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Bloomberg Businessweek USA - January 04, 2018

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January 8, 2018
Life and Death on the Third Shift
p36
PHOTOGRAPH BY SARAH ANNE WARD FOR BLOOMBERG BUSINESSWEEK; STYLIST: PAOLA ANDREA RAMIREZ
January 8, 2018
3
42
Brooks’s $150 Levitate shoes aren’t designed for “runners”
CONTENTS
Bloomberg Businessweek
January 8, 2018
IN BRIEF
8
○ Germany puts Twitter on notice ○ Spotify will try a direct listing instead of an IPO ○ A bitcoin ban in Egypt
REMARKS
The odds are improving for real
change in Iran
10
1
BUSINESS
14
Masayoshi Son,
the Buffett of Japan,
takes Uber for a ride
16
Air Berlin is gone. Is
Lufthansa ready for the
foreign competition landing
at German airports?
4
17
VIEW
Macau deals in some big
new players
2
18
12
TECHNOLOGY
HQ Trivia is:
(a) wicked fun,
(b) a harbinger of
dystopia, or
(c) another unicorn
headed for a
tragic end
20
CES in Las Vegas is
relevant again
21
Bitcoin burning a hole
in your pocket?
FINANCE
22
Pingpong, lattes,
beer on tap—you
know, just another
day at the office
23
Even Harvey, Irma, and Maria
couldn’t sink the market for
catastrophe bonds
24
The University of Illinois
bought the farm—in a
good way
ECONOMICS
14
“Robots
everywhere,
that’s the vision
we share”
We are powerless over
social media, but our
lives don’t have to be
unmanageable
POLITICS
27
Can the economy
thrive when these
key curves go flat?
32
Pocketbook issues
send Iranians into
the streets
29
Why Ukraine refuses to do
the one thing that might
help it get back on its feet
34
CIA chief Mike Pompeo
has flourished in Trump’s
first year
31
For the under-35 set,
2017 was indeed #happy
Bloomberg Businessweek
January 8, 2018
PURSUITS
FEATURES
36
42
Working the third shift at the
slaughterhouse, America’s
most brutal job
Runners love Brooks. But
what about “people who run”?
53
Where to travel
in 2018, month
by adventurous
month:
Bahia, Patagonia, Jordan,
Scotland, New Orleans,
Singapore, Tunisia,
Copenhagen, Slovenia,
Borneo, Cambodia, Tbilisi,
Seoul, Fiji, Namibia,
St. Kitts, Abu Dhabi,
Tanzania, and, yes,
Florence
6
64
46
Game Changer:
The mastermind
behind Chase’s
Sapphire Reserve card
takes on banking
Zimbabwe must build a
functioning state out of the
wreckage Mugabe left behind
21
29
31
46
Roger Ver, aka
Bitcoin Jesus
Oleh Lyashko
Katy Perry
Emmerson
Mnangagwa
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Cover:
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Businessweek
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CONTENTS
IN BRIEF
Europe
○ Germany started
enforcing a new
law that requires
social media
networks to deal
with hate speech
within 24 hours.
Asia
○ BP said it would take a
$1.5b
○ Ryanair braced for Brexit.
The Irish carrier had a
subsidiary apply for a license
to avoid being classified as a
foreign entity in the U.K.
fourth-quarter charge related
to the U.S. tax overhaul.
The company said lower
corporate rates will benefit
BP over time.
Twitter promptly suspended the
account of far-right leader Beatrix
von Storch, who’d called Muslims
“rapist hordes.”
ELEANOR: CHRISTOPHER FURLONG/GETTY IMAGES. RYANAIR: NICOLAS ECONOMOU/NURPHOTO VIA GETTY IMAGES. KIM: AFP/GETTY IMAGES.
KOTB: NATHAN CONGLETON/NBC VIA GETTY IMAGES. ALLAM: KHALED DESOUKI/AFP/GETTY IMAGES
8
○ Diageo suspended all its
advertising on Snapchat
after U.K. regulators said
the liquor giant wasn’t doing
enough to keep the posts
away from those younger
than 18. The company
had made a “sponsored
lens” that let users add a
mustache reminiscent of
the one sported by the
pirate on bottles of Captain
Morgan rum.
○ China froze
production of 500
vehicle models to
reduce emissions.
The move affects domestic
carmakers, joint ventures with foreign
brands, and Dongfeng Motor, a stateowned giant.
○ “In the competition with
the Pentagon and Silicon
Valley on the one hand
and China on the other, only
Europe in its entirety has the
necessary operational size.”
○ Al-Futtaim Group, a
franchisee, bought 27 of the
stores it operates for the
U.K.’s Marks & Spencer in
Hong Kong and Macau, for
an undisclosed sum. The
British retailer is retreating
to focus on its business in
Europe.
Günther Oettinger, the European commissioner for budget and human
resources, on the need for a “United States of Europe.”
○ Banks rushed to comply
as a wave of regulation
aimed at boosting investor
protection took effect.
Among other things, the
measures, called MiFID II,
make it easier for small
trading platforms to challenge
established exchanges.
○ Waves whipped up by Storm Eleanor lashed against the sea wall in New
Brighton, U.K., on Jan. 3. High winds and torrential rain in parts of the U.K. and
Ireland led to flooding and electricity outages in some areas.
○ Nepal barred
solo climbers
from Mt. Everest
and the rest of its
mountains after
at least six people
perished last year.
The measure
could mean more
work for guides
and Sherpas.
By Kyle Stock
Bloomberg Businessweek
January 8, 2018
Americas
○ North Korea reopened
a hotline to South Korea
on Jan. 3, making good on
dictator Kim Jong Un’s call
for warming relations. First
order of business: working
out a plan for the North to
participate in the Winter
Olympics in South Korea.
○ Utah’s
Orrin Hatch, the
longest-serving
Republican
senator, said he
would retire at the
end of his term
next year.
○ Morning TV veteran Hoda
Kotb was named
co-anchor of
NBC’s Today
show, replacing
Matt Lauer, who was fired
in November for allegations
of inappropriate sexual
behavior. As an interim
co-anchor, Kotb has helped
NBC keep its ratings lead.
○ Petróleo Brasileiro
agreed to pay $3 billion
to settle a U.S. class
action by investors who
claimed they lost money
because of the company’s
wide-ranging corruption
scandal. Petrobras denied
wrongdoing. The so-called
car-wash investigation of
alleged money laundering
and construction kickbacks
continues.
*FORECAST; DATA: U.S. DEPARTMENT OF AGRICULTURE
Senate leaders have approached Mitt
Romney, one of President Trump’s
harshest critics, about running for
the seat.
○ Vietnam
launched a cyber
unit to rebut critics
of the government
on social media.
Dubbed Force 47,
the team has
10,000 people
scanning posts for
“wrong views.”
○ Spotify filed to go public
on the New York Stock
o
Exchange, according to
E
a person familiar with
tthe matter. The world’s
largest paid music
streaming service is trying
s
a direct listing instead of a
conventional IPO. A direct
listing doesn’t raise money
but allows a company’s
shares to be traded on a
public exchange. Valued at
$15 billion, Spotify would be
the biggest company to use
the approach.
○ “They’re going
to crack Don Junior
like an egg
on national TV.”
○ The average American is expected
to eat a record 222.2 pounds of red
meat and poultry this year, according
to federal data, as prices drop and
more people turn to high-protein diets.
Africa
Meat available for human
consumption in the U.S.,
pounds per capita
225
200
175
1970
2018*
Steve Bannon, quoted in Fire and the Fury: Inside the Trump White House by
Michael Wolff, discussing Robert Mueller’s investigation into contacts between
the campaign and Russia and Donald Trump Jr.’s meeting with Russians who
said they had information that would hurt Hillary Clinton.
○ The Democratic Republic
of Congo shut off internet
and text communication
as anti-government
demonstrations boiled over.
Protesters called for the
removal of President Joseph
Kabila, whose term ended in
December 2016.
○ Egypt’s top imam, Grand
Mufti Shawki
Allam, endorsed
a ban on bitcoin,
claiming the
cryptocurrency carried
risks of fraud and is thus
forbidden by Islam. Allam’s
adviser said bitcoin is used to
fund terrorism.
9
REMARKS
10
The aftermath of
protests in Dorud, Iran,
on Dec. 30
REMARKS
Bloomberg Businessweek
January 8, 2018
This Stat Says Iran Is
Ripe for Change
○ The country’s population is in the
sweet spot for prosperity—and a
peaceful transition to democracy
SALAMPIX/ABACA/SIPA USA
○ By Leonid Bershidsky
In 2008, U.S. demographer Richard Cincotta predicted that
Tunisia—then under a well-established authoritarian regime
—would probably democratize before 2020 based on the age
structure of its population. When Cincotta aired the forecast
at a meeting of Middle East experts sponsored by the U.S.
Department of State, the audience burst into laughter. “One
well-known Middle East scholar laughed until he was in tears,”
Cincotta recalled in a 2017 paper explaining his age-structural
theory of state behavior. “Because the laughter did not subside,
the session’s chair ended the question and answer session.”
Today, Tunisia is the one success story of the Arab Spring
chain of revolutions that began there in 2010. It is classified as
“free” by Freedom House, a U.S. government-funded think tank
whose rating system Cincotta uses in his analysis.
The reason Cincotta picked it out among regional neighbors—
including those that would soon live through their own
revolutions—was that, thanks to a sustained near-replacement
fertility rate, the Tunisian population’s median age was rapidly
increasing, moving the country along Cincotta’s age-structural
scale. The scale has four stages: youthful (median age under
25), intermediate (26 to 35), mature (36 to 45), and post-mature
(higher than 45).
In “youthful” countries with high fertility rates, schools are
usually crowded, investment per student is low, and competition for jobs among young people is intense. That raises the
population’s propensity to protest and increases the chance
of a revolution. According to Cincotta, the probability that a
regime controlling a population with a median age of 15 is free
from civil conflict is about 60 percent. It goes up to 80 percent
at an average age of about 27, and civil conflict becomes almost
unthinkable when half the population is older than 40.
While a country is in a youthful phase, an uprising is highly
unlikely to result in sustainable democratization. Cincotta has
shown that most such countries revert to authoritarianism; that
may help explain why the Arab Spring didn’t end up democratizing Egypt (median age 24) but established a functional democracy in Tunisia (median age 32).
Today, Iranians are getting older. Thanks to successful
fertility-control policies in the 1980s (now regretted by the
country’s religious leadership), Iran is rapidly going through
the intermediate age-structural phase, just as Tunisia did. This,
according to Cincotta, is a window for economic growth and
political change favoring the middle class.
Countries in this phase usually have just enough resources
for a workable education system, and there are plenty of young
workers and consumers—and few enough dependents, both
young and old—to ensure increases in prosperity as well as
demand for democracy. In the 2017 paper, Cincotta published his
model’s predictions of the probability of certain Middle Eastern
countries being declared free by Freedom House in the current
year. Iran landed near the top.
The paper came out early last year, and democratization in
Iran looked so unlikely that Cincotta was forced to add a disclaimer: “Ideological political monopolies (e.g., Iran) characteristically behave without deference to the order of the list.”
Now, after a week of protests and even riots that have combined
economic and political demands, including liberalization and
greater openness to the world, some lasting democratic change
no longer seems out of the question (page 32).
It may not come through a violent revolution, though. In an
article published by the Carnegie Endowment for International
Peace in December, but before the protests began, Cincotta and
Karim Sadjadpour wrote:
As Iran’s youth bulge dissipates and the country’s median
age increases, the population will likely become increasingly
Waiting for Democracy to Bloom
Current freedom score ○ Free ○ Partly free ○ Not free
Median age
36
Cyprus
Tunisia
Israel
Turkey
Iran
Lebanon
Morocco
Libya
27
Bahrain
Saudi Arabia
Egypt
Jordan
Syria
1984
2018
Oman
Qatar
Yemen
Iraq
18
After 2040
Year state passes a 50 percent chance of being free, according to Cincotta’s
age-structural theory
DATA: RICHARD CINCOTTA, THE AGE-STRUCTURAL THEORY OF STATE BEHAVIOR. DATA FROM 2016. SAUDI ARABIA,
BAHRAIN, OMAN, QATAR: MEDIAN AGE OF CITIZEN-RESIDENTS ONLY; LABOR MIGRANTS DISCOUNTED
11
VIEW
Bloomberg Businessweek
averse to risky, violent confrontations with the regime.
Consequently, political changes in Tehran could move more
slowly than Washington might wish.
Some of the current protests’ dynamics suggest that this prediction may turn out to be accurate. People under the age of 25
appear to be the driving force of the anti-government actions,
and they definitely make up the bulk of the hundreds of activists detained by the authorities so far.
But the protesters are less numerous than in 2009, the previous time the Iranian regime faced serious domestic resistance, and Tehran’s middle class hasn’t joined them, fearful of
violence and chaos. While the country’s leaders have threatened tough action, and some 21 people have been killed in
street fighting, President Hassan Rouhani has offered some
conciliatory rhetoric. He acknowledged the people’s right
to protest and the legitimacy of their economic gripes. That
may mean concessions and a partial liberalization are likely.
Just as the protests were starting, Tehran police announced
that they would no longer arrest women for breaking the
country’s strict Islamic dress code. Economic measures to
pacify protesters unhappy about rising prices, corruption,
and inequality may well follow.
Iran’s religious leader, Ayatollah Ali Khamenei, has blamed
Iran’s “enemies” for the unrest. But perhaps the country’s demographics have more to do with it than any foreign interference.
Although Cincotta’s theory has been dismissed as simplistic and criticized for not providing robust proof of causation,
it’s intuitively convincing: A country with a young population
has a relatively higher chance to change, and as it matures and
more people have something to lose, this change is more likely
to be peaceful and sustainable. Iran’s demographic window
of opportunity threatens the corrupt, highly unequal, and
repressive status quo.
Regardless of how change takes place in Iran, it’s worth noting
the high probability of democratization that Cincotta’s method
assigns to Turkey. President Recep Tayyip Erdogan’s regime
looks rock-solid and bent on tightening its hold on power. But
Iran, too, looked immutable just weeks ago, and so did Tunisian
President Zine El Abidine Ben Ali’s regime in 2008. Bershidsky is a columnist for Bloomberg View.
To read Noah Smith on the link between
land and inequality and Mohamed A.
El-Erian on a banner year in the markets,
go to Bloombergview.com
VIEW
12
Social Media Doesn’t
Have to Be Terrible
○ Why is everyone hooked on something that makes them miserable?
For the social media business, this new
year is one of grim tidings. Every day,
it seems, pioneers in the field are offering mea culpas—airing regrets, expressing caution, apologizing for a technology
that seems to have run amok.
One former Facebook Inc. executive
recently conceded that the network is
“ripping apart the social fabric.” A former
engineer at the company has warned of
a looming “dystopia.” Another veteran
admitted that Facebook is “exploiting
a vulnerability in human psychology.”
(“God only knows what it’s doing to our
children’s brains,” he added.)
Across Silicon Valley, insiders have
been fretting that the social media’s business model may be undermining the
well-being of its users. A growing body
of research suggests they have a point.
Among the young, social media may be
playing a role in rising rates of depression
January 8, 2018
and suicide. It seems to induce feelings of
envy, anxiety, and inadequacy. It appears
to reduce self-esteem, inhibit sleep, interfere with schoolwork, and (of all the
ironies) encourage antisocial behavior.
Some two-thirds of kids say they wouldn’t
mind if social media didn’t exist. And who
can blame them?
The problem is that it’s hard to quit.
Armed with vast troves of data, companies have deduced clever ways to keep
users on their sites. They’ve developed
powerful tools—push notifications, like
buttons, auto-play videos, and so on—
that exploit quirks in human psychology
to induce something close to addiction.
Add all this up, and an uncomfortable
truth emerges: People are being drawn
inexorably to products that are making
them feel terrible. A number of solutions
have been mooted for this dilemma. Try
“digital detoxes,” say some. Develop
ethics and standards for software
designers, say others. Use Facebook
more, says Facebook.
In the end, though, it’s up to the social
media business to make its products
more humane and less exploitative. Its
leaders might take a cue from an older
and humbler technology. Inscribed on
the wall of the City Post Office Building
(now the National Postal Museum) in
Washington is a verse by Charles W. Eliot,
called The Letter:
Messenger of Sympathy and Love
Servant of Parted Friends
Consoler of the Lonely
Bond of the Scattered Family
Enlarger of the Common Life
Carrier of News and Knowledge
Instrument of Trade and Industry
Promoter of Mutual Acquaintance
Of Peace and of Goodwill Among Men
and Nations.
