Bloomberg Businessweek Middle East 16 feb 2017 Issue

16 — 28 February, 2017 businessweekme.com

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

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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

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“When you’re starting a company, it never goes at the pace you want. ...You start, you build it, and you think everyone’s going to care.

But no one cares, not even your friends” Airbnb’s Nathan Blecharczyk, Brian Chesky, and Joe Gebbia

1

COURTESY AIRBNB

p44

“You will remember the feeling of being a human being”

“I’ve heard that complaint from different people in this room. Probably about one hour after I got elected”

“There are concerns in relation to America now, in their inward focus”

p22

p14

p30

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Cover Trail 16 — 28 February, 2017

How the cover gets made

Opening Remarks Business may be one executive order away from chaos

6

Bloomberg View In search of a Syria policy • The ban: Reckless or just incompetent?

8

“This issue, we’re looking at President Trump’s comments to US airlines that government-funded Gulf carriers have an “unfair” advantage in America”

Global Economics Defence contractors love the new put-up-or-shut-up standard for NATO

10

“Erm, so Trump is on the cover again…”

To the Kremlin, Putin and Trump don’t look like BFFs anymore 11 Oil is on the rebound, but the size of the industry’s workforce is another story 12 In the Year of the Rooster, China’s luxury market is crowing again 13

Companies/Industries

“Fine, but Trump as King Kong…”

Trump to decide who has the right to America’s skies

14

Qatar Petroleum wants to expand its slick operation

16

Abu Dhabi oil deal gets a makeover

16

Briefs: Dubai airport takes off with a loan, all change on Kuwait’s stock exchange

17

Politics/Policy

2

“Come on, he’s the only game in town right now. “

Trump sends Iran to the naughty step

20

Erdoğan is Mr Nice Guy in run-up to referendum

22

Russia goes its own way on Iran stance

22

China needs friends in the White House. Paging Ivanka and Jared.

23

“He’s grappling with planes, throwing his weight behind the problem and scaling the issue – how many more metaphors do you need? Plus Kong was technically in America illegally and from the dubious state of Skull Island..”

“Okay let’s go with it before you throw a wall in there too.”

Technology Snapchat tries to keep the public out of its initial public offering

24

Apple joins the long line of antitrust litigants suing Qualcomm 25 Wi-Fi routers that route better—and look better, too 26 Innovation: If we can land a man on the moon, we can teach Laundroid to fold your socks 27

Markets/Finance Supersize me. Everyone wants a piece of Saudi’s giant IPO

28

Turkey is banking on the future

29

Brexit Britain is a Middle East investor’s dream

30

Features Rich Man, Cabinet Man? Wilbur Ross embodies Trump’s plutocrat-into-bureaucrat model

38

Twin Peeks Brad Stone’s The Upstarts lifts the veil on Uber’s and Airbnb’s strategic smarts

44 16 — 28 February, 2017 businessweekme.com

Etc. cover Photo illustration by SJC

Jacobe Chrisman’s Wonder Forge keeps board games from being bored games

55

Health: Sit and sweat in an infrared sauna—just like celebrities! 58 The Critic: The government couldn’t get Steve Cohen. Black Edge tells why 60 Design: Replace your sad office supplies with classier brass alternatives 62 What I Wear to Work: Interior designer Lisa Turner’s wardrobe is dog-friendly 63 How Did I Get Here? Glassdoor CEO Robert Hohman spent a year playing World of Warcraft full time. For his job 64

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

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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

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Index People/Companies 20

PQRS

Trump gets Iran all fired up

Plume Design 26 Porsche 13 Postal Services Co. 30 Qatar Airways Ltd. 14 Qatar Petroleum 16 Qatargas 16 Qualcomm 25 RasGas 16 Raytheon 10 Recep Tayyip Erdoğan 22 Rémy Cointreau 13 Rex Tillerson 14 Rosneft PJSC 16 Royal Dutch Shell Plc 16 Samsung 25 Saudi Aramco 17 Sergei Lavrov 22 Shane Quinn 29 Shell 16 Sinan Ulgen 22 Snap 24 Stephen Clifton 30 Stephen Forshaw 29

22 22

Vladimir VladimirPutin Putin

4

Abu Dhabi Co. for Onshore Petroleum Operations 16 Abu Dhabi Investment Corp.

30 Abu Dhabi National Oil Co. 16 Akbar Al Baker 15 Alaska Airlines Inc. 15 Ali Akbar Velayati 21 Alibaba Group 23 American Airlines Group Inc. 14 Apple 25

Binali Yildirim 22 Bob Dudley 17 Boeing Co. 21 BP Plc 16 Carnegie Middle East Center 21 Carsten Spohr 15 Cay Isletmeleri Genel Mudurlugu 30 Cetin Osman Budak 30 Charoen Sirivadhanabhakdi 29 Chow Tai Fook Jewellery Group 13 Comcast Cable 26 ConocoPhillips 16

DEF

21

Boeing Co.

Baker Hughes Barack Obama

12 20

Delta Air Lines Inc. 14 Deutsche Lufthansa AG 15 Devin Ryan 28 Dina Esfandiary 21 Dmitry Peskov 22 Donald Trump 14 Ed Bastian 14 Emirates 14, 17 Ericsson 26 ETI Maden Isletmeleri Genel Mudurlugu 30

Hossein Dehghan HSBC Holdings Plc Huawei Ilnur Cevik Inpex Corp.

Intel

JKL

15

James Hogan

Etihad Airways PJSC Exxon Mobil Corp Facebook FedEx Corp.

Fidelity International

21 28 26 22 17 26

14 16 24 14 30

GHI Gazprom PJSC 16 GIC Pte 29 Goldman Sachs 24 Goldman Sachs Group Inc. 28 Google 25 Gucci 13 Harrods 30 Himmet Karadag 30

James Hogan Jera Co. JetBlue Airways Corp.

Jill Zuckman Ken Moelis Kerem Alkin Khalid Al-Falih Knight Frank KPMG LLP Lockheed Martin Loh Boon Chye Louis Vuitton

15 16 14 14 28 30 29 31 31 10 29 13

Mitsui & Co 16 Moelis & Co. 28 Mohammed Al Sada 16 Mohammed bin Salman 28 Morgan Stanley 24 Nabors Industries 12 National Iranian Oil Co. 16 National Oilwell Varco 12 Nebras Power QSC 16 Netgear 26 Nihat Zeybekci 29 Oger Telecom Ltd. 30 Onshore Petroleum Operations 16 Oppo 26 Oral Erdoğan 30 Oriental Watch 13

MNO Maha Yahya Marubeni Corp.

Matthew Richardson Microsoft Mike Pence

21 16 30 25 23

25

Microsoft

30

London’s calling Middle East investors

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4_index.indd 4

TUV TC Ziraat Bankasi AS 29 Temasek Holdings Pte 29 Teneo Intelligence 30 Thai Beverage Pcl 29 Tiffany 13 TMX Group Ltd. 29 Total SA 16 Transocean 12 Turk Telekomunikasyon AS 29 Turkish Airlines 29 Turkiye Halk Bankasi AS 29 Turkiye Petrolleri AO 29 Turksat Uydu Haberlesme ve Kablo tv Isletme AS 30 Twitter 24 Ubiquiti Network 26 UBS Group AG 28 United Continental Holdings Inc. 14 Vladimir Putin 22

WXY Wolfango Piccoli Xiaomi Yigit Bulut

30 26 30

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Trump Vs. The Rule Of Law

By Matt Levine

6

One weekend came close to undoing the firm legal foundation that’s let US business thrive

06_OPENING.indd 6

In October 2016, Anthony Scaramucci compared the US Department of Labor’s fiduciary rule to Dred Scott v.

Sandford, the 1857 US Supreme Court decision protecting slavery and ruling that blacks couldn’t be citizens. “The left-leaning Department of Labor has made a decision to discriminate against a class of people who they deem to be adding no value,” said Scaramucci, a fund-of-funds marketer who was also an adviser and public supporter of Donald Trump’s campaign. And he said that, if elected, Trump would repeal the ­fiduciary rule.

Trump, however, never said that during his campaign. Instead, he promised to ban Muslims from entering the US Scaramucci tried not to think about this: “I’ll make a prediction right now that he will not put a ban on Muslims coming into America,” he once told Gawker. Did he believe that? Or did he just think that the Department of Labor rule requiring financial advisers to put their customers’ interests ahead of their own is the great moral evil of our time, comparable to slavery, and that if Trump could repeal that rule then he was worth supporting, regardless of what he did about immigration?

Now Trump has his Muslim ban, sort of. On 27 January—International Holocaust Remembrance Day—he issued an executive order banning people from seven Muslim-majority countries from traveling to the US The ban covered interpreters who heroically helped the US military, children of US ­citizens, dissidents who stood up to hostile regimes, medical researchers, Syrian Christians, British Olympians, and endangered refugee families who were carefully vetted to be allowed into the US. But you know what Trump hasn’t done yet? Repeal the fiduciary rule! Or even talk about it. Its future remains uncertain, and while there’s a good chance that it will eventually be repealed, big brokerages are moving to comply with its requirements anyway, ahead of its scheduled implementation in April.

This is a widespread pattern. Many people in the business and financial and technology communities listened to what Trump said and cheerily assumed he’d do something completely different. Sure, he talked about restricting trade and banning Muslim immigrants, but what they heard was that he’d enact “sensible immigration policy” and progrowth trade agreements, reduce taxes, cut back regulation, and generally

improve conditions for business. In the runup to the presidential election, ­billionaire Peter Thiel and other Trump supporters said the candidate should be taken “seriously but not literally.” As I wrote in my Bloomberg View column, taking Trump literally means believing that he’ll do what he says; taking him seriously means believing that he’ll do what you want.

W h a t ’s h a pp e n e d s o f a r?

Immigration bans, border walls, abandoned trade agreements, an official reliance on ­“ alternative facts,” unprompted promises to bring back torture. And what hasn’t happened so far? Tax policy is a complete mystery, with an unclear and walked-back proposal to impose a border tax. Healthcare policy is even more mysterious.

Trump has promised to do a “big number on Dodd-Frank” and has issued an executive order ­requiring agencies to retire two regulations for each new regulation they implement,

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b to r ­im

photo illustration by caroline david

Opening Remarks

is t a ­e to a t o o u R p ­h o H m e

d T

Many listened to Trump and cheerily assumed he’d do something completely different

? ni” k o y, ohs. g s g r t,

photo illustration by caroline david

n n, p e I n, g m o

but that order doesn’t seem to apply to Trump’s own remarkable flurry of rules that complicate the regulation of ­immigration and business relocation.

Everything Trump literally said is coming literally true; everything the serious people heard remains an ­u nserious hope. Businesses may ­e ventually get the tax and regulatory reform they wanted, but it’s not a p ­ riority. The technology industry, the financial industry, and some others are beginning to figure this out. Richard Fenning, the chief executive officer of consulting firm Control Risks, told Bloomberg TV that the president has “had this extraordinary ­honeymoon where Wall Street has kind of discounted all the negative aspects.”

However, as the ramifications of the migrant ban set in, “perhaps that honeymoon is starting to be over.”

The problem is bigger than some disagreements over policy priorities.

The most troubling aspect of Trump’s

06_OPENING.indd 7

immigration order may be that it covered US lawful permanent residents, that is, green card holders who’d spent years building lives in the US. While the timeline is a little unclear, it appears that the Department of Homeland Security originally assumed that the order wouldn’t apply to green card holders but was overruled by political advisers in the White House. After a weekend of protest, this decision was reversed, and Secretary of Homeland Security John Kelly announced that green card holders would be allowed in—unless he finds a reason to keep them out. All of this happened through informal channels, avoiding the usual rule-­making and oversight procedures that normally constrain our administrative state, and left even those in charge of enforcing the order confused. “A Border Patrol agent, confronted with arriving refugees, referred questions only to the president himself,” reported CNN. A visitor from Jordan—a country

not on the banned list—was reportedly denied entry in Chicago. And after several federal courts issued orders staying enforcement, there were reports that Customs and Border Protection agents were defying those court orders.

The upshot is that US lawful permanent residents, who have spent years jumping through hoops to comply with the intricate immigration rules enshrined in US law, are no longer protected by that law. They can be deported at the whim of the president, or his advisers, or a border agent—or they can be spared by a two-­ sentence statement from the secretary of Homeland Security. There are no guarantees that the courts or legal procedure can protect them. The nation of laws they immigrated to is gone, replaced by a nation of arbitrary rule.

If the president can, without consulting the courts or Congress, banish US lawful permanent residents, then he can do anything. If there’s no rule of law for some people, there’s no rule of law for anyone. Business leaders are waking up to that reality. Many grouse in private about the impact of Trump’s actions but are afraid to speak out publicly. “They are scared out of their minds about being attacked,” wrote Andrew Ross Sorkin of the New York Times, “and what that’s going to do for their business.”

When the president can damage your business with a tweet—and will, if you disagree with him publicly— then dissent is more difficult. Business ­decisions, too, are now complicated by the fact that a company that decides to close a factory must now answer ­p ersonally to the p ­ resident. As Peter Coy wrote in these pages in the last issue, businesses spent eight years under President Obama c­ omplaining about “uncertainty” in the tax code, in the Affordable Care Act, and in regulation. President Trump’s first week, of drastic and inconsistent ad hoc ­regulation, seems unlikely to inspire any certainty. The reason the US is a good place to do business is that, for two centuries, it’s built a firm foundation on the rule of law. President Trump almost undid that in a weekend. That’s bad for business. <BW>

7

13/02/2017 04:20

Bloomberg View Donald Trump Heads For the War in Syria Can his “foolproof” plan end a conflict that’s created millions of refugees?

their ultimate safety depends on the defeat of Islamic State.

Trump has given Defence Secretary James Mattis 30 days to come up with options for more aggressive action.

Mattis, a general who’s seen plenty of combat duty in Afghanistan and Iraq, needs to convince Trump that a comprehensive and deliberate plan, carried out with Russian cooperation if possible, stands the best chance of victory. Any assault on Islamic State in Syria will inevitably spill into Iraq, as the border between the two countries is now fictional.

This would be no small undertaking, to put it mildly, involving great risk to US forces. There will be no quick and total victory over Islamic State. Nevertheless, a change in strategy is overdue, and how Trump proceeds in Syria will be among the first and most difficult tests of his military decision-making.

The Travel Ban: Unwise, Un-American 8

For almost half a decade, the world’s only superpower has mostly abdicated its role in helping to resolve the world’s most consequential conflict. Now Barack Obama’s excessive caution about Syria has given way to Donald Trump’s unstrategic uncertainty. Does this qualify as an improvement?

It’s certainly good news that Russia has invited the US to participate in Syrian peace talks, along with representatives from Turkey and Iran. But Trump—who claimed during the campaign to have a “foolproof ” plan to defeat Islamic State quickly—will soon face some tough choices.

He’s apparently open to creating a safe zone in northern Syria to protect Sunni Muslims and Kurds from the Syrian government, which seems likely to remain under President Bashar al-Assad’s control indefinitely. Carving out a protected area requires control of the skies above it, however. With both Russian and Syrian planes bombing rebel (and civilian) locations in northern Syria, enforcing a full no-fly zone with US jets and ground-based air defences would risk turning a sectarian civil war into something vastly larger.

So the Trump administration should use the peace talks to get buy-in on the safe zone from the Russians—who seem anxious to claim victory and go home—and their puppet in Damascus. Iranian negotiators are likely to object, but they have little sway on a safe zone in any deal.

The US will also need a cooperation agreement with the Turks, who have created a small protected area across the Syrian border and have been bombing US-supported Syrian Kurdish forces, which they claim are in cahoots with Kurdish terrorists inside Turkey. But Turkey has much to gain from ­stabilising northern Syria and enabling many of the 2.7 million Syrian refugees it houses to return home. Promised support from other members of the US-led coalition, such as Saudi Arabia and Abu Dhabi, is also vital.

Protecting innocents and allies in Syria is important. But

8_view.indd 8

Leave aside the moral, legal, economic, political, and practical objections and instead consider just the security implications of the executive order Donald Trump issued on 27 January: Will temporarily banning the entry of all refugees and nationals from seven countries make the US safer?

Regrettably and emphatically, the answer is no. First, if the goal is “Protecting the Nation From Foreign Terrorist Entry Into the United States,” as the order is titled, then it would make sense to focus on countries from which terrorist a­ ttackers have entered. The main countries that come close to fitting that bill (Egypt, Pakistan, Saudi Arabia) don’t make the list.

Nor does the order convey any acknowledgment that refugees are the most vetted group of travellers to the US. That’s even more true after they apply for their green cards and undergo another round of biometric screening.

Trump’s directive will also make it more difficult for any government official—federal or otherwise, at home or abroad— to work closely with those in a position to help stop terrorists.

Finally, there’s the effect on international co-operation in the fight against terrorism. Allies such as Canada, France, Germany, and the UK aren’t pleased with this order.

There are more profound reasons to oppose the order. It degrades US moral authority. On a human level, it plays to people’s worst instincts while also being unreasonably cruel to tens of thousands of the world’s most vulnerable people.

Trump insists this is “not a Muslim ban,” even as ­defenders of the order point out that he campaigned on just such a promise. Regardless, it’s now up to the other branches of the US government—and America’s civic institutions more broadly— to defend against the White House’s reckless incompetence.

Trump needs to know that this policy is as unwise as it is unAmerican. <BW>

Paolo Pellegrin/Magnum Photos

It won’t make the US any safer and will make the global campaign against terrorism tougher

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Global Economics 16 — 28 February, 2017

2 o 2 b o A m c d w a fi n

s g d p d F B s d 2

10

▶▶Defence contractors exult as Trump tells NATO members not to rely on the US ▶▶“If you’re a participant, you should be a contributor” Donald Trump is right when he says America’s allies in the North Atlantic Treaty Organisation aren’t paying their fair share. Just 5 of the 28 member states have devoted 2 per cent of gross domestic product to defence as stipulated in NATO’s guidelines: the US, the UK, Greece, Poland, and Estonia. But, to the delight of the arms industry, the Europeans may be revising their views.

Trump himself is the change-maker.

Although not famous for his policy consistency, his positions on NATO have held fairly steady—leaving European leaders wondering whether they can still rely on the American security umbrella. “Let’s not fool o ­ urselves,” German Chancellor Angela Merkel said on 12 January. “There is no infinite guarantee.”

10_GE.indd 10

Germany and many other European nations are finally boosting military budgets. The plans have been around since before Trump, and, under NATO rules, they should’ve been carried out long ago. But they haven’t, and the shortfall added up to about $121 billion last year at 2010 prices, according to Bloomberg calculations based on NATO estimates.

Because Trump is promising to increase the already enormous US military budget, the additional prospect of a European arms-shopping spree is a win-win for weapons suppliers. Shares of defence ­contractors—Raytheon, Lockheed Martin, and Thales, among others—have hit record highs since his election. “This is the best market for defence in many years,

across the board,” says Richard Aboulafia, an aerospace analyst with Teal Group in Fairfax, Virginia.

NATO was established after World War II to protect Western democracies against the Soviet Union. An under­lying tenet is that an attack on any ­alliance member is considered an attack on all. Trump has questioned that assumption. If Russia moved against one of NATO’s Baltic members, he told the New York Times in July, he’d come to their aid only after ­reviewing whether they have “fulfilled their ­obligations to us.”

Before the Trump ascendancy, NATO members had agreed in 2014 to move toward the 2 per cent threshold. One-fifth of that money is ­supposed to buy hardware. Germany,

13/02/2017 04:21

t photo illustration by 731; photos: getty images (1); nato (1); *Budget estimates based on 2010 prices and exchange rates; Data: North Atlantic Treaty Organization

NATO Makes It Rain

B

D

U

U

F

G

It

C

2

, d

The Chinese buy bling again—but not the pricey stuff 13

which spent 1.2 per cent of GDP on defence last year, according to NATO figures, has announced the biggest increase in 25 years—an additional €10.6 billion ($11.4 billion) through 2020. France has approved more outlays for 2017. Nineteen of NATO’s 28 members have increased ­military budgets in the past 18 months, a Bank of America Merrill Lynch report shows.

Antoni Macierewicz, Poland’s defence minister, says the country plans to complete a deal this year for a m ­ issile defence system. The nation also is weighing new submarines, helicopters, and potentially “a large number” of fighter aircraft, he said in January news conference in Warsaw.

Even as Europe confronts a strategic reality where NATO guarantees are no longer unconditional, some defence budgets will probably fall short, says Jan Techau, director of the Richard C. Holbrooke Forum at the American Academy in Berlin. “The Europeans will have to do something,” he says. “But I have my doubts that we’ll get across-the-board 2 per cent spending.”

Trump’s presidency may increase the likelihood they’ll follow through. photo illustration by 731; photos: getty images (1); nato (1); *Budget estimates based on 2010 prices and exchange rates; Data: North Atlantic Treaty Organization

n

No severance needed for this oilfield roughneck 12

Big and Little Spenders Defence budgets, as estimated by NATO* US

Raytheon Chief Executive Officer Thomas Kennedy sees a parallel with Middle Eastern nations that stepped up spending during the Obama administration as the US s­ ignalled its attention would shift elsewhere. “These countries were given a message to beef up their defensive systems,” Kennedy said at an industry conference in November. Raytheon “saw that writing on the wall” and registered “significant international growth.” The company signed a $2.4 billion deal in 2014 to sell a missile defense shield to Qatar, for example. Middle Eastern arms spending increased by about one-third during Obama’s first six years, according to the Stockholm International Peace Research Institute, which m ­ onitors the weapons trade.

The chairman of BAE Systems, Europe’s biggest defence contractor, welcomes the pressure from the new US president. “I personally agree with his stance on the whole business of NATO,” Roger Carr told Bloomberg TV in Davos in January. “If you’re a participant, you should be a contributor.”

Trump’s international policy remains embryonic. His nominees for key posts have sounded less ­conciliatory toward Russia: Secretary of Defence James Mattis branded it

2016*

$608b

NATO target UK $60b $54b France $50b $56b Germany $45b

2 per cent of nation’s GDP

$75b Italy $23b $41b Canada $18b $37b 22 other NATO members

10_GE.indd 11

a “­strategic competitor” at his Senate confirmation hearing on 12 January and stressed the importance of NATO. Mattis did echo Trump, though, by saying he’d encourage alliance members to spend more on defence.

