people were using it,” McComas says. Just by word-of-mouth, Redditgifts attracted so many people that McComas was quickly overwhelmed with maintaining the code. He handed off customer service to Moreno, a soft-spoken artist who enjoys the medium of felt. Still, the unpaid hobby was taking so much time that, after Christmas 2010, McComas planned to shut down the service. Instead, Reddit bought it for an undisclosed sum and brought the couple officially on board. Redditgifts grew to have more than 200,000 participants by 2014, landing the Guinness record for world’s largest gift exchange, and McComas became the jolly face of the forum. He even delivered a TEDx Talk titled “It’s All About the Giving.” McComas went on to be named vice president for product for all of Reddit, and Moreno headed up the team handling community issues. But Reddit is a radical proponent of free speech—it’s been criticised for fostering bullying and hate speech—so the issues she dealt with were more intense than, say, a secret Santa participant not receiving the perfect Star Wars figurine. The site hosted forums—“subreddits”— called “beatingwomen” and “jailbait.” Most days, Moreno went home shellshocked, sometimes having spent the afternoon contacting the FBI about possible child porn in the jailbait thread. Eventually, she persuaded Ellen Pao, Reddit’s chief executive officer at the time, to ban five communities, including beatingwomen and jailbait; the largest was “fatpeoplehate,” which had 150,000 members bent on shaming the overweight. The haters weren’t pleased. Moreno got death and bomb threats—their address was “doxxed,” or maliciously published online, and they had to have a police watch put on their Bay Area home. McComas, who argued with Pao about how best to engage Reddit users, says he was fired in July 2015; Moreno says she quit soon after. (The company won’t comment on former employees. In a statement to Bloomberg Businessweek, it said, “Reddit is not immune to the challenges faced by other social media platforms around harassment and extreme content, and it’s an issue we take seriously.”) In the days and weeks that followed, McComas thought about his time at Reddit. “I feel like I

did something bad for the world,” he says more than a year later, turning down the 1940s Sirius station in his Audi as he drives in Salt Lake City, where the couple now live. “I didn’t want to be part of a company with a group that teaches one another to ‘groom’ children for incest. It makes me sick that I even know that phrase.”

So Moreno and McComas decided to start a community that would be nice—no harassment, racism, misogyny, porn, or fat shaming. “You’re never standing on a corner, and someone walks by and says, ‘You’re a fat pig!’ ” McComas says. “That’s what happens on the internet. That’s what I want to change.” In August he and Moreno gathered four former Reddit employees and a person who worked for Twitter to begin hatching the site. They decided that if they wanted a kind site, it would help to work in a kind place—thus the move to Salt Lake City. McComas left the Mormon church when he was 17, but his practicing parents had retired there. “That’s where my love of community comes from,” he says. “It came from Mormonism, and then from punk, and transferred online.” (McComas was the drummer for the Criminals, a band Moreno and McComas whose most popular at Imzy headquarters song was The Angry Ouija Board Has Sent Us to Destroy the City of Berkeley California So Run for Your

PHOTOGRAPH BY MICHAEL FRIBERG FOR BLOOMBERG BUSINESSWEEK

Etc. F---ing   Life, off the 1998 album Burning Flesh and Broken Fingers.) Imzy—the name means nothing; it was an a vailable URL without copyright issues—made its debut on 26 October and has attracted more than 50,000 members, many of them Redditors whom McComas courted. Imzy users have founded communities similar to what you’d find on Reddit, plus a bunch you might not, such as “daily positivity,” which asks, “What did you do that made you say, ‘Wow, today was awesome’?” The company has attracted $11 million in seed money, which McComas and Moreno say will last three years. Most of the capital comes from Index Ventures, where partner Danny Rimer, a Reddit fan, noticed the uptick in far-right invective on the site during Donald Trump’s presidential candidacy. “If you moderate the platform, you could build something large,” Rimer says. Instead of relying on ads as Reddit does, McComas wants to take a cut of user-generated commerce. The plan is for communities to offer subscriptions for extra content, throw paid events, and sell merchandise. For now, Imzy is just trying to add users. Its 18-person team works at an office on the second floor of an old, exposed-brick building on Main Street. They code on laptops, sitting on couches, in recliners, and on a beanbag arranged around a 55-inch television screen showing a crackling yule log. Christmas music plays, and a stack of stockings with each employee’s name sits on a chair. McComas wears a Christmas hat. It’s 3 November. The staff is intentionally diverse to help sensitise Imzy to users’ needs. Much of what employees work on is how to get people not to be jerks. To fight trolls, Imzy has created numerous barriers to joining a community. On Reddit, new users are assigned communities to explore. Most Reddit meanness isn’t leveled by members of a subreddit, but by visitors. That meanness shows up as “brigading” (groups from one community maliciously s warming another)

The “fatpeoplehate” group that Moreno banned from Reddit migrated to Voat, which was started by Atif Colo and Justin Chastain, software engineers in their early 30s who believe that people should be able to say or see anything, as long as it’s legal under US law. They answered questions by e-mail. Edited excerpts:

people who actively choose to filter reality. Free speech can be good and bad. While we don’t approve or condone hateful speech, we also firmly stand against meddling in human nature.