Those may seem like lofty aspirations for the business of clicks and likes.
But writing a letter and logging on to
Facebook are expressions of the same
ancient desire: for human connection. As
a new year dawns, it’s worth reflecting on
how to meet that desire—without making
everyone miserable in the process. LOOK AHEAD
1
14
B
U
S
I
N
E
S
S
Japanese tycoon
Son has become the
Warren Buffett of global
technology investing
January 8, 2018
Edited by
James E. Ellis
and David Rocks
Businessweek.com
○ JPMorgan Chase’s annual
health-care conference begins
on Jan. 8 in San Francisco
○ Target reports its December
2017 sales, a barometer of holiday
shopping vigor
○ Delta Air Lines will report fourthquarter earnings on Jan. 11
Masayoshi Son Has
A Deal You Can’t Refuse
○ The SoftBank founder
presses tech startups to take his
cash—or watch it go to a rival
Early last year, Cheng Wei, founder and chief executive officer of the Chinese ride-hailing juggernaut
Didi Chuxing, tried to resist taking money from
legendary investor Masayoshi Son. Cheng told the
SoftBank Group Corp. chairman he didn’t need
the cash because his company had already raised
$10 billion, according to people familiar with the
matter. Fine, Son said. Then he suggested he might
direct his support to one of Didi’s rivals. Cheng
relented and took the investment: $5 billion in the
largest fundraising round ever for a tech startup.
Son pulled a similar maneuver in November,
publicly warning Uber Technologies Inc. that if he
didn’t get the deal he wanted, his backing would go
to archrival Lyft Inc. Uber also took the money—a
$9 billion complicated stock transfer and investment deal announced on Dec. 29 that resulted in
SoftBank gaining a 15 percent stake in the company.
Son has been an unstoppable force in the technology world over the last year. As he lined up a roster of
big backers—Saudi Arabia’s crown prince and Apple
RYAN PFLUGER FOR BLOOMBERG BUSINESSWEEK. DATA: SOFTBANK, BLOOMBERG
BUSINESS
Bloomberg Businessweek
Inc.’s Tim Cook among them—for SoftBank’s planned
$100 billion Vision Fund, he took stakes in scores
of businesses engaged in a dizzying array of activities: ride-hailing, chipmaking, office-sharing, satellite
building, robot making, even indoor kale farming.
In deal after deal, according to people involved,
Son encouraged founders to take more money than
they wanted and wielded his outsize checkbook as a
weapon. Along the way, he rattled rivals with his influence and changed the world of startup investing—for
better or worse. “There really isn’t a precedent for
this,” says Steven Kaplan, a professor at the University
of Chicago’s Booth School of Business. “The jury is
still out on whether it will work.”
Son’s investment strategy defies easy categorization. He portrays himself as a true believer in the
information revolution, a proponent of the so-called
singularity—the notion that one day computers will
exceed human intelligence, which has become the
key thread connecting his investment decisions.
But even some of his own investors wonder how
ride-hailing fits with money management, or what
satellites have to do with indoor farming.
Son has made hundreds of investments since he
founded SoftBank in 1981, and during the dot-com
bubble he was briefly the world’s richest man. But the
majority of those deals failed, and his reputation rests
almost solely on one transaction: $20 million invested
in Alibaba Group Holding Ltd. in 2000. SoftBank’s
stake is now worth about 15 trillion yen ($132 billion),
making the deal one of the most lucrative venture
investments of all time. But many people think that
was a fluke and question whether he can do it again.
Son declined to comment for this story. A
SoftBank spokesman said the founder’s success
goes well beyond Alibaba and includes investments
in Sprint, Yahoo!, and Supercell, the developer of
games such as Clash Royale.
The latest deal spree began in September 2016.
Mohammed bin Salman, then deputy crown prince of
Saudi Arabia, flew to Tokyo as his country was looking
for ways to diversify beyond oil. He met with Son,
who pitched the idea of setting up the largest investment fund in history to finance technology startups. In less than an hour, Salman agreed to become
the cornerstone investor. “Forty-five minutes,
$45 billion,” Son said on The David Rubenstein Show
in September. “One billion dollars per minute.”
Son didn’t wait for the money to come in before
starting to cut deals. He made about 100 investments
last year with a total value of $36 billion, according
to research firm Preqin Ltd. That’s more in dollar
terms than Silicon Valley’s top two heavyweights,
Sequoia Capital and Silver Lake Partners, combined.
More surprising, given the numbers, is that
SoftBank is largely a one-man show when it
comes to deals, despite its ranks of bankers from
Deutsche Bank, Goldman Sachs, and Morgan
Stanley. Lieutenants pitch Son ideas, but he makes
the final decisions. One CEO, who agreed to sell a
stake in his company, says: “It’s 100 percent Masa.
OK, 99.9 percent Masa.”
Son has an unusually personal approach. He often
invites founders to Tokyo to meet at SoftBank’s headquarters. Conversing in English, he’ll typically begin
with a formal meeting in one of his conference rooms
on the 26th floor before moving to a nearby private
dining area, according to people who’ve attended
the sessions. Visitors can wander in his garden. Son’s
personal chef prepares Japanese specialties. Bigscreen TVs often play Fukuoka SoftBank Hawks baseball games. There’s little small talk, though.
“He asks a lot of questions,” says Greg Wyler, CEO
of satellite provider OneWeb Ltd., which received
a $1 billion investment from SoftBank in December
2016. “If you like thinking really hard and really
fast, and you like thinking through the art of the
possible, it’s a wonderfully motivating experience.”
Son’s staff does due diligence before he meets
with startup founders. So he has a good sense of
whether he wants to invest before the meeting starts.
His questions are usually focused on prodding executives to think more broadly about opportunities.
Eugene Izhikevich, a prominent Russian neuroscientist who lives in San Diego, was invited to Tokyo
in May. Izhikevich runs a startup that builds brains
for robots. He pitched Son on investing “tens of millions” so his company could develop robots that
would find widespread use in a decade or two. “He
interrupted me in the middle of my presentation
and said, ‘I got it,’ ” Izhikevich says. “ ‘How much
do you need to achieve your vision?’ ”
Izhikevich realized Son wanted to give him more
money than he was requesting—on the condition that
he accelerate his work. Son didn’t want to wait 10 or
20 years. He wanted a full range of robots in three
to five years. “Robots everywhere, that’s the vision
we share,” Izhikevich says. “What drives me crazy is
how slow things are. In Masa, I found my match.” In
July, SoftBank announced a $114 million investment
in Izhikevich’s Brain Corp. The Russian appreciates
the money but says he feels the pressure of living up
to Son’s expectations.
While some question the wisdom of Son’s practice of giving entrepreneurs more cash than they’re
looking for, it’s gotten SoftBank big stakes in more
than a dozen of the world’s most prominent startups,
including the two most valuable, Uber and Didi. In the
process, he’s shown he can help entrepreneurs chase
ambitious, expensive dreams with a single check.
“For all of the founders I work with, he’s now the first
name on their list,” says Mark Tluszcz, co-founder of
venture firm Mangrove Capital Partners.
Chris Lane, an analyst with Sanford C. Bernstein
& Co., says most investors he talks with view Son as a
solid telecom operator who’s taking enormous risks
with his investments and has demonstrated no special
skill in tech venture capital. Lane sees clear evidence
of that skepticism: SoftBank’s stock in Alibaba and
other companies is worth more than 19 trillion yen
January 8, 2018
○ Three of Son’s
successful bets
Yahoo! Japan
Investment in
Jan. 1996:
$68m
Value on Dec. 29, 2017:
$11b
Sprint
Investment in
Oct. 2012:
$17b
Value on Dec. 29, 2017:
$20b
Alibaba
Investment in
Feb. 2000: $64m
Value on Dec. 29, 2017:
$130b
15
BUSINESS
16
after subtracting all the company’s debt, but its
stock market value is only 9.8 trillion yen.
Son doesn’t view that big discount as a repudiation
of SoftBank’s prospects. “The goose has more value
than the golden eggs,” he said in May. “I don’t know
how you don’t think this. If you ask me, it’s better to
be undervalued, because it leaves room for growth.”
With his investment in Uber, Son is betting heavily
on CEO Dara Khosrowshahi, who’s pledged to repair
a toxic culture, overcome regulatory pushback, and
take on mounting competition before leading Uber to
a successful initial public offering. “This is a critical
test for SoftBank and whether they can deploy large
amounts of money in late-stage investments,” Lane
says. “The market will judge [Son] by the Uber IPO.”
SoftBank has stakes in the biggest ride-hailing startups in the U.S., China, India, Brazil, and Southeast
Asia. Four of those backed by the company compete
with one another, so Son may encourage the rivals
to make peace, merging operations in certain countries to save billions in subsidies for drivers and customers. For example, Grab, the largest ride-hailing
service in Southeast Asia, may acquire much of Uber’s
operation in the region, according to a person familiar with the matter. Didi could also move to acquire
Grab to speed its expansion beyond China.
Still, Son doesn’t hold controlling stakes in any of
the companies, and he can’t force them into deals
if management or other investors resist. So a key
longer-term role for him may be helping managers at his portfolio businesses see their shared economic interests. “SoftBank will do its best to eliminate
unhealthy competition,” Lane says.
At a conference in July, Son took on critics who
say Alibaba is his sole success. He flashed a slide
citing his other successful deals and another showing
his investments, including Alibaba, have returned
44 percent annually—and 42 percent excluding it.
“You may think, You were lucky because you hit upon
Alibaba,” he said. “That’s true. I’m really, really grateful to [Alibaba founder] Jack Ma. It was not just one
lucky hit. Perhaps if you continue with lucky hits
then it’s your capability. Maybe I’m smart after all!”
Or maybe too powerful to ignore.
Anthony Tan, who co-founded the taxi-hailing
service Grab, recalls first meeting Son a few years
ago when the Japanese billionaire was considering
investing in his startup. As the two chatted, Son
mentioned his early support for Alibaba’s Ma, then
an unknown schoolteacher who’s now the richest
man in China. “Years ago, Jack Ma sat there,” Tan
recalls Son telling him. “Anthony-san, you take my
money. It’s good for you. It’s good for me. If you
don’t take my money, not so good for you.”
Like so many others before and since, Tan took
Son’s money. —Peter Elstrom, Pavel Alpeyev, and
Lulu Yilun Chen
THE BOTTOM LINE SoftBank founder Son is amassing a
$100 billion tech venture fund to make more deals like his big
investments in Alibaba, Sprint, and now Uber.
Bloomberg Businessweek
January 8, 2018
When a Weak Rival
Collapses , Watch Out
○ Lufthansa is soaring post-Air Berlin.
But here come EasyJet and Ryanair
Travelers flying between Germany’s political and
financial capitals this fall have been in for an occasional surprise: boarding a humpbacked 747 jumbo jet
for the one-hour hop from Berlin to Frankfurt. While
the massive planes are typically reserved for longhaul flights to, say, Tokyo, Denver, or Rio de Janeiro,
Deutsche Lufthansa AG trotted out its jumbos as seats
on its planes grew scarce after insolvent local rival
Air Berlin Plc was grounded in October. Lufthansa
added the big jets because it has “a responsibility to
stabilize the situation to help keep air traffic in the
country running,” Chief Executive Officer Carsten
Spohr told journalists in October.
Air Berlin’s demise, coupled with troubles at
low-cost carriers and Middle East rivals, have made
Lufthansa the world’s best-performing airline stock
over the past 15 months. Since September 2016,
when ailing Air Berlin said it would lease dozens of
planes to Lufthansa in a last-ditch revival effort, the
latter’s shares have more than tripled, compared
with a gain of about 46 percent for the Bloomberg
World Airlines Index. Those positives, though, are
tempered by trouble ahead: The hapless Air Berlin
wasn’t much of a rival, and more efficient operators
such as Ryanair Holdings Plc and EasyJet Plc will
provide stiffer competition as they jump in to fill the
void. “Low-cost carriers are weaker in Germany than
just about anywhere else in Europe, and Lufthansa’s
German profits will come under pressure as they
use Air Berlin’s failure to speed up expansion,” says
Daniel Roeska, an analyst at Sanford C. Bernstein
Ltd. “The longer-term outlook remains cloudy.”
While Air Berlin lost money for most of the past
decade, it kept no-frills operators largely at bay
even as they invaded the U.K., Spain, and Italy.
And with Etihad Airways pouring almost €2 billion
($2.4 billion) into the carrier in recent years, Air
Berlin was able to absorb losses that would have
driven most other competitors into bankruptcy.
Now, Ryanair says it can more than double its share
of the German market, to 20 percent, by 2020. To
get there, it’s seeking some of Air Berlin’s landing
rights and last year started serving Lufthansa
strongholds such as Frankfurt and Munich instead
of the out-of-the-way secondary airports it often
uses. EasyJet has bought 25 Air Berlin planes and
put up billboards across the city to trumpet upcoming service from Berlin’s Tegel Airport, in addition to its base at the frumpier Schönefeld in the
former East Berlin.
○ Spohr
BUSINESS
SPOHR: COURTESY LUFTHANSA. *MARKET SHARE ESTIMATES FROM DAIWA CAPITAL MARKETS; MAP DOES NOT INCLUDE SATELLITE CASINOS OPERATED BY THIRD PARTIES; MARKET SHARE FOR GRAND LISBOA
INCLUDES ALL GAMING REVENUE FOR SJM, INCLUDING ITS SATELLITE CASINOS; DATA: MACAU’S GAMING INSPECTION AND COORDINATION BUREAU, DAIWA, ANALYST SURVEY COMPILED BY BLOOMBERG
Gaming
Norwegian Air Shuttle ASA is already pushing the
discount concept on long-haul routes, and Air FranceKLM and IAG SA—the owner of British Airways—have
set up low-cost arms that could woo passengers from
lucrative intercontinental routes. And with Lufthansa
facing antitrust scrutiny from European regulators
unhappy about its rising market share, on Dec. 13 it
shelved an agreement to buy Air Berlin’s leisure arm,
Niki, which was then snapped up by IAG. “Lufthansa’s
momentum will slow later this year,” says Damian
Brewer, an analyst at RBC Capital Markets.
For 2017, Lufthansa benefited from favorable conditions beyond Air Berlin’s collapse. Relatively low oil
prices over the past two years have made it cheaper
for Lufthansa to fly its fleet, which is heavy on less
efficient, four-engine jets like Boeing’s 747 and the
Airbus A340. The company has improved the quality
of its cabin and food service on long-haul flights while
expanding its cheaper Eurowings brand for shorter
hops to fend off low-cost rivals. And after dozens of
strikes by pilots and cabin crew over the past three
years grounded more than 20,000 flights, cost the
carrier more than €500 million, and left airports
full of fuming passengers, Lufthansa last fall sealed
agreements with three unions.
The carrier has also been the beneficiary of troubles at Emirates, Etihad, and Qatar Airways—longhaul specialists with Mideast hubs that for years
siphoned off Asia-bound traffic. Those carriers have
suffered from renewed terrorism concerns and
Trump administration restrictions on visitors from
Muslim-majority countries. And while low oil prices
have cut costs, they’ve also cut into the wealth of
those airlines’ state-linked owners. So 2017 showed
that even new planes, top-notch service, and generous government support can’t insulate such carriers from geopolitical crosswinds.
Lufthansa’s newer European rivals have also seen
their share of setbacks, with Ryanair facing a pilot
shortage that forced it to cancel more than 20,000
flights and recognize unions. EasyJet’s aggressive
expansion has been slowed by falling fares, the
departure of its CEO, and uncertainties over Brexit.
And those nifty 747 flights from Berlin to
Frankfurt? Lufthansa acknowledges that the service
runs at a loss: It can’t really fill the planes, so the
upper deck is closed and swaths of business class
are typically roped off. Those jumbo runs, therefore,
could be short-lived—especially since Ryanair and
EasyJet are likely to sort out their issues and become
fiercer rivals than Air Berlin ever was. The Gulf carriers are also unlikely to go away. That’s why Bank of
America Merrill Lynch analyst Mark Manduca wrote
in a Jan. 2 investor note that Lufthansa has “persistent
structural issues” and its average fares will decline.
Adds Manduca: “Enthusiasm amongst investors has
got carried away.” —Richard Weiss
THE BOTTOM LINE Lufthansa had a great 2017, with Air Berlin’s
demise and struggles at other rivals, but this year will likely be
tougher as low-cost carriers jump into its home market.