Some of the extra European cash would go to local suppliers, but the US has an advantage with big-ticket items such as Lockheed’s fighter jets, says Loren Thompson, chief operating officer of the Lexington Institute, a public policy think tank in Washington. “Given the pressure that Trump is exerting, it’s easy to imagine more will sign on to the F-35 programme, to the tanker programme,

$337b

$88b $133b

to the trainer programme,” says Thompson, who’s also a Lockheed consultant. The tanker programme supplies aerial refuelling planes, and ­trainers are aircraft that pilots train on to fly fighter jets. The new administration isn’t all upside for defence contractors. Trump has called out com­panies such as Lockheed and Boeing for high prices. But the combination of a m ­ averick president, insecure allies, and unresolved conflicts probably suits the industry. “Threats are rising,” Thompson says. “Although that is bad news for most people, it’s good news for arms makers.” �Rick Clough The bottom line NATO members will increase military spending, though some members will fall short of the mandatory 2 per cent of GDP.

Diplomacy

11

Putin Isn’t So Sure Trump’s a Pal ▶▶The Russians now see the president as unpredictable ▶▶“There is a sensible shift of expectations in the Kremlin”

Russia gave Donald Trump’s inauguration the kind of fawning television coverage usually reserved for Vladimir Putin. But inside the Kremlin, the initial euphoria over having a Putin admirer in the White House is fading into skepticism that any meaningful détente with the US can be achieved, according to four senior officials in Moscow, who insisted on anonymity.

Controversies over alleged Putinordered hacking to help Trump get elected and a leaked dossier claiming the Kremlin has blackmail material on him have transfixed Washington, where a bill to impose even harsher sanctions on Russia is gaining bipartisan support.

The backlash appears to have forced many of Trump’s cabinet picks to be tougher on Russia in their confirmation hearings than the Kremlin had anticipated, the officials say.

13/02/2017 04:21

Global Economics

10_GE.indd 12

only one attempt at reconciliation.

“The recent scandals are a nasty background for future talks,” Solovei says.

“Trump won’t try more than once.”

Andrey Kortunov, director general of the Russian International Affairs Council, a research group set up by the Kremlin, says Tillerson’s testimony showed how deeply anti-Russian sentiment runs in Washington. Tillerson, the former ExxonMobil chief who’s known Putin since 1999 and received a medal of friendship from him in 2012, called Russia a “danger” to US interests.

“It was like he had to sign in blood that he opposes Putin,” Kortunov says.

Both Tillerson and Mattis expressed views that clashed with some statements of Trump’s, including about NATO and Russia. Those differences, coupled with Trump’s unpredictability, worry the Kremlin, according to Dimitri Simes, president of the Center for the National Interest in Washington. “The leadership definitely preferred Trump to Clinton,” he says, “but now they’re concerned. Trump is very impulsive and takes things very personally, so a nice beginning could have a sour conclusion.” �Henry Meyer, Ilya Arkhipov, and Irina Reznik The bottom line The Russians think Trump will make only one attempt to put US-Russia relations on more solid footing.

Energy

Drilling Is Back. What About the Workers? ▶▶As it recovers, the oil industry replaces many with machines ▶▶For field hands, “now your main tool is a laptop”

The robot on an oil drillship in the Gulf of Mexico made it easier for Mark Rodgers to do his job stringing together heavy, dirty pipes. It could also be a reason he’s not working there today. The Iron Roughneck, made by National Oilwell Varco, automates the r­ epetitive and dangerous task of ­connecting hundreds of segments of drill pipe as they’re shoved through miles of ocean water and oil-bearing rock. The machine has

also cut the need for the number of roustabouts like Rodgers from three to two, he estimates. Rodgers, who took a job repairing appliances after being dismissed from Transocean, says, “I’d love to go back offshore.”

The odds are against him. As the global oil industry begins to climb out of a collapse that took 440,000 jobs, anywhere from a third to half of those positions may never come back. A combinaUS employment in oil tion of more effiand gas extraction cient drilling rigs 205k and increased ­automation is reducing the need 185k for rig workers.

Because of its reliance on large, 165k complex equip12/2013 12/2016 ment for drilling and ­maintaining wells, the industry is well-­positioned to benefit from ­automation, says Dennis Yang, chief executive officer of Udemy, a San Francisco company that trains workers from all industries whose careers were derailed by advanced machinery. “It used to be you had a toolbox full of wrenches and tubing benders,” says Donald McLain, chairman of the industrial programmes department at Victoria College in Texas. “Now your main tool is a laptop.”

McLain, who worked as a rig hand for 25 years, is helping retrain laid-off oil workers for more ­technical jobs.

During the boom, companies were too busy pumping to worry about head count, says James West, an analyst at Evercore ISI: “We got fat and bloated.”

He says the 2½-year downturn gave companies time to r­ econsider the mix of human labour and automated machinery in the fields. After the world’s four largest oil service companies spent $3.1 billion in severance costs in 2015 and 2016, the industry was acutely aware of its heavy ­dependence on manpower, says Art Soucy, ­president of global products and technology for Baker Hughes.

Nabors Industries, the world’s largest onshore driller, expects one day to cut the number of workers at each well site from 20 to about 5 because of more automated drilling rigs. Rigs have gotten so efficient that the US oil industry needs only half as many as it did at the height of the shale boom in 2014 to

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The uproar has energised Putin’s US critics, says Alexei Chesnakov, a former senior Kremlin staff member who continues to advise authorities.

“There is a sensible shift of expectations in the Kremlin,” Chesnakov says.

“The leadership understands clearly now that restoring ties won’t be easy.”

Trump’s own, often contradictory, statements are as worrying for Russia. In December, Trump said the US should “greatly” expand its nuclear capability; he seemed to be calling for a new arms race. Yet in an interview with European media that appeared on 15 January, he said both countries’ atomic arsenals should be cut “very substantially” and linked sanctions relief to a possible arms deal with Putin. Foreign Minister Sergei Lavrov said on 23 January that “we see a lot of overlapping points” between Trump’s foreign policy goals and “how President Putin sees Russia’s.” A poll conducted in November by the staterun Russian Public Opinion Research Center found that almost half of Russians surveyed anticipated better relations with the US “soon” after Trump takes office.

But Prime Minister Dmitry Medvedev, who served as president during Russia’s last thaw with the US, warned at a 22 January meeting of the ruling party that “it’s time to part with any illusions that sanctions against our country will be lifted.” He added, “There’s no reason to pin hopes on somebody else’s elections.” Lavrov said on Jan. 25 that the Kremlin knows Trump believes he’s a dealmaker, but “Putin also knows how to negotiate, and always in Russia’s interests.”

State broadcasters, carefully controlled by the Kremlin, have been adding “no need for illusions” caveats to their Trump coverage, though Russian news anchors still reassured viewers that tough comments by Rex Tillerson, Trump’s choice as secretary of state, and James Mattis, the new secretary of defence, were posturing to ensure Senate approval.

That’s not how Russian officials saw it, according to Valery Solovei, a political scientist at the Moscow State Institute of International Relations. He sees a “threatening subtext” in the hearings that suggests the administration will make

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suck the same amount of oil out of the ground, says Angie Sedita, an analyst at UBS. The impact of technology extends far beyond the wellhead. “The biggest thing will be the systems,” says Ahmed Hashmi, head of upstream technology for BP. In layman’s terms, the systems are all the processes involved in drilling and fracking a well. That means an engineer could design an oil well at his desk. With the press of a button, an automated system would identify the equipment needed from a ­supplier, create a 3D model of the well, send the details to the rig, and tell the rig to do the job, Hashmi says.

“That is ­automation.” �David Wethe

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The bottom line The number of jobs lost globally in the oil downturn may never fully come back because of automation and more efficient rigs.

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Consumption

The Chinese Rediscover Luxury ▶▶The dampening effect of the bribery crackdown is lifting ▶▶“People still come to buy,” but they want “more affordable items”

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A Porsche driver in Shenzhen

To ring in the Chinese New Year, Cathy Zhang is opening her wallet. A whitecollar worker from eastern China’s Jiangsu province, the 33-year-old travelled to Hong Kong before the holiday.

On a recent weekday afternoon, she navigated the crowds, looking for her favorite European luxury brands.

Zhang spent HK$3,400 ($438) on a Gucci belt she plans to give her husband as a New Year’s gift. And she’s treating herself to a HK$10,500 Louis Vuitton handbag. “I give myself something special at the yearend,” she says.

As the Year of the Rooster began on 28 January, the world’s luxury ­retailers hoped Zhang and others were in the mood to celebrate.

The slowing Chinese economy and President Xi Jinping’s anticorruption ­c ampaign depressed demand for bling in 2015-16, with the market for luxury goods contracting 5.5 per cent, to $18.2 billion from 2015, according to Bain. “Last year, the market—oh,

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my God,” says Alain Lam, executive ­director at Hong Kong-based Oriental Watch, which sells European timepieces that can command prices above HK$200,000. Net income at Oriental Watch fell HK$13.8 million in the 12 months ended in September.

Chinese gross domestic product expanded 6.8 per cent in the final quarter of 2016, up from 6.7 per cent in the previous quarter and the first ­quarterly acceleration in two years.

Retail sales rose 10.9 per cent in December from a year earlier, the best monthly result in 12 months. Chinese imports of Swiss watches are up after falling for seven consecutive months through July, rising 7.9 per cent in November from a year earlier. Led by its best-selling Macan SUV, Porsche had a 12 per cent sales increase in 2016.

Tiffany on 17 January reported “strong growth” in China. On 19 January, Luca Marotta, chief ­financial officer of Rémy Cointreau, said the outlook for the Chinese New Year was “very, very ­positive.” Xi hasn’t ended his a­nticorruption drive, but its chilling effect on spending is easing. “A rebound across all luxury c­ ategories is now in progress,” Bloomberg Intelligence analyst Deborah Aitken wrote on 9 January. During the Lunar New Year holiday, millions of Chinese travel and shop at home and overseas. Bookings for international air travel made in December for Chinese New Year rose 9.8 per cent from the previous year, according to ForwardKeys, an analyst of tourism data. Mainland tourist arrivals in the gambling hub of Macau jumped 7.8 per cent in December, the largest increase since February 2015. Chinese consumers “are still very confident,” says Amrita Banta, managing director of Agility Research & Strategy, a consulting

firm focusing on the affluent.

Yet they may not be prepared to spend as much. Rather than purchase expensive items as bribes for officials, Chinese are buying more for personal use, says Bruno Lannes, a Bain partner in Shanghai. “When you buy for ­yourself, you are a bit more cautious.

The mix is therefore more to entrylevel, lower-priced products.”

Chow Tai Fook Jewellery Group, the world’s largest jewellery chain, last year launched the first of a line of mainland shops selling lowerpriced jewellery, with average prices of 2,000 yuan ($291), about a third the prices at its flagship stores.

Average prices for gem-set jewellery at the Hong Kong and Macau shops of Chow Sang Sang, a retailer based in Hong Kong, have dropped more than 14 per cent since 2015, according to Bloomberg Intelligence. Instead of spending HK$200,000 for a Piaget watch in a precious metal, Oriental Watch customers can buy a stainless-steel version for HK$80,000.

“People still come to buy,” Lam says, “but they are looking for more affordable items.” The Chinese market is worth the effort, says Aidan Yao, senior ­economist for emerging Asia at AXA Investment Managers Asia in Hong Kong. The market “is getting out of that extraordinary period and ­embracing the new normal,” he says. “And the new normal is not bad. We are talking about steady, single-digit growth going forward.” �Bruce Einhorn and Daniela Wei, with Christoph Rauwald

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The bottom line The Chinese are spending again, with mainlanders booking 10 per cent more international flights for New Year’s than last year.

global-economics

13/02/2017 04:21

16 — 28 February, 2017

Trump’s Hot Air In F ▶▶Trump wades into dispute over “unfair” Gulf airlines US expansion ▶▶“He is focused on trade violations by the UAE and Qatar that are costing American jobs”

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President Donald Trump has told US airlines he'll help them compete with foreign carriers that are aided by their governments, a crucial signal of White House support for an industry campaign that began in 2015.

“A lot of that competition is subsidised by governments, big league,” Trump said at a White House meeting with the nation’s largest airlines, air freight companies and airports.

“I’ve heard that complaint from different people in this room. Probably about one hour after I got elected, I was inundated with calls from your industry and many other industries, because it’s a very unfair situation.”

Active involvement by Trump would answer two years of prodding by Delta Air Lines Inc., United Continental Holdings Inc. and American Airlines Group Inc. to act on claims that $50 billion in government support have enabled three Arabian Gulf carriers to compete unfairly.

While Trump didn’t name individual foreign companies, the US airlines asked to meet with the Secretary of State Rex Tillerson to discuss their allegations against airlines Emirates, Etihad Airways PJSC and Qatar Airways Ltd. Delta Chief Executive Officer Ed Bastian suggested a connection between opposition to alleged subsidies and Trump’s focus on job creation in the US. “At Delta, we plan to hire 25,000

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people over the next five years with the support of a level playing field globally,” Bastian said in a statement about the White House meeting.

Etihad declined to comment.

Representatives for Emirates and Qatar Air didn’t respond to requests for comment. The airlines have disputed the claims of their US rivals.

Trump hasn’t said what steps he might consider in regard to alleged aid. But he has promised to help domestic carriers while also encouraging investment by foreign airlines in the US. In bringing up airline subsidies, Trump is wading into a fight that pits the interests of the biggest US passenger carriers against those of Boeing Co., the country’s top exporter. The Arabian Gulf trio are the largest customers of Boeing’s wide-body jetliners, accounting for nearly one-third of the order backlog, according to data compiled by Bloomberg Intelligence.

The Obama administration said it would hold discussions with Qatar and the United Arab Emirates last year but never took formal action. The airlines want the US to convene talks on whether the subsidies violate international agreements governing air travel. Some companies at the White House meeting, including JetBlue Airways Corp. and FedEx Corp., oppose such talks.

“We are particularly gratified that President Trump is focused on

longstanding trade violations by the UAE and Qatar that are costing American jobs,” said Jill Zuckman, a spokeswoman for the Partnership for Open & Fair Skies, which represents the three biggest US carriers and airline unions.

The conversation with Trump was focused on infrastructure investment, regulation and “the overall need to reduce the tax burden, and especially for aviation,” Kelly told Bloomberg Television. Trump promised broadbased help on those fronts.

“You people are regulated probably as much as anybody,” he told the executives. “We’re going to be announcing something I would say over the two or three weeks that will be phenomenal in terms of tax and developing our aviation infrastructure.”

This comes as Emirates, the world’s biggest long-haul airline, said a flight from Seattle to Dubai was delayed for more than six hours after it was unable to obtain a $300 spare part from Delta Air Lines Inc. A Boeing Co. 777 due to depart the American city at 9 am on 2 February was held up by a mechanical issue requiring the replacement of a minor hydraulic component, Emirates says. While the part was sourced from Delta’s local engineering office and installed on the plane, a senior manager at the US carrier’s Atlanta base later ordered that it be removed, it claims.

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could accommodate its own schedule, a company spokeswoman said in June.

In the incident this month, Emirates said Delta had refused a credit-card payment for the spare and ordered a local engineering provider to remove it from the 777. Code-share partner Alaska Airlines Inc. eventually came to the rescue by providing the part, leaving the flight to depart 6 hours and 24 minutes late.

“Despite this incident, Emirates will continue to render such technical support to other carriers, including Delta, irrespective of whether we agree or disagree with their policy views,” the Gulf company said.

Thomas, the Delta spokesman, said it wasn’t immediately clear why the company originally allowed Emirates to use the part before calling it back.

Meanwhile fellow UAE carrier Etihad Airways PJSC has sought to head off the prospect of further clashes, saying it has no plans to add destinations beyond those already served in the US. “We are not flying into any further points in the USA,” Etihad Aviation Group Chief Executive Officer James Hogan said earlier this month in an interview with Bloomberg Television.

“We are very comfortable with our American network.”

Should US airlines revive claims that Mideast carriers have benefited from illegal aid now that Trump is in the White House, Etihad stands ready to reassert that it has expanded fairly and operates trans-Atlantic services strictly in line with an Open Skies aviation treaty, Hogan said in Abu Dhabi.

“In regards to how that’s addressed moving forward, we have to wait and see,” said Hogan, who plans to step down later this year. “You can only work with the issues that are in front of you. If those issues are raised again we will tackle them.”

Partnership for Open & Fair Skies, which represents US carriers and labour groups, said in response to Hogan’s comments that Etihad could still grow its American capacity on existing routes while remaining true to the CEO’s word, adding that the carrier’s market exposure is in any case already too great.

“This meaningless pledge will not stop Etihad from continuing to add subsidy-fuelled flights to the US markets they already serve,” the Washington-based lobby group said in an e-mail to Bloomberg News. “Hogan appears to think that the US should be willing to accept the status quo and just move on. He’s wrong. The US should not tolerate this rule-breaking, bad behaviour.”

Hogan spoke after announcing catering and maintenance deals with Deutsche Lufthansa AG, which had previously led European criticism of Gulf carriers. The German group’s CEO, Carsten Spohr, told a press conference that the companies continue to hold “different perspectives” on some topics and restated his opposition to state aid, while saying they will be “putting these differences aside” to build a closer alliance.

Etihad currently serves New York, Washington, Chicago, Dallas, Los Angeles and San Francisco in the

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“It is sad, in our view, that any airline would deny such standard technical assistance to another carrier based on orders from headquarters that had nothing to do with maintenance or cost, but seem clearly to have been intended to inflict harm on the airline and its customers,” Emirates said in an e-mail.

Delta shares parts with other airlines whenever possible through an industry agreement and doesn’t withhold them from any particular carrier, Delta spokesman Michael Thomas said. He added that the item in question was the last spare of its kind in Delta’s Seattle inventory, and company policy requires that it keep the last one on hand in case Delta needs it.

“Having the right spare parts in the right places and in ample quantity is critical to ensuring a reliable airline operation for our customers,” Thomas said.

Qatar Air Chief Executive Officer Akbar Al Baker branded Delta “wicked” last year after the Dohabased carrier’s first flight to Atlanta with the Airbus Group SE A380 superjumbo was directed to a remote gate at the world’s busiest airport, leaving elderly and infirm passengers to disembark via temporary stairs rather than through the usual air-bridge.

At the time, Delta said Qatar Airways was late in trying to secure gates for the A380 flight, which require special gates because of the jet’s size. Delta attempted to accommodate Qatar’s flight, despite the carrier’s tardiness, while making sure it

13/02/2017 17:48

Companies/Industries

The bottom line US airlines are mounting a challenge to Gulf carriers in America claiming their government backing gives an unfair edge.

Expansion plans

Qatar Petroleum Eyes Global Pipeline ▶▶Expansion abroad seen as key for future growth at the company 16

▶▶Aging oil fields and a dearth of discoveries have weighed on QP

Qatar Petroleum is the hidden giant of the global energy industry, overshadowed by its neighbour Saudi Aramco. Yet, the country’s colossal natural gas resources allow the state-run company to pump more oil and gas than Rosneft PJSC or Exxon Mobil Corp.

After almost two decades of breakneck growth, the company needs to change tack. QP plans to expand abroad as domestic crude output declines and the government bars new drilling in the offshore North Field, home to the gas that made Qatar the world’s leading supplier of liquefied natural gas.

QP will have no problem paying for overseas expansion. Qatar’s energy minister, Mohammed Al Sada, said that almost all the country’s domestic LNG terminals have been paid for.

And despite a near-term glut, he said the commodity will be in short supply by 2021.

Qatar’s energy story, as with its peers in the Arabian Gulf, began with oil.

The desert nation of 2.6 million residents started drilling wells in 1939 and exported its first oil 10 years later. In 1971, Royal Dutch Shell Plc discovered

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the offshore North Field, which, it was pumping. together with the connected South Pars Qatar Petroleum owns a minority deposit in Iran, is the world’s biggest stake in Nebras Power QSC, the interreservoir of non-associated gas. The national investment division of a local find was a disappointment at the time power company. Nebras, which backs because it showed no crude. wind, solar and potentially also coal It took more than twenty years projects, isn’t primarily focused on for Qatar Petroleum to partner with using Qatar-produced fuel to generExxon Mobil, Shell, Total SA and ate electricity. But its November agreeConocoPhillips, as well as with ment with Japan LNG buyer Jera Co. Japanese customers Mitsui & Co. and points to a strategy of building gasMarubeni Corp., to start building 14 fired power plants to help soak up the plants that chill gas into a liquid for current glut of LNG and keep a price shipment to Asia and Europe. By 2006, floor beneath QP’s main exports. Qatar Qatar was the biggest exporter of liqPetroleum also has majority holdings uefied natural gas, and it shipped 78 in domestic refineries, petrochemicals million tons in 2015, or 32 per cent of and aluminum companies. global supply that year, according to � Mohammed Aly Sergie the International Group of Liquefied The bottom line Qatar Petroleum is taking the Natural Gas Importers. step of expanding beyond its country's borders to shore up future output.

By more than doubling gas and oil production since 2006, Qatar has become the world’s fourth-biggest energy supplier and wealthiest country by per capita income.

Qatar Petroleum has overtaken Oil market Rosneft and Exxon in total output, according to data compiled by Bloomberg, and the company makes and sells more LNG than any other. QP ranks behind Saudi Arabian Oil Co., ▶▶Improved terms of an oil Gazprom PJSC and National Iranian production partnership Oil Co. for energy production.

Qatar Petroleum, through its LNG▶▶UAE boosting production producing divisions Qatargas and capacity as it diversifies from oil RasGas and other investments in related businesses, holds stakes in the Abu Dhabi’s state energy producer, companies that extract, process, ship which is seeking more partners to and receive gas. This integrated supply develop its fields, improved some chain helps make Qatari LNG the terms in an oil-production partnership cheapest in the world to produce, an to offer greater returns to international advantage QP plans to exploit. companies such as BP Plc and Total Helium has given Qatar Petroleum SA, according to people with knowlmore to brag about as the world’s edge of the matter. biggest exporter. RasGas, QP’s joint Abu Dhabi National Oil Co. venture with Exxon that will be improved terms related to taxation merged with Qatargas this year, has and depreciation for companies in the two plants with capacity of 2 billion venture, known as Abu Dhabi Co. for cubic feet per year, and it’s building a Onshore Petroleum Operations, or third facility.

ADCO, said the people, who asked not Aging oil fields and a dearth of to be identified because “It just took us a large discoveries have weighed the negotiations were while to work through the point on QP’s crude output. Qatar private. The provisions where we could pumped 615,000 barrels a day of were changed when BP make this great crude in January, down from a joined in December, they investment with peak of 880,000 in June 2008, data Abu Dhabi." said.

—Bob Dudley compiled by Bloomberg show.

The United Arab Condensate and other natural gas Emirates, of which Abu liquids surpassed Qatar’s oil proDhabi is the capital, is duction in 2010 and by 2015 had risen boosting its production capacity to almost double the amount of crude even as it diversifies away from oil to

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US, according to its website, and like other Gulf carriers says the services help support thousands of American jobs while providing competition that brings down fares.