What challenges have you encountered? Voat has been under constant DDoS [distributed denial of service] attacks almost since Day One. At one point, our servers were shut down by our ISP without notice. We even received death threats.

Has the fatpeoplehate group been hard to deal with? This group posted an image of us and called us fat. Instead of r emoving the image and banning the entire group, we decided to change our lives. Atif has been training at a gym twice a day for almost a year, and he changed his bad diet in favour of h ealthier alternatives. Justin has begun a juicing addiction.

Imzy is trying to create a Reddit with heavily moderated communities in which hateful speech is banned. That model will certainly work for

How is Voat doing in general? Voat is doing better than ever. We’re in a position to pursue funding and will be taking steps in this direction soon. �J.S.

and “s---posting” (purposefully o ff-topic comments), behaviour Imzy’s approach seeks to prevent. The site also doesn’t allow for the kind of gamification that’s built into Reddit, where users compete for “upvotes” to get to the top of a page or “downvotes” to prove their trollishness. Imzy just lists posts chronologically. And it bans bad actors. “You can have your feelings hurt on Imzy. You can have disagreements,” says Kaela Worthen Gardner, Imzy’s head of product. “You can’t have someone stalking you. You can’t get death threats and rape threats and see racial slurs. You can’t be a jerk.” Subreddit moderators have limited power, but Imzy gives community leaders real authority. They can disallow anonymity, establish rules of decorum, and ban members who violate them. (So far, no trolls have attacked the 10 members of my community, “The Awesome Column by Joel Stein.” All of them abide by my one dictate: “Stop making fun of me.”) Imzy has attracted celebrity community leaders such as Lena Dunham, whose 700 members discuss her feminist publication, Lenny Letter, though she rarely engages with them. McComas says about 60 per cent of the moderators of the 200 most popular subreddits have joined Imzy. One of them goes by Zork. He doesn’t want to give his real name—he fears that Reddit users will track him down, because, after starting a Reddit group about celebrities eating sandwiches (and paying to have it advertised on the site), he got hate messages from people annoyed about seeing the ads. Zork created an Imzy community about debunking falsehoods, mostly political ones. It’s got 3,000 members and no trolls. Imzy “put this huge target on themselves,” Zork says. “I thought for sure the trolls were going to try to take it down. I haven’t seen that. People have been a lot nicer on Imzy.” Recently, the fatpeoplehate haters tried to start an Imzy community. Moreno, who usually responds to hate-riddled e-mails with a cute cat GIF, banned them immediately. But “they were pretty chill. They said, ‘OK. Thanks,’ ” she says. “They didn’t know I was the one who banned them” from Reddit. Bad people, she and McComas have found, can act decently when there’s an expectation that they should. The couple already knew the opposite was true, too. <BW>

Etc.

Marketing

THE SWEET SCENT OF SUCCESS

ragrances are a $4 billion annual market, with men accounting for a quarter of it, according to consulting firm A.T. Kearney. But Brian Jeong thinks the way guys go about buying scents—having a sales associate assault their olfactory senses—stinks. His fix? Delivering proprietary colognes to men who won’t have to wander any farther than their phone to order the stuff, at prices that beat the beauty counters. Jeong’s company, Hawthorne for Men, is the latest in a category of digital-native fragrance boutiques banking on the proposition that you’ll pay money for what you can’t smell first. Step No. 1 is getting guys to pay any money at all, because 43 per cent receive their fragrances as gifts, according to market researcher NPD Group. Jeong says he can ensure satisfaction by asking men a few questions. Users enter biometric info (Does your body run hot or cold? Are you a vegetarian or an omnivore?) and choose behavioural and lifestyle leanings (Introvert or e xtrovert? Hipster or preppy?). Jeong says the data points are relevant because they’re based on studies, such as the way body temperature affects how long a scent lasts. He and his co-founder, Phillip Wong, both 27, also surveyed friends and co-workers on their reactions to Hawthorne’s 10 original fragrances. The answers are run through an algorithm that selects two scents—a strong one for “play,” a subtle one for “work”— designed by award-winning perfumers. The two 1.7-ounce bottles arrive in about a week and cost $100 total, a big discount off the most successful department-store brands. The best-known fragrance from Hawthorne scentologist Rodrigo FloresRoux, Neroli Portofino for Tom Ford, is $225 for the same-size bottle. If you’re dissatisfied with the picks, a replacement is free. So far the return rate is under 5 per cent, Jeong says. He and Wong know each other from high school, when they started a