Macau Rebounds
Macau, the world’s largest gambling hub,
is seeing casino profits approach levels
last generated before a Chinese
government corruption crackdown drove
high rollers away. —Daniela Wei
Macau gaming market share, by property
Change in Macau
casino revenue
Circle size represents share of total Macau gaming
revenue in 2017*
60%
Opened before Aug. 1, 2007
Projected
Opened after Aug. 1, 2007
0
Altira
(Melco
Resorts)
1.9%
Sands Cotai
Central
4.9%
Still
Growing
2018
City of Dreams
(Melco Resorts)
9.8%
Venetian
(Sands)
8.5%
Galaxy Macau
16.3%
VIP gamers are
expected to be the
biggest source of
revenue this year. A
flood of casual gamblers
will also contribute, as
glitzy new casinos and
attractions open on
reclaimed land in Cotai,
Macau’s equivalent of
the Las Vegas Strip.
2010
Sands Macao
1.9%
Wynn Macau
9.0%
MGM Grand
6.9%
-60
StarWorld
(Galaxy)
6.0%
Grand
Lisboa
(SJM
Holdings)
16.7%
Wynn Palace
7.1%
COTAI
Four Seasons
(Sands)
1.8%
Studio City
(Melco
Resorts)
4.4%
Parisian
(Sands)
4.6%
In 2018 casinos from the local unit of MGM
Resorts International and Hong Kong’s SJM
Holdings are set to open in Cotai. That will
give all six Macau operators—MGM and SJM,
along with Galaxy Entertainment, Melco
Resorts & Entertainment, Las Vegas Sands,
and Wynn Resorts—a presence on the strip.
17
LOOK AHEAD
January 8, 2018
Edited by
Jeff Muskus
Businessweek.com
○ Coders are scrambling to fix a
security flaw in Intel’s processor
chips. The fix is likely to slow them
○ Networking-equipment maker
Citrix hosts its annual cloud
conference in Anaheim, Calif.
This Isn’t Just a
Game (Show)
HQ Trivia is a winner. But its creators could lose anyway
The open-plan office of Intermedia Labs is a noisy
place. About 30 employees are crammed into the
small loft in Manhattan’s SoHo neighborhood,
working over the din of garbage trucks and car horns.
The 98-year-old building’s elevator hums and clanks
between floors, the heating system announces itself
with a high-pitched whir, and the door to the bathroom seems to shake the whole place every time it’s
slammed shut. None of this would pose trouble for
most startups, but Intermedia’s office doubles as a
soundstage. Most days, at 3 p.m. and 9 p.m., a skeleton crew shoots a live game show, HQ Trivia, that
airs exclusively on smartphones and, at the moment,
happens to be the hottest thing in media.
“We’re soft live,” the director of content shouts,
sticking his head out of a closet that doubles as the HQ
studio. “Please be mindful of slamming doors.” Then,
appearing slightly panicked, he gestures at the operations manager and yells, “The fan is still running!”
While they spend a few minutes switching off the
HVAC system and pulling a partition across the length
of the office to dampen sound, 33-year-old host Scott
Rogowsky throws on the jacket he wears for most
shows, slips on and tightens a pre-knotted skinny tie,
and steps in front of a green screen. A few minutes
after 3 p.m., the camera’s rolling. Rogowsky cracks a
few jokes, announces that more than 200,000 viewers
have logged in, and bellows, “Let’s get this show on
the rooooooo-oad, baby!”
HQ looks like an ordinary, albeit low-rent, game
show. Each 15-minute online broadcast comprises
12 multiple-choice questions, which start out reasonably easy and get maddeningly obscure. For this
installment, shortly before Christmas, Rogowsky
begins by asking contestants to identify Tom Cruise’s
airplane in Top Gun (the Tomcat) from among three
choices that include the Batwing and the Millennium
Falcon. A later question asks for an earlier name of
the First Transcontinental Railroad (the Overland
Route). The twist is that any viewer can be a player,
tapping the phone’s screen to lock in answers. Those
who correctly answer all 12 questions win a share of
the prize pool, which currently ranges from $2,000
to $18,000. The purse is paid by Lightspeed Venture
Partners, Intermedia’s main backer, which has
invested $8 million.
That interactivity has people hooked. Four
months into its broadcasts, HQ generally attracts at
least 400,000 viewers in the afternoon and more
than 600,000 in prime time. Those are impressive numbers in the world of online live video. In
September, Amazon.com Inc.’s first Thursday NFL
broadcast had an average live audience of 372,000.
HQ’s popularity has thrust its creators into the
spotlight. In December, the New York Post wrote about
Rogowsky’s dating life, the Wall Street Journal published a front-page story on the many workplaces
that effectively shut down during HQ games, and
the Atlantic offered a lengthy essay warning that the
app is “a harbinger of dystopia.” On Christmas Day—
“Quiz-mas,” Rogowsky called it—a mini news cycle
was devoted to one of the latest winners: former CBS
Evening News anchor Dan Rather.
Like any sensible, promising, VC-backed startup,
Intermedia isn’t trying to make money. But “advertisers are obsessed,” says Chief Executive Officer
Rus Yusupov. “They’re hitting us up.” Yusupov had
co-founded Vine Labs Inc., whose once-hot video
app languished and eventually shut down after the
company was sold to Twitter Inc. for $30 million in
2012. Intermedia is negotiating for more venture
funding that could value it at as much as $100 million.
A year ago, HQ’s sudden cachet probably would
have made that kind of deal a certainty. But after
the implosion of several once-promising unicorns
( Jawbone, Theranos, Zenefits) and the wave of allegations of sexual harassment and mismanagement
that began at Uber Technologies Inc., investors are
more careful with their money. Intermedia’s own
brief history has also given them reasons to be wary.
First, there are the technical hiccups. HQ players
PHOTOGRAPHS BY CAROLINE TOMPKINS FOR BLOOMBERG BUSINESSWEEK
18
T
E
C
H
N
O
L
O
G
Y
○ Apple will sell iPhone batteries for
$29 instead of $79 after admitting
iOS slows down old phones
have become accustomed to routine errors—video
feeds failing to appear or freezing and booting
people out. The show I watched in person had about
half its typical viewership; the app failed to send
some users the usual push notification alerting them
that a game was starting. Several times in the past
month, Intermedia’s servers crashed altogether,
scrapping the scheduled game. During a heavily promoted New Year’s Eve show, the questions failed to
load on people’s phones, forcing Rogowsky to vamp
awkwardly for several minutes. The problems have
created an opening for lookalike game shows—The
Q, G.O.A.T., and others—though none has attracted
a big audience yet.
Yusupov says these are standard growing pains for
a new enterprise. HQ’s success has surprised even
its creators; it was conceived as part of an attempt to
promote Intermedia’s video app Hype, which failed to
catch on. The company was also experimenting with
a concept for a DIY-focused game show and another
program built around matching celebrities with their
baby photos. Yusopov says his focus now is on building a “100 percent participatory” streaming network.
That’s more ambitious than it sounds. Most online
video streams billed as “live,” including Amazon’s
NFL broadcast, can be delayed by 30 seconds or more
so broadcasters have time to compress the video feed
transmission. A 30-second delay isn’t practical for
HQ, whose players have only 10 seconds to answer
each question. Intermedia has just two seconds to
compress its feed. “It’s superhard,” says Yusupov,
who oversees each broadcast, making last-minute
tweaks to questions from a team of four writers and
fact-checkers. “We’re doing something that really
hasn’t been done before.”
There are personal difficulties to match the technical ones. In November, Yusupov lost his cool after the
Daily Beast tried to profile Rogowsky. He complained
that the writer hadn’t cleared an interview with him
and threatened to fire Rogowsky if the site published
its story. The Daily Beast published, of course, and
Yusupov apologized in a tweet “for being a jerk,” as
he put it. “I learned that I’m good at working with
engineers and designers and building products,” he
now says. “And I learned that I’m not good at working
with talent and doing PR stuff.”
Questions about the maturity of Intermedia’s management were magnified in mid-December when
tech-news site Recode reported that several venture
firms had raised concerns about his co-founder Colin
Kroll’s “creepy” behavior toward women at Twitter
when the two men worked there. That prompted an
investigation by Lightspeed. According to partner
Jeremy Liew, the venture firm concluded that though
Kroll was unpopular at Twitter, he wasn’t a harasser.
In a statement, Liew said he “did not find evidence
that warrants his removal from the company.”
An Intermedia spokeswoman says the company
is “committed to maintaining a workplace where
everyone feels safe, respected, and valued.” Kroll
declined to comment.
Concerns about Yusupov and Kroll might be
beside the point if Intermedia can’t capitalize on its
early success. So far, audiences have shown no sign
Yusupov (left)
watches Rogowsky’s
broadcast in
Intermedia’s SoHo
office
Rogowsky (right)
makes last-minute
changes to questions
for a show
19
TECHNOLOGY
Bloomberg Businessweek
of tuning out despite the bad press, think pieces,
and technical snafus. For the 9 p.m. edition on New
Year’s Day, HQ attracted close to 1 million viewers
but capped the game at a record 750,000 players
because of technical problems. “We’ll see where
this goes,” Rogowsky says after the show I watch in
person, pulling off his tie and collapsing onto a sofa.
“I mean, Jeopardy! can run for 30 years, so why can’t
we?” —Max Chafkin
companies are racing to differentiate themselves
in the emerging market for smart speakers and the
shaky market for virtual-reality headsets and to
beat their rivals to store shelves with augmentedreality glasses that can overlay information or goofy
characters on a wearer’s view of the real world. There
won’t be much for consumers to play with, but sales
reps pitching advanced chips and other components
have a shot at career-making deals, and the sales
made in the meeting rooms off the show floors will
likely help shape the design of groundbreaking
products for the next few years.
“Hardware, specifically component hardware, is
hot at CES because that is what’s keeping VR, AR,
and AI from reaching their pinnacle,” says Patrick
Moorhead, president of consulting firm Moor Insights
& Strategy. The competitors, he says, all need markedly better performance at low power than their
current parts can provide. Apple, Amazon.com, and
Facebook declined to comment, and Google declined
to comment beyond saying it will have a booth.
Although Amazon.com Inc. won’t have its own
booth, people familiar with its plans say executives
overseeing Alexa, the company’s artificial intelligence software, will be keeping a close eye on the
generic smart speakers flooding the halls from
China and elsewhere. Alexa operates a new line of
smart speakers from Sonos Inc., and three times
as many households use an Amazon Echo than use
the second-place Google Home, according to analysis firm Consumer Intelligence Research Partners.
Apple Inc.’s similar HomePod is loosely slated for
release in the early months of 2018.
The smart-speaker market is well-established, but
this is a make-or-break year for VR. The major headset
makers, including Facebook Inc.’s Oculus, haven’t
been able to shrink their hardware or prices enough
to attract interest from non-diehards. Facebook aims
to change that early in the year with a budget model,
the $200 Oculus Go. Headset makers attending the
show will be eager to negotiate for more powerful
chips, better lenses, and other components.
Augmented reality is a priority for even more
of the big tech companies, which are investing in
AR glasses they hope will fare better than Google
Glass. Microsoft is refining its bulky and decidedly
uncool-looking HoloLens; Amazon and Google are
rumored to be experimenting with their own headsets; and Apple is planning on a 2020-ish release for
the glasses it’s betting will be the next iPhone. These
efforts will require even more specialized lenses and
other components than VR headsets. Paul Travers,
chief executive officer of Vuzix Corp., which makes
AR glasses and components, says his schedule for
CES week is packed with meetings focused on both
developing and distributing his glasses and putting
his optics in other companies’ systems.
Electric and driverless cars will remain a big
part of this year’s CES, as makers of high-tech
cameras, batteries, and AI software vie to climb into
THE BOTTOM LINE HQ has figured out how to get tons of people
to watch live streaming video at the same time. Now it’s trying to
outgrow its technical problems, and maybe a co-founder.
The Hardware
Show Matters
Again
20
○ Tech leaders are looking to CES to
improve their AI, AR, and VR gear
The last time CES mattered to the masses may have
been as far back as 2001, when Bill Gates appeared at
the consumer electronics show to promote Microsoft
Corp.’s first Xbox. Dwayne “the Rock” Johnson, then
best known as a wrestler for what was still called the
WWF, exchanged catchphrases with Gates for a few
minutes onstage in Las Vegas before they demoed the
video game console’s top-of-the-line visuals. A year
later, the first entry in the Xbox Halo franchise would
become the fastest-selling console game released
to that point. It probably would have done just fine
without CES, but the trade show was considered a
key stop on its road to commercial success.
Things changed. The focus of the consumer technology industry swung from hardware to smartphone apps and social media. Companies such as
Apple, Samsung, and Google began holding their
own, separate product demo days, usually a bit
closer to the next holiday shopping season than
January. The Vegas show became largely the province of automakers hunting for new gear lower
down in their supply chain. This year, however, the
biggest internet companies are pouring money into
a growing range of consumer gadgets, many in competition with one another. CES is relevant again.
At the 4,000-exhibitor show kicking off on
Jan. 9, Google is setting up a booth for the first time
in years, and Amazon.com, Apple, Facebook, and
other companies are expected to prowl the Vegas
showrooms more deliberately than usual. The
January 8, 2018
TECHNOLOGY
Bloomberg Businessweek
automakers’ dashboards. There probably won’t be
any mind-blowing announcements from Las Vegas
this January, and the show’s history is littered with
more duds than hits (3D TVs, anyone?). But as the
leaders of the app, search, and social media worlds
edge out of their comfort zones in search of more
precious data, CES is becoming something it hasn’t
been in a while: a stop companies think they can’t
afford to miss. —Mark Gurman
about $15,000.) Governments including China’s and
Japan’s tightened the rules governing cryptocurrency
businesses, and China has shut down its exchanges.
Bitcoin’s popularity has also made its network much
slower and sent transaction fees spiraling. In late
December, sellers had to choose between waiting
hours and sometimes days for their transactions to
go through or paying an average $55 fee to jump the
line. (In mid-2016 such fees topped out at about 15¢.)
That’s made bitcoin impractical for everyday transactions, such as $3 cups of coffee.
The eight-year-old bitcoin network is “really
janky,” says John Quinn, co-founder of Storj Labs
Inc., whose dozen employees worked 12-hour days
for two months last spring to switch their datastorage startup from bitcoin to the rival cryptocurrency ethereum. Two-year-old ethereum has its
own problems, including rising transaction fees,
but it’s become the first choice for most startups
seeking to use so-called smart contracts or raise
money through initial coin offerings, which generated about $4 billion in 2017. While ethereum has
added lots of features and uses, bitcoin looks almost
the same as it always has, says Lucas Nuzzi, a senior
analyst at Digital Asset Research.
Bitcoin’s limitations are becoming bigger issues as
banks and other financial institutions build out their
own similar networks. “Cost, we expect that to be
sub-1¢,” says Richard Brown, chief technology officer
for industry consortium R3, which is helping companies build such networks. Completing a transaction,
he says, “takes the speed of light, seconds at most.”
Some bitcoin developers are trying to tweak the
network software to speed transactions, but disagreements about the approach have led some groups
to split off and create their own smaller networks.
“Startups need to be aware that they are building a
house on moving ground,” says Michael Dunworth,
chief executive officer of Wyre Inc., a cross-border
payment service using the bitcoin network.
Because only 21 million bitcoins will ever be
issued, there’s a case to be made that the currency is
simply evolving from a transaction network to digital
gold. Longtime advocates say different. “At the end
of the day, it is bitcoin’s use in commerce that drives
its price and further adoption,” says Roger Ver, the
advocate known as Bitcoin Jesus, who spent bitcoin
last year to cover his startup’s 60-person payroll and
book hotels on Expedia. (He’s become a vocal champion for “bitcoin cash,” a cryptocurrency that’s facing
an internal insider-trading investigation after having
splintered from bitcoin last summer. )
Amid the current fervor, Ver is the exception.
“No one is spending bitcoin,” says Iqbal Gandham,
managing director at EToro Ltd., a cryptocurrency
exchange. “It could be the most expensive piece of
pizza you ever bought.” —Olga Kharif
THE BOTTOM LINE CES, known for the past few years
mostly as the “Car Electronics Show,” will be a more important
destination for Silicon Valley’s biggest names this year.
You’d Be Crazy to Buy
Pizza With Bitcoin
ILLUSTRATION BY KURT WOERPEL
○ Speculative fervor makes the
cryptocurrency clumsy for commerce
A little more than four years ago, Coupa Café, a
caramel-macchiato joint in Palo Alto, began accepting
bitcoin. This was shortly before the first big bitcoin
rush briefly pushed the cryptocurrency’s price from
about $100 to more than $1,000. At the time, two or
three Coupa customers a week would pay their bills
with bitcoin, says co-owner Camelia Coupal. Today,
the number is … still two or three people a week. “It’s
a really minimal part of our sales,” she says. “It’s
really just a quirky thing for our customers.”