“It’s about connectivity, its about jobs, its about economic contribution,” Hogan said after the Lufthansa press event. “It shouldn’t be about politics.” � by Mary Schlangenstein and Toluse Olorunnipa, with Deena Kamel Yousef and Yousef Gamal El-Din

13/02/2017 05:06

Companies/Industries build new industries and create jobs.

Adnoc is partnering with European and American companies that have pumped oil in the Middle East for more than a century as well as with comparative newcomers to the region from Asia to contribute technology needed to extend the life of its oil and natural gas reserves.

Total and BP each hold 10 per cent ●● Dubai agreed a $3 billion loan with banks stakes in ADCO, while Japan’s Inpex Corp. owns 5 per cent and GS Energy to fund the expansion of Dubai World Central of South Korea 3 per cent. Adnoc, airport and logistics hub as it prepares to host which aims to retain 60 per cent of the the World Expo in 2020, people familiar with the Saudi Arabia’s Public venture, is seeking partners for the remaining 12 per cent of ADCO. Fund, which matter said, The emirate will pay interest of 200 Investment is transforming into a $2 The ADCO concession terms, which investment giant, remain fundamentally unchanged, basis points, or 2 percentage points, above the trillion is considering buying apply to all existing and future partstake in US theme London Interbank Offered Rate on the seven- apark operator Six Flags ners, an Adnoc media official said, year facility, said the people, asking not to be Entertainment Corp. asking not to be identified by name, in line with company policy. identified because the talks are private. It will also pay a ADCO pumps about half of Abu Dhabi’s roughly 3 million barrels of one-time fee of 85 basis points on the loan value, they said. daily crude output. The emirate, HSBC Holdings Plc is advising Etihad Airways PJSC with about 6 per cent of global group chief James oil reserves, is seeking to boost the government on the talks and Hogan has detailed its production capacity to 3.5 2017 plans to add 12 an agreement is expected to be wide-body aircraft, million barrels a day by 2018.

17 including two A380 signed within weeks.

BP has worked in Abu Dhabi superjumbos, swelling since 1939 and was a partner in capacity at the airline ●H● Saudi Arabia’s sovereign in what will be “another the emirate’s previous onshore challenging year”. wealth fund has discussed inoil concession, which expired in 2014 after 75 years. Total was the first vesting billions of dollars in global buyout funds as the kingcompany to sign a new contract to condom seeks private equity’s help to manage its portfolio of tinue developing the fields; the Parisbased company agreed in January 2015 companies at home, according to people familiar with the to pay a $2.2 billion signing bonus to matter. The Public Investment Fund, with more than $100 Adnoc.

BP sought a stake in the renewed billion worth of shares in listed local companies including concession before plunging crude Saudi Basic Industries Corp. and Saudi Telecom Co., has prices and damages related to the Deepwater Horizon oil spill in the Gulf informally reached out to some of the world’s leading priof Mexico forced them to halt talks. vate equity firms to secure know-how and expertise to help “It just took us a while to work through the point where we could improve these businesses, the people said, asking not to be make this great investment with Abu identified as the deliberations are private.

Dhabi,” BP Chief Executive Officer Bob Dudley said. “The key element there ●● Kuwait’s stock exchange is increasing its efforts to is we’ve used BP shares,” he said. The attract investors by reforming its trading infrastructure company issued about $2.2 billion in CEO stock and transferred it to Abu Dhabi and introducing products such as stock Wisdom for its stake in the ADCO venture. � options and futures. Boursa Kuwait, as Anthony DiPaola

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The bottom line A major Abu Dhabi oil partnership deal is now looking even more attractive to the companies taking part.

the stock exchange is known, is currently working with the local capital markets authority and settlement and clearing bodies to revamp its infrastructure.

“The fourth-quarter 2016 was impacted by deteriorating yield margins the Middle East region is witnessing” — Air Arabia Chairman Sheikh Abdullah Bin Mohammad Al Thani

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13/02/2017 05:06

Companies/Industries: Leadership

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Hassan Abdalla CEO, Arab African International Bank (AAIB) interview

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An Egypt for Tomorrow How has the currency situation in Egypt affected operations and what do you think the long-term impact will be of the free-floating Egyptian pound?

which reaffirmed Egypt’s B-/B long and short-term sovereign credit ratings and revised the outlook from negative to stable.

In any economy, currency depreciation instantly hits consumer purchasing power and reduces wages. However, these adjustments are necessary to structurally address the economy and trigger latent growth potential.

By allowing the Egyptian pound to weaken, Egyptian assets are now much cheaper and more attractive for foreign investors. There are already signs that foreigners are taking interest in the country’s financial markets. Stock exchange figures show that foreign investors have made large net purchases of Egyptian stocks since the pound was floated. About EGP2.8 billion ($176 million) of overseas funds flew into the country’s stocks in November. Additionally, total proceeds from debt instruments amassed a total of $700 approximately million.

Apart from de-pegging the Egyptian pound from the US dollar, a number of measures have been taken by Egypt to rectify its fiscal deficit, including introducing VAT and progressive taxes, slashing the public sector wage bill, and the lifting of fuel subsidies - all prerequisites for approval of the IMF loan. The move was applauded by Global Rating Agencies,

What will be the impact of the recent IMF loan?

IMF loans are a stamp of creditworthiness. Concluding the IMF agreement means the fundamentals of Egypt’s economy are in place. This will make other multilateral funds and international investors consider Egypt as an attractive investment destination. It also means that the government must undertake certain tough measures to restore Egypt’s macroeconomic stability and growth rates. We are aware of the challenges including managing the socioeconomic complexity of this transition. The initial steps are decisively taken. The new investment law will complement the structural reform programme to enhance Egypt’s economic competitiveness.

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What are the prospects for increased IPO activity in Egypt and the wider region?

Current trends in the MENA region indicate less dependence on oil and gas. IPOs have consecutively emerged as ideal means of encouraging foreign as well as regional investments. Egypt and Saudi Arabia are positioned to lead the region in terms

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of IPO activity. Oil prices have increased since January 2016, reaching US $50 per barrel in the quarter, which positively affected market performance. Oil prices are expected to stabilise in the near future which might impact the environment for IPOs favourably.

A high volume of perspective investments by banks is expected in the Egyptian Stock Exchange next year, where the flotation contributed to the re-evaluation of assets of companies, making it cheaper and more attractive. The second half of 2017 will see high foreign cash inflows after the Egyptian economy stabilises as a result of the government’s economic reform measures. The total market cap for Egypt is EGP 405 billion standing at 12.5 per cent of the total GDP, which is dominated by the real estate and construction sectors. The government also plans to sell stakes in oil companies, banks, and electricity companies.

How do you ensure AAIB stays ahead of the pack when it comes to helping businesses arrange loans and other facilities?

AAIB has a proven record profitability and revenues. It has a deeply rooted tradition of delivering tailored and structured solutions to its clients. The bank has competent and proficient analysts well versed in understanding risk–return tradeoff and capable of creating value for clients.

Another point of distinction is AAIB’s prerogative in leveraging a financial group; so the bank has leasing, asset management, brokerage, securities, and mortgage finance subsidiaries. We are capable of availing to our corporate clients a conglomerate of financial services. Add to this, our regional presence; through which we have successfully funded regional projects and channeled investments across the Egypt-Gulf axis. I am pleased we were given the Best Investment Bank in Egypt award, 2016 by Global Banking and Finance magazine.

What are the biggest threats to your growth at the moment?

The biggest threats are smugness and complacency. Many of the challenges today were not there a decade earlier. For instance, risk management systems now cover electronic banking, and governance, along with social and environmental risks. Correspondent banking used to be a peaceful straightforward source of fees and profitability. Now because of global terrorism, strict compliance with international regulations are stipulated. Earlier, we used to compete against just banks, now we have to compete against mobile companies, fintech, retailers, crowdfunding, etc..

Is Egypt currently perceived as a place to do business?

There are a countless untapped opportunities for Egyptian and foreign businesses. Investments in Egypt tend to provide relatively high return as compared with risk. Egypt is characterised by a resilient economy that withstood and overcame internal and external shocks. Structural reforms should transform Egypt’s economy into a market-driven, private sector-led, competitive enterprise capable of generating high rates of inclusive and sustainable growth.

Egypt is expected to witness rising growth rates over the medium term due to the inherent advantages in the Egyptian economy, namely, a large population, deep market and a highly diversified economy.

Egypt is vested with high growth potential including construction, food & beverage, energy, including clean energy,

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◗◗“There are countless untapped opportunities for Egyptian and foreign businesses. Investments in Egypt tend to provide relatively high return as compared with risk.”◖◖ and energy efficiency projects. There is also progress taking place in Egypt’s megaprojects that open up lucrative opportunities for investors including the New Suez Canal Economic Zone–a world-class integrated investment and industrial hub– highly valued for its central location and logistical facilities.

The New Capital of Egypt is another megaproject offering a diversified portfolio of investment opportunities.

How are you helping entrepreneurs and small businesses take off?

In terms of its medium-term strategy, AAIB aims at tapping the small- and medium-size markets. Microlending and SME lending markets have been identified to be the optimum opportunity for loan portfolio diversification, the base for enhancing financial inclusion, and creating new revenue streams. SMEs may be the best solution for Egypt’s challenges. They have the ability to provide a large number of jobs to subdue unemployment and substitute imports of finished goods. The Central Bank of Egypt aims at increasing the SMEs lending share of total banks’ portfolio to 20 per cent over the next four years.

AAIB is currently establishing Sandah, a green field microfinance company that will serve the untapped microfinance segment in Egypt.

During 2016, IFC extended a $100 million loan to AAIB to scale up our lending operations to SMEs. This loan will help AAIB build its sustainable energy finance SEF portfolio in response to increased energy bills for many companies and SMEs. About $50 million will be earmarked for SMEs to support the bank’s strategy to significantly increase its lending to smaller businesses. The remaining $50 million will be earmarked for introducing credit lines that support energy efficiency.

For entrepreneurs, AAIB has co-founded AUC Venture Lab. The mission of V-lab is to commercialise technologies and innovations developed by Egypt-based startups into viable ventures.

The partnership between AUC V-Lab and AAIB will support ecommerce startups. In addition to the mentorship and training, the startups can also attend workshops and training sessions by AAIB experts. Our challenge is to move away from the big-ticket items but we need to focus and learn how to do that effectively and in a timely manner. We are structuring a specialised SME unit inside our bank and are considered the best new revenue stream. We have also focused on investing in training in the corporate and retail businesses with Frankfurt School of Finance & Management. AAIB is planning to leverage on its growing branch network coverage and will focus on digitisation of banking services in tandem with the increased spread of mobile devices.

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13/02/2017 04:22

Politics/ Policy 16 — 28 February, 2017

c K th le fo G Ir

Trump Fires Iranian Warning Shot.

in Ir ta

a s fe S C

a fa th to Ir G p E

It Backfires

s b U fe M w a

s n to b n is o

▶▶Iran’s president Rouhani stands up to Trump’s “bully” tactics Iran isn’t seeking tensions but will stand up to any “bullying,” President Hassan Rouhani said as his nation marked the anniversary of the 1979 Islamic Revolution amid a souring of ties with the Trump administration.

“We will stand up to those who have their eyes on Iran,” Rouhani said in Tehran, days after the US responded to an Iranian ballistic missile test with new sanctions. Iran “won’t give in to bullying and threats,” he said.

Relations between Iran and the US— which improved under Barack Obama and enabled the 2015 nuclear deal between Iran and six world powers

20_PP.indd 20

— have deteriorated under President Donald Trump, who has warned that Iran is “playing with fire” and that “nothing is off the table” when his administration considers its approach to the country.

During his approximately 45-minute address at the anniversary gathering earlier this month, Rouhani didn’t refer to Trump by name.

“Some newcomers have come to power in the US and in the region,” Rouhani said. “They all should know they must only speak with the language of respect to Iran. This nation will give a determined response to threats.”

Iranian officials have said they won’t be intimidated by the Trump administration, which put Iran “on notice” following its missile test and sanctioned a list of entities it said were linked to its missile programme. The US is also weighing whether to list Iran’s Revolutionary Guard Corps as a terrorist organisation, a decision that would have economic, political and geopolitical implications because of the enormous might it wields.

Trump’s response to the missile test and his earlier executive order including Iran in a seven-nation immigration ban, stalled by US courts, have been

photo illustration by SJC, images: AFP (2)

▶▶“Only speak with the language of respect . This nation will give a determined response to threats”

13/02/2017 04:24

S ti ti a D c w th

a b a te c

Erdoğan steps up charm offensive in his bid for more power 22

Russia tells Trump how it is on Iran foreign policy 22

photo illustration by SJC, images: AFP (2)

Want to cosy up to the Chinese? Send in Ivanka 23

cited by Supreme Leader Ayatollah Ali Khamenei and hardliners as evidence that the US can’t be trusted. The US leader has pledged to increase support for traditional American allies in the Gulf, many of whom oppose a greater Iranian role in the region.

Khamenei said Trump was revealing the “real face” of the US and that Iranians would respond to threats by taking part in this year’s annual rally.

Khamenei’s “remarks were heeded, as the crowds on this anniversary were significant,” said Dina Esfandiary, a fellow at the Centre for Science and Security Studies at London’s King’s College.

The Treasury Department published a list of 13 individuals and 12 entities facing new restrictions for supporting the missile programme, having links to terrorism or providing support for Iran’s hard-line Islamic Revolutionary Guard Corps. The entities include companies based in Tehran, the United Arab Emirates, Lebanon and China.

The Trump administration has sought to take a harder line on Iran, banning its citizens from entering the US and accusing the nation of interfering in the affairs of US allies in the Middle East. But these latest sanctions were limited in scope, serving mostly as a warning signal.

The sanctions wouldn’t affect a deal signed between Boeing Co. and Iran’s national carrier in December, according to a Trump administration official who briefed reporters on condition of anonymity. The agreement to sell 80 planes is valued at $16.6 billion and is the first of its kind since 1979.

“This action reflects the United States’ commitment to enforcing sanctions on Iran with respect to its ballistic missile programme and destabilising activities in the region,” the Treasury Department said in its statement. It called the actions “fully consistent” with a nuclear accord Iran reached with the US and five other world powers.

While Trump’s decision to take action against Iran pleased US lawmakers in both parties who were never comfortable with President Barack Obama’s tentative rapprochement with Iran, it could unsettle domestic Iranian politics

20_PP.indd 21

brandished placards that read “Those as President Rouhani seeks re-election who dream of America, may God in May. awaken them” and “Thank you Trump “With the increase in sanctions, the for making it easier for us to show the perception that the US might be rolling real face of America.” A giant Iranian back on the Iran deal—and the anti-Iran flag was carried by some of the crowd. mood that is emerging in Washington— “The more time goes by, tensions will further empower hardliners in Iran, and conflicts increase, especially when where the rhetoric will be, ‘we told you you compare it to previous years,” said so—these people cannot be trusted,” Mostafa Rezai, a 44-year-old driver at said Maha Yahya, director of the the rally in the capital. “This suits the Carnegie Middle East Center.

West, that’s what they want. The smell An administration official said the of war is near.” sanctions were pulled together after The anniversary parades mark the extensive consultation between various uprising when followers of Ayatollah government agencies and the National Security council. The official said the US Ruhollah Khomeini ousted the US-backed Shah Reza Pahlavi in 1979. wants to work with Iran when it abides They are intended to demonstrate by its international commitments, but support for the clerical regime and will continue to pressure Iran to change its values, and each year tens of thouits behaviour. sands of Iranians, including many state “Iran is playing with fire—they don’t employees and their families, take part. appreciate how ‘kind’ President Obama Ali Akbar Velayati, adviser to was to them. Not me!,” Trump tweeted Khamenei, said in an interview with earlier this month.

Al Jazeera earlier this month that Tensions between the ‘The more time goes Iran will maintain its missile protwo sides were already by, tensions and conflicts increase, gramme “at any cost.” Iran has no escalating before the especially when you intention of changing its Middle missile tests. While they compare it to didn’t contravene the previous years. This East policies because of Trump, suits the West, he said. Iranian officials say it nuclear accord signed in that’s what they can rely on no one for its defense 2015, the missile tests are want. The smell of and that’s why it needs a missile seen by some nations as war is near’ programme. going against a UN Security —Mostafa Rezai In his rally speech, Rouhani Council resolution that defended the nuclear deal that enshrines the agreement. lifted key sanctions against his A second administranation last year. He said that the 2015 tion official said the recent missile deal ensured the nation’s “right” to a test defied the resolution because the nuclear programme while pursuing its missile met payload and range parameconomic revival. eters that make it capable of carrying If Trump tries to unpick the nuclear a nuclear warhead. The official called deal as he vowed during campaignIran’s missile launches extremely proing, Rouhani can expect a renewed vocative and destabilising. onslaught from critics sensing an opporStill, the new sanctions weren’t tunity to weaken him in the lead-up to directed at Iran’s nuclear programme the May presidential elections. and wouldn’t directly affect the agreeRouhani’s rally speech, which also ment forged under Obama’s administracalled for national unity and focused tion that eased restrictions in exchange on the economic achievements of his for Iran’s promise not to develop administration, was part of his “bid for nuclear weapons. re-election,” said Esfandiary.� Ladane For its part, Iran has urged the US Nasseri, Golnar Motevalli and Hashem not to overreact to the tests. Defense Kalantari, with Nick Wadhams and Minister Hossein Dehghan insisted Saleha Mohsin they were part of Iran’s ongoing defence program and were not illegal, The bottom line Relations between the US and Iran according to the Tasnim news agency. are further strained after Trump’s bullish response to a recent missile test in the country.

Crowds at the annual rally in Tehran

“The rep pro pro enl mo nat —M chi Pre

21

13/02/2017 04:24

Politics/Policy

Constitutional change

Erdoğan Courts Support For Power Bid 22

▶▶Key groups in the country will vote his plan down ▶▶“Are we ready to say ‘yes’ at the ballot box in April?”

Turkish President Recep Tayyip Erdoğan chose the opening of a new hospital to begin the campaign for constitutional changes to bring more power to his office, drawing on past pledges to improve health care to appeal to voters ahead of the upcoming referendum.

“In this hospital, you will remember the feeling of being a human-being and be able to say ‘my state is taking care of me,”’ Erdoğan told a crowd gathered in the southern city of Mersin earlier this month. “Are we ready to say ‘yes’ at the ballot box in April?”

Erdoğan is seeking to transform the mostly ceremonial post of president into the official nexus of political power in Turkey. While the president and the government say the changes will help to foster growth, critics accuse him of trying to create one-man rule. However the country’s five main Kurdish groups, including the HDP and DBP, will vote against the change, the Cumhuriyet newspaper has reported, citing a joint statement.

“This referendum is not a foregone conclusion, both sides have to make a

20_PP.indd 22

real effort to win,” Sinan Ulgen, a visiting scholar at Carnegie Europe, said by phone from Istanbul.

The ruling AK Party, despite its proven record in elections, “will have to come up with credible arguments to convince their voter base that this will be a good thing for the future of the country,” he said.

The president will tour 40 provinces, or about half of the country, with the AK Party to persuade skeptical voters that parliament will in fact have stronger oversight under the new system, Ilnur Cevik, a senior adviser to Erdoğan, said in an interview.

An AK Party booklet says the changes would bring about a more stable government, a fast and efficient executive branch and a strong government and parliament.

While the president will run the country through executive orders, “laws will always be one step ahead of the presidential decrees,” Cevik said, adding that the new system will make the president fully accountable for what he does.

As well as the Kurdish groups, Turkey’s main secular opposition party CHP have said they will vote against the changes, which they say will have insufficient checks and balances once the office of the prime minister is formally abolished.

The president would directly appoint some top judges on the constitutional court and on another judicial body that oversees judges and prosecutors. While martial law would no longer exist, the president would be able to declare a state of emergency

Is

The bottom line Erodgan has urged the country to vote for constituional reforms that would hand him huge political power.

li in o c N s a e d to

U v b w s la

s c in R a

Power play

Putin Playing Game Of Top Trump

to to s te c Is

▶▶Russia refusing to back Trump’s claim that Iran funds terrorism ▶▶“Iran should, of course, be part of our joint efforts”

Russia has rejected US President Donald Trump’s assertion that Iran is the world’s “number one terrorist” nation, and said that the government in Tehran should be part of a proposed coalition to fight against Islamic State.

“All those who see Islamic State as an existential threat should start to act in a coordinated manner and I’m sure that if we look objectively at potential members of this coalition, Iran should, of course, be part of our joint efforts,” Russian Foreign Minister Sergei Lavrov told reporters earlier this month.

Trump labelled Iran as the top sponsor of state terrorism in an interview with Fox News, adding: “They are sending money all over the place, weapons.” Russia doesn’t agree with this characterisation and values its “friendly” relations with Iran, Kremlin spokesman Dmitry Peskov said on a conference call with reporters.

The exchange marks the first major disagreement between President Vladimir Putin and the new Trump administration, even as both sides say they are ready to work together to fight

13/02/2017 04:24

th m R th fi S U it S

T s

AFP (2)

President Erdoğan is hoping for a warming of public opinion ahead of the landmark referendum

with increased security measures similar to those under martial law.

For critics of the plan, it’s measures such as these that raise the red flag.

Even without these formal powers, Erdoğan has been able to purge the civil service—especially since last July’s coup attempt.

Prime Minister Binali Yildirim campaigned earlier this month alongside Erdoğan, calling on supporters to “vote ‘yes’ for a safer Turkey, for development, for dams and hospitals.” � Selcan Hacaoglu

Politics/Policy Islamic State.

Russia has defended Iran against US claims that its recent missile tests violated the 2015 nuclear agreement between the Islamic Republic and world powers, and criticised American sanctions imposed in response to the launches as counterproductive.

Peskov sought to play down divisions, saying that their “diametrically opposed” views on this and other international issues shouldn’t prevent Russia and the US establishing mutually beneficial relations.

US Vice President Mike Pence linked cooperation with Putin in fighting Islamic State to a possible easing of sanctions against Russia over the conflict in Ukraine. Asked in an ABC News interview if the punitive measures would remain in place as long as Russia is violating the cease-fire in eastern Ukraine, Pence replied that it depended in part on the opportunity to work on common interests.