streetwear line before landing jobs in e-commerce and fashion. Hawthorne, which launched in October, is the first online fragrance seller to tackle the men’s market specifically, but it’s not the first to put perfume on the internet. Two years ago in San Francisco, Christine Luby, 34, and Erika Shumate, 32, founded Pinrose for the millennial woman who “lives with all five senses.” Shumate studied the psychology of scent at Yale and developed a smell quiz of her own; you can buy a proprietary fragrance for $55 or a “Petal Pack” for $30, which includes 25 single-use testers in as many as five scents. There’s also unisex scent maker Phlur out of Austin, which began last July. Founder Eric Korman, 45, the former president of Ralph Lauren Digital, presents the six fragrances available on Phlur’s site in unique terms: Siano, for example, shown against a backdrop of city lights and scored to tracks by Drake and Hot Chip, is “a pure expression of elation.” Shoppers order samples of two scents for $10, a fee that’s subtracted

from the $85 cost of the bottle they finally then choose. The companies have raised millions of dollars from Silicon Valley investors— Bonobos co-founder Brian Spaly bought into Pinrose—and each reports high rates of customer satisfaction. Still, not everyone in the industry is sold on the formulaic approach. Jason Fried, who consulted for the technology and innovation office at a top fragrance house (he won’t say which) and advised Phlur, is wary of quizzes. “Sense of smell is biological,” he says. “People who you would think are very similar will have different preferences.” Having tried all three services (no, I’m not in Pinrose’s target demo, but so what?), each had its own interpretation of what would work for me: Pinrose’s Pillowtalk Poet was powdery, Phlur’s Greylocke was salty and aquatic, and Hawthorne’s Play selection smelled of dry wood and smoke. I liked them all. There’s little to be lost from giving these a go. Except, maybe, the associate’s commission at the perfume counter. <BW>

INTROVERT? IT MIGHT AFFECT WHAT’S IN YOUR IDEAL COLOGNE

PHOTO ILLUSTRATION BY 731: PHOTOS: GETTY IMAGES (3)

Hawthorne and a handful of online-only fragrance startups smell money. By Jon Roth

What I Wear to Work What does the alliance do? We’re a nonprofit organisation that does programming around the contemporary arts. We have two fairs a year: one in Miami in December and another in March in New York.

Etc.

Tell me about your pants. They’re the house brand of this store that’s near my acupuncturist. I’ll pop in there before appointments to see what they have.

What’s a typical day like? I can be doing anything from meeting with a board of directors to heading to an opening after work to just being at my desk. I also have a 4½-year-old son, so in the mornings I get up, get him ready, and get out the door.

NU NEW YORK How would you describe your style? I dress in a way that’s interesting enough for meeting with contemporary art people while still being practical.

NU NEW YORK 59

That’s a great cardigan. Is it the same brand? Oh, gosh, it is! I love the length on it, because something slightly longer makes Your shoes aren’t from clothes more the same company, elegant and though. No. I like that they don’t dressed up.

I like that the red of your shirt breaks up the black. Red is not a colour I wear often, but when I do wear it, it works for me.

look like a sneaker even though they have the comfort of a sneaker. They come in white, brown, and blue, and I had a hard time deciding what to pick, because I wanted them all.

PHOTOGRAPH BY E. O’LEARY FOR BLOOMBERG BUSINESSWEEK

NU NEW YORK

HEATHER HUBBS

45, executive director, New Art Dealers Alliance, New York

So why blue? I can wear them with black or with coloured clothing, and they work. I was tempted to get the white ones, too, but then I thought they’d make me look like a nurse.

MAIYET Interview by Jason Chen

Etc.

Food

Not Curry In a Hurry Indian cuisine’s modern makeover. By Sheila Marikar white cheddar and serrano chillies. Badmaash is one of several new restaurants r ehabilitating Indian cuisine’s hole-in-the-wall, curry-in-a-hurry image. “Up until recently, Indian food was in a 9-1-1 state in America, the way Chinese food was in the ’80s and ’90s,” says co-owner Nakul Mahendro. Here, Mahendro; Jessi Singh, co-owner  of Babu Ji in New York; and Manish Mehrotra, head chef at Indian Accent in New York, talk about what i nspires their cooking.