That’s the story of bitcoin this past year: The
cryptocurrency has made fortunes for speculators,
but—for that reason and others—it hasn’t been much
use as a medium of exchange. Except in countries
such as Venezuela, where inflation makes the local
money even more volatile than bitcoin prices, its use
by online merchants is virtually zero and shrinking,
according to Morgan Stanley. When businesses like
Coupal’s started accepting bitcoin, advocates predicted it would eventually replace money. Those
voices have grown quiet. “The value of bitcoin is
really predicated on its being a useful means of transactions,” says Jacob Leshno, an assistant professor
at Columbia Business School. “If you take that away,
all you are left with is a bubble asset.”
In 2017 bitcoin’s value rose from about $1,000 to
as much as $19,000, often with swings of thousands
of dollars a day. (As of publication, it’s trading at
THE BOTTOM LINE There’s little sense in using bitcoin for its
intended purpose as a medium of exchange when its value can
fluctuate by thousands of dollars in a given trading day.
January 8, 2018
21
“Startups
need to be
aware that
they are
building a
house on
moving
ground”
22
F
I
N
A
N
C
E
January 8, 2018
Edited by
Pat Regnier
Businessweek.com
○ Shareholders of Rockwell Collins
vote Jan. 11 on being acquired by
United Technologies for $23 billion
○ Bank earnings season starts with
JPMorgan Chase results. One item
to watch for: Comment on tax cuts
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Landlords are adding
features at stodgy office
towers to make them more
millennial-friendly
○ The U.S. Senate banking
committee holds a hearing on antimoney laundering rules on Jan. 9
Brian Flaherty, a 25-year-old in green sneakers and
a North Face fleece, quaffs his second Lord Hobo.
At home, a four-pack normally sets him back $16.
Here at work, craft beer is always on the house.
Flaherty, naturally, works for a tech company. But he
isn’t kicking back in a former meatpacking district,
or at a hip “co-working” space. He’s in the heart of
Boston’s financial district—at a 32-story office tower,
home to button-down businesses such as law firm
Nixon Peabody LLP and some offices of 225-yearold financial giant State Street Corp.
To fill vacancies, Blackstone Group LP, the
biggest U.S. office owner, is going after startups
and their armies of twentysomething workers. In
Flaherty’s building, 100 Summer Street, Blackstone
has installed a private club on the second floor open
to employees of companies in the building, with
beer and wine taps, a gym with private showers,
arcade games, foosball, and baristas who finish
off cappuccinos with foam artwork. It even has
a startup- style name, Assemblyon2. “Having a
cool office when I was a kid meant you worked at
Google,” says Flaherty, who is on the sales force
at Rapid7, a cybersecurity company. “Among my
friend group, this is now the coolest office.”
Companies in every industry, from autos to
retail, have been scrambling to adjust to millennials’ tastes and expectations, and commercial
real estate is no exception. Blackstone, Brookfield
Property Partners LP, Boston Properties, and other
big landlords are spending millions to inject Silicon
Valley playfulness into aging towers in big cities.
They’re in an arms race against new construction
and co-working businesses such as WeWork Cos.
“The way towers were built in the 1980s, they were
a monument to the corporation,” says Lisa Picard,
chief executive officer and president of Equity
Office, a Blackstone unit that owns office buildings.
“Now, if it feels corporate, that’s the kiss of death.”
Like Google or Facebook Inc., big landlords can
harness the power of scale, spreading the cost of
freebies over thousands of employees, most of
whom will never set foot in the gym that therefore needs only a few treadmills. In return, they can
fill gaps in buildings left by companies’ shrinking
footprints or moving to fresher digs. Still, the landlords are under pressure. Since the 2008 financial
crisis, tenants have been saving money by packing
more workers into the same space. The average
square footage per employee has shrunk 9 percent
in the past seven years, to 181 square feet, according to an analysis by commercial real estate tracker
CoStar Group.
New buildings make up for the tighter quarters
with open floor plans, breakout rooms, and entertainment spaces. “It’s a cultural shift in the office
market driven by what people in my generation
and the generation before think the millennial generation wants,” says 46-year-old Craig Caggiano,
executive director of real estate services company
ILLUSTRATION BY OSCAR BOLTON GREEN
LOOK AHEAD
FINANCE
Bloomberg Businessweek
Colliers International Group Inc. “The thinking is
that millennials like to take their laptop and work
in a coffee bar at the base of the building.”
Boston’s financial district is losing tenants to the
fast-growing Seaport area next door and biotech
centers such as Cambridge, home to MIT and
Harvard. The neighborhood’s vacancy rate rose to
11.9 percent in the fourth quarter, up from 8.7 percent
two years earlier, says Aaron Jodka, Colliers’s director of research for Boston. In Midtown Manhattan,
where buildings average 56 years old, large tenants
have notified landlords that they’re vacating about
8 million square feet over the next few years, according to Colliers. Many, including Wells Fargo & Co. and
Time Warner Inc., are shifting to new buildings on
Manhattan’s thriving far West Side.
Near Wall Street, at One World Trade Center, the
tallest building in the Western Hemisphere, workers
can stop at the 64th floor for the barista coffee bar,
pingpong, table shuffleboard, and yoga classes with
floor-to-ceiling views of the Statue of Liberty. “This
puts talent at the center of the equation,” says Chris
Kelly, 35, president and co-founder of Convene, a
startup helping landlords remake buildings for millennials. “If you create the best workplace, then you
get the best talent.” Convene, which manages the
year-old amenities area for the Durst Organization,
is applying for a liquor license for events at the One
World Trade lounge and is working with a landlord
to introduce a full-service bar in another New York
office building, which it declined to name.
Convene is also operating the amenities in Equity
Office’s Park Avenue Tower in Midtown, which has a
game room and catering facilities, and it’s working
with Brookfield on a group of buildings in downtown
Los Angeles. Blackstone’s Willis Tower, the tallest
building in Chicago, now has a cafe and full-service
bar for tenants.
Even banks are renting tricked-out spaces for
software engineers who always are at risk of getting
poached by tech firms with sweeter offices. JPMorgan
Chase & Co. is leasing more than 400,000 square
feet from Brookfield for its new technology hub at
5 Manhattan West. Techies can mellow out with board
games or jam in a soundproof room equipped with
electric guitars and a drum kit.
Boston Properties is spending about $100 million
on 399 Park, the 57-year-old former Citigroup Inc.
headquarters, to freshen up its appearance. A
new bike valet service for employees of 399 Park
and two other nearby Boston Properties towers
stores 100 two-wheelers at a time. The landlord is
also collaborating with WeWork on a ground-up
development at the Brooklyn Navy Yard, the coworking company’s first, to be called Dock 72. The
675,000-square-foot building will have rooftop
gardens and a food hall.
At 100 Summer Street, Blackstone’s Boston tower
with the second-floor club, the longest lines are in
the morning, for lattes, flat whites, and other coffee
drinks made to order. The three baristas serve about
700 free coffees a day, says Pat Walsh, who manages
the building. (Bloomberg LP is a tenant.)
The amenities room may have already been
partly responsible for luring one tenant to a building that was about 40 percent empty after American
International Group Inc.’s Lexington Insurance Co.
moved out in 2014. The vacancy rate is now about
10 percent. CloudHealth Technologies Inc. will move
from its Seaport location, taking 80,000 square feet
at 100 Summer.
Corporate landlords will never be entirely
free-spirited. At 100 Summer Street, employees
are limited to two drinks a day, and they must
sign lengthy waivers releasing the landlord from
any liability. Taps are open only from 4:30 p.m. to
7:30 p.m. three days a week. Employees must first
place their building badge over a sensor before
pouring a cup of beer or wine. Like the world’s
least generous bartender, the system automatically
stops after 24 ounces of beer. Even then, one tenant,
whom the landlord won’t name, has blocked its
employees from drinking. It’s a law firm, of course.
—Prashant Gopal and David M. Levitt
January 8, 2018
○ The average age
of buildings in
Midtown Manhattan:
56
THE BOTTOM LINE Commercial real estate companies have
had to adjust to competition from co-working spaces, while
tenants pack employees into smaller offices.
23
Catastrophe
Bonds Survive
A Stormy Year
○ The turbulence of 2017 couldn’t destroy
a market for betting against disasters
The year 2017 turned out to be a big test for one of
the odder financial assets on the market: catastrophe bonds. They’re essentially a way for insurers to
protect themselves against high costs from natural
disasters—and for investors to bet on earning a steady
return as long as those disasters don’t happen.
Recent hurricanes across the Atlantic are estimated to have caused more than $200 billion in
damage. Through early October 2017, the U.S. was hit
by 15 weather events that cost $1 billion or more each,
according to the National Centers for Environmental
Information. That’s one short of the record set in 2011
and doesn’t include the costs of the recent wildfires
in California. By and large, the $90 billion catastrophe bond market survived intact.
Bloomberg Businessweek
January 8, 2018
Billion-Dollar Disasters
usually doesn’t rise and fall in lockstep with other
assets; the risk of a hurricane doesn’t have much
to do with, say, the pace of corporate earnings.
KKR & Co. has bet on the market by taking a stake
in hedge fund Nephila Capital Ltd., which oversees
more than $10 billion mostly invested in cat bonds.
The development of the market has led investment
bankers and brokers to envision more complicated
offerings. Underwriters are considering bonds for
pandemics, terrorism, and cyberrisks.
The caveat is that the market may have had a
bigger loss this year if the wind had blown in a different direction. A large swath of existing bonds helps
insure weather risks in Florida, which was spared
the worst of Hurricane Irma when its path swerved.
Before Irma made landfall in Florida, some analysts
said it could have caused as much as $200 billion in
damages. After the storm changed direction, forecasts of damages slipped to a quarter of that.
And then there’s the question of whether investors have accounted for the potential long-term risks
of climate change. Millette says there’s one thing that
could ultimately crush investors’ faith in the market:
“If we had year after year after year like this, and
investors would say, ‘Look, this is not a bad year. This
is normal.’” —Sonali Basak and Brandon Kochkodin,
with Brian K. Sullivan and Jim Efstathiou Jr.
“The industry
has gotten a
much better
grasp on risk
management”
Weather and climate events in the U.S. that resulted in losses of
more than $1 billion
16
8
0
1980
24
2017*
Investors who owned the bonds suffered
losses, to be sure. The Stone Ridge Reinsurance Risk
Premium Interval Fund, which owns catastrophe
bonds, tumbled more than 11 percent in 2017. The
Swiss Re Cat Bond Total Return Index, a widely used
gauge of the market’s performance, lost more than
15 percent in one bad week, then recovered to end
the year basically unchanged. The pain was a sign of
health. If investors don’t take a hit in bad years, the
bonds probably aren’t doing their job providing protection to the issuers.
Here’s a simplified model of how a cat bond
works: If an insurer wants to protect itself against
insurmountable losses—generally for risks expected
to happen once in 50 or 100 years—it can issue a
cat bond to investors. The proceeds are set aside to
help pay future disaster claims. If there’s no disaster, the bondholders get interest payments and their
principal back when the bond matures. But when a
so-called trigger event occurs, the bond issuer gets to
use some or all of the money to pay for damages, and
investors eat the cost in the form of a lower payout.
At the beginning of the hurricane season, about
13 catastrophe bonds were considered to be at risk
of being downgraded by S&P Global Ratings. So far,
only one has been. Some chalk this up to smarter
underwriting by insurers. “The industry has gotten
a much better grasp on risk management,” says
David Havens, an analyst at Imperial Capital LLC
who tracks insurers. In the almost 20-year history
of the market, there have been very few instances
in which a cat bond has been completely wiped out.
“The market has exceeded my expectations as far
as resiliency this year,” says Michael Millette, former
head of structured finance at Goldman Sachs Group
Inc., who helped the bank develop a market for
cat bonds in the 1990s. He now runs his own fund,
which makes some catastrophe-related bets. “Losses
were consistent with the losses that investors felt
should have occurred from events like these.”
Hedge funds, pensions, and high-net-worth individuals are drawn to cat bonds by the yields, which
are higher than those available on conventional corporate or government bonds. Another appealing
feature is diversification: The value of cat bonds
THE BOTTOM LINE There’s a $90 billion market in bonds that
pay out high yields to investors willing to bear the risk of natural
disasters. Soon they might cover pandemics and cyberthreats.
Turning Corn
And Soy Into
College Cash
○ Why the University of Illinois endowment
wants farms in its portfolio
Early in Ellen Ellison’s tenure as chief investment
officer for the University of Illinois Foundation, she
and some staff toured a university-owned farm in
Monticello, 30 miles west of the flagship UrbanaChampaign campus. Ellison was impressed by the
complexity of a GPS-outfitted planting machine,
which was able to track the variety of seeds used,
measure their depth in the soil, and record the exact
number of them planted per acre.
*DATA AS OF OCT. 6, CPI-ADJUSTED. COSTS OF HURRICANES HARVEY, IRMA, AND MARIA STILL BEING ASSESSED. DATA: NATIONAL OCEANIC AND ATMOSPHERIC ADMINISTRATION
FINANCE
PHOTOGRAPH: COURTESY UNIVERSITY OF ILLINOIS; DATA: UNIVERSITY OF ILLINOIS
FINANCE
Ellison is aiming to make farmland about
10 percent of the $1.8 billion endowment portfolio
she oversees. Separately the university manages
an additional $800 million, which also includes
farms. That might seem like an obvious play for a
big Midwestern school—similar to the University of
Texas System’s getting money from oil. According to
campus lore in Urbana, the undergraduate library
was built underground in part to avoid casting a
shadow on an historic experimental cornfield. But
few universities are committed to building up their
ag holdings the way Illinois is. For a public university in a state with budget woes, “you’re always
looking for new and creative ways to skin a cat,”
Ellison says. “I feel my conduit is agriculture.”
Part of the strategy is to draw more gifts of land.
The university already owns almost 17,000 acres
of donated farmland, dotted across 25 counties in
central Illinois, planted mostly with corn and soybeans. Starting in 2005 a controversial university
policy required tenant farmers to bid on their lease
contracts every three years. The move was unpopular in the state’s farming communities, and land
donations dropped more than 80 percent below the
average of the preceding 15 years. Ellison and the
new dean of the school’s College of Agricultural,
Consumer, and Environmental Sciences, Kimberlee
Kidwell, working with school officials, got the policy
changed in September so the university can consider factors besides the rent, such as how long
a tenant has been working the land. It’s too soon
to say how big an effect this will have, but Kevin
Noland, who oversees real property for the foundation, says it’s seen more interest from people considering farmland gifts.
As a financial asset, land has done well for U of I.
Despite weak gains in the past few years, the holdings have generated an average 10.2 percent annual
return over the past decade, more than double the
4.7 percent return of the whole portfolio. They also
provide some diversification. When the endowment’s investments were down 20 percent during
the financial crisis, farmland was up 10 percent.
Justin Ourso, managing director of Nuveen Natural
Resources, part of money management company
TIAA, says farmland can be an inflation hedge. “The
end product is a necessity, not a luxury,” he says.
The risks: Climate change could wreck harvests,
and farmland isn’t a liquid asset—it could be hard
to get a good price if the university ever needs to
sell in a cash crunch.
Ellison says she wants to build on the example
of Stanford’s success with venture capital, leveraging the expertise of Illinois alumni and professors,
including those from its renowned ag school. “Let’s
do what we actually know about,” she says. “We have
a means of sourcing new ideas long before everyone else is paying attention.” In addition to land,
the portfolio invests in agriculture-related private
equity. Ellison recalls one alum who wanted her to
Bloomberg Businessweek
make a venture capital investment in a cow—just one
cow—that would produce more milk. In that case,
she declined.
Similar institutions with deep agricultural roots
are more cautious about holding farmland as a strategic investment. “We don’t feel we have the expertise to manage it,” says Brian Neale, who oversees
investments for the $1.2 billion endowment of the
University of Nebraska Foundation. The Lincolnbased foundation is exploring some agriculture
investments via private equity; Neale says he’s considering an investment in a California almond farm.
One other school with significant farm holdings is Whitman College, a 1,400-student liberal
arts school in Walla Walla, Wash. Its endowment
manages 24,000 acres near its campus, including
15 farms that grow peas, garbanzo beans, canola,
and three types of wheat, says Justin Rodegerdts,
manager of investments. Some of the garbanzos
end up in Sabra hummus, and much of the wheat
goes to Asia. Agricultural revenue contributes about
$1.6 million annually to help operate the school.