“The president’s made it clear the top priority of this administration is to hunt down and destroy ISIS at its source,” Pence said, using another term for Islamic State. “Russia has a common interest in confronting radical Islamic terrorism and especially ISIS.” Trump, who’s repeatedly criticised the Iranian nuclear deal, is looking at means to split up the alliance between Russia and Iran to bring an end to the war in Syria and strengthen the fight against Islamic State, the Wall Street Journal reported, citing senior US, European and Arab officials that it didn’t identify. � Henry Meyer and Stepan Kravchenko

s

l-

o m

d

China Makes Nice With Ivanka and Jared ▶▶Beijing seeks to cultivate Trump through his family ▶▶“There is no obvious China point person in his cabinet”

As countries around the world try to figure out how to influence the new US administration, China is going straight to the top: President Donald Trump’s immediate family. In particular, Chinese officials are hoping to forge a closer relationship with the president’s daughter Ivanka Trump and her husband, Jared Kushner, a senior White House adviser.

The strategy was on full display on 1 February at the Chinese Embassy in Washington, where Ivanka and her daughter, Arabella, who was dressed in red for the Lunar New Year, met with Chinese Ambassador Cui Tiankai.

Ivanka later posted a video of Arabella singing a song in Mandarin, further helping to quiet criticism after her father broke with convention by not sending a personal New Year’s greeting.

Ivanka’s very public meeting came after extensive behind-the-scenes ­discussions between Cui and Kushner, which have been positive, a ­ ccording to a White House official who asked not to be identified because the meetings were private. In ­bypassing ­traditional diplomatic channels such as the US Department of State, China is looking to avoid a trade war or m ­ ilitary confrontation after Trump signalled a willingness to challenge Beijing’s lines on

Quoted

“How we deal with Russia is going to be one of the major projects for Secretary of State Rex Tillerson” AFP (2)

t

The bottom line Putin and Trump’s foreign policy strategies are already running into troubled waters over relations with Iran.

Diplomacy

20_PP.indd 23

Chairman of the US Foreign Relations Committee, Senator Bob Corker at a Washington hearing, referring to mixed messages from the new administration

Taiwan and the South China Sea. The reaction to Ivanka’s New Year’s visit in the Chinese media marked a change from largely defensive responses to previous Trump remarks.

The Global Times, a Communist Partyrun newspaper known for its nationalist tone, said Ivanka helped balance her father’s “harsh posture” and that her appearance “could be invigorating to the China-US relationship.”

Still, Trump has plenty of staffers urging a harder line against China, including strategist Steve Bannon and trade adviser Peter Navarro, whose books include Death by China: Confronting the Dragon—A Global Call to Action. Criticism of China over trade policy was a centrepiece of Trump’s campaign. Chinese President Xi Jinping has responded by urging countries to reject trade wars and protectionism, most notably in a speech to the World Economic Forum in Switzerland last month.

So far, Trump and his family have been in closer touch with Chinese businesses than with officials. Trump met last month with Jack Ma, chairman of Alibaba Group, to discuss ­creating jobs in the US. The Chinese government has been “testing and ­ ifferent ways to avoid a major trying” d confrontation with the US based on ­miscalculations, says Wang Fan, director of China Foreign Affairs University’s Institute of International Relations.

Ma’s visit was an example of that approach, he says.

It’s unclear what effect the moves might have on Trump himself. He still hasn’t set up a call with Xi despite having spoken with more than a dozen world leaders since his i­ nauguration.

Trump’s choice for ambassador to China, Terry Branstad, continues to serve as governor of Iowa, ­following a strict hands-off policy on China matters until after he’s confirmed by the Senate. Until then, Ivanka and Kushner may fill the vacuum. “At this moment, there is no obvious China point person in his cabinet,” says Wang. “All the previous China hands have gone.” �Bloomberg News

23

The bottom line Ivanka Trump and Jared Kushner are emerging as key players in the tenuous relationship between China and the White House.

politics-and-policy

13/02/2017 04:24

Technology 16 — 28 February, 2017

c k

Snapchat

It Keep t ’ n Ca

it to F S o in ­e th w th E te

Private

p c S s C m r th N ia

▶▶The company’s culture of secrecy is at odds with its IPO plans ▶▶“Investors learned their lesson with Twitter”

24_Tech.indd 24

app. He’s also the only person who knows the full picture of the company’s next steps, and he tends to frame that fact as something resembling a strategy. “Keeping secrets gives you space to change your mind, until you’re really sure that you’re right,” he wrote in a 2015 note to employees.

Snap’s initial public offering, planned for March, will test Spiegel’s commitment to secrecy. He’ll have to travel the country and venture abroad to convince potential investors that Snap has concrete, long-term plans to make more money and outmaneuver rivals.

Snap declined to comment for this story.

In the runup to the IPO, the company has already made its secrecy more intense, not less. In November, after Bloomberg News reported details of how much stock Snap planned to offer (as much as $4 billion worth) and its projected market valuation (at least $25 billion), executives assumed the leaks had come from the banks underwriting the IPO and threatened to cut some underwriters’ fees, say people familiar with the matter. While confidentiality is a priority for companies going public, making fees contingent on strict confidentiality is an unusual

requirement. Lead underwriters Morgan Stanley and Goldman Sachs declined to comment.

Snap executives began providing underwriters with more detailed data on app use in January, people familiar with the matter say, but they’ve been reluctant to release any details to investors that aren’t legally required. Wall Street analysts say clients regularly ask for introductions to executives or for details about Snap’s proxy filing, which was filed confidentially under the Jumpstart Our Business Startups ( JOBS) Act, an Obama-backed law that eased disclosure requirements and other securities regulations on small businesses. “Everyone’s kind of flying blind on this,” says James Cakmak, an analyst with brokerage Monness, Crespi, Hardt.

The roadshow will have to overcome skepticism from investors who see Snap more as the next Twitter than the next Facebook. Twitter, the last major social media company to go public, had a successful IPO but has since struggled, demonstrating that having a popular, influential product isn’t the same as having a promising business. “Investors learned their lesson with Twitter,” says Rett Wallace, CEO of Triton Research, which analyzes Silicon Valley

to th c T w s Jo g fi p a u

13/02/2017 04:24

Data compiled by bloomberg

Many Snapchat employees first learned about the company’s video-shooting Spectacles from the news. In September a report on a leaked commercial led staffers to ask their bosses whether the smart glasses were real. After the inquiries, according to people familiar with the matter, an e-mail went out: You may have seen reports about a product that we may or may not be working on.

Don’t talk about it.

Hours later, Chief Executive Officer Evan Spiegel publicly announced the glasses were part of a strategy to redefine five-year-old Snapchat as a camera company called Snap. Again, this was news to employees. And that’s the way things have continued to work at Snap, where workers are unlikely to know what other teams are doing. Even by Silicon Valley standards, the company’s culture of ultrasecrecy stands out.

“Certain people should get certain pieces of information, others shouldn’t—it’s like the military,” says Ethan Kurzweil, a partner at Bessemer Venture Partners.

This is largely because of Spiegel, whose advocacy for increased privacy online has informed much of the development of his disappearing-messages

illustration by ori toor

24

a a c s im “ F a E In S r u g

S h

Making routers chic and a lot better – 26 Innovation: But will this robot fold fitted sheets? 27

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h

S)

d t t.

y

Data compiled by bloomberg

s

illustration by ori toor

p t al -

companies preparing IPOs. “They now know what metrics to ask about.”

If Snap won’t explain in detail how it sees its future, investors will be left to judge whether they trust Spiegel.

From broad strategy to the shape of Snapchat’s buttons, he has the final say on Snap’s moves and tends to rely on instinct rather than data and testing, ­employees say. He’s also made sure that he and co-founder Bobby Murphy will retain majority voting control after the IPO, ­according to an analysis by Equidate, a stock market for private technology companies.

Snap employees, unlike their Valley peers, don’t have a main corporate campus or all-hands strategy meetings.

Spiegel communicates with executives scattered among a handful of Venice, California, offices primarily via Snap messages, which vanish after they’re read. Employees were told not to use their phones at the company’s recent New Year’s party, says a person familiar with the matter.

Some of these policies have less to do with Snap’s business model than with its products. That kind of caution is more common in the Valley: The secrecy around Snap Spectacles wouldn’t sound crazy to anyone who saw the quarantined room where Steve Jobs tested the first iPad. And Snap’s gamble on word-of-mouth worked. The first week the glasses were available, people lined up for hours to pay $130 and, in some cases, resell them for upwards of $1,000 on EBay. Spiegel also has reason to worry about copycats. In October, Facebook added Snapchat-like effects to the camera on its app, the latest in a string of Facebook features that imitate those of Spiegel’s company.

“I wonder if there are more people at Facebook working on Snapchat than at Snapchat,” venture capitalist Josh Elman tweeted. Facebook-owned Instagram’s version of Snapchat’s Stories feature, also called Stories, recently reached 150 million daily users—the same number Snapchat gives for its global audience.

With the name change in September, Spiegel made an effort to broaden his company’s purpose to one that

24_Tech.indd 25

resembles Facebook’s (connect everyone) or Google’s (organise the world’s information). His new pitch, which amounts to helping people express themselves and live in the moment, is closer to those of Facebook and Google than Snapchat’s earlier incarnation.

For now, proving Snap can become a profitable growth machine on that level remains the biggest priority for investors, says Cakmak, the brokerage analyst. But the company’s lack of transparency could loom large, too. “It’s an issue,” he says, “if they’re not making as much money as everyone thinks they are.” �Sarah Frier and Alex Barinka The bottom line Snap’s pitch for an IPO of as much as $4 billion likely requires its CEO to open up his intense culture of secrecy.

Mobile

Apple Tries the Full-Court Press ▶▶Its lawsuit against Qualcomm is a bid for better licensing deals ▶▶“They’ve got to get their margins higher”

For much of the past 20 years, Qualcomm has successfully defended itself in court against those who don’t want to pay it for technology that’s at the heart of all modern phone systems.

As smartphone sales growth has flattened, governments and phone makers Qualcomm’s Licenses To Print Money Licensing profit Chip unit profit

$8b

$6b

$4b

$2b

$0 FY2003 FY2016

have taken more notice of Qualcomm’s enviable profit margins. Apple is the latest to take the chipmaker to court under antitrust claims, which may ultimately help the iPhone maker negotiate a better deal.

Qualcomm makes most of the advanced 4G chips in the world’s smartphones. Like Microsoft did with Windows, it also controls patents that cover the fundamentals of phone systems, so it charges manufacturers to license its intellectual property even when they’re not using its chips.

Qualcomm gets a percentage of the retail price of each phone whether or not the phone carries its chips. And as purchases of high-priced phones exploded over the past decade, its profits from licensing fees have eclipsed its gains in chip sales.

Apple’s 20 January federal lawsuit, which follows similarly themed regulatory actions and fines in several countries, seeks to base Qualcomm’s royalties on the price of its components, rather than the phones. Like other complaints against Qualcomm, including a 17 January lawsuit filed by the Federal Trade Commission, Apple’s alleges that the chipmaker has unfairly used its market position and patent portfolio to squeeze out competition.

“We welcome the opportunity to have these meritless claims heard in court, where we will be entitled to full discovery of Apple’s practices,” Don Rosenberg, Qualcomm’s general counsel, said in a statement.

Qualcomm is a fat target. In its last five fiscal years, the company has turned $37 billion of licensing revenue into $32 billion of pretax profit. Its gross margin, the slice of revenue remaining after deducting production costs, is 61 per cent. Analysts expect that to rise.

By contrast, Apple and rival Samsung each reported gross margins of 39 per cent in their most recent fiscal years. Smartphone shipments likely increased by less than 1 per cent last year, researcher IDC estimates. As recently as mid-2015, the market was growing by double digits annually.

In December antitrust regulators in Samsung’s home country of South Korea announced a record

25

13/02/2017 04:24

Technology

Hardware

The End of Terrible Wi-Fi May Be Near ▶▶New routers prioritise better device management—and looks ▶▶“As an industry, we’re sort of failing the customer”

Wi-Fi routers have long suffered from a few big problems. Weak antennas.

Radio interference. Their inability to diagnose their own issues. Not least, the boxes tend to be ugly as hell, hideous messes of plastic, ­blinking lights, and wires jutting off in every direction.

All that may be about to change.

Bloomberg tested three new routers that use the latest home wireless ­technologies—Plume Design’s Plume, Ubiquiti Networks’ AmpliFi, and

Wi-Fi networks can be maddeningly slow because they operate on a limited bandwidth at 2.4 GHz, where they compete with other networks and devices such as baby monitors.

3 KHz

500 MHz

1 GHz

Cell phones Broadcast TV

1.5 GHz

AM radio

GPS

GPS

Infrared Ultraviolet Visible X-rays light 3 KHz 300 GHz Radio wave spectrum

2 GHz

Cell phones Satellite radio

3 GHz

5 GHz

Weather radar Maritime

2.4 GHz ISM band Wi-Fi Microwave ovens Wireless cameras Baby monitors Personal radio Amateur radio Bluetooth Cordless phones

Microwave ovens generate radio waves in this band, which is why they tend to disrupt your streaming

4 GHz

radio navigation

r c w it d w C S r

Gamma rays

50 GHz 300 GHz

r p w n b d c c a n b m a h s s fi

Amateur Radio satellite astronomy Satellite TV

Earth exploration satellite

Wi-Fi While the 5 GHz band is also open to Wi-Fi, higher frequencies have shorter range and are more vulnerable to interference data: fcc, Reporting by bloomberg visual data

Netgear’s Orbi—and found them far more reliable than their predecessors.

They all seem sleek enough to earn a place on the mantle, which will do a lot to help their performance, too.

Fixing Wi-Fi has taken on increased urgency as hardware makers sell consumers on internet-connected fridges, lightbulbs, and lots more. Swedish ­network-equipment maker Ericsson estimates there were about 16 billion smart devices on earth last year and says most future additions (an estimated 29 billion by 2022) will be devices other than phones or computers.

In this hypothetical, hyperconnected future, routers can’t keep functioning the way they do now, says Chris Satchell, executive vice president and chief product officer at Comcast Cable. “As an industry, we’re sort of failing the customer,” says Satchell, whose company provides most of the routers its customers use. “The internet doesn’t stop at the wall. It stops at your device.”

When customers with wireless problems call Comcast AmpliFi or another provider, the first thing they’re usually told to do is unplug the router and plug it back in. This is

because older devices connecting to a traditional router look for a reasonably uncongested lane of wireless spectrum, then stay in that lane regardless of how backed up traffic gets. Newer phones and tablets are capable of changing lanes when they see roadblocks, and newer routers are better equipped to direct that traffic.

Comcast’s latest wireless gateway, due to roll out by the end of March, finetunes the network based on traffic data.

The company will charge its usual $10 a month for the angular cube. It’s also planning a software update for older equipment that can do some of the same work, and recommends that customers who have trouble getting online in certain parts of their home ask for supplemental plug-in gizmos called wireless extenders to boost the signal.

Extenders, which have been around in some form for a few years, are becoming a key part of the wireless industry’s plan to improve Wi-Fi connections. San Francisco startup Plume Design takes the concept further. Instead of a central home router, it’s selling $179 sets of three routers the size of makeup compacts. They plug into wall outlets Orbi around the house and

h in th a b d m is s li a s

Plume

24_Tech.indd 26

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s e w ti w y m s G to o e O Akio Kon/Bloomberg (2)

The bottom line Apple’s pile-on lawsuit against Qualcomm is more likely to lead to a compromise settlement than a prolonged courtroom battle.

An Overcrowded Spectrum

courtesy amplifi; courtesy plume; courtesy netgear

26

1.03 trillion won ($880 million) fine against Qualcomm for violating antitrust laws and called for the chipmaker to reduce its royalties. (The company is appealing.) In China, Qualcomm paid $975 million to settle an antitrust suit with regulators in 2015.

Apple’s been feeling pressure, too. Last year marked the first-ever annual decline for iPhone sales, and the average price dropped from a 2015 peak of $691 to $619 in the most recent fiscal quarter as the company introduced cheaper models to better compete with Chinese rivals including Huawei, Xiaomi, and Oppo. With the iPhone 7, it’s also shifted some versions to modems from Intel instead of Qualcomm. “They’ve got to get their margins higher,” says Mike Walkley, an analyst at investment bank Canaccord Genuity. “This is Apple’s posturing to get a lower rate going forward.”

A settlement that lowers fees is a better bet for Apple than a yearslong legal fight, Walkley says. “Apple is trying to overturn 20 years of history,” he says.

But if they manage to do so, Qualcomm will be in real trouble, he adds. “Then everyone else will then want their money back.” �Ian King and Alex Webb

T lo th

Technology report device data to computers in the cloud, which make decisions about which connections should get priority. A ­videoconference will take precedence over another device surfing the web, for example, according to Plume Chief Executive Officer Fahri Diner.

Setting up the Plumes was easy, and reliability was excellent.

Many older routers can’t send and receive data at the same time. If you’re posting photos to Facebook while watching YouTube, the router is alternating every fraction of a second between uploading the images and downloading video. Although imperceptible to the user, those milliseconds can add up. Startup Ubiquiti is selling an antenna that can do both simultaneously. The result is AmpliFi, a $135 box ($299 with two extenders, recommended) that provided good coverage across a 2,100-square-foot, single-story home, with the signal moving through several walls. AmpliFi resembles the sort of ultramodern digital clock you’d find in a boutique hotel.

In a way, routers’ aesthetic issues have the greatest consequences for internet speeds. Many people hide them under a desk or behind a cabinet, and any wall or other solid object between the router and your gadgets degrades the signal. Putting one in the middle of a room, with no ­obstructions, is the first thing any t­ roubleshooter should try. Netgear’s Orbi looks a bit like an air purifier, was easy to install, and seemed to offer ­consistently high speeds.

If you want the full coverage these systems are designed for, you can expect to pay $350 or more, compared with about $100 for a decent conventional router or about $10 a month for whatever your internet provider hands ­ uildings with you. And in apartment b multiple networks competing for the same airwaves, a peak event like the Game of Thrones premiere may still lead to a digital pileup. If all else fails, there’s one foolproof piece of networking equipment: a 40-foot Ethernet cable.

Of course, it ain’t pretty. �Ian King

Hz

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ta

,

e.

Akio Kon/Bloomberg (2)

,

courtesy amplifi; courtesy plume; courtesy netgear

e

The bottom line New networking systems solve a lot of the problems with conventional routers, but they’re pricier, too.

24_Tech.indd 27

“A tonne of team members quit, saying it’s impossible or I’m crazy. But the ones who remained came up with some truly brilliant ideas.”

Innovation Laundroid Form and function

Innovator Shin Sakane

A fridge-size robot that, given enough time, sorts, folds, and neatly arranges clothes, even storing them while their owners are away or otherwise occupied. Later models, the developers say, will be able to do the washing and drying, too.

Title Chief executive officer of Seven Dreamers Laboratories, a six-year-old startup in Tokyo

1.

Scanning Users dump clothes in a lower drawer in the robot. Mechanical arms grab each item while scanners identify them based on distinguishing features such as buttons or collars.

Cost Sakane says he hopes to get the Laundroid’s retail price below 300,000 yen ($2,700). The pilot model, due out in March, will likely cost much more.

②

① 3.

Caveats Users will still have to do some tasks, including partially buttoning shirts, ensuring clothes aren’t inside out, and pairing socks before putting them in the Laundroid.

Even the best AI can’t teach a machine to handle socks all by itself, Sakane says.

Age 45

Origin Sakane, a chemistry Ph.D., previously invented high-efficiency surgical tools, an anti-snoring nasal tube, and golf clubs made from the materials Funding Seven used in orbital Dreamers is valued at about 20 billion satellites. yen ($176 million); in November it received 6 billion yen from investors including Panasonic, which is slated to manufacture the Laundroid.

27

2.

Folding Sliding plates help fold the clothes and stack them on upper shelves. Each item takes a full 10 minutes to fold. Sakane says he’s working to cut that down to as little as three minutes.

Rivals US company FoldiMate says its $700 to $850 dryer-size machine, coming in 2018, will be able to de-wrinkle and fold garments in about 30 seconds, but users will have to clip clothes onto an attached conveyor belt.

Next Steps “The biggest challenge has always been the folding,” says Jonathan Roberts, a robotics professor at Queensland University of Technology in Brisbane, Australia. “This is the first time I have seen sliding plates used.”

Roberts says he’s skeptical that consumers will pay Seven Dreamers’ asking price. Sakane says he’s hired Nomura Holdings to explore an initial public offering while he develops a Laundroid that can also wash, dry, and track how often people wear particular items. He’s aiming for 2019 for the version that handles all those tasks. �Yuji Nakamura and Hiroyuki Nakagawa

13/02/2017 04:24

IP Markets/ Finance 16 — 28 February, 2017

a a th c m

All eyes are on the world’s biggest

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c o a th fr s d S la p

to fo c p c a fu s h li T

▶▶Markets around the world are vying for Saudi Arabia's landmark IPO

▶▶“This is something we want to pursue. We want to compete for this type of listing”

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it select underwriters for the sale, make decisions on potential listing venues and ensure the deal goes smoothly, people familiar with the matter have said. The IPO is predicted to raise about $100 billion, which would make it the largest ever. The offering may generate “tens of millions of dollars” in fees for New Yorkbased Moelis, Ryan wrote.

The boutique, founded by former UBS Group AG dealmaker Ken Moelis in 2007, jumped 5.4 per cent to $36.90, extending its climb for the past 12 months to 49 per cent.

Saudi Arabia is aiming to sell less than 5 percent of Aramco as part

of a plan by Deputy Crown Prince Mohammed bin Salman to set up the world’s biggest sovereign wealth fund and reduce the economy’s reliance on hydrocarbons.

Aramco also recently asked banks including Goldman Sachs Group Inc. and HSBC Holdings Plc to pitch for advisory roles, people familiar with the matter said. The company plans to finish selecting banks later this year ahead of a listing in the second or third quarter of 2018, two of the people said.

Meanwhile, with the all eyes on the historic offering, Singapore is considering a range of measures to lure

$9

llustration by sjc:

As the historic Saudi IPO beckons, the industry looks on, keen to get a slice of the action. Earlier this month, Moelis & Co. rose the most since October after winning an advisory role to Saudi Arabian Oil Co. “Transactions of this magnitude clearly elevate the perception of the brand,” Devin Ryan, an analyst at JMP Securities, said in a note to clients. “The press and publicity from a high-profile win represents great advertising for Moelis, which can have tangible benefits, as success often begets more success.”

Aramco, as the Saudi company is known, was seeking an adviser to help

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S ev

PO Assisting Trump not part of the deal for investment boss 31

‘Transactions of this magnitude clearly elevate the perception of the brand. The press and publicity from a high-profile win represents great advertising for Moelis, as success often begets more success' —Devin Ryan

a listing from the energy giant, according to people familiar with the matter, as global exchanges compete for a slice of what the mammoth initial public offering.