Badmaash spices up Canada’s comfort food, dusting french fries with kala namak (black salt), paprika, and dried mango powder

CHICKEN TIKKA POUTINE Badmaash Badmaash layers chunks of marinated, tandoor-cooked chicken on top of fries and douses the whole thing in traditional beef gravy and cheese curds. “We’re Toronto boys,” says Mahendro, who opened the 50-seat spot with his father, Pawan, and brother, Arjun, in 2013. (Badmaash, a Punjabi and Hindi word that translates roughly as “badass,” is a term of endearment.) “Some of my best memories are of sharing a poutine with my brother at 3 am. If you take away the seasoning on the fries and chicken, and the cilantro, you have a classic Canadian poutine: crispy fries, cold cheese curds, and piping hot gravy. Our chicken marinates in yoghurt, ginger, and fenugreek for two days. We use a finesse that those restaurants stuck in the ’80s and ’90s don’t. Their orange tandoori chicken—that's food colouring.”

BADMAASH: PHOTOGRAPH BY KRISTYNA ARCHER FOR BLOOMBERG BUSINESSWEEK. BABU JI: PHOTOGRAPH BY DAVIDE LUCIANO FOR BLOOMBERG BUSINESSWEEK; ILLUSTRATIONS BY 731

The first thing you notice when you enter Badmaash, an Indian restaurant in downtown Los Angeles, is that it looks nothing like an Indian restaurant. There are no burgundy banquettes, no tinny sitar soundtrack. Instead, Kanye West thumps from the speakers. Waitresses wear high-waisted jeans under kimonos. There’s a wine list—noteworthy by itself—with bottles of Nero d’Avola. And there’s the food, including a seafood stew with Indian spices, none of it served in a hammered copper pot. The naan is baked with

Indian Accent offers a seven-course tasting menu for $110 per person. “Thomas Keller, Eric Ripert, Daniel Boulud—they are chefs I look up to,” says Mehrotra, whose 70-seat New Delhistyle restaurant opened in Manhattan in February.

Etc.

HOUSE SPECIALS Unexpected ingredients making their way onto Indian menus BURRATA

The recipe for papri chaat—a crunchy, savoury street-food snack—normally incorporates yoghurt and standard chutneys. “We have replaced that with burrata-style mozzarella, with tamarind chutney, chilli chutney, and mint chutney,” says Mehrotra of Indian Accent.

FOIE GRAS

Another celebrated Indian Accent dish: galouti kebabs, made with minced goat and stuffed with foie gras.

SCALLOPS

CURRY SAMPLER Babu Ji It’s common for an Indian restaurant to offer a thali, an assortment of dishes on a round plate that’s meant to be mixed into rice or scooped up with flatbread. Less common? For that sampler to account for India’s regional diversity, like Babu Ji’s does. “We wanted to create a restaurant where you have a beautiful atmosphere, great food, good wine, and a whole fridge of microbrews—so it’s not just Kingfisher and curry,” Singh says. Born in India and raised in

Australia, he opened the 64-seat Babu Ji (rough translation: mayor of the block) in New York last year; a San Francisco location was on the way. “Indian food, whether it’s very cheap or very high-end, usually has the exact same focus on North Indian food. I take my wife, Jennifer, back to India, and she’s so impressed. Like, ‘Wow, Indian food changes every 100 kilometres.’ That’s what we’re trying to show here: one small menu that features all of India—my butter chicken from Punjab in the north, the coconut curry that’s a staple of the south.”

“They don’t belong in Indian food, but that’s the Aussie part of me,” says Babu Ji’s Singh. “Day-boat scallops are beautiful and so easy to get. That’s the main thing I put in my coconut milk curry.”

BEEF

Traditionally absent from Indian restaurants, because of India’s Hindu majority, beef has a home at Badmaash, which serves a red-winebraised short rib with onion and tomato.

Workplace

THE CORPORATE BEDROOM The home office might go the way of the fax machine By Patrick Clark

ac Atkinson keeps a desk in the corner of the living room of his one-bedroom apartment in Studio City, California. Not that he uses it much: The work-from-home television writer migrates from couch to kitchen table and back again as he churns out scenes for animated children’s programmes. “The folks from the generation before me tend to have more of an office,” says Atkinson, 32. “Most people I know end up sitting on the sofa, and half the time the TV is on when they’re working.” Not long ago, someone t elecommuting might have needed a desktop computer, a printer, a landline, and a fax machine (plus filing cabinets to store pay stubs, bank statements, and bills). Today more people than ever work from home, but laptops and Wi-Fi function just as well couchside—or, hey, by the pool—as

deskside, and chances are you’re neither sending nor receiving a tonne of faxes. This helps explain why “the bigger, more ornate home offices that we once did have kind of gone away,” says Tim Shigley, a home remodeller in Wichita. “People started saying, ‘Do I need a home office? I have other things I want to buy.’ ” The home office has lost enough cachet that, as of the end of August, the share of listings on real estate site Zillow that make special mention of one decreased by 20 per cent from the previous year across the US, according to data compiled for Bloomberg Businessweek. Those rooms might still exist, but the numbers at least signal that real estate agents see them as less of a selling point than they once did.