On one 6,000-acre farm, soft white wheat—used to
make confectionery items such as cookies—grows
next to some wind farms that also generate returns.
“We have access to a lot of experts in wheat
farming and wheat management,” Rodegerdts
says. “Having them on our farm committee helps
us govern and hire good farmers that take care of
this land. It’s been a good financial return for the
college, which is a double win.” —Janet Lorin
THE BOTTOM LINE The University of Illinois is trying to
encourage more farmers to make donations in land as it looks for
ways to make the most of its agricultural expertise.
January 8, 2018
25
○ Farm properties
donated to the
University of Illinois
Chicago
University
of Illinois at
UrbanaChampaign
○ Total annual returns
by fiscal year
Donated farmland
Total endowment
portfolio
30%
0
-30
2007
2017
LOOK AHEAD
○ On Jan. 8 the Brookings Institution
hosts a panel on whether the
2 percent inflation target should go
○ The World Bank launches
the winter edition of its Global
Economic Prospects report
○ China publishes data on foreign
direct investment in 2017 on Jan. 11
27
A Tale of
Two Curves
C
S
ILLUSTRATION BY JOE MELHUISH
Some trusted economic
gauges are giving out confusing readings
The new year in economics will be a tale of two
curves that have mysteriously gone flat—the
yield curve and the Phillips curve. Some economists argue that the uncurvy curves are sending
a message that the U.S. economy needs more
stimulus. The debate is likely to be a prime topic
at the Federal Reserve when Jerome Powell takes
over as chair in February, assuming the Senate
confirms his nomination as expected.
For all the attention they’re getting, though,
there might be less to the two flattenings than
meets the eye. Skeptics argue that the risk of recession remains low and the possibility inflation will
pick up is still high. Says Jim Paulsen, chief investment strategist at Leuthold Group LLC: “I agree
they are considered big stories, but I think both
are overblown.”
The yield curve is about the price of money.
It shows the interest rates an investor can earn
on U.S. Treasuries or other bonds of different
maturities, with the shortest-term instruments on
the left and longest on the right. The yield curve
normally tilts upward, since rates tend to be higher
for longer-term bonds, because investors demand
a better rate as compensation for tying up their
money for a longer period of time.
January 8, 2018
Edited by
Cristina Lindblad
Businessweek.com
28
It’s a bad sign when the yield curve inverts to
a downward slope—that is, long-term rates become
lower than short-term ones. The higher rates on
the left end of the curve indicate that the Fed is
raising short-term borrowing costs, which chills the
economy, while the lower rates on the right end of
the curve indicate that long-term investors have low
expectations for growth and inflation.
When the yield curve is steeply inverted, a recession almost always follows. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis,
explaining his dissent from the Fed’s December
rate hike, wrote, “While the yield curve has not
yet inverted, the bond market is telling us that the
odds of a recession are increasing and that inflation
and interest rates will likely be low in the future.”
He said the flatness of the yield curve should discourage the Fed from hiking rates more “until it
becomes clear that inflation is actually picking up.”
The potential flaw in Kashkari’s analysis is that
the yield curve is still a long way from tipping over.
Its current incline is historically associated with
healthy growth. Says Leuthold’s Paulsen: “Until
you actually invert, it says nothing about higher
recession risk, at least historically. There really is
a toggle switch for inversion.”
Liz Ann Sonders, chief investment strategist for
Charles Schwab & Co., wrote in December that the
stock market has turned in its best performances
when the yield curve is sloped the way it is now,
or even flatter. She called this the “sweet spot.”
It’s possible, of course, that the economy will
slow and the Fed will keep cranking short-term
rates higher. But that assumes a blunder by the
central bank. Jan Hatzius, chief economist of
Goldman Sachs & Co., told Bloomberg Television
in December that long rates are likely to go up at
the same pace as short rates in the coming year,
leaving the yield curve no flatter than it is now.
In contrast to the yield curve, the Phillips curve
slopes downward in textbooks. Named after the late
New Zealand economist A.W. Phillips, it shows that
inflation tends to be high when unemployment is
low, and vice versa. That makes sense: Workers
demand higher wages when the labor market is
tight, and that spills over to the general price level.
The Phillips curve is a less reliable indicator
than the yield curve, though. Since the last recession, contrary to the textbooks, it’s been flat, not
sloped. Inflation has remained below the Fed’s
target even though the unemployment rate was at
an almost 17-year low of 4.1 percent in November.
If the Phillips curve is broken—that is, low unemployment no longer leads to high inflation—then
the Fed can afford to keep financial conditions
loose despite the tight job market. Fed Governor
Lael Brainard, who tends to favor keeping rates
low, argued in December that there’s more slack
in the labor market than the headline unemployment rate would indicate because many people
Bloomberg Businessweek
January 8, 2018
Shape-Shifting
The yield curve has flattened significantly in the last eight years as the
Federal Reserve has raised short-term rates to ward off inflation.
U.S. Treasury yields
June 1, 2009
Dec. 29, 2017
4%
2
0
1 month
30 years
The Phillips curve, which plots unemployment against inflation, has also
leveled off, which means the low jobless rate isn’t driving up wages and
the overall price level.
June 2004 to June 2009
November 2012 to November 2017
Inflation rate
6%
4
2
0
-2
4% Unemployment rate
gave up looking for a job and were therefore not
being counted. Those once-discouraged workers
are a hidden source of new employment. “In the
past few years,” she said in a December speech,
“the job market has gotten so strong that many
of these people have come off the sidelines—and
many are now back at work.”
But the logic behind the Phillips curve remains
sound. If the U.S. economy keeps creating jobs at
its current clip, it stands to reason that eventually
the labor market will get so tight that wage inflation
will accelerate. That would be good for workers,
but it would bolster the hawks’ case for extra rate
hikes in 2018 and beyond.
The U.S. is far enough along in its economic
recovery that people are speculating nervously over
what will go wrong, and when. The Phillips curve
and yield curve will be studied closely in 2018 to
help forecasters see around the next bend in the
road. —Peter Coy
THE BOTTOM LINE The debate over what the flattening of the
yield curve and the Phillips curve mean for the U.S. economy is
getting louder. The pessimists may be making too much noise.
10%
“Until you
actually invert,
it says nothing
about higher
recession
risk, at least
historically”
VINCENT MUNDY/BLOOMBERG
ECONOMICS
ECONOMICS
Bloomberg Businessweek
January 8, 2018
Stalin’s Legacy Is Choking
The Ukrainian Economy
○ The government has resisted pressure to lift a ban on land sales, despite pressure from the IMF and investors
It could be a picture of rural prosperity: Workers
steer grumbling trucks and red harvesters as high
as houses, churning 1,400 acres of snowy farmland
into thick, black mud. The early winter scene, about
250 miles west of Kiev, instead illustrates Ukraine’s
failure to drag its most historically significant
industry into the 21st century.
Mriya Agro Holding Plc, the company hauling
away the last of the sugar beet crop on the land,
owns none of the wide-open field, a patchwork of
270 individual plots that it leases for three years
to five years each. The landowners, who were
bequeathed the property after the fall of communism, aren’t allowed to sell, so Mriya has little incentive to spend any money to increase the harvest. “If
the company is the owner, it would be possible to
invest more,” says Viktor Tarchynskyi, a foreman for
Mriya. “Germans put in complex fertilizers every
five years. We can’t afford to do that.”
Few things define Ukraine more than farming. Its
people have lived, toiled, and starved on the land for
centuries, and their economic and political struggles are dug deep into the soil. It’s here that Joseph
Stalin’s forced collectivization drive exacted its
heaviest toll. From 6 million to 7 million Ukrainians
perished in the 1932-33 famine. One enduring legacy
of that painful chapter is that land reform has been
too sensitive for successive governments to tackle.
Ukraine tallied $13 billion in agricultural
exports from January to September, equal to about
40 percent of total exports. The country is among
the world’s top producers of sunflower oil, barley,
wheat, and corn. Still, there’s huge untapped potential: Although Ukraine boasts one of the world’s
Driving a harvester
on farmland in Ukraine
leased by Mriya Agro
29
Bloomberg Businessweek
richest concentrations of fertile black soil, its crop
yields are among the lowest in Europe.
It all harks back to the messy transition from
communism to capitalism. Following the dissolution of the Soviet Union in 1991, Ukrainians whose
forebears had been victims of collectivization were
awarded parcels of land averaging 4 acres each.
Combined, the land totaled 166,000 square kilometers (64,000 square miles), an area almost the
size of Florida. In 2001 the government passed a
law prohibiting the sale and purchase of the plots,
a ban that’s been extended nine times. More than
4 million Ukrainians—most of whom are now beyond
retirement age—earn an average $190 a year, or the
equivalent in grain, sugar, or other commodities,
by leasing out their 4-acre plots.
The government has been under pressure from
the International Monetary Fund and companies such as Mriya Agro to lift the ban. “We are all
farming on short-term leases, which is not in line
with the long-term returns that everyone expects to
get in agriculture,” says Simon Cherniavsky, Mriya’s
chief executive officer.
The Ukrainian Parliament voted on Dec. 7 to
extend the moratorium through Jan. 1, 2019, and
some argued for an extension to 2024. Without it,
foreign companies from the European Union or
the U.S. would flood into Ukraine, lawmakers say.
“Land will be taken from people for pennies,” Oleh
Lyashko, leader of the Radical Party, said during
debate before the vote. “And the land that is supposed to feed their grandchildren and children will
feed large property barons and representatives of
power structures.”
neighboring Romania and Poland. Gross domestic
product contracted a cumulative 16 percent in 2014
and 2015 because of the conflict with Russian-backed
separatists in the eastern part of the country. Growth
has been tepid since.
Although agriculture is the largest single
contributor to goods sold abroad, a World Bank
report published on Oct. 3, blaming the land law,
said farm productivity in Ukraine is a fraction of
what it is in other European countries. Wheat
yields, for instance, are less than half those in
Germany, it said.
Agro-industrial companies say they would
be able to boost yields and earn higher profits
if they owned the land they farm. Myronovskiy
Hleboproduct SA, a Ukrainian poultry producer
that also grows wheat, sunflower, and other crops,
says the cost of managing hundreds of individual
leases is a drag on investment, particularly when
wheat prices are depressed. “Given the present
level of grain prices, the cost of leasing land, and
the headache associated with extending lease
agreements, it’s very expensive to expand the areas
we farm,” CEO Yuriy Kosyuk says. As long as the
ban remains in place and the wheat market stays
depressed, the company is unlikely to expand its
farming operations, he says.
Agrotrade Group, in Karkhiv, lost almost
300 acres of arable land in 2017 because of the
vagaries of the leasing system, CEO Vsevolod
Kozhemyako says. Hired thugs have been known
to strong-arm small landowners into switching
partners on leasing contracts, giving rival companies
and local political officials tied to them an unfair
advantage, he says.
“Politicians have fooled people with the myth
that an open land market will lead to poverty and
destitution,” Kozhemyako says. “But people are not
getting the money they are entitled to if they could
sell the land.”
As the first of the winter’s snow quietly blankets
a farmyard dotted with idled tractors and other
equipment, Nazar Terekh, a crop specialist who
works for Mriya, seeks the warmth of a barracks
used to house seasonal employees. While workers
in dirty overalls file past, Terekh quickly flips
through multicolored maps on his tablet to show
visitors a cluster of sunflower land with blacked-out
squares that indicate some local owners decided
not to renew their leases.
That complicates issues for Mriya harvesters,
which have to be carefully maneuvered to avoid
those plots, says Tarchynskyi, the foreman. “We
always need large areas of land, given our machinery
is designed for a wide sweep,” he says. “It’s difficult
to work because we have this checkerboard effect.”
—James M. Gomez and Kateryna Choursina
Larysa Hrynevych, 42, a resident of Kiev, the
capital, inherited two plots from her grandparents
about a decade ago. She says she’s happy to lease the
land, located an hour outside the capital, to a small
company that plants sunflower, corn, and soybeans
because she’s not about to move to the countryside
to become a farmer. The arrangement earned her
11,500 hryvnia ($412) last year. “It’s good support
for local people,” she says. “They can choose how
they get paid.”
Nevertheless, calls to rescind the moratorium
are growing louder as Ukraine’s economy continues
to lag other former communist countries such as
THE BOTTOM LINE Ukraine’s agricultural sector supplies
almost 40 percent of export earnings, but crop yields lag because
of regulations that discourage investment.
January 8, 2018
Scooping up the last
of the sugar beet crop
VINCENT MUNDY/BLOOMBERG; ILLUSTRATIONS BY JAY DANIEL WRIGHT
30
ECONOMICS
Indicators
Americans Are Feeling #happy
Last year, U.S. consumers finally got their mojo back. Here
we decipher the economic import of seven of 2017’s notable
trends—from Unicorn Frappuccinos to Instagram hashtags.
Some, such as increased spending on travel and gym
memberships, may continue into 2018. Others, like the
rise in homeownership for the under-35 set, may falter.
—Jeanna Smialek
Spending on discretionary
services such as sports
clubs climbed above its
pre-recession peak.
Gym membership spending,
seasonally adjusted annual rate
$55b
Pingpong at Work
Status Symbol
Starbucks Corp.’s
Unicorn Frappuccino
came and went in a
flash. But its appearance
was well-documented:
Celebrities such as the
Kardashians and Katy
Perry snapped pics of
themselves indulging in
the limited-edition pink
and purple concoction, as did thousands of
mere mortals, prompting
Starbucks to pronounce
it an “Instagrammable
success.” People’s
willingness to shell out
around $5 for a 16-ounce
drink (the price varied
by market) is evidence
American consumers will
splurge on small luxuries.
That could presage
increased spending in
the year ahead—but if
consumers don’t move
up to more substantial
purchases, the economy
won’t see much benefit.
Hit the Gym
Pack Your Bags
U.S. residents took a
record 80.2 million trips
out of the country in
2016, data show, up
8 percent from 2015. It
looks as if the momentum
carried into 2017: Travel
import spending (what
Americans paid for goods
and services overseas)
ticked up 9.6 percent in
the first 10 months of
the year.
Newly Confident
Consumer confidence
climbed steadily in 2017,
eclipsing pre-recession
levels. Another sign of
American optimism:
#happy made Instagram’s
top hashtags of the year.
1. #love
2. #fashion
3. #photooftheday
4. #photography
5. #art
6. #beautiful
7. #travel
8. #happy
9. #nature
10. #picoftheday
The labor market
tightened significantly
in 2017, with unfilled
job openings setting
records. But wages
barely budged.
Anecdotal reports
collected in the Federal
Reserve’s Beige Book
suggest employers have
been offering
nonwage benefits
and perks—think
wellness programs and
snack bars—in lieu
of raises. A key question
for 2018 is whether
they’ll finally have to
pony up cash.
51
47
1Q 2015
3Q 2017
Amazon Effect
The share of core
retail sales transacted
online reached a high
of 20 percent in 2017,
TD Securities says. Fed
officials are skeptical
about how big a role the
so-called Amazon effect
on prices has played in
keeping inflation muted, a
debate that’s sure to carry
on throughout 2018.
Bye-bye, Mom’s Basement
The homeownership rate for adults younger than 35
q
edged up to 35.6 percent in the third quarter
of 2017,
from 34.3 percent in
the first quarter. But the
trend could peter out if
median home price gains
keep outpacing inflation
and inventory stays tight.
Share of cohort who live with relatives
18- to 25-year-olds
26- to 34-year-olds
60%
30
0
1962
2016
31
LOOK AHEAD
5
○ Democratic and GOP leaders
negotiate protections for DACA
recipients in a budget deal
○ The top U.S. energy regulator
has until Jan. 10 to act on a plan to
subsidize nuclear and coal power
P
O
L
I
T
I
C
S
President Rouhani’s budget sets off protests from people
angry about unemployment and inflation
January 8, 2018
Edited by
Matthew Philips
Businessweek.com
As is often the case when people take to the streets
in protest, the recent uprising in Iran may have its
roots in something as basic as the price of eggs.
Toward the end of December, several provinces
reported a significant increase in the cost of agricultural goods, including a 50 percent spike in egg
prices. Several factors were blamed, such as rising
feed prices and an outbreak of avian flu that led to
the culling of millions of chickens.