The island nation is studying proposals including inviting one of its state investment companies to become a cornerstone investor in Aramco’s IPO, as well as potential Singapore cooperation with the Saudi government on future investments, the people said.

Singapore Exchange Ltd. management including Chief Executive Officer Loh Boon Chye visited Saudi Arabia late last year to pitch a listing on the bourse, according to the people, who asked not to be identified as the information is private.

Singapore, the biggest oil trading centre in Asia, is hoping a full package of government incentives will give it a better chance of winning a piece of the listing than a standalone proposal from the stock exchange, the people said. Aramco is yet to make a final decision on the venue for the IPO, and Singapore faces challenges from the larger international exchanges, the people said.

The country’s plan shows the extent to which Asian economies are vying for a share of the IPO. Aramco officials have also received pitches on a potential Hong Kong listing for the company, which could come with anchor investments from Chinese funds, people familiar with the matter said last year. Company executives have also mentioned the possibility of listing in London, New York, Tokyo or Toronto.

TMX Group Ltd., the owner of the Toronto Stock Exchange, sent officials to Saudi Arabia as part of efforts by a Canadian consortium that includes major local the value of banks to seek a slice Singapore's biggest of the IPO, said ever IPO by a foreign TMX spokesman company Shane Quinn.

“It’s a Team

$980m

llustration by sjc:

f

Opening the door to Middle East investors in Brexit Britain 30

28_MF.indd 29

Canada approach,” he said. “We think with our expertise in the resource sector that this is something we want to pursue.

We want to compete for this type of listing.”

The biggest Singapore IPO by a foreign company was the $980 million offering in 2006 from Thai Beverage Pcl, the maker of Chang beer backed by the billionaire Charoen Sirivadhanabhakdi, according to data compiled by Bloomberg.

Singapore’s average daily stock trading was about $761 million last year, compared with $5.8 billion in Hong Kong and $7.4 billion in London, the data show.

“SGX is the world’s most international exchange and offers unique access to Southeast Asia’s markets,” the bourse operator said in an e-mailed statement, without commenting specifically on a potential Aramco listing. “Singapore is a well-regulated international financial centre with strong corporate governance.”

A representative for Aramco declined to comment, while a representative for Singapore sovereign wealth fund GIC Pte didn’t immediately respond to an e-mail seeking comment. Temasek Holdings Pte, the Singapore state-owned investment company, “looks at opportunities for investment based on its intrinsic value tests,” spokesman Stephen Forshaw said by e-mail. “We do not provide views on our interest or intentions with respect to individual companies.”

Aramco plans to sell shares on at least two or three stock markets in 2018 with a base listing in Riyadh, Saudi Energy Minister Khalid Al-Falih told reporters last week.

No single bourse would be able to absorb the entire offering, Al-Falih said. � Sonali Basak and Javier Blas, with Dinesh Nair, Ruth David, Andrea Tan and Joyce Koh

The bottom line As momentum gathers, the race is on to take a slice of the Saudi Aramco IPO, which is set to be one of the largest in history.

Development

Turkey Moves Funds To Turn Fortunes Around

▶▶Sovereign wealth fund gets government top up

▶▶Erdoğan seeking to boost growth after a series of terrorist attacks

The Turkish government transferred its holdings in the country’s biggest bank by assets and a state-owned phone company to a new sovereignwealth fund created to finance large infrastructure projects.

The treasury’s stake in TC Ziraat Bankasi AS, oil and gas producer Turkiye Petrolleri AO, and a nearly 7 per cent holding in phone operator Turk Telekomunikasyon AS are among the assets that the fund will own, according to a decree listed in the Official Gazette.

The government will also move its 51.1 per cent stake in Turkiye Halk Bankasi AS and 49.1 per cent in Turkish Airlines after regulatory approvals, according to a regulatory filing.

“The existing management of these companies, their operational policies and business plans will continue in accordance with their investment and growth strategies,” Prime Minister Binali Yildirim said. His office will manage the fund under an investment plan to be approved by cabinet.

The fund, approved by parliament in August, will use proceeds from the sale of assets to finance large infrastructure projects such as airports, seaports, roads and railroads, with Economy Minister Nihat Zeybekci saying the fund could eventually control businesses worth $200 billion.

President Recep Tayyip Erdoğan is seeking to boost economic growth after a series of terrorist attacks damaged consumer confidence and tourism, while Fitch Ratings last month became the last of the major credit ratings to cut the country’s debt to junk status.

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“The move is likely to increase political control over the companies,” said Wolfango Piccoli, co-president at Teneo Intelligence. “The government is currently struggling to finance a series of high-profile infrastructure projects; Erdoğan hopes these will boost his domestic prestige and enable him to consolidate his grip on power through the introduction of an executive presidential system with almost no checks or balances.”

Appointments to the board include Yigit Bulut, a senior presidential adviser; Himmet Karadag, Borsa Istanbul Chairman and Chief Executive Officer; and Kerem Alkin and Oral Erdoğan, both academics, according to the country’s trade registry.

“Turkey’s most valuable state assets are being given to a specially authorised and unsupervised company,” said Cetin Osman Budak, a lawmaker and deputy chairman of the main opposition Republican People’s Party. “This is not a step for the benefit of the public.”

The Treasury’s 73.6 per cent stake in Borsa Istanbul AS, the owner of the country’s only stock exchange, holdings in miner ETI Maden Isletmeleri Genel Mudurlugu, tea producer Cay Isletmeleri Genel Mudurlugu, Postal Services Co. and cable TV and satellite operator Turksat Uydu Haberlesme ve Kablo tv Isletme AS have also been transferred to the fund.

A facility of 3 billion liras ($810 million) held by Turkey’s Defense Industry Support Fund will also be given to the wealth fund for a period of three months, while several plots of lands in tourism regions in Antalya, Aydin and Izmir will be shifted to the

fund. The government also moved its license in the national lottery and horse racing operations for the next 49 years to the fund.

The government hired international banks in 2013 to sell 6.7 per cent of its stake in Turk Telekom from its total ownership of 31.7 per cent through a secondary public offering, but the plan didn’t go through. The phone operator is 55 per cent owned by Dubai-based Oger Telecom Ltd. � Ercan Ersoy The bottom line The Turkish government has boosted the sovereign wealth fund for infrastructure development across the country.

Property

Middle East Investors Buck Brexit Trend ▶▶Property investors from the Gulf moving in on UK property ▶▶“It means you can pick up these assets a lot cheaper”

Middle East investors, benefiting from a weak pound and rising oil prices, increased their spending in UK commercial property even as Brexit prompted buyers from every other region to shrink their spending.

Investors from the region accounted for 24 per cent of all overseas acquisitions in the fourth quarter compared with 10 per cent a year earlier, according to the latest data which was compiled by fund manager Fidelity

International.

“We have seen a really significant increase from our Middle Eastern clients in their appetite for London,” Stephen Clifton, head of central London at broker Knight Frank LLP, said in an interview.

“There are two key reasons for that: currency and stability.”

Office values in the City of London financial district fell the most in seven years after the vote to leave the European Union and property funds were forced to freeze redemptions as investors, fearing further price drops, rushed to withdraw money.

Values stabilised instead as sterling’s weakness gave buyers from countries including the United Arab Emirates and Qatar a 15 per cent currency discount after the referendum.

“The pound has taken an absolute battering,” Matthew Richardson, head of real estate research at Fidelity International, said in an interview.

With the price of oil rising 62 per cent year-on-year, Middle Eastern investors who depend on petrodollars have been lured back to the UK, he said.

Buyers from the region had bought or developed some of the city’s best known landmarks before the price of oil fell to its lowest level in a decade last year. Qatar’s holdings include stakes in the Canary Wharf financial district, the Shard skyscraper as well as Harrods department store. Kuwait’s St Martins unit bought More London, a group of properties next to Tower Bridge, for about 1.7 billion pounds in 2013 and Abu Dhabi Investment Corp. is developing apartments on Grosvenor Square in Mayfair.

v in s F w y th a

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The office yields achievable in the City of London financial district

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T M fo

Markets/Finance As crude fell in price and property values reached record highs in London in 2015, investment from the region slowed for six successive quarters, the Fidelity data shows. Now they’re back with investment rising 83 per cent year-on-year to 1.6 billion pounds in the fourth quarter, according to the asset manager.

Deals in the period included the acquisition of The Peak office building in the Victoria district, 5 King William Street in the City of London and a property opposite the Ritz hotel in the Mayfair district, Fidelity said.

While the collapse of the pound has also benefited Asia Pacific buyers, a crackdown by the Chinese government on outbound capital flows has helped Middle Eastern buyers regain market share, according to Richardson. Many investors from the Middle East region also have long standing relationships with the UK and its education and legal systems which provides a sense of stability, he said.

As well as currency discounts, London real estate is luring buyers after becoming more affordable compared to other major European markets. Prime office yields are 3 per cent in Paris and 3.5 per cent in Berlin compared with 4.25 per cent in the City of London financial district, according to Knight Frank.

“These are investors who know London well and it means you can pick up these assets a lot cheaper than historically,” said Andy Pyle, head of UK real estate at KPMG LLP. The election of Donald Trump has also raised the prospect that London will regain its crown as the top global destination for Middle Eastern investors. The UK capital was surpassed by New York for spending from the region in the 18 months through June 2016, according to a report by broker CBRE Group Inc. “There are concerns in relation to America now, in their inward focus and restrictions on who they allow in,” Clifton said. “That’s a further attraction of London.” � Jack Sidders

s

n

SHUTTERSTOCK

s

The bottom line There has been an increase in Middle East property investors buying in the UK following the fallout from Brexit.

markets-and-finance

28_MF.indd 31

Mystery Deal

Investment manager Anthony Scaramucci, in line to become an assistant to Donald Trump, may now get a lesser role, according to a senior administration official. The change may be related to the deal to sell his firm SkyBridge Capital to a subsidiary of Chinese conglomerate HNA Group and little-known RON Transatlantic. RON declines to disclose who its investors are. The deal values SkyBridge at $180m or more, say people familiar with the matter, or 7.2 times earnings before interest, taxes, depreciation, and amortisation.

Similar firms often get 3 to 5 times Ebitda, says Karl D’Cunha of CBIZ Valuation Group. Scaramucci says the price was fair and he turned down higher offers.

Scaramucci had filed all ethics disclosures required for the White House role, says his lawyer.

Scaramucci says he doesn’t know the identity of RON’s investors and relied, as is customary, on RON’s managers to vet them.

31

“They bought SkyBridge in spite of, not because of, my affiliation with the administration,” says Scaramucci, because the buyers know he’ll recuse himself from SkyBridge-related matters.

——Zachary Mider, Katherine Burton, and Simone Foxman

13/02/2017 04:29

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13/02/2017 04:34

Kuwait Country Report

By Sudeep Guha

Special advertising section

A country on the rise S1

Muscat

I

n 2015, Kuwait became the latest country in the Middle East to throw its weight behind a billion-dollar diversification plan. Like its neighbours in the Gulf, the realisation that the key to longterm economic stability lies beyond a dependence on oil has become the very cornerstone of future strategy. The Kuwait Development Plan (KDP) maps out the way ahead for the private sector and robust infrastucture development. The US$155 billion five year goal is that Kuwait will become the Gulf's banking, trade, and services hub by 2020.

Itâ&#x20AC;&#x2122;s a bold plan, and one that Kuwaitis know relies on a major boost for the private sector. Hopes rest on a host of

33_Kuwait _report.indd 33

As diversification plans start to bear fruit, Kuwait looks to a more strategic role in the Gulf infrastructure projects, taking forward a successful year of project implementation in 2014, and emphasising a commitment from the authorities to maintain capital investment, despite the volatility in oil. The crux is integrating the private sector into areas of the economy traditionally under state control and to raise the non-oil sectorâ&#x20AC;&#x2122;s GDP contribution to 64 per cent in 2015-20, up from an average of 45.1 per cent in 2010-13.

Moves are also being made to cut state subsidies, with the government opting to liberalise diesel and kerosene prices and reduce subsidies on aviation fuel, which started in January 2015, and will generate savings equal to 0.3 per cent of the country's GDP. More than 500 projects to upgrade infrastructure, utilities, and housing are planned to catalyse growth and strike a balance between Kuwaitâ&#x20AC;&#x2122;s public and private sectors, while at

13/02/2017 04:29

Kuwait Country Report

S2

the sane time, accommodating the demands of a growing population.

It all folds into the country’s Vision 2035 plan to wean the economy off hydrocarbon revenues. Given the present turmoil in oil markets, the initiatives come at a critical time when the country’s oil-dependent economy needs to become more competitive to attract foreign direct investment.

Danny Richards, Lead Economist at Timetric’s Construction Intelligence Center, says: “The low oil price is a concern, as it is for many other countries in the region, and further across the world. There are risks associated with Kuwait’s construction industry outlook but low oil prices and the poor business environment will undermine growth prospects.”

An OPEC member, oil is fundamental to the economy - the government recently set a production target of four million barrels per day (bpd) from the present 3.1 bpd, despite the fact many oil fields are still maturing and largely untapped. According to Kuwait’s Central Statistical Bureau data, oil accounts for more than 60 per cent of the country's GDP and 95 per cent of its exports. Hydrocarbon revenues have delivered strong public finances, along with consecutive annual budget surpluses and funded the development of a generous welfare system. However, an IMF forecast in 2012 predicts Kuwait's oil revenues will be entirely committed by 2017, based on current spending projections.

This is where private sector development becomes essential as the way forward. There is a solid base from which to build - in the 1960’s, the government launched an economic diversification programme that attracted overseas investment and laid good foundations across industries including shipbuilding, water desalinisation, food processing, construction and fertiliser production. To add to this, projects worth $123.6billion are now planned, alongside $68.9billion government construction projects. $166billion has been set aside to construct 45,000 new housing units, a metro and railway network, and a new oil refinery. The metro, which will be 171 kilometres long, will cost $7 billion and is planned to be operational by 2020, while the railway project will cost $10 billion. There is also a plan in place to construct a $46 million ter-

33_Kuwait _report.indd 34

ê

Home to the largest per capita reserves and fourth-largest total reserves of crude oil in OPEC, Kuwait’s finances suffered in 2016 following the rapid decline in oil prices, which drove revenues down from $108.6billion in 2013 to $51.8billion in 2015.

60% of Kuwait's GDP comes from oil

ê

"If you were to have spoken to someone of my age 65 years ago, they would have said ‘the next generation can’t outdo us.’ The next generation did outdo them, and did it royally, and on a world stage, and maybe the generation after us has to shoot for the stars" -- HE Sheikh Mohammad Al-Sabah, Minister of State for Cabinet Affairs

minal at Kuwait International Airport.

Meanwhile, the construction tender for a $1 billion Olympic village will also be issued this year.

A major share of the new projects are in the health care sector. In 2012, Kuwait Ministry of Health and Ministry of Public Works announced a $4.42 billion project to design health care facilities that would replace or expand nine operating hospitals - five general hospitals and four specialised hospitals - by 2022. These include the $1.6 billion Jaber Ahmed Al Jaber Al Sabah Hospital, the $1.2 billion Al Jahra Hospital extension, and the $1 billion new Farwaniya Hospital expansion. Elsewhere, among projects already completed is the $775 million Sheikh Jaber Al Ahmad Cultural Centre.

“Energy and utilities construction was the largest market in the Kuwaiti construction industry, accounting for 26.1 per cent of its total value in 2015,” says Richards, “the market is expected to become the second-largest and account for 22.7 per cent of the industry’s total value in 2020.”

This market growth will work towards increasing the share of energy generated using non-oil, non-conventional, and renewable sources. In fact, by 2030, 15 per cent of the country's energy requirements will be fulfilled by the non-oil sector. This, combined with the planned increase in oil production to become one of the world's largest producers, will be a shot in the arm for the Kuwaiti economy.

Unlike many other GCC nations that shy away from public-private-partnerships (PPPs), Richards says Kuwait is tapping the full potential of PPP as part of its overall growth strategy.

He says: “Kuwait’s attractive PPP policies and regulatory framework have encouraged foreign and domestic investors to invest in the country’s railways, highways, and road and seaport infrastructure.”

Delayed utilities projects are slated to move ahead after the creation in 2014 of the Kuwait Authority for Partnership Projects (KAPP), an agency tasked with identifying and developing PPPs. Developing PPPs is a key pillar of the six-point economic reform plan launched by Anas Al Saleh, Minister of Finance and Acting Minister of Oil. To further promote PPP, the Kuwait National Assembly has passed legislation aimed at activating the economy and

13/02/2017 04:29

Special advertising section

Kuwaiti MPs attend the opening session of the new parliament in Kuwait City, on 11 December 2016.

Kuwait's Emir Sheikh Sabah al-Ahmad Al-Sabah opened the new parliament by declaring that a reduction in public spending is "inevitable" in the face of weak oil prices.

S3 overcoming many of the obstacles and hurdles that existed in the past. One amendment to the law on partnerships between public and private sectors allows this model to be a major contributor to development.

“The assembly has also passed a new law for commercial agencies that would allow for greater competition and break up the domination of the few, which we believe is in the best interest of the citizen. A new, more modern, law for the Central Tenders Committee has also been passed – after being shelved for more than 20 years – to allow the nation to keep up with

economic development around the world,” says Marzouq Ali Al Ghanim, Speaker, Kuwait National Assembly.

He adds: “Other recent pieces of legislation include a law on electronic transactions and digital infrastructure to facilitate the issuance of commercial licenses, as well as a law allowing foreign banks to open more than one branch in Kuwait in order to better compete with local banks.”

Added to these measures, Kuwait also has a $6.6 billion fund that supports small projects, which in turn creates jobs and investment opportunities. As Eduardo Eguren, CEO Burgan

“It is true that Kuwait is not at the forefront of innovation; yet that has not precluded effective performance.

Kuwait focuses on fundamentals” 33_Kuwait _report.indd 35

Bank puts it: “The Kuwaiti banking system is one of the strongest in the world, thanks to the players present and the support given by a strong government. This is also backed up by the fact that the Central Bank, by law, backs 100 per cent of deposits, irrespective of the amount. It is true that Kuwait is not at the forefront of innovation; yet that has not precluded effective performance. Kuwait focuses on fundamentals.”

Kuwait National Assembly has also passed environment-conservation laws to keep up with global guidelines that industries should adhere to. These laws outline technical specifications for industries across all sectors for reducing waste and pollution. “This law will have a positive impact on the economy as it will open a new window for green industries,” says Ghanim.

Kuwait is a country with a clear diversification plan to develop its infrastructure, transport links and energy capabilities. This vision, coupled with its approach to PPPs, shows the country will soon emerge as a major player among its regional neighbours, proving itself to be a country more than ready for business.

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agreements, and a Trump spokesman has said Ross will be the administration’s leader on setting trade priorities, a role usually reserved for the US Trade Representative. To the extent that the Trump administration is an experiment in government by—and possibly for—the ultrawealthy, Ross would be its public face. hat face is an evocative one. Ross reminds people of a ­p rofessor, an owl, or the Simpsons moneybags C. Montgomery Burns. He has a taut, bald dome; squinting eyes behind rimless spectacles; and thin lips that, in ­c onversation, can curl downward, as if he’s slightly displeased. It’s the mug of someone who’s been very sharp for a very long time.

Born in 1937, Ross graduated from the Manhattan Jesuit high school Xavier, describing himself in the 1955 yearbook as a country boy who wanted to go to Notre Dame and become a lawyer. Instead he went to Yale, then Harvard Business School. He landed on Wall Street, spending much of his career working for the Rothschild financial dynasty. Ross became one of the world’s most sought-after bankruptcy advisers and then, around age 60, started a private equity fund to make investments in distressed companies.

Ross has been married three times. His wedding in 1995 to his second wife, Betsy McCaughey, had to be postponed because he was still married to his first; the couple eventually

previous spread: photos: ALamy (1); AP Photo (1); Everett Collection (1); this spread: from left: The Palm Beach Post/ZUMA Press; Jason Cohn/Reuters

40

n the last day of November, President-elect Donald Trump chose Wilbur Ross as his nominee for secretary of Commerce. A few hours later, Ross, a 79-year-old Wall Street multibillionaire, stepped into Gramercy Tavern, a tasteful restaurant for the Manhattan elite, off Park Avenue. A woodbeamed and chandeliered private dining room had been reserved for Navigator Holdings, a liquefied gas shipping company whose biggest investor is Ross’s private equity firm, WL Ross & Co. He and David Butters, Navigator’s chief executive officer, both arrived early. “Your interest is aligned to mine,” Butters recalls Ross saying. “The US economy will grow, and Navigator will be a beneficiary.”

When the other guests arrived, they took turns congratulating Ross. As the executives enjoyed a menu that offers sherry-sauce sea bass and pear buckle, the mood was jovial, Butters says. One of their own could soon be running the cabinet department that is the conduit between government and corporate America. “It was like—we have a chance now,” Butters says. “We have a chance to make some differences.”

Although Trump ran as a populist, railing at the elite on behalf of blue-collar workers, he surrounded himself during his campaign with plutocrats. And now that he’s president, he’s elevating them to power. Trump’s proposed cabinet has a net worth of more than $6 billion. Ross is by far the richest, worth $2.9 billion, according to a Bloomberg estimate. And how he achieved his fortune—a well-known Wall Street tale of “vulture” investing at its shrewdest—takes on a different cast in light of his nomination.

Ross got rich in part with government assistance, taking advantage of bankruptcy laws and tariffs and having others pick up the bill for pensions owed to employees. He’s been on both sides of perhaps the most pivotal issue of the 2016 campaign—­free trade—depending on how it affected his own wealth. If confirmed as Commerce secretary, as is widely anticipated, Ross would be expected by Trump’s electorate to deliver on promises of working-­class jobs and an industrial renaissance. Yet he would have the means to continue rewarding the E ­ stablishment. Even before taking office, he’s pushed policies that would enrich private investors in public projects.

Ross is positioned to become the most powerful Commerce boss in years. The department calls itself the voice of US ­b usiness, but it’s less a single creature than a dozen ­agencies rolled together. Ross would oversee the census, patents, economic analysis, the development of minority-­owned businesses, and even, under the aegis of the National Oceanic and Atmospheric Administration, the monitoring of the effects of climate change. In addition, Trump has said he’ll direct Ross to identify every violation being committed under existing trade

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Ross wouldn’t comment for this story. After his assistant asked Bloomberg Businessweek not to contact anyone who works or has worked for WL Ross, a spokesman e-mailed a list of outside people Ross wanted to make available. It included two mayors, one governor, and six billionaires, among others.