This shift leaves the homebuilding industry contending with diverging trends. Sixty per cent of employers let workers telecommute, up threefold from 1996, according to 2016’s annual survey by the Society for Human Resource Management. But roaming the way Atkinson does has its appeal: If you’re expected to answer an e-mail at any hour, why not burn the midnight oil in bed, Netflix on pause? So builders are compromising. Current home design tends toward open-floor plans, with an emphasis on flexible spaces and workspace nooks, says architect Paul Adamson, who operates out of the San Francisco Bay Area. Modern homes are also built with more wall outlets to allow for nomadic charging, and some even come with builtin USB ports, says Jeremy Wacksman, Zillow’s chief marketing officer. This style is especially appealing to younger buyers, who are already accustomed to living off Starbucks Wi-Fi. A 2016 survey by John Burns Real Estate Consulting shows that while half of prospective buyers still say a home office is important or very important, younger ones care less about a dedicated workspace. In Southern California, for example, only a quarter of buyers born in the 1990s want a formal home office, says Pete Reeb, a principal at John Burns. There’s still one good reason to keep that wooden behemoth with the family photos: the tax b enefits. Owners— and even renters—can write off insurance, utilities, and other home office expenses. In 2011 independent contractors and sole proprietors claimed about $11 billion in these deductions, including depreciation, according to a March 2015 blog post by Robert Dietz, chief economist at the National Association of Home Builders. (Salaried employees are less likely to take the deduction, even if they telecommute.) Suburban homeowners with preexisting home offices, meanwhile, are adapting their spaces to further merge work and home lives. “It seems like people I know are bringing in a big-screen TV and a comfy chair,” Reeb says. “While the kids are playing video games in the living room, Dad is watching football in his office.” <BW>

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How Did I Get Here?

SUE DESMOND-HELLMANN Chief executive officer, Bill & Melinda Gates Foundation

With her six siblings, 1976

“I had a sister a year older and a sister a year younger, so we just had a great time.”

“My husband and I went together. He’s an infectious disease doctor. I was studying AIDS and Kaposi sarcoma, and I took care of the patients in the adult cancer ward.”

Education

Bishop Manogue Catholic High School, Reno, Nevada, class of 1975 University of Nevada at Reno, class of 1978

“I wanted to be an orthopedic surgeon, but it involved a lot of coordination, and I do not have magic hands.”

University of Nevada at Reno School of Medicine, class of 1982 University of California at Berkeley School of Public Health, class of 1989

Work Experience

“We were all consumed with HIV/AIDS. I discovered six months after I left that all my patients had died. It had a profound impact on me, that sense of needing to do better.”

64 1982–89

In Kampala, 1989

Chief resident of internal medicine, assistant clinical professor of AIDS and oncology, University of California at San Francisco

Private practice oncologist, Lexington Oncology Associates, Kentucky

1993–94

Associate director of clinical oncology, Bristol-Myers Squibb

Receiving an award from Cal’s alumni association, 2012

“What I love about the foundation is its doggedness to innovate so that things get better. It’s about a $40 billion endowment, with 1,400 employees. In 2015, $4 billion was given away.”

1995–2009 Chief medical officer, president, Genentech

2009–14

Chancellor, UCSF

2014– Present

CEO, Bill & Melinda Gates Foundation

Life Lessons

Giving a TED Talk in Vancouver, 2016

ou 1. “Humility is underrated.” 2. “Always be in learning-and-listening mode.” 3. “You shouldn’t be a manager if it doesn’t make you excited when someone y

COURTESY SUBJECT (6)

“There’s shared governance with the faculty, so there’s a lot of consultation. Coming from a more classical company hierarchy increased the challenges of being a chancellor.”

1991–93

ached behind the scenes succeeds.”

With a Genentech employee and her daughter, 2008

“I worked on drugs that are now important cancer drugs: Rituxan, Herceptin, Avastin, Tarceva.”

1989–91

Visiting faculty member, Uganda Cancer Institute

“When I left my patients [at Lexington], I felt so awful. I committed to them that I would do whatever I could. I got to work on the approval of Taxol for breast cancer.”

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