Whatever the cause, on Dec. 28, about a hundred
people gathered in the streets of Mashhad, Iran’s
second-largest city more than 500 miles northeast of
Tehran, to protest the government’s handling of the
economy. What started as a rally backed by conservative clerics quickly turned into a broader demonstration against the very theocracy they uphold.
Within a few days, protests had spread to 20 cities and
included calls for the death of the Islamic Republic’s
supreme leader, Ali Khamenei. By Jan. 3, Iranians
supporting the Islamic Republic were staging counter
rallies, and a police crackdown had left 21 people
dead and more than 700 arrested.
The last big anti-government uprising in Iran
was the Green Movement in 2009, when more than
2 million people protested the disputed reelection
of conservative President Mahmoud Ahmadinejad—
what Khamenei refers to now as simply “the sedition.” The crackdown that followed killed upwards
of 73 people, according to opposition estimates, and
led to the arrests of some 4,000.
There are a few major differences this time. The
Green Movement was led by reform-minded intelligentsia and educated middle class and was concentrated in the streets of Iran’s capital city. This one
has been led by mostly working-class young men;
there are far fewer people rallying, yet the protests
are more widespread across the country. “These
protesters are from the fringes of Iran, from small
VAHID SALEMI/AP PHOTO; DATA: INTERNATIONAL MONETARY FUND
32
○ The U.S. Supreme Court returns
to session on Jan. 8
POLITICS
Bloomberg Businessweek
towns that no one had heard of before,” says Alireza
Nader, an international policy analyst at the Rand
Corp. “In 2009, the protests were about empowering
the reformists. This time, this is anti-establishment.
This is against the whole Islamic Republic.”
Navigating this will be a critical test for President
Hassan Rouhani. Seen as a reformer and a moderate, he’s faced criticism since his reelection in May,
both from hard-line opponents and from disillusioned supporters, who’d been expecting a broader
economic recovery following the country’s 2015
nuclear deal with world powers and the easing of
international sanctions. Unemployment stands at
12 percent, and while inflation has dropped from
more than 40 percent in 2013, when Rouhani was
first elected, it still hovers at about 10 percent. A
wave of bad loans from unregulated lenders has
rocked the banking sector. Meanwhile, oil prices
have averaged less than $60 a barrel for the past
three years, draining Iran of a key source of revenue.
On Dec. 10, Rouhani submitted a $337 billion draft
budget to parliament. Based on an oil price forecast of $55 a barrel, it earmarks about $100 billion
to create jobs, address the banking crisis, and introduce a social security program that Rouhani says
will bring all poor families to a minimum standard
of living. The budget also introduces significant
increases to various fees, including car registration and the departure tax for citizens leaving the
country. It makes steep cuts to cash subsidies for
food and fuel while also raising funds allocated
to the clergy and the premier security force, the
Revolutionary Guards.
Rouhani has to strike a balance between the
people and the religious and security establishment that wields ultimate power. He’s defended
Iranians’ right to protest while urging them to
work with his administration to address what he
says are justified grievances. He has a chance to
use the protests to his advantage and push through
more reforms, says Amir Handjani, a senior fellow
at the Atlantic Council: “Rouhani is savvy, he needs
to ... say to the other factions in Iran, ‘Hey, look,
people want change, and time isn’t on your side.’ ”
While Handjani doesn’t think the protests will lead
to a revolution, he says they “will serve as a warning
shot for the regime that they have serious structural
problems to address, and I think this gives Rouhani
the upper hand.”
There are also forces outside of Rouhani’s control.
Iran has a serious water shortage that’s caused people
to move from rural areas. Foreign investment has also
been slow to materialize following the nuclear deal,
in part because the U.S. never lifted some of the sanctions that bar U.S. companies and banks from doing
business there. Some oil and construction companies, as well as airplane and car manufacturers such
as Airbus Group SE and Groupe PSA, have signed
deals, but interest among overseas businesses has
fallen short of projections by Rouhani.
And then there’s President Trump, who’s
tweeted his solidarity with the protesters and
is using the demonstrations to bash the regime.
“Many reports of peaceful protests by Iranian
citizens fed up with regime’s corruption & its
squandering of the nation’s wealth to fund terrorism abroad,” Trump tweeted on Dec. 29. A day
later he tweeted, “the good people of Iran want
change” and that “Iran’s people are what their
leaders fear the most.” Rouhani in turn hit back,
claiming Trump has “no right to show sympathy”
for Iranians, especially since he’s branded their
country a terrorist nation and banned their citizens from obtaining U.S. visas.
Trump has imposed new sanctions related
to Iran’s ballistic missile program and the
Revolutionary Guards, which fall outside the scope
of the nuclear accord. He’s also asked Congress to
determine whether to withdraw altogether from the
nuclear deal. This all makes investors even more
nervous about putting money into Iran. “If there is a
kind of scapegoat to Iran’s economic problems post
the nuclear deal, it would be the U.S. administration,” Jean-Paul Pigat, Dubai-based head of research
at Lighthouse Research, told Bloomberg Television.
“Donald Trump continues to threaten to renegotiate
the nuclear deal. That does not encourage foreign
investors to enter the market.”
On Jan. 2, Trump met with Vice President Mike
Pence and members of his national security team to
discuss the protests amid deliberations already under
way about reimposing suspended sanctions or adding
new ones, according to two White House officials who
asked not to be identified discussing internal deliberations. The meeting came about 10 days before Trump
must decide whether to continue waiving sanctions
that were lifted under the nuclear deal.
Trump’s tweets allude to another potential source
of grievance among some protesters: the billions of
dollars that Iran has spent outside the country to
support allies such as Syrian leader Bashar al-Assad
as well as militant groups including Hezbollah and
Hamas. Iran is also backing Houthi rebels in Yemen
who are at war with Saudi Arabia. It’s all part of Iran’s
efforts to project influence across the Middle East
and challenge the Saudis for regional dominance.
Some in the U.S. and Europe think that supporting Iran’s economy is the best way to boost political moderates represented by Rouhani. They say
better integrating Iran into the global economy
creates incentives for the country to abide by the
nuclear agreement and other international norms.
Skeptics—led by Trump—argue that such thinking
underestimates the commitment of Iran’s leaders to
expanding their power in the region and that a richer
Iran is a more dangerous one. —Golnar Motevalli,
Kambiz Foroohar, and Grant Clark
THE BOTTOM LINE Protests in Iran have focused attention on
the country’s economic woes and fueled calls from President
Trump to continue a hard-line approach to the Islamic Republic.
January 8, 2018
○ Iran’s
unemployment rate
14%
12
10
2007
2017
33
POLITICS
Bloomberg Businessweek
January 8, 2018
Why Mike Pompeo
Is the Anti-Rex
○ The former Tea Party Republican turned CIA director is everything
Trump likes in an appointee—decisive, combative, and loyal
administration official who says White House staff
and Tillerson’s inner circle all but stopped talking last
summer. The U.S. Department of State says Tillerson
has continued with a “robust” agenda, which includes
a trip to Canada this month to discuss North Korea
and a Dec. 28 op-ed in the New York Times lauding
the merits of diplomacy. Although talk of Tillerson’s
imminent departure has cooled over the past couple
of months, he and Trump seem to have passed a point
of no return. Despite early efforts to build a personal
relationship, including dinners during the early days
of the administration before Melania Trump moved
to Washington, the two never quite clicked.
In Pompeo, Trump in many ways has found his
mirror image, someone who shares his penchant
for being combative and opinionated. Before being
tapped to run the CIA, Pompeo spent six years as
a Republican representative from Kansas. Even
among the first-time representatives who helped
the GOP take over the House as part of the 2010 Tea
Party wave, he stood out as a strident critic of the
Obama administration’s foreign policy. He’s perhaps
best known for his role castigating Hillary Clinton’s
Pompeo testifying
at his confirmation
hearing as CIA director
in January 2017
MANUEL BALCE CENETA/AP PHOTO
34
If you had to pick the Trump appointee who had
the best 2017, a good choice would be Mike Pompeo,
director of the CIA. In a year when a record number
of administration officials left and a handful of others
came under fire from President Trump, Pompeo is
the rare team member whose fortunes have risen.
He’s a key defender of the president’s policies, from
Iran to China, and has shown a fierce loyalty, including a proclivity to indulge some of Trump’s views on
controversial issues such as Russian meddling in the
2016 election. While that may have improved the
standing of an agency Trump attacked repeatedly
during his presidential campaign and the transition,
it’s raised concerns about Pompeo’s commitment to
keep the CIA free of politics.
As much as anyone in the administration, Pompeo
has mastered the art of communicating with this president. He’s one of the first people in the Oval Office
each morning when he shows up to deliver Trump
the daily intelligence briefing. By most accounts, this
is one of the highlights of the president’s day. Not only
does Trump get details of the country’s most secretive operations, he gets them in bite-sized, boileddown charts and graphics designed to maximize the
attention of a famously fickle president.
It’s unusual for the CIA director himself to deliver
the briefing every day, yet by doing so, Pompeo has
forged a strong personal connection to Trump and
also helped bridge what could’ve been a dangerous
gap between the White House and the intelligence
community. Trump came into office deeply skeptical
of U.S. intelligence agencies, going so far as to accuse
the CIA of being the source of leaks against him after
the election. “It’s hard to say it’s not a success that the
CIA director has been able to maintain a daily briefing relationship when it looked like all signs were in
the other direction,” says David Priess, a former CIA
officer and author of a book on presidents’ intelligence briefings, The President’s Book of Secrets.
Pompeo, 54, is seen as a potential successor to
Rex Tillerson as secretary of state. A plan to make
Pompeo the country’s top diplomat has been under
debate since at least September, according to one
POLITICS
Bloomberg Businessweek
response to the 2012 Benghazi attacks. Pompeo ended
up drafting his own conclusions separate from the
findings of the House Intelligence Committee’s
Republican majority. He was also one of the strongest critics of the Iran nuclear deal. “Pompeo has a
sort of hard-line approach on foreign policy that’s
quite black and white, and that’s also how Trump sees
the world,” says Ilan Goldenberg, a senior fellow at
the Center for a New American Security who worked
at the State Department under then-Secretary John
Kerry. “This is where Pompeo has really been able
to endear himself to Trump.”
Pompeo also has the kind of résumé Trump
loves to brag about: West Point graduate, U.S. Army
veteran, Harvard-trained lawyer, and business owner.
In 2006, Pompeo sold the manufacturing company
he’d founded, Thayer Aerospace. In an administration filled with multimillionaires and billionaires, he’s
an exception. His financial disclosure ran to just eight
pages, compared with Tillerson’s 38-page disclosure
that included details of his $180 million retirement
package from Exxon Mobil Corp.
While Tillerson has gained a reputation for being
isolated and aloof at the State Department, Pompeo
holds monthly “Meet With Mike” sessions where CIA
officers shoot him questions in an open setting. And
while Tillerson has in many ways rolled back the
State Department’s global presence and centralized
its decision-making, Pompeo has empowered CIA
staffers. Field officers are encouraged to “carry out
more aggressive, agile operations,” according to a
CIA spokesman. Pompeo has also moved officers out
of Washington and into remote areas and pushed
decision-making down the chain of command.
Yet not everything he’s done has been wellreceived inside the CIA. Pompeo’s decision to have
the agency’s counterintelligence unit report directly
to him while multiple parts of the government are
investigating possible collusion between Russia and
the Trump campaign carried political overtones. It
also raised questions about whether he could influence intelligence that the CIA was sharing with the
FBI or congressional committees. According to a CIA
spokesman, Pompeo’s decision was aimed at stopping the “dangerous leaks and insider threats” that
he saw emanating from the agency when he was a
member of the House Intelligence Committee.
Pompeo’s alignment with Trump and outspokenness on sensitive policy issues have raised questions
among current and former CIA staffers: Instead of
what’s supported by the agency’s conclusions, they
wonder if the director is pursuing policies and making
recommendations that will please the White House,
former intelligence officers say. Some analysts inside
the CIA are dispirited that Pompeo has policy preferences and isn’t valuing their unbiased analysis,
according to a former intelligence official, who says
officers have described experiencing “deja vu” of the
Iraq War, only this time they’re being asked leading
questions about Iran and Russia. While those on the
operational side of the agency have been empowered,
some are concerned about chatter of reviving torture
or other controversial programs in place during the
Bush administration, the former official says.
After Sept. 11 and the Iraq War, the intelligence
community has grown “very concerned about being
misinterpreted by policymakers in a way that will lead
to bad policy outcomes for the nation,” says Mieke
Eoyang, a former Democratic House Intelligence
Committee staffer and vice president for national
security at Third Way, a Washington think tank. “So
they want to be careful about what they’re putting
forward, and I don’t see Pompeo echoing that carefulness.” A CIA spokesman dismissed concerns that
Pompeo expresses policy preferences in the questions and analysis that agency analysts are directed
to pursue, saying “the director has been adamant that
CIA officers have the time, space, and resources to
make sound and unbiased assessments that are delivered to policymakers without fear or favor.”
There are also reports of curious meetings
Pompeo has held at the CIA, including with Tony
Perkins, president of the Family Research Council,
a conservative advocacy group, and William Binney,
a former National Security Agency whistleblower
who claims someone with access to the Democratic
National Committee leaked its data rather than
Russian hackers. Although Pompeo isn’t the first
politician to hold the job, he’s “probably the most
political CIA director that we’ve had,” says Burdett
Loomis, a political science professor at the University
of Kansas who’s followed Pompeo’s career. “He’s
made statements politically in defense of Trump that
previous CIA directors might not have made.”
That includes standing by the president when it
comes to Russia. In October, Pompeo caused a stir
when he said the intelligence community’s assessment of Russian meddling in the 2016 election was
that it “did not affect the outcome of the election.”
Yet the report released by intelligence agencies in
January 2017 explicitly said that it “did not make
an assessment of the impact that Russian activities had on the outcome.” Pompeo subsequently
clarified his remarks. In a Dec. 18 call to Trump,
Russian President Vladimir Putin thanked the CIA
for information that led to the breakup of a suspected Islamic State cell. Following his conversation
with Putin, Trump called Pompeo to congratulate
him, the White House said.
Should Pompeo end up secretary of state, his relationship with Trump could benefit the department.
His reputation as being an approachable and effective manager could also be a welcome change. But
his strong ideological positions could cause concern.
“Those things about Pompeo that make him appeal
more to the president—some of those are going to be
really dangerous,” Goldenberg says. —Nafeesa Syeed
THE BOTTOM LINE CIA Director Pompeo has forged a close
personal relationship with Trump and is seen as an eventual
successor to Tillerson at the State Department.
January 8, 2018
“Pompeo has
a sort of hardline approach
on foreign
policy that’s
quite black
and white, and
that’s also how
Trump sees
the world”
35
Bloomberg Businessweek
L I F E A N D D E AT H
36
The nightly dangers
and horrors of cleanup
at the slaughterhouse
By Peter Waldman
and Kartikay Mehrotra
Photograph by
Johnathon Kelso
January 8, 2018
ON THE THIRD SHIFT
37
A sanitation worker heads into Mar-Jac Poultry in Gainesville, Ga.
Bloomberg Businessweek
NO ONE KNEW HER REAL NAME. AT WORK
38
she was Tiffany Sisneros, until her arm
got crushed in a conveyor belt. She filed
for workers’ comp as Martha Solorzano,
born 1966. The doctor who evaluated her
wrote down her last name as Torres.
We’ll call her Martha, the name her
lawyer uses. Like millions of undocumented immigrants, Martha lived in the
shadows. She slept by day, worked at
night, shifted names as circumstances
demanded, and supported her family
with scraps that fell her way from the
U.S. labor market.
She worked as a cleaner on the graveyard shift at Tyson Foods Inc.’s cavernous meatpacking plant in Holcomb, Kan.
Every day up to 6,000 cows clamber off
18-wheelers lined up at the facility, 200
miles west of Wichita. They’re watered,
then ushered into the kill box, knocked
unconscious by a bolt gun, hung upside
down with their hearts still pounding, and
bled to death by a slash to the jugular.
After the heads, hides, and hooves
are removed, the carcasses are sawed
in half, checked by U.S. Department of
Agriculture inspectors, and sent down a
network of conveyor belts to be butchered, boxed, and bar-coded by 3,800
workers in two shifts. The journey,
from carcass to cargo ramp, takes about
40 minutes.
After 11 p.m. the procession halts, and
the sanitation crews move in. The only
slaughterhouse job worse than eviscerating animals is cleaning up afterward.
The third-shift workers, as the cleaners
are often called, wade through blood
and grease and chunks of bone and flesh,
racing all night to hose down the plant
with disinfectants and scalding water. The
stench is unbearable. Many workers retch.