One of the nonbillionaires was C. John Wilder, a colleague Ross picked in 2015 to be executive chairman of the hobbled oil explorer EXCO Resources. “He wants to win, but business to him is not filled with a lot of emotion,” Wilder says. “Very emotionless, very deliberate, very calculated.”

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held a reception for hundreds of guests on the USS Intrepid.

(They told the New York Times they couldn’t even estimate the number of attendees.) Ross funded McCaughey’s 1998 run for governor of New York until she announced, just days before the primary, that he’d withdrawn funding. They divorced.

In 2004, Ross married the society writer Hilary Geary. They paid $7.8 million last year for a 5,000-square-foot duplex in Manhattan’s art deco River House co-op. It has five bedrooms, not counting three maid’s rooms.

For his 70th birthday, Ross was feted with Tin Pan Alley songs whose lyrics were changed to praise his investments, his globe-trotting, and, to the tune of Ain’t We Got Fun, his shoes: “So many pairs of velvet slippers, hard to choose one.” His art collection, which Bloomberg estimates is worth $250 million, is heavy on the midcentury Belgian surrealist René Magritte.

At a gala in 2012, Ross pulled back his tuxedo sleeve for a reporter to reveal a custom Van Cleef & Arpels timepiece with two Magritte-inspired apples on a pink face. “It’s our painting,” he said. “It’s hanging in Palm Beach.”

Ross belongs to at least three private clubs in London and four in South Florida. In and around New York, he’s a member of Mory’s Association, the Harvard Business School Club, the River Club, Southampton Bath & Tennis Club, and Kappa Beta Phi, a secret banking fraternity founded before the 1929 stock market crash. Ross has served as grand swipe, the title given to the frat’s leader.

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fter Ross shifted from adviser to investor, he explained his thinking to a Bloomberg News reporter in 2003: “All we could do was make recommendations—­now we’re actually doing what we think is right. I wish I’d done this years before.”

In February 2002, Ross had a hand in a record-setting deal.

He announced he was buying the bankrupt Cleveland steelmaker LTV. One month later, the Pension Benefit Guaranty Corp.—a government entity funded by private industry—said it was taking responsibility for the pensions the company had promised its employees. Covering about 82,000 workers and retirees, it was the largest pension takeover in US history, and it meant that the agency, not Ross, would have to fulfill LTV’s multibillion-­dollar obligations to steelworkers.

It wasn’t a coincidence. After decades of witnessing deals come together as an investment banker, Ross understood how to use bankruptcy to his advantage—acquiring only assets while others shouldered the burdens. “He taught me so much,” says Rodney Mott, who ran International Steel Group, the company Ross formed. “Purchase the assets through bankruptcy, which would make them free and clear. There is no pension obligation. The government takes over.”

The PBGC’s pension takeover record didn’t even last until the end of the year. In November 2002, Ross began work on a deal to buy bankrupt Bethlehem Steel, and one month later the PBGC took over benefits for about 95,000 people.

Pensions were sometimes slashed in half.

“It didn’t happen once, it happened a number of times,” Vince Snowbarger, a former acting director of the PBGC, says about the takeovers. “So when you’d hear that Wilbur Ross was considering purchasing a company … I’m not going to say [we] were terribly thrilled to hear that he was involved.”

The pattern repeated at least three more times. As Trump’s Commerce secretary, Ross would be one of three directors overseeing the PBGC. Union leaders have praised Ross for bringing companies back from bankruptcy, but he wasn’t bringing back all of the previous employees. Mott figures that on average they employed about half the number of workers they had employed before. “At the time, I think we did the right thing,” he says. “You only feel really bad on a personal basis if you ever meet any of those employees. You go off on

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week after Ross announced the LTV deal, President George W. Bush said he’d protect US steel by putting tariffs as high as 30 per cent on imports, breaking with some members of his own economic advisory team who said it would hurt consumers. Ross went on a buying spree, assembling the second-­biggest steelmaker in the US Without the tariffs, he told a trade commission in 2003, “none of this would have been possible.”

At the time, Ross spoke unequivocally against free trade.

“America’s standard of living is being systematically destroyed by our international trading partners,” he said in a public appearance, “and the people must be made aware of this ­economic disaster.” In late 2003, the World Trade Organisation ruled the Bush steel tariffs were illegal. But they did their job for Ross: In the period after the tariffs were announced, steel prices soared. Within months, he and his backers announced they were selling their steel company to an Indian ­billionaire for $4.5 billion, reaping more than an eightfold profit.

By then, Ross had also bought the bankrupt textile

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companies Burlington Industries and Cone Mills, the largest denim maker in the world. Burlington had operations in Mexico and India, and Ross wanted to expand worldwide.

At the end of 2003 he invited dozens of industry executives to a conference room in downtown Washington, where he persuaded them to sign a statement backing a trade agreement that would allow Mexican textiles to be sewn in Central America and imported duty-free into the US. The next day he gave a speech in North Carolina, telling textile makers that protectionism was “the way to extinction.”

Now loudly for free trade, Ross began embracing countries he’d recently accused of systematically destroying America.

His textile company announced that it was building a plant in China, a complex in Vietnam, and an 850-worker facility in Nicaragua that drew the country’s president to the opening ceremony. In September 2008, Ross’s private equity firm announced a joint venture with a subsidiary of China’s largest state-owned power producer. Ross called it “living proof of the financial and intellectual interconnectedness of two of the world’s great powers.” Three years later, he and the s­ overeign fund China Investment Corp. invested in a shipping deal together. “I think that it’s total political nonsense, all the China bashing,” Ross said at the time. “The trade deficit we have with the rest of the world is almost equal to the trade deficit we have with China, so what’s the big deal about China?”

It proved a big deal to Trump, of course. “We can’t continue to allow China to rape our country,” the then-candidate said at an Indiana rally last spring. A few months later, Ross publicly reversed himself on this issue, too. “China has used a potent arsenal of unfair trade practices to shut over 70,000 American factories and kick millions of American workers to the curb,” he wrote with the economist Peter Navarro in an August op-ed in the Pittsburgh Post-Gazette. In a September white paper for the campaign, they called China the “biggest cheater in the world,” blaming the US trade deficit on a flood of subsidised imports. Ross also repudiated the Trans-Pacific Partnership, a trade agreement he’d endorsed in 2015. He told senators in January that his feelings changed when he delved into details.

In business, switching positions is considered pragmatic.

In politics, it’s flip-flopping.

After Ross spent a lifetime on Wall Street, what he really thinks about the issues is anyone’s guess. In 2012 he defended Mitt Romney’s comments about 47 per cent of Americans being freeloaders; the same year, WL Ross invested about $50 million into the longtime union lender Amalgamated Bank. “I would watch him on CNBC at 6 in the morning, taking positions totally adverse to the bank and its customers,” says Edward Grebow, Amalgamated’s then-CEO. “And then at 9:00 I would have breakfast with him, or a meeting with him, and he could not have been more supportive.”

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vacation, run into an ex-Bethlehem employee that’s been forced into retirement and has a reduced pension—you try to avoid conversation.” On a trip to Florida a decade ago, Mott recalls, “I was at Daytona at a flea market, and somebody there was selling wares. And we just got to talking, and I could tell from the accent they were from the North, and he was an exsteelworker. Nobody I knew, but just an ex-­steelworker. You don’t identify yourself at that point, ’cause you don’t know how people think of you.” He says he walked away without buying anything.

Ross defended his practices in a 2003 interview with Businessweek, saying he saved jobs that would have vanished. “What we do is a very countercultural activity,” he said. “Confrontational things, admission of error, admission of defeat, restructuring, laying people off: Those are not American ideals.”

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rump, too, has benefited from Ross’s support. In 1990 the Trump Taj Mahal casino in Atlantic City opened with a ceremony featuring red ribbons, green lasers, and a talking genie. Like many of the buildings that marked Trump’s rise, the casino had been funded with borrowed money, including $675 million worth of junk-bond sales. It quickly slid into bankruptcy, and Ross represented bondholders who could have cut Trump out. Instead, the two men struck a deal that allowed Trump to keep a major stake.

By tapping Ross to head Commerce, Trump is rewarding his former saviour with oversight of almost 47,000 federal employees, more than the Education and Labor departments combined. The century-old department was run by Herbert Hoover just before he became president and Pete Peterson before he became a private equity billionaire. If confirmed, Ross will be expected to fulfil some of the campaign pledges to the Rust Belt that got Trump elected. “Your steel has been decimated,” Trump said during an October rally in Pennsylvania.

“We know all about the games where China is dumping all over the place. They are dumping steel. Your steel will come back.”

Most politicians make promises to blue-collar workers, but the stakes for Trump are higher. The conservative Tax Foundation has warned that his plan to slash taxes would add trillions to the national debt. In his September white paper

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in to make money,” he said before the hearing. “In my Palm Beach world, no one is complaining about him having screwed them.” Lauder predicted that Ross would do well at his hearing.

“Is he rich? He’s rich,” Lauder said. “Will he be grilled by some people about his investments in coal mines? Yeah, I guess he will, because he was a big coal mine guy.” (In 2006, 12 workers at Sago Mine, one of Ross’s holdings, died in the worst West Virginia mining disaster in decades. One miner, age 51, had time to write a message on a scrap of paper that was found afterward. It read in part, “It wasn’t bad I just went to sleep.”)

Lauder was wrong about the coal questions. When Ross sat alone at a table in front of the Commerce committee in Washington, he wasn’t grilled about the years he spent putting together the International Coal Group, nor Homeward Residential, which Ross had made into the s­ econd-largest servicer of subprime mortgages during the housing crisis. There were few questions on his steel or textile conglomerates. The

co-written with Navarro, Ross promised that, by improving deals, boosting exports, replacing some imports with American products, and using tariffs, Trump would cut the trade deficit so dramatically that new tax revenue would mostly make up for all those tax cuts. Moody’s Analytics wasn’t as optimistic. In June it said Trump’s economic proposals could trigger a trade war and a recession.

Ross, who sold his company to Invesco a decade ago, offered some indication of how his business history might play out in his new role: Days before the election, he and Navarro, now the head of a new White House National Trade Council, released a paper on Trump’s infrastructure plans.

Dams, railroads, pipelines, airports, bridges, ports, tunnels, and highways are crumbling, it warned—an assessment on which both parties agree. But rather than calling for more public spending, as Democrats would prefer, the Ross-Navarro plan advocates about $140 billion in tax breaks for private investors. Critics say these developers could build toll roads and other revenue-producing forms of infrastructure while leaving alone unprofitable but essential structures, such as rural water mains and levees. ne day in January, as Ross was getting ready for his confirmation hearing in the Senate, he attended a party hosted by one of his friends, the cosmetics heir Leonard Lauder, who’s worth about $10.4 billion. Lauder was glad for Ross’s good fortune. “All I know is that here’s a guy who’s

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senators were chummy, tranquil, and distracted. At one point, Connecticut Democrat Richard Blumenthal praised Ross for planning to divest hundreds of millions of dollars in assets to take the job, even though a half-hour earlier Ross had told the ­committee that he wouldn’t part with his stake in Diamond S Shipping, a tanker company that his private equity firm had invested in alongside China’s sovereign wealth fund.

Near the end of the hearing, the ranking Democrat, Senator Bill Nelson of Florida, commended Ross’s wife for not letting her eyes wander during the proceedings. “Let me assure you that this hearing is a piece of cake compared to some of the other nominees,” Nelson said. Everyone grinned. Ross had sent Nelson $4,800 for his last run.

As Trump settles into the White House, some Americans have expressed fears that the Wall Street financiers he’s ­b ringing into government will usher in an era of cronyism, c­ orruption, trade wars, and disregard for the plight of the poor. Trump, of course, argues otherwise. “One of the ­networks said, ‘Why, he put on a billionaire at Commerce!’

Well, that’s ’cause this guy knows how to make money, folks,” he said about Ross at a December victory rally in Cincinnati.

Trump stepped away from the microphone, spreading his arms. “I’d like to put on a guy that failed all his life, but we don’t want that, do we?” The crowd hissed. “No, I put on a killer. I’ve been honest. I said, ‘I am going to be putting on the greatest killers you’ve ever seen.’ We need that. It’s time. It’s time. It’s time.” <BW> �With David Carey

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From the book The Upstarts: How Uber, Airbnb, and the Killer Companies of the New Silicon Valley Are Changing the World by Brad Stone. © 2017 by Brad Stone. Reprinted by permission of Little, Brown & Co., New York, N.Y. All rights reserved.

In January 2009 the three founders of a little-­ known website called Airbedandbreakfast.com decided at the last minute to attend the ­inauguration of Barack Obama. Brian Chesky, Joe Gebbia, and Nathan Blecharczyk were all in their mid-20s and had no tickets to the festivities, or winter clothes, or even a firm grasp of the week’s schedule. But they saw an opportunity. Their online home-sharing company had limped along for more than a year with little to show for it. Now the eyes of the world would be on the nation’s capital, and they wanted to take advantage.

They found a cheap crash pad in D.C., an apartment in a drafty three-floor house near Howard University that, like so many other homes during that desperate time, was in foreclosure. The rooms were unfurnished save for a pullout sofa, which the three founders gave to their friend and adviser, Michael Seibel, who ran the streaming-video site Justin.tv. At night they crowded onto the hardwood floor on inflatable beds.

Their host was a tenant waiting for eviction. He lived in the basement apartment and had used the AirBed & Breakfast website to rent out the empty first floor and, to three other guests, his own bedroom, living room, and walk-in closet. Sensing a promotional opportunity, Chesky e-mailed the staff of Good Morning America about the closet, and a producer included it in a roundup of unusual accommodations for the inauguration.

By day the founders and Seibel passed out AirBed & Breakfast fliers at the Dupont Circle Metro station. “Rent your room! Rent your room!” they cried to the bundled-up commuters, who mostly ignored them. At night they met other AirBed & Breakfast hosts in the city, talked their way into inaugural parties, and answered multiple e-mails from a disgruntled customer—the guest in the basement bedroom. The woman had driven her

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Volkswagen bus from Arizona to D.C. with her support dog, a Chihuahua, and she wasn’t keen on the crowded accommodations. In a barrage of complaints, she said she was certain she smelled marijuana, that the juice she’d left in the fridge had been taken, and that the house didn’t comply with the Americans with Disabilities Act. At one point she threatened to call the police.

Chesky, Gebbia, and Blecharczyk sat just a few feet above her head, typing out apologetic replies.

On the day of the inauguration, they awoke at 3 am to claim a good viewing spot on the National Mall. They walked 2 miles to get there, buying hats and face masks at a kiosk along the way. By 4 am they’d found a space on the green in the area open to the general public, a few football fields away from the presidential podium.

“We just kind of sat back to back in the middle of the Mall and tried to stay warm,” says Chesky, the chief executive officer of the startup, now named Airbnb. “It was the coldest morning of my life.

Everyone cheered when the sun came up.”

Garrett Camp and Travis Kalanick also attended the festivities that week. A friend on the inaugural committee, the investor Chris Sacca, had persuaded them to come. Kalanick, a Los Angeles native who’d recently sold his startup to web

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infrastructure company Akamai, made a $25,000 donation to the inaugural committee and split the expense with Camp. They were both in their early 30s and, despite the global economic meltdown, full of optimism about the transformative effects of technology. They were largely ambivalent about politics but didn’t want to miss a historic moment or, just as urgently, a seminal party.

They also arrived in D.C. fully unprepared. The night before the inauguration, they found themselves stuck in a line outside the Newseum, trying to get into a party hosted by the Huffington Post. It was windy and cold, and they had only one wool hat between them, which they took turns wearing, 10 minutes each, while frantically texting one of the party’s hosts, asking to be allowed inside.

On the big day, Camp and Kalanick woke up late.

Kalanick had rented a swank home near Logan Circle on the vacation-rentals website VRBO, but it was a few miles away from the Mall, and no taxis were available. They ended up sprinting down the wide D.C. avenues. When they finally got to their seats, perched with Sacca and his high-powered Silicon Valley friends above the inaugural platform, the sweat on their bodies cooled, giving way to a chill. “By the end of the day, I was definitely sort of pre-hypothermic,” Kalanick says. “Everyone was like, ‘What’s wrong with you?’ ” At the time, Camp had been trying to get Kalanick excited about a business idea he was developing that would allow anyone with a smartphone to call a black town car with a click of a button. Kalanick was interested but not particularly enthusiastic, conceding that it was a good idea, just not a big one. He had his own startup ideas, including one that he called “Pad Pass,” a network of furnished high-end apartments.

Yet here in Washington was clear evidence that Camp’s car service was needed. A car that could be summoned, tracked, and rated via a smartphone would be a godsend for getting around big cities, especially during huge events such as inaugurations.

“See?” Camp said to Kalanick, as the crowd chanted “O-bam-a! O-bam-a!” and the world waited for the new First Family to take the stage. “We really need this.”

Camp even had a name for his high-tech car service: Uber.

That was eight years ago. Much has changed since—the president, for starters. But few companies have altered city life as deeply and as swiftly as the two started by the entrepreneurs shivering anonymously in the crowd that day.

Airbnb and Uber, their headquarters only a mile apart in San Francisco, are among the fastestgrowing startups in history by sales, market value, and number of employees. Together they embody the third phase of internet history, the

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post-Google, post-Facebook era of innovation.

They’ve attained these heights, and a combined worth of $99 billion, despite owning little in the way of physical assets. Airbnb can be considered one of the biggest hotel companies in the world— currently valued at $30 billion, about the same as Marriott International—yet it possesses no actual hotel rooms. Its founders are billionaires three times over, at least on paper. Uber is among the world’s largest car services, yet it doesn’t employ professional drivers or own any vehicles (save for a small, experimental fleet of self-driving cars).

Uber is valued at $69 billion, more than any other privately held tech startup in the world. Kalanick and Camp have an estimated net worth of about $6 billion each.

Both startups offered age-old ideas (share a vehicle, rent your home) with new twists and f­ ostered a remarkable degree of openness among strangers. And both companies have been ­generating nearly nonstop controversy in every urban market they enter. They’ve come to r­ epresent, at least to some, the hubris of the techno-elite. Critics blame them for destroying the basic rules of employment, exacerbating traffic, ruining neighbourhoods, worsening housing s­ hortages, and generally bringing unrestrained capitalism into liberal cities. Airbnb and Uber didn’t anticipate this degree of pushback, which might have undone less zealous, more circum­spect entrepreneurs.

So how did it all happen? How did each company maneuver past entrenched, politically savvy incumbents to succeed where others had failed? How much of their success was luck?

There are two little-known chapters in the histories of Uber and Airbnb, two pivotal moments when each discovered the secret weapon that would drive its rise. Both stories are at odds with the creation tales the founders like to tell, and both are crucial to understanding how these two companies defied odds, mayors, and city councils, and became widely admired, bitterly resented, and valued into the stratosphere.

The Growth Hacker By the spring of 2009, the newly renamed Airbnb was small and struggling. After graduating from Y Combinator, a startup school in Silicon Valley, Chesky, Gebbia, and Blecharczyk worked out of their apartment on Rausch Street in San Francisco’s South of Market district. They hadn’t solved the chicken-and-egg problem that confronts any new online marketplace: To get listings, you need customers, and to get customers, you need listings.

An early Airbnb PR stunt: Presidentialthemed cereal.

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“Every day I was working on it and thinking, ‘Why isn’t it ­happening faster?’ ” Chesky says.

“When you’re starting a company, it never goes at the pace you want”

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Airbnb ­founders (from left) Chesky, Gebbia, and Blecharczyk

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from middle school one day at age 12, when he took a book about computer languages off his dad’s shelf and devoured it. For Christmas, he asked for a book about Microsoft’s programming language QBasic, and he plowed through that one in three weeks.

Blecharczyk ran cross-country at his Boston public high school and excelled in his classes, but at home he had a far less conventional life. After learning to code, he started writing increasingly sophisticated programmes and giving them away on the internet, asking for voluntary donations.

One early piece of shareware allowed computer users to place digital sticky notes on their screens.

Later, another programme of his interfaced with America Online, which was then walled off from the broader web, and gave programmers a way to send internet messages into the e-mail and IM accounts of AOL members.

Soon after he posted that programme, Blecharczyk got a phone call. The caller had seen the e-mail tool and offered him $1,000 to write something similar. When he told his dad about the offer, Paul Blecharczyk responded: “Son, no one from the internet is going to pay you $1,000.”

Blecharczyk wrote the programme anyway and got his money. He later found out his customer had himself been hired to create it and was merely subcontracting out the work (and was surely paid more than a grand). The customer then introduced Blecharczyk to his client and to other potential clients, and suddenly Blecharczyk was earning considerable money coding a variety of tools for a nascent industry. Its practitioners innocuously dubbed it “e-mail marketing.” The world came to know it as something else: spam.

Continuing with this side work through college, Blecharczyk eventually developed a suite of e-mail marketing products to help spammers organise and orchestrate their campaigns and maneuver around internet service providers that were desperately attempting to shut off the deluge. The orders poured in, as did the cash.

His company went by several names at various times, including Data Miners and, eventually, Global Leads, which he incorporated in the State of Massachusetts after his freshman year at Harvard in 2002. At first he couldn’t accept credit cards, Blecharczyk recalls, so he had customers enter

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The few apartments on the site drew few guests looking for travel accommodations, and the lack of guests didn’t inspire potential hosts to make their homes available to total strangers over the internet.

“Every day I was working on it and thinking, ‘Why isn’t it happening faster?’ ” Chesky says.

“When you’re starting a company, it never goes at the pace you want. … You start, you build it, and you think everyone’s going to care. But no one cares, not even your friends.”

He and his co-founders like to recount their early misadventures trying to ignite the business.

They sold boxes of presidential-themed cereal, Obama O’s and Cap’n McCain’s. While Blecharczyk stayed behind to code, Chesky and Gebbia kept trying to build up early listings by visiting New York, Las Vegas, and Miami, among other cities, and organising meetups with any potential hosts they could find. They also cold-called propertymanagement companies, asking them to add multiple listings to the site, then abandoned that tactic when Chesky concluded these types of listings didn’t represent “the spirit of what Airbnb was”— hosts inviting travellers into their homes and facilitating authentic travel experiences.

The official company history focuses on Chesky and Gebbia’s prodigious ability to light up an online community through clever design and their enticing ideology of a new, open, noncorporate world order. But what really got it all going was the more technical, clever, and some might say devious work of Blecharczyk.

Just 24 at the time, Blecharczyk had coded the entire site himself, using what was then a new open source programming language called Ruby on Rails.

He devised a flexible, global payment system that allowed Airbnb to collect fees from guests and then remit them to hosts, minus commission, using a variety of online services such as PayPal. He’d also presciently hosted the site on Amazon Web Services, a new division of the e-commerce company that allowed businesses to rent servers via the internet only as needed, a huge cost savings that would become standard practice for an entire wave of new businesses.

“Joe and I would have crazy dreams and visions,” says Chesky of his co-founder. “Nate would find a way to make the wildly impractical possible.”

But that wasn’t the full extent of Blecharczyk’s talents. He was born in Boston, the son of a homemaker mum and an electrical-engineer dad who worked for a local industrial equipment manufacturer. His father, Paul, would have his sons do mechanical tasks around the house, and he brought home discarded equipment, such as an old Xerox copier, and encouraged them to take it apart in the backyard. “There is no job too big or too small for PB and sons,” he would say to his boys.

Soon, young Nate was consumed with computers. According to family lore, he was home sick

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their bank account details on his site, and then he printed the bank numbers on blank OfficeMax checques, wrote down the amounts he was due—­ typically around a thousand dollars—and went to the bank to deposit them. “Amazingly, this is legal,” he says, recounting his early success with delight.

“I was literally printing money!”

At the end of every week and after every three months, he gave his parents a financial report.

Naturally, Paul and Sheila Blecharczyk were mystified. “This was a whole new world,” Blecharczyk says. “I don’t think anyone really knew what to expect or what this was.”

The spam operation earned Blecharczyk close to $1 million, he says, and paid his college tuition and more. It also earned him a spot on an online blacklist called Register of Known Spam Operations, maintained by a London-based anti-spam organisation called the Spamhaus Project. On its page devoted to Data Miners, Spamhaus alleged: “Data Miners (aka: Nathan Underwood Blecharczyk) is one of the main sources of broken/open e-mail relays (used by spammers), and the tools to help locate and exploit them,” meaning Blecharczyk was finding SMTP servers that had an open connection between sender and receiver, which allowed him to slip in spam e-mails. Blecharczyk says he shut his business down in 2002 to focus on his college studies, because the work was taking up all his time.

He discusses all this years later from Airbnb’s offices and is unapologetic about how he earned his first considerable fortune. “All this was new,” he says. “There were frankly no rules around it.” That is technically true—the Federal CAN-SPAM Act that made sending or facilitating spam a federal crime wasn’t passed until 2003. But for years before that, spam was a well-known scourge that frustrated e-mail users and overwhelmed internet companies.

“It’s part of being a pioneer,” Blecharczyk says.

“It’s not just exciting to build things but to explore new fields and to recognise what comes with that is a lot of uncertainty. That’s very true today, and it has been true of Airbnb. It’s a whole new concept.”

PHOTOGRAPHS: COURTESY AIRBNB. DATA: AIRBNB, EQUIDATE, AIRDNA.CO

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Data: str, inside airbnb.com

,

When he graduated from college, Blecharczyk wasn’t just a skilled programmer but also the embodiment of a new Silicon Valley hero: the growth hacker. Growth hackers use their engineering chops to find clever, often controversial ways to improve the popularity of their products and services. Blecharczyk’s talents are recognisable behind two of Airbnb’s early, crafty schemes to usurp Craigslist, which had a far larger audience at the time.

In late 2009, a few months after Airbnb graduated from Y Combinator, Craigslist users in some cities began to notice something annoying.

Whenever anyone posted a property for rent on Craigslist, even if that person had specified that

44_FEA_UBER.indd 49

he didn’t want to receive unsolicited messages, he would get an e-mail touting Airbnb. If the apartment was listed in, say, Santa Barbara, the e-mail would read: “Hey, I am e-mailing because you have one of the nicest listings on Craigslist in Santa Barbara and I want to recommend you feature it on one of the largest Santa Barbara housing sites on the Web, Airbnb. The site already has 3,000,000 page-views a month.”

All these e-mails were identical except for the city, and they typically emanated from a Gmail account bearing a female name.

Dave Gooden, another online real estate entrepreneur, recognised the soaring popularity of Airbnb in 2010 and became curious about it.

Suspecting what was going on, he posted a few dummy listings on Craigslist, and then wrote a blog post in May 2011 about his findings. He ­c oncluded that Airbnb had registered Gmail accounts en masse and set up a system to spam everyone who posted on Craigslist. In his opinion, Airbnb’s activity was a nefarious “black-hat” operation. “Craigslist is one of the few sites at massive scale that are still easily gamed,” he wrote. “When you scale a black hat operation like this you could easily reach tens of thousands of highly targeted people per day.”

After Gooden’s post, a few technology blogs picked up the story and Airbnb was put on the defensive. Its explanation, which is somewhat difficult to believe, was that it had hired contractors who may not have been up to the company’s ethical standards. “One of the lessons you learned is you have to be very close, provide constant management and guidance to the people you’re working with,” Chesky said when I asked him about it onstage at an industry event after Gooden’s blog post.

A few years later, Blecharczyk offered a little more detail. They’d hired foreign contractors on Elance, an online staffing service, and were paying them per lead, or for every new host that would list on Airbnb. “Many companies bootstrap themselves off of finding a user segment on Craigslist and then building a better experience,” he says. The whole effort, he insists, was ineffective because Craigslist users were typically looking for long-term tenants, or roommates, rather than vacationers. “It did not

Airbnb guest arrivals

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$0

4/2009 1/2017

Airbnb is worth $30 billion, which comes to

$198 per guest arrival

Blecharczyk at home, 1999

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technique. He says Chesky apologised, stopped the campaign, and sent him two boxes of Obama O’s as a peace offering.

Blecharcz yk pioneered a clever use of Facebook’s early rudimentary ad system, which for the first time allowed companies to tailor and target ads to the interests and hobbies that members specified in their profiles. If a user said he liked yoga, for example, he would see an ad from Airbnb on Facebook that announced “Rent Your Room to a Yogi!” If a person liked wine, he’d see “Rent Your Room to a Wine Lover!”

Facebook ads were cheap, and people tended to respond to these eerily targeted messages. By February 2011, Airbnb had passed 1 million nights booked. Less than a year later, in January 2012, it passed 4 million. The chicken-and-egg problem was solved.

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Most listings, Airbnb ① Paris ② London ③ New York City ④ Rio de Janeiro

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⑤ Los Angeles

Travis’s Law

Kalanick: Granada Hills High School, Los Angeles, class of 1994

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The Uber app’s “de Blasio mode” was a dig at the New York City mayor

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FRANCE: GEORGES GOBET/AFP/Getty Images. data: uberestimate.com

It started with a tweet. On 11 January, 2012, almost three years after Camp and Kalanick discussed the idea for a luxury car-hailing service while freezing at the Obama inauguration, a short, cryptic message from a rider-advocacy group called D.C. Taxi Watch quoted the top taxi official in the US capital.

“Chairman Linton: @uber DC is operating illegally,” it read.

At the time, Uber was operating in only six US cities and was moving cautiously. Although Kalanick and his colleagues had come to distrust taxi ordinances as schemes designed to protect incumbents and their shoddy levels of service from new competition, they examined local laws closely and were flexible when required. Uber was by and large a law-abider, not a law-bender. That was about to change.

The tweet was sent from inside the drab, postwar D.C. Taxicab Commission headquarters in Anacostia. The city’s taxi drivers had packed a normally sleepy hearing to make their voices heard. Uber’s town-car drivers, they argued, had been illegally operating for the past two months.

Ron Linton, appointed only six months before

by Mayor Vincent Gray to head the taxicab ­c ommission, was inclined to agree. Linton, in his early 80s, was an avuncular policy planner and longtime reserve officer in the city police ­department who wore a stern disposition and an obvious toupee. He fashioned himself an agent of change and was determined to modernise the capital’s pitifully antiquated taxis, which ignored minority neighborhoods and didn’t accept credit cards. Back then they didn’t even have dome lights or a uniform colour to distinguish them from other cars.

But Linton was hellbent on reforming the

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end up driving any meaningful business,” he says.

But another strategy unquestionably did. A few months after the bulk e-mailing campaign to Craigslist users, Airbnb tried a new tactic.

Instead of luring Craigslist users to Airbnb, the company did the opposite: It allowed Airbnb users to take a streamlined version of their elegant listing and cross-post it with a single click on Craigslist. “Reposting your listing from Airbnb to Craigslist increases your earnings by $500 a month on average,” the site informed prospective hosts. “By reposting your listing to Craigslist, you’ll get the benefit of more demand, while still being able to use Airbnb to manage and moderate your inquiries.”

The tool, which Chesky says was originally the idea of adviser Seibel, was a boon for the company.

It established Airbnb as a way to create more visually appealing Craigslist ads and, in effect, dropped ubiquitous Airbnb ads into the network of its largest competitor. “It was a kind of a novel approach,” Blecharczyk says. “No other site had that slick an integration. It was quite successful for us.”

Other growth hackers noticed this and applauded it as a sophisticated technical ­achievement. Craigslist has different versions of its site in hundreds of cities, each with different web domains and menu formats. Blecharczyk had designed a way for Airbnb to post seamlessly onto the right site. “It’s integrated simply and deeply into the product, and is one of the most ­impressive ad-hoc integrations I’ve seen in years,” wrote Andrew Chen, a fellow growth hacker who now works at Uber, in an admiring blog post.

“Certainly a traditional marketer would not have come up with this, or known it was even possible.

Instead it [would] take a ­marketing-minded engineer to dissect the product and build an integration this smooth.”

Airbnb removed the tool in 2012 after Craigslist objected to these kinds of tactics, but by then it was too late. Like sucking through a straw, Airbnb was pulling listings and users over from Craigslist. It helped, of course, that its site was better designed and far easier to use and that it was constantly working to provide easier forms of payment, better mobile apps, and a safer experience where hosts and guests used their real ­identities and reviewed one another.

Blecharczyk also ran productive online ad campaigns during these early years. If people searched Google for an apartment in Boston, for example, Airbnb ads would pop up at the top of the page.

Blecharczyk and his marketing team became experts at finding the cheapest and most frequently searched keywords and at generating crisp ads that sometimes directly attacked rival home-­listing sites.

“Better than Couchsurfing.com!” some of Airbnb’s early search ads blared. Dan Hoffer, a Couchsurfing co-founder, e-mailed Chesky to complain about this

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i­ndustry from the inside and preserving the jobs of the region’s 8,500 licensed drivers. Uber is “­o perating illegally, and we plan to take steps against them,” Linton assured the boisterous drivers at the meeting, which was duly tweeted

by D.C. Taxi Watch.

That morning, Uber’s then D.C. general manager, Rachel Holt, was just settling into her new office.

As in the other cities Uber had entered, the maze of local taxi regulations didn’t seem to explicitly prohibit the company’s service. In D.C., yellow cabs had to use taxi meters to calculate fares, while limos could charge only a ­prearranged fare. But there was a third classification in the bylaws, under section 1299.1 in the District of Columbia Municipal Regulations, which seemingly contradicted the other two rules by stipulating that sedans carrying six passengers or fewer could charge on the basis of time and mileage. Uber’s approach clearly qualified.

After she saw the tweet, Holt e-mailed Linton’s office asking for a clarification. She was told she would hear back within 48 hours. That was a Wednesday, and Linton was true to his word.

On Friday, his office tipped local press to assemble outside the Mayflower Hotel on Connecticut Avenue. The chairman then ordered an Uber town car from the Cleveland Park neighborhood and took it to the hotel, where he was met at the circular driveway by five hack inspectors from the D.C. Taxicab Commission.

As three reporters watched, the officers slapped the stunned driver with $1,650 in fines for driving an unlicensed vehicle in the District and not having proof of insurance on hand, among other infractions. Then they impounded his car for the Martin Luther King Jr. Day long weekend. Standing in front of the press, Linton slammed Uber for unleashing regulatory havoc in the city. “What they’re trying to do is be both a taxi and a limousine,” he said. “Under the way the law is written, it just can’t be done.”

Holt, who’d arrived three minutes late to the scene after being alerted by the driver that trouble was afoot, was perplexed. According to the actual citations, Linton was going after the driver himself, a Virginia resident, not Uber, and he was doing it based on one of the city’s more arcane and senseless rules—that limo drivers must present a fare to the passenger in advance, rather than using a meter that measures time and distance. The fines seemed mostly aimed at intimidating drivers and keeping them from signing up with Uber. Nothing Linton did affected whether Uber could continue to operate in the city, much less slow its rapidly growing business there.

Over the next few months, Uber’s business in D.C. grew briskly. By then the issue of Uber’s regulatory status had fallen into the lap of a D.C. city councilwoman, Mary Cheh, the c­ hairperson

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Dummy fixed to a taxi during a protest in France, January 2016

of the Committee on Transportation and the Environment.

She’s a graduate of Harvard Law and a Democrat who’d struggled for years to drag anachronistic D.C. cabs into the modern age. “Even while Uber was coming around, I was in the process of trying to reform the taxicab industry, which was in the 20th, maybe the 19th, century,” she says.

She was also a pragmatist who sought peaceful ­compromise among many of the powerful local taxi interests in what was turning into a radio­ active topic. That spring she sent a letter to Linton and the D.C. Taxicab Commission, asking them to stop towing Uber cars, and then started working toward a compromise among all the parties, including those who were increasingly incensed

by Uber’s success.

What was needed, she reasoned, was an ­unambiguous clarification of Uber’s legal status that cut through the contradicting regulations and allowed it to operate in the city. Cheh spent the week after Memorial Day 2012 negotiating with Uber executives, and the result of those talks, Cheh thought, was an elegant short-term compromise that she called the “Uber amendments.” The regulations would give Uber legal sanction to operate.

But they also added a price floor, which required Uber to charge several times the rate of a taxicab.

What happened next would mold the political tactics of Uber and many of the tech startups that sought to emulate it.

In San Francisco, Kalanick had never fully agreed to a minimum fare. Now recognising the approaching competition from companies such as Hailo, a competitor in the UK, and realising that services like UberX would require aggressive price cuts, he decided he wanted to fight—to the consternation of his own lobbyists, who’d already provisionally agreed to Cheh’s deal.

Kalanick started hurling rhetorical hand ­grenades, labeling Cheh’s proposal a “price fixing scheme” on Twitter and accusing the council­ woman of “doing everything to protect the taxi industry.”

But Uber was going to need more than tweets to sway the D.C. City Council, so Kalanick decided to go right to his customer base. He sent an impassioned e-mail to thousands of Uber users in D.C.,

Most Uber surges during the week of 16 January ① Los Angeles Intl.

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Airport ⑦ San Francisco Intl.

Airport ⑧ Midtown New York ⑨ Portland Intl. Airport ⑩ Westwood, Los Angeles

“I know that you like to cast this as some sort of fight,” Cheh told Kalanick.

“Do you understand that? I’m not in a fight with you”

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“Brian would come back saying, ‘We have to be tougher!’ ’’ says an Airbnb exec of Kalanick and Chesky’s dinners. “And Travis would come back saying, ‘We have to be nicer!’ ”

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of fight,” she said. “Do you understand that? I’m not in a fight with you.”

“When you tell us how to do business, and you tell us we can’t charge lower fares, offer a high-­ quality service at the best possible price, you are fighting with us,” Kalanick replied.

“You still want to fight!” Cheh said in exasperation. The conversation turned to surge pricing, Uber’s controversial practice of charging more— sometimes a lot more—during rainstorms, blizzards, presidential inaugurations, and other times of peak demand. “I am curious about whether that is somehow a kind of gouging,” she said. “If there’s more demand, why should the rider have to pay more money?”

Kalanick launched into an explanation of the economy of Communist Russia and how long lines formed at stores for essentials such as toilet paper.

“It’s because the price of toilet paper was too low,” he said. “There wasn’t enough supply. Everybody could afford toilet paper, but they could never get it because there were too many people that wanted it and not enough people willing to supply it. And so that’s kind of the situation that gets created when you’re not able to change price.”

“So they didn’t have any toilet paper,” Cheh said with mock amazement.

“It was a rough situation,” Kalanick replied.

“Look, price controls by governments, you know, they don’t always go well. In fact, I’d say 99 per cent of the documented cases don’t go well.”

“But what I’m trying to figure out is why you get the advantage,” Cheh said, as she recalled standing in a long hot line in 1968 to view Robert Kennedy lying in state after his assassination and being horrified as vendors jacked up their prices for water. “I’m not sure I fully agree with you that this is really an economic mechanism that makes everybody happy!”

In San Francisco, Salle Yoo, Uber’s relatively new chief counsel, was watching a webcast of the hearing. According to an Uber lobbyist named Marcus Reese, at around this point in the testimony, she started texting him, asking him to pull Kalanick from the stand as soon as possible. “He’s in the middle of a public hearing,” Reese texted back. “I can’t just walk up to him and say you’ve got to go!”

Pro-taxi councilman Jim Graham, wearing a taupe suit and a gold bow tie, was sitting to Cheh’s right. “I’m trying to make a point,” he scolded Kalanick. “And the point that I’m trying to make is that if you remain unregulated, and the taxicabs remain increasingly more regulated, there’s a fundamental inequity to that.” He urged Kalanick to reconsider a minimum fare. “I don’t want this city to be [all] Uber. I really don’t. Because there’s too much of a history of our taxicab industry.”

“If you allow competition, what you’ll get is a better taxi industry,” Kalanick said.

data: uberestimate.com

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complaining that the City Council would make it impossible for the company to lower fares and ensure reliable service. “The goal [of the Uber amendments] is essentially to protect a taxi industry that has significant experience in influencing local politicians,” he wrote, basically accusing Cheh and her colleagues of corruption.

Then he supplied the phone numbers, e-mail addresses, and Twitter handles of all 12 members of the City Council and urged his customers to make their voices heard.

On Uber’s website the next day he posted an open letter to the council members, writing ominously, “Why would you so clearly put a special interest ahead of the interests of those who elected you? The nation’s eyes are watching to see what D.C.’s elected officials stand for.”

Cheh was taken aback by the ferocity of the response. Within 24 hours the council members received 50,000 e-mails and 37,000 tweets with the hashtag #UberDCLove. When they arrived for the last session of the summer on 10 July, Cheh’s colleagues all turned to her in confusion and fear.

The overwhelming response from its customers in the capital presaged the political campaigns Uber would later mount in places such as London, New York, Florida, and California.

Cheh’s price-floor idea was gone by midmorning, and an alternative amendment was proposed allowing Uber to operate legally in D.C. until the matter was revisited at the next meeting in September.

Kalanick got plenty of advice from his lobbyists in advance of his testimony that month in the historic Wilson Building on Pennsylvania Avenue.

Play it straight. Just stick to the talking points and don’t engage in a philosophical back-and-forth.

The real advocacy takes place in other forums. In public hearings, try to act benign and respectful.

He started testifying at 1:15 pm, after a morning that had included appearances by Linton, various drivers, and Hailo founder Jay Bregman, who wore a suit and tie and pointed out that Hailo worked harmoniously with regulators in London and Dublin and planned to do so in D.C. as well.

But Kalanick wasn’t in the mood for gentle courtship. Facts and intellectual arguments, not charm, were his weapons, and unlike Bregman, he wasn’t ready to kiss any political rings. Wearing a blue blazer, white shirt, and no tie, he interrupted Cheh’s first question with the words “I would disagree with that characterisation.” Things went downhill from there.

“You wanted to make sure that there was a minimum fare on our services so that only rich people could use Uber, not people of middle income,” Kalanick told her.

Cheh pointed out that the proposed and discarded price floor was meant as a way to ensure a peaceful transition to a more permanent arrangement. “I know that you like to cast this as some sort

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“You can’t have competition where one party is unbridled and able to do whatever they please whenever they want to do it and the other party has their hands and feet tied,” Graham said. “That’s not competition.”

“That means drivers are making a better living and riders are getting a better service,” Kalanick said. “And that doesn’t sound bad to me.”

Graham said that many taxi businesses in the District were small businesses. “This is a good thing. This is something we want to protect and nurture. This is not something we want to destroy for the sake of some kind of consolidation into a big company.” Kalanick tried to interrupt him. Graham snapped, “May I be a member of this committee, please? Do you mind?”

Kalanick laughed. “Go ahead.”

After Kalanick left the stand, Graham, visibly infuriated, suggested reinstating and even increasing a proposed minimum fare. Janene Jackson, a deputy chief of staff to Mayor Gray, came up to Reese and Claude Bailey, a well-known local lawyer that Uber had also hired, and offered her own memorably harsh review of the testimony.

“Never bring that guy back here!” she said, according to Reese. Later, Jackson couldn’t recall saying that specifically. “The hearing was probably a bad one, because I have no recollection of it, except that he pissed almost everyone off,” she tells me.

And yet. By December, with Uber growing by 30 per cent to 40 per cent each month in the capital, Cheh and her colleagues, knowing that its users were ready and willing to defend the service, succumbed to the tide of political advocacy and essentially rolled over. On 4 December, the Public Vehicle-for-Hire Innovation Amendment Act defined without ambiguity a new class of sedans that could be dispatched via a smartphone app and could charge by time and distance.

It passed the Washington, D.C., City Council unanimously, garnering even Graham’s vote, without debate. “The real issue is how receptive the government is to the progress of the people,” Kalanick told me a few years later. “It’s not about the city council or the government, it’s actually about how the incumbent industry is persuading them, let’s say, to do what I would consider the wrong thing.” Ultimately, he added, “D.C. was very receptive. But it took them time to see it and feel it.”

When traditional advocacy failed, Uber mobilised its users and directed their passion toward elected officials. The company wasn’t the first to employ this tactic, but it quickly became among the best at it, leveraging it in early battles with Cambridge, Massachusetts, Philadelphia, and Chicago—and usually winning.

Kalanick had broken every rule of advocacy.

Nevertheless, Uber’s lawyers and lobbyists, who’d begged him, unsuccessfully, to seek compromise and testify with humility, began to whisper in

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reverent tones about a new political dictate that contravened all their old assumptions. Travis’s Law. It goes something like this: Our product is so superior to the status quo that if we give people the opportunity to see it or try it, in any place in the world where government has to be at least somewhat responsive to the people, they will demand it and defend its right to exist.

Over the years, Chesky and Kalanick struck up a ­sporadic friendship. Every few months or so, they would go out to dinner in San Francisco, first by themselves, then with other entrepreneurs or with their girlfriends to discuss their companies’ twin successes and their common experiences battling regulators and lawmakers. “I think we learned a lot by watching each other,” Chesky says. “There are only so many people in the world that you can relate to [who share] your position.”

Employees at both Airbnb and Uber remember these dinners well. Says one Airbnb executive who was also close to Uber employees: “Brian would come back saying, ‘We have to be tougher!’ and Travis would come back saying, ‘We have to be nicer!’ ” Kalanick’s realisation may have come too late.