It was about 3:30 a.m. on July 7, 2011,
when Martha finished cleaning conveyor
belt FC-3A on the main factory floor. After
powering the machine back on, she realized she had forgotten to wipe down a
spot where fat collects under the side
rail. Such deposits, if neglected, can shut
down a processing line, at considerable
cost in lost output, if a USDA inspector
discovers it during daily swab tests.
So Martha reached under the moving
belt to get at the smudge and lost her
balance, she testified in her workers’
comp case. As she tried to brace herself,
her left hand got caught in the machine’s
roller, which reeled her in past her elbow,
twisting and cracking her forearm. A
January 8, 2018
supervisor heard her scream and shut
down the line. Maintenance workers had
to dismantle the guards and rollers to get
her out. The radius and ulna bones could
be seen sticking out of her arm, in shards.
Most accidents at the Holcomb plant
are covered by Tyson’s workers’ comp
insurance. But Martha didn’t work for
Tyson. The cleaning crew was employed
by Packers Sanitation Services Inc., the
nation’s largest cleaning contractor to the
food industry. The meatpacking industry
has a hard enough time filling daytime
production jobs, so many bigger plants
staff the night shift through contractors
such as Packers. These companies pay
their largely immigrant workforce up to
a third less than what production employees earn during the day. Martha was
getting $202 a week. Packers pays current
employees an average of $11.86 an hour.
Such is the genius of American outsourcing. In an era of heightened concern
about food safety, meat and poultry producers are happy to pay sanitation companies for their expertise. The sanitation
companies also assume the headaches
and risk of staffing positions that only
the destitute or desperate will take—very
often undocumented immigrants. And
they relieve the big producers, including household names such as Tyson and
Pilgrim’s Pride Corp., of responsibility
for one of the most dangerous factory
jobs in America.
The North American Meat Institute,
an industry trade group, says OSHA data
show that the injury rate is lower among
sanitation workers than among meat production employees, and that total U.S.
meatpacking injuries are at an all-time
low. The industry has given “tens of thousands” of sanitation workers safety training with OSHA grants and made safety a
“major focus,” the group says.
But no one knows how many sanitation workers get sick and injured on the
job, according to the U.S. Government
Accountability Office, an arm of
Congress. The Occupational Safety and
Health Administration doesn’t require
plants to report contractors’ injuries, and
the highly fragmented sanitation industry
uses multiple job codes, so cleaners fall
through the data cracks, the GAO says.
Judging from Packers’ record, the
nightly storm of high-pressure hoses,
chemical vapors, blood, grease, and
frantic deadlines, all swirling in clouds
of steam around pulsing belts, blades,
and blenders, can be treacherous. From
2015 through September 2016, Packers
had the 14th-highest number of severe
injuries—defined as an amputation, hospitalization, or the loss of an eye—among
the 14,000 companies tracked by OSHA in
29 states, according to data analyzed by
the National Employment Law Project, or
NELP. Even that statistic understates the
risks. With about 17,000 workers, Packers
is a fraction of the size of the 13 companies above it on NELP’s danger scorecard, including the U.S. Postal Service
(No. 1), Tyson (No. 4), and Pilgrim’s Pride
(No. 6). Adjusting for size, Packers topped
the danger list by a wide margin, with a
rate of 14 severe injuries for every 10,000
workers. Its amputation rate of 9.4 dismemberments per 10,000 workers was
almost five times higher than for U.S. manufacturing workers as a whole in 2015.
“Sanitation workers face some of the
harshest and most dangerous conditions
in American industry, and there’s no
outcry because they’re largely low-paid
immigrants hidden away on the graveyard shift,” says Deborah Berkowitz,
senior fellow at NELP and a former OSHA
chief of staff. “That’s the cost of American
consumers wanting cheap protein and
the meat and poultry industry demanding huge profits.”
On the morning of Martha’s accident,
Packers dispatched a technical-services
manager, Salvador Diaz, to investigate. He
drove north from Texas, arriving at the
Holcomb plant at 6 a.m. to look around
before going to interview Martha at the
hospital. He caught her shortly after she
woke up from three hours of surgery.
She said the conveyor belt “grabbed”
her as she was trying to clean beneath
it, though she blamed herself for the
accident, according to Diaz’s report. “I
understand I have done wrong but never
thought that it would catch my hand,”
Diaz quoted Martha as telling him.
Packers fired her. The company and
its insurer argued in workers’ comp court
that Martha wasn’t entitled to compensation beyond medical expenses, because
she had recklessly disregarded its safety
rules about powering down machines.
Martha said she had cleaned under
moving conveyor belts many times in her
22 months on the job without Packers
managers ever saying a word.
The doctor who evaluated Martha
wrote that her left hand had suffered
permanent nerve damage resulting in a
Bloomberg Businessweek
January 8, 2018
Last November—35 months and at least 19
amputations later—Packers refinanced its loans and
paid its investors a dividend of $339 million
“9% whole person impairment,” which
could have entitled her to a maximum
workers’ comp payout of $150,000. But
the court sided with Packers, ruling the
accident was entirely Martha’s fault. She
got nothing. Martha vanished after that,
melting away like many undocumented
workers who are injured on the job. She
could not be located for comment.
Packers fared better. On the same
day in December 2014 that the Kansas
judge rejected Martha’s workers’ comp
claim, Packers announced it had been
bought by Leonard Green & Partners LP
of Los Angeles, its third private equity
owner in seven years. The purchase was
financed with more than $550 million of
debt. Last November—35 months and at
least 19 amputations later—Packers refinanced its loans and paid its investors a
dividend of $339 million.
The profit-taking was aggressive,
wrote a debt analyst at Moody’s Investors
Service; S&P Global lowered Packers’
credit rating. But the company’s outlook
remains stable, they said, partly because
of strong industry demand and rising
labor productivity. Packers brings in more
than $800 million a year in revenue from
about 500 plants. To David Michaels, who
ran OSHA during the Obama administration, big debt is a potential red flag. “Are
they reducing costs to pay debt by pressuring workers to work faster?” he asks.
“That’s a common danger with highly leveraged companies.”
Packers executives declined to discuss
specific employee injuries and rejected
the notion that debt or dividends have
any effect on work conditions. “We recognize the hazards are high in the sanitation
industry,” wrote Todd Mitchell, Packers’
vice president for safety, in response to
emailed questions. “Our sole concern is
making sure our team members perform
their job safely.”
Packers’ “aggressive approach” to
minimizing areas of concern such as
amputations has “greatly reduced” such
incidents, Mitchell continued. Since
2015 cleaners have been instructed not
to run blenders and augers while cleaning them, and supervisors increasingly
power down all machines themselves.
After reporting 14 amputations to
OSHA in 2015, Packers reported only 3
in 2016. Mitchell called NELP’s analysis
of OSHA’s severe-injury data “inflated
and incomplete,” in part because the
data included companies Packers had
recently acquired and at which it was
trying to improve safety practices.
I N U P TO N S I N C L A I R ’S 1 9 0 6 N OV E L
The Jungle, the protagonist is injured in a
meat plant and, like Martha, summarily
fired. Sinclair likened the “unspeakable”
conditions for European immigrants in
Chicago’s meatpacking plants to slavery,
only “there was no difference in color
between master and slave,” he wrote.
A century later, the racial component is back. Almost 30 percent of the
nation’s half-million meat and poultry
workers are foreign-born noncitizens,
compared with 10 percent of manufacturing workers overall, according to the
U.S. Bureau of Labor Statistics. More
than a third of meatpacking workers
are Hispanic. The proportion of sanitation employees who are immigrants isn’t
tracked, but many workers and industry
executives estimate it’s the vast majority
in many places.
Meatpackers tend to be scrupulous
these days about checking the papers
of production-line hires. Landing a job
on the third shift, however, is easy for
undocumented workers, especially at
smaller plants and with cleaning contractors, immigrants say. All workers
in the U.S. must have proof of identity
and employment authorization, which
companies are not obligated to verify as
authentic. Employers are responsible
only for misrepresentations the government brings to their attention. All sides
know the feds rarely raid at night.
Outsourcing sanitation is “driven
purely by profit,” says Tim Cox, who
runs a consulting firm in North Carolina
that specializes in sanitation for meat and
poultry producers. “It’s less costly to hire
someone with no documentation who
doesn’t understand his worker rights
than to hire someone who does.”
They’re also more willing to do the
work than U.S. citizens and holders of
green cards, and, by some accounts,
more able. “It’s sad to say, but it’s the
gospel truth: Seven out of 10 Americans
in the Deep South, whether black or
white, will fail the drug test,” says Randy
Hadley, local president of the Retail
Wholesale and Department Store Union
in Birmingham, Ala., which represents
about 6,000 poultry workers in Alabama,
Mississippi, and Tennessee. “Immigrants
pass the drug test. That’s what companies tell us.” Nationally, about a third of
poultry workers and roughly two-thirds
of beef and pork workers are unionized, but affiliation is much lower among
undocumented workers. “They’re too
scared to sign union cards,” Hadley says.
Gilberto Gonzalez, a 47-year-old
Guatemalan immigrant who has been
cleaning poultry plants in Alabama for 11
years, says smaller plants and sanitation
contractors ask few questions of undocumented hires and accept virtually any
supposed proof of employment eligibility. “They have a way of working it out
to get people on,” he says. (“Gonzalez”
is a pseudonym he provided for this
article in order to speak openly about
his experiences as an undocumented
sanitation worker.)
He lives with three of his sons in
a decaying mobile home just outside
Albertville on northeastern Alabama’s
Sand Mountain, famous for its snakehandling preachers. He sent for each
son separately in recent years. Just teenagers when they came, the boys paid
smugglers $10,000 apiece to spirit them
along the 2,300-mile trek from Guatemala
through Mexico, across the Rio Grande,
and on to Alabama, the last leg in the
back of 18-wheel trucks. They’re still
mostly invisible. They work at night, stay
inside during the day, use back roads to
avoid police, and never open the door
for anyone they don’t know. Once, the
family huddled inside as Immigration and
Customs Enforcement agents snooped
around the trailer park and knocked
on their door for several minutes. “We
just prayed to God, and they finally left,”
Gonzalez says.
He works now at a Tyson plant, an
employee of a large cleaning contractor
called QSI, owned by the Vincit Group
of Chattanooga. (QSI and Packers say
they use the federal E-Verify system to
confirm employment authorization.) The
work is good, as these things go. He’s still
haunted, though, by his previous job.
39
Bloomberg Businessweek
40
For about 15 months, he and his oldest
son, who is 22 and identifies himself as
Miguel, worked sanitation at a small processing plant called Farm Fresh Foods
LLC in Guntersville, Ala. The facility is
typical of the makeshift warehouses that
dot the back roads of chicken country,
picking up deboning work and other
butchering jobs from the big poultry producers. Most operate on thin margins—
bad news for workers, particularly the
undocumented, who are always the most
vulnerable to abuse.
Farm Fresh’s sanitation supervisor
rode the cleaning crew without mercy,
according to the Gonzalezes and other
former colleagues, who filed a complaint with OSHA in 2016. They were
forced to work at punishing speeds in
ankle-deep water with floating fat and
chicken guts. They were enclosed in
poorly ventilated rooms with chlorinated cleaning products wafting in the
air and severely limited in bathroom
and water breaks. The chemical vapor
caused heart-pounding insomnia, Miguel
says. Several workers had to seek medical
help. Workers who didn’t keep up the
pace were moved to an extremely cold
area of the plant as punishment.
After pushing the 20-man crew all
night, the supervisor would make them
play a devious game before going home,
Gonzalez says. To prepare the facility for
the morning shift, the cleaners had to distribute 80-pound crates of raw chicken
on the cutting tables. There were more
workers than crates, and anyone caught
empty-handed faced possible suspension
or firing. As a result, workers raced one
another across the wet floor to get the
heavy loads, causing injuries.
“When we complained, they only
got meaner,” Gonzalez says. After the
cleaners met with Farm Fresh’s management to discuss work conditions, the
company suspended them and refused to
issue their last paychecks. The Southern
Poverty Law Center helped them file
safety and whistleblower complaints
with OSHA, which has an agreement
with other federal agencies not to act
against undocumented workers at job
sites while complaints are pending. OSHA
fined Farm Fresh $29,000 for having
inadequate drains and failing to provide
proper protective gear against contaminated water, chicken waste, and chemical solvents and vapors. The company
settled with the workers separately. Farm
January 8, 2018
Fresh did not respond to inquiries for
comment for this story.
Gonzalez wants to stay in Alabama
another year or two to finish paying off
the family’s home in Guatemala, where
his wife and youngest son still live. But he
worries the decision won’t be his to make
in an era of highly publicized ICE raids.
“We just work and sleep and stay off the
street,” he says. “What choice is there?”
OSHA’S POWER HAS ALWAYS LAIN MORE
in its capacity to shame than punish. The
fines for serious safety violations seldom
exceed $20,000, a trifle for most manufacturers. Now OSHA doesn’t shame much,
either. In the past, the agency called out
safety violators in press announcements,
often resulting in embarrassing hometown headlines about injured workers.
But in 2017, under President Trump, OSHA
issued 123 press releases, compared with
546 in 2016 under President Obama.
The Trump administration has
also stripped OSHA’s website of data
on workplace fatalities, replacing it
with highlights of the agency’s cooperative safety initiatives with industry.
Among the Obama regulatory proposals that Trump’s OSHA has dropped is an
updated standard for lockout/tagout, the
crucial procedures workers should follow
to shut down dangerous machines before
working on them. And this fall, after the
GAO reported that meat and poultry
workers were suffering health problems
from being denied bathroom breaks and
feared punishment if they complained,
OSHA rejected the GAO’s recommendation that its inspectors ask about bathroom access during plant visits. “OSHA
does not routinely ask questions about
any potential hazards that go beyond the
scope of a complaint investigation, unless
those hazards are in plain sight,” wrote
the agency’s Loren Sweatt to the GAO in
response to its findings.
Meat and poultry companies have
operated without much fear of OSHA
since well before Trump took office, particularly in the Southeast. In 2016, when
three OSHA investigators showed up at
Mar-Jac Poultry in Gainesville, Ga., to
investigate an electrical explosion that
injured a maintenance worker, Mar-Jac
allowed them to examine the site of the
incident but nothing else. OSHA discovered a rash of other injuries in the plant’s
injury log and tried to expand the search,
but the company’s lawyer sent them away.
When an OSHA inspector returned
four days later to examine the blast victim’s tools, Mar-Jac’s attorney, Mark
Waschack of Wimberly Lawson Steckel
Schneider & Stine in Atlanta, said the
inspector could walk through the plant
to the locker room where the tools were
located, but only if he agreed to wear
a cardboard box over his head to blind
him to any safety hazards. “Mr. Waschack
stated that he had previously done this
to two [inspectors] in two previous
OSHA inspections,” wrote OSHA’s Robin
Bennett in a court affidavit.
Bennett refused to wear the box.
Instead, OSHA issued a search warrant,
which, at Mar-Jac’s request, a Gainesville
federal judge quashed, saying OSHA
lacked probable cause. The agency fined
Mar-Jac $20,000 for violations linked to
the explosion and appealed the searchwarrant ruling last March to the 11th Circuit
Court of Appeals in Atlanta, arguing the
injury logs and electrical blast provided
a “reasonable suspicion” of safety violations. The appellate court has yet to rule.
Poultry producers across the
Southeast, using Wimberly Lawson
lawyers, have blocked at least 13 other
OSHA searches. One, Fieldale Farms
Corp., limited OSHA’s access in 2015
after a Burmese sanitation worker lost
five toes in its Gainesville plant. Another,
Gold Creek Foods LLC in Dawsonville,
Ga., blocked OSHA from inspecting all
but a single machine after one of its sanitation workers, just 18 at the time, lost
an arm in a chicken cuber. OSHA fined
Fieldale $9,800 for the shorn toes and
Gold Creek $21,000 for the dismembered
arm. Both plants had been fined before,
but OSHA has still been denied access to
do a full safety inspection. Fieldale did
not respond to questions for this story.
Gold Creek’s general counsel, Robert
Weber Jr., said the company cooperated
Mar-Jac’s attorney said the inspector could walk
through the plant, but only if he agreed to wear
a cardboard box over his head to blind him to any
safety hazards
Bloomberg Businessweek
January 8, 2018
The Tyson plant in Holcomb, Kan.
with OSHA, but he did not respond to
questions about blocking the agency’s
expanded inspection.