His company’s reputation as a ruthless aggressor was molded by such tactics as introducing ridesharing in Europe, where it was expressly illegal, and adding a “de Blasio mode” to its app over the summer of 2015. It was a dig at New York City Mayor Bill de Blasio, which showed a hypothetical alternate reality with 25-minute wait times for Uber cars, should his proposed vehicle cap be put in place.

As the D.C. City Council had done years before, de Blasio meekly withdrew the proposal when confronted with a torrent of criticism and activism from Uber drivers and riders.

Chesky and his team watched Uber’s travails, following Kalanick’s series of defiant stare-downs with city councils and regulators, and insisted somewhat dubiously that Airbnb’s approach was different and softer than Uber’s. “They have their own way of seeking growth,” says Jonathan Mildenhall, who joined Airbnb as chief m ­ arketing officer in 2014. “I think for us, our community and the humanity of our community actually drives a lot of the things we do. So we approach any kind of awkward situation or any challenge with a lot of empathy and a lot of open collaboration. ... We don’t want to kind of bulldoze our way into success. We a ­ ctually want to partner our way in.”

Airbnb’s reputation survived this period of feverish empire building far better than Uber’s. But like Uber, when confronted by laws it found unjust, or perhaps just inconvenient, Airbnb didn’t slow down. As Airbnb grappled with unfriendly governments in New York and other cities, it turned out that the upstarts were far more alike than Chesky and his colleagues cared to admit. <BW>

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red hot saunas

the rise and rise of steve cohen

all about brass

Game On! Jacobe Chrisman,s Wonder Forge has perfected the not-boring board game

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Spurred by hits such as Settlers of Catan and Cards Against Humanity, the overall US board game market grew from $794 million in 2008 to $1.6 billion in 2015, or more than 100 per cent, according to NPD Group’s retail tracking service. The service doesn’t break out figures for preschool and children’s sales. But in a separate report from November, NPD found that in the first three quarters of 2016, children’s and preschool game sales took in $400 million, a 20 per cent increase over the same period in 2015.

“Wonder Forge is able to reach beyond that niche of progressive parents” who worry about the havoc wreaked on their toddlers’ brains by too much screen time, says Jon-Paul Dyson, a director of the International Center for the History of Electronic Games at the Strong National Museum of Play in Rochester, New York. Like smoothies blended with spinach, Wonder Forge games are designed to sneak healthy stuff into something kids enjoy. None of it’s something a boy or girl would notice while playing Disney Princess Enchanted Cupcake Party, but it’s the velvet rope separating Wonder Forge’s games from its competitors’. Its licensing deals allow beloved characters such as, say, Frozen’s Elsa, to teach skills both social (negotiation, empathy, cooperation) and cognitive (pattern recognition, strategy, balance). “Playing a game, you learn simple things like how to take turns, how to be part of a team, how to bluff, how to win or lose without being a jerk,” says Stephen Conway, a board game designer who runs the blog Major Fun. “But you also get to know the people you’re playing with. You learn about them, and they learn about you by how you play.”

Ironically, Chrisman turned cardboard evangelist during the late-’90s dot-com boom. In 1999, after selling for an undisclosed amount a data-­mining software company he founded, he intended to go into the video game business. Instead, Chrisman was recruited to work at a new board game company two former Microsoft employees had started the previous year. It was called Cranium. The Trivial Pursuit-Pictionary-charades hybrid game of the same name that it designed for age 12 and up sold 15 million copies before Hasbro bought it and the rest of Cranium’s catalogue in 2008 for $77.5 million.

Although Chrisman left Cranium in 2004, he remained, he says, a “significant shareholder.” (He won’t disclose his takeaway from the sale.) After returning from a 2005 surfing sabbatical, he realised there was a gap in the board game market, which skewed toward innovative adult strategy games or

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n a large, reclaimed-metal conference table in the lofty, brightly painted Seattle offices of Wonder Forge—among roaming dogs, treadmill desks, a surfboard, and Snoopy and Darth Vader figurines—the company’s latest board game is ready for play. Flight of the Jaquins, which is scheduled to be released in May, is based on the Disney Channel’s Elena of Avalor; Elena, as anyone with young kids knows, is a Latina princess with magic powers. The game’s cardboard playing surface and other components will look familiar to adults who grew up with Monopoly, Sorry!, and the Game of Life: illustrated instructions in English (and Spanish); coloured dice that correspond to treasure cards; a stack of spell-casting cards; and four plastic Jaquins, which are mythical flying jungle cats. The centrepiece is a pop-up Missionstyle castle where Elena and her friends live, and it presents Wonder Forge Chief Executive Officer Jacobe Chrisman, 43, with a challenge. “How do we do something big and real but also make it safe for kids and resilient enough that it won’t break if your brother steps on it?” he asks, examining the proto­type.

“All of which has to fit into a $15 package.”

It’s not the first time Chrisman has had to ask this question.

Potential smushings by rambunctious siblings are a habitual concern for the company, which, since its founding a decade ago, has become the dominant maker of licensed children’s board games. Many in the toy industry assume that the way to win a kid’s heart is via apps and other technological gewgaws, but Wonder Forge has carved out a lucrative niche in the board game market. You might not recognize the name, but chances are you’ve come across a Wonder Forge invention: The company sells 8 million games annually, for age 3 and up, at retailers such as Walmart, Target, and Toys “R” Us. Its 120 titles feature characters including Peppa Pig, Curious George, and Mickey Mouse, as well as those from the Frozen film and the Marvel universe.

y g it L w in e to g a m r p th A Ja

Marketing uninspired games for children. “What people were used to 10 or 12 years ago were licensed games that were either so simple you’d throw them away or something you’d played before,” like a Disney version of Monopoly, Chrisman says. His idea was to combine the originality of adult game design with the popular characters youngsters love.

Wonder Forge began by licensing popular preschool book franchises—Dr. Seuss’s The Cat in the Hat, Eric Carle’s The Very Hungry Caterpillar, and Richard Scarry’s Busy, Busy Town—and inventing games that brought these stories to life. Rather than base each one on the predictable “roll and move” formula most competitors rely on, Wonder Forge makes products that reward different styles of play—tabletop-based strategising, performing physical challenges, and simple memory matching.

(Wonder Forge works with Seattle design firm Forrest-Pruzan Creative to shape the look of its merchandise; the principals were colleagues at Cranium.) The Cat in the Hat’s I Can Do That! requires players to crawl backward under a foam stick with a plastic boat between their knees. All props are included.

st m r e s at ol r

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photograph by meron menghistab for bloomberg businessweek; courtesy wonder forge (4)

on ul y n h, o d y, m s ige o n n. u .” g se n o It s d st

Like smoothies blended with spinach, Wonder Forge games are designed to sneak healthy stuff into something kids enjoy The company’s games are imagined for the youngest of the young but geared no less to parents. “A great kid’s game is great because it’s a great game” regardless of what age range it’s intended for, says Steve Tassie, chief curator of Snakes & Lattes, a popular game cafe and store in Toronto. (Put another way: “Any preschool game worth its salt is a fabulous drinking game,” Chrisman jokes.) This whole-family approach isn’t easy. The younger the players, the more limited a toy’s ability to engage kids who are even slightly older. Wonder Forge games have won industry awards for their cross-generational appeal—the instructions for I Can Do That! explicitly recommend adjusting or ignoring rules depending on the players, which isn’t the industry norm.

And Flight of the Jaquins will be

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one of the company’s first attempts at growing with its fans: The rules will change depending on which of three challenge levels are accepted; in each one, a player adds additional cards, characters, and pieces in what Chrisman calls a “graceful graduation of difficulty.”

Wonder Forge and Disney began working together in 2012 after an executive played I Can Do That! with his daughter and was impressed enough to reach out to Chrisman. Since then, the entertainment company has been Wonder Forge’s biggest source of licensing revenue growth. Disney’s Eye Found It! is evidence of how Wonder Forge envelops kids in all things Disney. The board is 6 feet long, and players have to work together to get their favorite character to Cinderella’s castle before midnight. To advance, participants dive into a Where’s Waldo?-style treasure hunt—or, depending on your perspective, branding buffet—for items from dozens of Disney movies: the orange pylons from the Cars auto repair yard and roses from the little French town in Beauty and the Beast, for example. The game, introduced in 2013, has sold more than 750,000 units, encouraging other versions with Disney properties such as Star Wars. The sequels aren’t just re-skins either. Instead of a 6-foot-long rectangle, the Star Wars rendition is made up of seven planets, including the Death Star; elements of game play change, too.

Sales of Wonder Forge games have increased more than 30 per cent annually over the past four years, and Chrisman says yearly revenue is in the “double digit millions.” This month the company will formally merge with Ravensburger, a German game and puzzle giant that’s been around since the 19th century and has had a controlling stake since 2011. The arrangement promises to help Wonder Forge leverage its licensing relationships to enter the puzzle market. Wonder Forge is also making non­licensed games skewed to an older audience. Last summer it rolled out three exclusively at Target, including a Clue-like jewel thief game called Suspicion.

Wonder Forge spends nothing on advertising. It markets, in part, through parent and toy blogs; the company has a database of 3,000 tester families across the country who receive reviewer copies. Ultimately, Chrisman says, good games sell themselves. His fiercest critics remain his daughter, 7, and son, 5, who make the slightly unreasonable demand that he bring home a new game every night. “When I didn’t have kids, I always second-guessed myself,” Chrisman says. “Now, if I see them getting into a game, I say, ‘We have something here.’ ” <BW>

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Health

Why are these a thing now?

The technology behind infrared saunas isn’t new, but the buzz around them has been growing since 2009, when Dr. Mehmet Oz went on The Oprah Winfrey Show and extolled their benefits. (No, audience members didn’t receive free infrared saunas.) Since then, gyms, spas, and wellness centres across the country have been installing the rooms. Gwyneth Paltrow endorsed them in her lifestyle publication, Goop, and power couple Jennifer Aniston and Justin Theroux installed one in their home gym.

See the L

The popularity of infrared saunas he How are they different from Proponents say the lower temperatures of infrared saunas let you stay in them longer to reap greater benefits—from weight loss to increased circulation to “cellular detox.” “There are two components to detoxing: One is supporting your detox pathways, so that your body is able to flush out the toxins”—everything from environmental pollutants such as cadmium and arsenic to alcohol and sugar—“and

the ot Mye Solut Infrar help s

250°

“D I’m fry

Traditional saunas can reach 220F

200°

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150° Infrared saunas hover at about 150F

Does this really work?

A 2012 study in the Journal of Environmental and Public Health found traces of lead, arsenic, cadmium, and mercury in participants’ sweat and concluded that “sweating deserves consideration for toxic element detoxification.” As far as infrared’s particular effectiveness, there’s no scientific evidence. But many people find heat treatments of all types relaxing, and destressing has its own health benefits.

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he Light

ed saunas heats up. By Laura Bolt

ent from a traditional sauna? the other is repairing the damage done by the toxins,” says Dr. Amy Myers, author of the New York Times best-seller The Autoimmune Solution. “Traditional saunas cause your body to sweat out toxins.

Infrared saunas not only flush out toxins more effectively, they also help your cells and tissues regenerate and support your immune system, which is why I recommend them to my patients.”

New York Higher Dose $65 for 60 minutes; higherdose.com Booths are equipped with medical-grade chromotherapy lighting in several colour options. Red is said to be good for energy, blue for relaxation, and yellow for stimulating creativity.

Floating Lotus $65 for 30 minutes; floatinglotus.com In addition to its infrared sauna, this airy Midtown Manhattan space also has a Himalayan salt cave—a room made of pink sea salt, which is said to treat inflammation.

“Does it look like I’m under a french fry lamp? Yes. Do I care? No.”

Los Angeles Sweatheory $35 for 60 minutes; sweatheory.com This Hollywood-based sweat studio offers lavender- or eucalyptus-scented towels for your post-session rinse.

If you’ve got time, or just happen to be a Bowie fan, add on a Ziggy Stardust—a crystal healing treatment said to refocus and realign your energy—for an extra $150.

Saunabar $70 for 40 minutes; saunabar.com

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Saunabar’s giant clamshell-style, single-occupancy SaunaPods are lined with more than 400 jade stones— nonporous, naturally antibacterial rocks—to conduct infrared heat, while the air around you stays cool.

Chicago Cleanse Chicago $30 for 30 minutes; cleansechicago.com This holistic health centre uses hypoallergenic basswood in its infrared sauna rather than the more typical Nordic spruce or cedar, making it a good choice for even the most sensitive sweaters.

What if I want to be like Jen and Justin and not leave the house?

Clearlight Saunas (starting at $2,295; healwithheat.com) has been selling infrared booths to consumers for more than 30 years, complete with accessories such as stereo systems. SaunaRay booths (saunaray.com) boast pure ceramic heaters, which are thought to generate purer infrared radiation, and basswood grown near its headquarters in rural Ontario.

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photograph BY LAUREL GOLIO FOR BLOOMBERG BUSINESSWEEK

t you ss to onents your mental —“and

Where can I try one of these?

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The Critic

the comeback kid

S 60

teve Cohen had a target on his back. The government was determined to prove that the hedge fund manager, known on Wall Street for eye-­popping annual returns of 30 per cent, made some of his billions trading on inside information. Sheelah Kolhatkar, a staff writer at the New Yorker (and a former correspondent for this magazine), has written a fast-paced tale of how the feds worked for almost a decade to build a case against him, and why they couldn’t indict him, in Black Edge: Inside Information, Dirty Money, and the Quest to Bring Down the Most Wanted Man on Wall Street (Random House, $28).

The story follows Cohen from his early days managing money at a scrappy brokerage firm, Gruntal & Co., to his founding of SAC Capital Advisors in 1992 and its dissolution in 2014. Along the way, SAC grew to manage almost $17 billion, much of it Cohen’s own money. He outbid other titans for fancy real estate and modern art, including Damien Hirst’s shark suspended in 4,360 gallons of formaldehyde, for which Cohen paid $8 million.

Kolhatkar paints a picture of a reclusive man who’s quick to anger, driven by greed, and ­insecure about his place in moneyed society. (Growing up, the Cohens were on the “low end of the financial spectrum” in prosperous Great Neck, New York). He’s also an unflappable trader. At least one employee Kolhatkar quotes said his understanding was that giving Cohen your best trading ideas meant giving him inside ­information— the “black edge” of the book’s title. While he was at Gruntal, allegations emerged in a since-dismissed lawsuit from Cohen’s

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ex-wife that he traded on nonpublic information. At SAC, Cohen didn’t ask for details on how a portfolio manager got his ideas, just his level of conviction.

The narrative weaves Cohen’s ­middle-class-to-riches story into the government’s simultaneous decade-long pursuit of other suspected Wall Street wrongdoers. Slowly, the US Securities and Exchange Commission and the FBI uncovered c­ onsultants sharing

nonpublic information with their hedge fund clients and analysts passing along inside information to their friends and bosses. Some ­conversations were caught on wiretaps. Time and again, the FBI approached these analysts and ­portfolio m ­ anagers at their homes or after a workout: “We want to talk to you about insider trading,” agents would begin.

Usually, the targets folded, confessing to illegal activities and turning on their contacts or their superiors.

The government’s pursuit of insider trading, and Cohen in particular, was covered extensively by major media outlets, including Bloomberg News.

Kolhatkar smartly pieces together the best of that reporting and refines our understanding of the saga with ­as-yet-unpublished tidbits she gleaned through interviews and court documents.

(Cohen declined to be interviewed for the book). Most interesting among these details are government missteps. The SEC sat on reports of suspicious trading at SAC for almost a year, and the FBI put a wiretap on Cohen’s Connecticut home just when he was spending most of his time in the Hamptons.

Kolhatkar started her reporting in 2012, when Cohen’s future looked bleak, and she undoubtedly expected a different ending for the book. The government had just arrested Mathew Martoma, a SAC portfolio manager who they alleged had received inside information on the results of a drug trial and who’d had a 20-minute phone call with his boss that caused Cohen to reverse a giant trade. The feds expected Martoma would testify against him to avoid going to jail.

Instead, Martoma refused to cooperate and went to prison. Later, a court threw out some of US Attorney Preet Bharara’s convictions, including one against another of Cohen’s senior traders.

The government wanted to put Cohen in jail—or, failing that, keep him from managing clients’ money forever. Instead, SAC, not Cohen himself, pleaded guilty to securities fraud in 2013, and the fund paid a record $1.8 billion fine. After dissolving SAC, he set up a family office, earning back the fine and more in the year after the guilty plea. The SEC banned Cohen from managing outside capital for two years starting in January 2016. He’s already plotting his return. <BW>

illustration by matija medved; PHOTO: SIMON DAWSON/BLOOMBERG

Sheelah Kolhatkar’s Black Edge dissects the government’s failed case against hedge fund giant Steve Cohen. By Katherine Burton

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Design

Top Brass

Made of six interlocking brass pieces, it’s a great thing to fiddle with while you’re brainstorming— or just want to look like you are.

Outfit your desk in the metal of the moment

By Monica Khemsurov

((15))

((14))

((1))

((1)) Ball puzzle

by Charles O. Perry $80; thefutureperfect.com

((5)) Oversize paper clip

by Carl Auböck From $220; odetothings.com

((11)) Brass Hemisphere

by Fort Standard From $110; fsobjects.com

((2)) Brass OK magnifying glass

by Jonathan Adler $150; jonathanadler.com

((6)) Rollerball pen

by Ystudio $99; store.leibal.com

((3)) Bureau d’Architecte tape dispenser by Joseph Dirand for Puiforcat $4,600; Cristina Grajales Gallery, 152 W. 25th St., New York

((7)) Brass pencil cup

by Appointed $95; needsupply.com

((12)) Metallic assorted mini softcover notebooks $8 for a set of three; poppin.com

((4)) Brass tray

by Tenfold New York $72; theline.com

((13)) Archer bookends

by Aerin $725; aerin.com

((8)) Brass letter opener

by Sir/Madam $31; burkedecor.com ((9)) Gold outline clips set by Hay $12; poketo.com ((10)) Midback desk chair

by Meelano $335; wayfair.com

((8))

Even Patrick Bateman would have found this worthy of his business cards.

((14)) Wave card holder

by Nina Cho for Souda $24; soudasouda.com ((15)) Strum organizer

by Umbra $10; umbra.com

((11))

((5))

((7))

((2))

((12)) ((9))

((4))

((6)) ((10))

((3))

Read the fine print and signal your agreement with the help of this cheeky magnifier.

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photograph BY ROBIN STEIN FOR BLOOMBERG BUSINESSWEEK

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((13))

Gold- and silver-plated, it might be the most expensive tape dispenser ever made.

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What I Wear to Work

Lisa Turner

Etc.

Tell me about that necklace under your scarf. It’s bone and raffia?

Yes. I found it in an antiques store where the owner had collected lots of African things. I enjoy oddities and curios like that—skulls and bones and such.

59, interior designer, Trinity Mercantile & Design, Decatur, Georgia.

Solomon Brothers What’s your job?

I’m in and out of my store ­creating new spaces. I take meetings with clients and try to keep their dogs off me while I’m at their houses.

It’s glamorous and unglamorous.

Judy Parady Studio

How would you describe your style?

I dress monochromatically or bichromatically.

I don’t ever wear prints.

Urban Outfitters 63

Laces of Lore

Your shoes must be functional, too.

I love how high the heel is.

They’re still comfortable, even though they’re so tall.

I wear these practically every day.

Urban Outfitters

photograph by peter B. samuels for bloomberg businessweek

Are those jeans or pants?

They’re jeans, even though you can’t quite tell. Most of my pants for work are jeans, because I have to do physical stuff—measuring and moving furniture, or directing people with light fixtures. I have to wear things I can function in.

That’s a colourful jacket.

It’s the only green thing I own. It’s a heavy linen, and you can wear it when it’s cool. You don’t need thick coats here.

7 for All Mankind Your scarf is huge.

Getting it around my neck requires a lot of looping and knotting so it doesn’t hang all the way to the ground.

Sol Sana

That’s a nice wedding ring.

When I was looking for one more than 16 years ago, I owned a construction company and was in the field, so I needed a ring that wouldn’t get knocked off or hooked on something. It’s the constructionpractical ring with diamonds.

Interview by Jason Chen

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How Did I Get Here?

Robert Hohman Co-founder and chief executive officer, Glassdoor

“I was a nerd: I started the computer club and was an avid member of chess club.”

Education

With a Stanford roommate, 1989

Louisville High School, Louisville, Ohio, class of 1989 Stanford, class of 1992

Work Experience

1990–94 Co-founder, Victory Briefs

64

“There were these gods of tech at Microsoft. The engineers were the most talented individuals that, to this day, I’ve ever gotten to work with.”

1993–96

Development lead, designer/developer, program manager, Microsoft

Getting his head shaved in solidarity with Expedia founder Rich Barton, who lost a bet to Hohman, 1998

1996–2003

Development manager, vice president for hotels and packages, senior VP for store and cruises, SVP for cruises and packages, Expedia

“Back then it was hard to build a website. We had to invent almost anything we needed. I was building one of the world’s largest vacation packagers, and I couldn’t go near a Ritz-Carlton without being invited to stay in the presidential suite.

It was so awesome.”

2003–04

President, Classic Custom Vacations

2004–06

President, Hotwire

2006–07

Player, World of Warcraft

2007– Present

Co-founder and CEO, Glassdoor

Glassdoor is an online database offering transparent salary information, anonymous company reviews, and job listings.

Life Lessons

With Hillary Clinton at a roundtable on pay inequality, 2016

“People were making a decision about where to work and how much money to take for that work with almost no information. This year, for the first time, we have a rich enough data set to see pay transparency and gender inequality in individual companies. I’m proud of that.”

av e to

“Hotels don’t give presidential suites to the discount outlet guy.”

“I took it seriously: I wanted to be an amazing Orc warrior.

And I learned what it feels like to be part of an online community. I hit the maximum level, and the next day I went and started Glassdoor.”

“It was the superluxury-vacationpackaging brand of Expedia.

We were the largest tour provider to Hawaii, so I spent a lot of time there, which was fun.”

1. “Amazing people are normal people who have done amazing things.” 2. “A balance between family, personal, and work time is mostly an act of will. You

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h

Courtesy subject (5). Courtesy World of Warcraft (1).

Getty Images (1)

“In college I started a company with a debating friend of mine. We sold debate briefs, which are books on how to debate. It was supernerdy, but it was pretty successful.”

“Steve Jobs talked to my computer science class, and he was just this interesting, relatively normal guy in a black turtleneck.” choose to do that.” 3. “Don’t optimise career changes to make the most money. The money will come later if you learn.”

Stanford School of Engineering, class of 1993

As one of Louisville High’s Most Likely to Succeed, 1989

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