J. Larry Stine, the Wimberly Lawson
partner in charge of the poultry litigation,
says that in preventing OSHA from conducting broad inspections, his clients “are
asserting their rights under the Fourth
Amendment of the U.S. Constitution to
be free from unreasonable searches and
seizures.” Putting boxes on the heads of
inspectors, he says, is “a little hyperbole
to illustrate the point.”
PHOTOGRAPH BY ADAM SHRIMPLIN FOR BLOOMBERG BUSINESSWEEK
HUNDREDS OF PAGES OF OSHA REPORTS
and other investigative documents
obtained by Bloomberg through public-records requests point to a dark place
in U.S. industry. And a protein boom
could make matters worse. U.S. production of red meat and poultry is expected
to hit a record 103 billion pounds in 2018,
up 3 percent from 2017, according to the
USDA. Processors are straining to add
capacity and workers in order to keep up.
With their allies in Congress, the poultry
industry is pushing the USDA to lift limits
on factory line speeds, a move the Obama
administration resisted as unsafe.
To meet output targets, production lines are operating later into the
night, leaving fewer hours for sanitation
workers to scrub down equipment before
morning inspections, says David Greer,
who’s managed chicken plants and sanitation crews for Pilgrim’s Pride, Perdue
Farms, Gold Creek, and others since
1991. And the third shift is getting more
complex and hazardous, as meatpackers
add automated blades, belts, and other
gear to the nightly steam bath, with many
not adding to crew sizes.
“The plant says if you were cleaning
it with five people before, you’re cleaning it with five people now,” says Greer.
“These guys are so pressed for time, it
creates a big temptation for shortcuts.”
Brent Sherman, 37, couldn’t keep
track of all the modifications at Tyson’s
meatpacking plant in St. Joseph, Mo.
Early one morning in 2015, he was hosing
down a Cozzini meat blender, capable of
grinding 8,000 pounds at a time, when it
did something he didn’t expect. Before
starting, Sherman had set the blender’s
controls on sanitation mode, ensuring it
wouldn’t power up for 60 minutes; safety
sensors on the machine were meant to
keep it powered off until he reinstalled
all the pieces, even if it took him more
than an hour.
What he didn’t realize was that
someone had disarmed the sensors so
it would automatically restart after the
sanitation cycle, making it easier—but
infinitely more dangerous—to hose down,
according to OSHA’s investigation. When
the hour was up, the blender suddenly
jerked back to life, snagging Sherman’s
hose and snapping off both his arms
below the elbow.
OSHA’s investigation found a sanitation culture at the plant of wanton
bravado. Many sensors had been similarly disabled for faster cleaning, the
agency discovered. A night-shift worker
was a plant legend for his speed and
daring, based on his refusal to power
down a single machine during sanitation.
Cleaning workers told OSHA that the only
time they felt any pressure from Tyson
managers to properly lock out machines
was when a government inspector was
expected at the plant.
OSHA fined Tyson $35,000 in the
Sherman case. Sherman is suing the
company and Cozzini for negligence in
state court, and both defendants deny
wrongdoing. Tyson spokeswoman
Caroline Ahn declined to comment on the
case or the company’s injury rate. “We
don’t want to see anyone hurt on the job,”
she wrote in an email. Tyson promptly
investigates accidents to avert recurrences
and monitors sanitation contractors to
ensure they abide by all training, health,
and safety standards, Ahn wrote.
Mel McCrary, a former OSHA inspector in Kansas City who worked the case,
says Tyson has tried to improve its safety
systems since Sherman’s injury. But a
long history with the industry suggests to
him that safety will never be a significant
priority. “People are getting cut up, but if
the company is performing, life is good,”
says McCrary, who retired last year after a
21-year career investigating meatpacking
injuries. “Sanitation workers are treated,
at best, with apathy.”
And at worst? In 2013, Hugo AvalosChanon, 41, was cleaning a hamburger
blender at Interstate Meat Distributors
in Clackamas, Ore., when, investigators believe, his hose got caught in the
machine’s paddles and pulled him in. His
widow in Mexico is suing Interstate for
negligence and wrongful death, claiming the night shift was a veritable death
trap. There were no safety guards on
dangerous machines, and workers were
required to clean the equipment while it
was running, according to court filings.
Based on pretrial testimony, a Clackamas
County judge is letting the widow seek
punitive damages at trial.
Interstate did not respond to questions for this story. In legal filings, the
company acknowledges safety problems
but says Avalos-Chanon’s employer, and
hence the company responsible for his
safety, was the sanitation contractor DCS
Sanitation Management Inc. Interstate
claims it paid DCS, which has since
been purchased by Packers, a flat fee to
assume full responsibility for the night
shift. Oregon OSHA fined DCS $6,300
after Avalos-Chanon’s death.
“DCS managers knew it was possible
to clean the machines without turning
them on,” Interstate argues in a court
filing, in a rare burst of industry candor,
“but they believed doing so would not
make financial sense.” —With Shruti Singh
41
Bloomberg Businessweek
42
Growing at an At
It got the running nerds. Now Brooks has
to conquer the jogging herds. By Claire Suddath
Photograph by Sarah Anne Ward
According to the people at Brooks Sports Inc., I’m not a runner.
I’m what’s known within the company as a person who runs.
“There’s a difference,” says Brooks Chief Executive Officer Jim
Weber, who’s run three to five mornings a week, every week, for
35 years but apparently isn’t a runner either. When he says this,
I give him a look, because, frankly, that’s ridiculous. I’ve been
running for more than two decades. I run on business trips and
vacations. I track my weekly mileage and voluntarily eat packets
of electrolyte-enhanced goo that—why does no one talk about
this?—tastes like mediocre cake frosting. In 2016, I ran my first
marathon, an experience that melded transcendent euphoria
and throbbing pain into an entirely new emotion I can’t really
describe, other than to say it was both the best and worst thing
I’ve ever felt. How am I not a runner?
January 8, 2018
43
thleisurely Pace
“That’s a self-defined runner,” Weber explains, not a runner
in the competitive, professional sense. And that’s all right,
because—and here Weber lowers his voice like he’s gossiping
about someone behind her back—“Running’s not really a sport.”
He has a point. Every year, 19 million Americans participate
in some kind of organized road race—five times the number of
people who play in basketball leagues—but most aren’t competing to win anything. Some 28 million more run regularly but
don’t race. “Nobody remembers who won the Olympic marathon
and what shoe they were wearing,” Weber says. So for Brooks,
the 104-year-old Seattle-based company that makes running gear,
and only running gear, to persuade those 47 million people to
drop $100 to $180 on a pair of shoes, it first has to understand
why they’re running. “The answer is almost always personal,”
Weber says. “When people run, they’re doing it for themselves.”
This running-as-lifestyle philosophy has propelled Brooks
from being a forgettable brand that 17 years ago was on the
brink of a second bankruptcy to a $500 million company. It sells
shoes in more than 60 countries, is the top brand at specialty
running stores, and has produced the first- or second-mostpopular shoe at the Boston Marathon for the past four years. At
the 2016 Olympic marathon trials, more runners wore Brooks
than any other brand. “Nike was second! To us!” Weber pumps
his fist when he says this, adding a quietly ebullient “Yesssssss.”
Bloomberg Businessweek
But beyond devoted runners, the company is still relatively
unknown. Strava, the athletic activity tracker, says about a sixth
of runners who log more than 30 miles a week wear Brooks
shoes but only 3 percent of those who run less than 10 miles a
week wear them. As a result its sales pale compared not only
with those of Nike (the Goliath of the business, with $5.2 billion
in annual revenue and a full third of the market), but also with
those of Adidas, Asics, and New Balance. Brooks is so specific to
runners that a few months ago, when employees saw someone
wearing a pair at a bar in Texas they interrogated him—Did he
run? How had he heard of Brooks?—in the middle of his friend’s
bachelor party.
Weber wants to change that. Over the next few years, he
thinks Brooks can become a $1 billion brand, essentially doubling its revenue. It just has to figure out a more complex customer: the runner who doesn’t like to run.
44
Brooks got its start in Philadelphia in 1914, making baseball
cleats and lace-up bathing slippers for the era’s demure beachgoers. It entered the running business in 1974 with a bouncy
foam midsole that became so popular with people dabbling in
jogging, the new fitness craze, that its Puerto Rican manufacturer couldn’t fill orders fast enough and briefly shipped shoes
with missing tongues or the wrong number of eyelets. Retailers
returned almost $3 million in Brooks shoes, citing defects, and
by 1981 the company had declared bankruptcy. For the next
two decades, Brooks passed through a handful of owners: For a
while, Wolverine World Wide Inc., the company that makes Hush
Puppies, owned it; later two Norwegians bought it and moved
it to Seattle to be closer to its (by then) Chinese manufacturers.
None of Brooks’s owners, however, were good at selling athletic
sneakers. A 1993 Seattle Times article about the company’s move
to a new office building noted that Brooks’s $30 million in U.S.
sales was smaller than Nike Inc.’s advertising budget.
Weber, who’d previously worked at outdoor apparel and
snowboarding companies, joined Brooks as CEO in 2001 at the
request of yet another owner, private equity firm J.H. Whitney
& Co. “We were losing money on everything we made,” he says.
He scrapped almost the entire product line—no more cleats or
tennis or basketball shoes, no $30 cross-trainers sold at Walmart—
and refocused the company on the one thing that still sold well:
high-end shoes designed for serious runners.
According to the University of Calgary’s Running Injury
Clinic, half of all runners get hurt each year. As a result they
tend to buy shoes not because of what they can do, but for
what they might prevent, an experience more like filling a prescription than shopping. For years, the dominant assumption
about injuries was that most happened when a runner’s foot
rolled inward (pronated) or outward (supinated) as it hit the
ground. Too much of either and the runner hobbled away with
overstretched ligaments or with knee, hip, or foot problems.
Since the early days, Brooks tried to engineer shoes that corrected problems. They shone at specialty stores where experts
watched customers trot, either on a treadmill or just down the
aisles, then suggested models providing varying levels of cushioning and pronation control and assorted heel-to-toe ratios (the
height of the heel relative to the forefoot). “They have legitimate
products and great innovation,” says Brett Lamb, who, along
with his wife, Kim Holt, owns two San Francisco franchises of
Fleet Feet Sports, a chain with 180 locations that, like Brooks,
January 8, 2018
catered to the first wave of running enthusiasts in the 1970s.
Within a few years of Weber taking over, Brooks became the
best-selling brand at specialty stores. Then Fruit of the Loom
Inc., which is owned by Berkshire Hathaway Inc., bought the
company in 2006. Brooks flew under Berkshire’s radar for a
couple of years until Todd Combs, one of Warren Buffett’s investment managers, brought it to his attention. Combs is a triathlete;
Ted Weschler, another top Berkshire investment manager, is a
marathoner. Buffett may not have realized it, Combs said, but this
random shoe company was doubling in size every three years.
Soon after, Buffett met with Weber, who explained his allrunning-only-running strategy. Buffett liked the idea of focusing
on a niche market. “He thinks long-term,” Weber says of Buffett,
who told him: “Whatever you do, just make the brand stronger.”
So that’s what Weber did. Buffett was so pleased by Brooks’s
success that in 2012 he spun it off from Fruit of the Loom, which
didn’t have footwear experience. As Berkshire holdings go,
Brooks is small, accounting for a sliver of the $24 billion it made
in 2016. But for Buffett, it appears to be a source of pride. Brooks
sells a limited-edition sneaker and hosts a 5K race at Berkshire’s
famously ostentatious annual shareholder meetings, which take
up an entire Omaha convention center. One year, Brooks printed
a caricature of Buffett on the sneaker’s heel.
As it happened, Brooks’s reinvention as a running company
coincided with a shift in how Americans approached their health.
Suddenly everyone stopped wanting to “diet” or “exercise” and
instead claimed to “eat clean” and be “into fitness.” The Sports &
Fitness Industry Association, which tracks athletic trends, estimates that since 2001 about 13 million Americans have taken up
running—the equivalent of the state of Illinois waking up one
day and deciding to go for a jog.
Running’s de-stressing, mood-lifting effects allow the sport to
fit nicely among other wellness trends such as yoga and meditation, pursuits people believe will clear their minds, slow them
down, and imbue life with a sense of purpose. And unlike other
sports—cavemen probably never played football—running is
natural. Organic. It’s no surprise then that in about 2009 a new
trend, spurred by ultramarathoner Chris McDougall’s book Born
to Run, emerged: Maybe running was so natural and organic that
shoes weren’t even necessary.
McDougall looked at injury rates and said, wait a minute, why
were runners still wrecking their knees and getting shin splints as
often as they did 30 years ago? What were these expensive shoes
even doing? At the same time, several biomedical researchers
published papers questioning the relation between pronation
and injury. “When you tried to look at the science behind the
shoes, there wasn’t any,” says Nick Campitelli, an Akron podiatrist who writes Dr. Nick’s Running Blog. “Companies talked
about innovation, but they usually meant the shoe’s materials, not evidence-based biomechanical studies.” Born to Run
became a best-seller; sales of traditional running shoes dropped.
Suddenly, people started plodding through parks in a product
from the Italian company Vibram SpA, which began making
thin rubbery slippers with individual toe pockets that look a
little like work gloves for your feet.
“I was like, Oh my God, nobody is going to run in our shoes
anymore,” says Carson Caprara, Brooks’s director of global footwear product line management. Caprara, a marathoner, had
read Born to Run but never thought its notions would catch
Bloomberg Businessweek
January 8, 2018
on. He watched confusedly as these slippers grew to account quicker,” says Eric Rohr, Brooks’s senior biomechanical engineer.
for almost a fifth of all running shoe sales.
While Brooks was partnering with Ideo to learn about casual
In the end, the trend was short-lived. “Are You Ready to runners, it also revisited its theories about pronation and supiGo Minimal?” Runner’s World magazine asked in 2012; “Sales nation. When the company moved its headquarters into a new
of Minimalist Shoes Plummet,” it announced a year later. In building in Seattle’s Freemont district in 2013, it had added a
2014, Vibram settled a class-action lawsuit, agreeing to pay test lab, staffed with engineers such as Rohr. “We found that,
$3.75 million to settle claims that it made deceptive statements except in extreme cases, the way someone’s foot falls doesn’t
about the health benefits of its shoes without offering any sci- affect their runs,” he says. Today, the Brooks website offers a
entific proof. Sales of traditional shoes rebounded, and by 2014 survey that mixes people’s mechanical needs (Do you have prethere was even an extreme-cushioning movement.
existing injuries? How’s your balance?) with their wants (Do you
Still, Caprara couldn’t get over it—millions of people had want that cushioned, Cadillac-style shoe? Or would you like to
eschewed the find-shoes-to-fix-your-gait selection process. literally pound the pavement?). The company is trying to get
Brooks needed to tap into whatever was motivating those gait-assessing salespeople on board with its new method, too. In
runners, because it definitely wasn’t injury prevention. To that September, Brooks paired its DNA Amp sole with a trendy (and
end, it hired Ideo, the Palo Alto design firm famous for creating less expensive to produce) knit upper. The shoe, which Brooks
the original Apple mouse, to help answer a seemingly simple calls the Levitate, sells for $150—on the higher end of its price
question: Why do people run? Ideo visited shoe stores across range—and comes in four colors: royal blue or gray for men,
the country and approached casual joggers. The answer was electric blue or white for women. The sides of the midsole are
as simple as the question: Most people ran because they liked painted to look like chrome. It probably won’t inspire sneaker
it. It wasn’t easy. Sometimes their feet felt like anvils, and their collectors to scour resale sites, but it’s Brooks’s most popular
shorts started chafing, and their phones ran out of power mid- shoe in six years. “Is it as cool as the coolest Nike shoe out there?”
Beyoncé. But the mindfulness crowd had actually been onto Caprara asks. “I don’t know. But it’s cool for us.”
something. Running was freeing. Refreshing, even. Wobbly
Brooks has never done much advertising, instead relying on
ankles weren’t a concern.
reviews in magazines such as Men’s Health and Runner’s World
There were those, though, who confessed that they didn’t to sell products. But last fall the company hired as its chief marenjoy it—they just ran because
keting officer Melanie Allen,
it was good for them. “They’d
who oversaw seasonal pro“That’s basically the first
try to life-hack their way into
motions at Starbucks Corp.
time they’ve made something
doing it,” says Clark Scheffy,
(translation: Pumpkin Spice
really visually appealing”
Ideo’s managing director. “I
Latte). In June, a few months
remember one woman we
before the Levitate came out,
talked to who had an iTunes playlist, and she knew that if she Brooks pulled a big (for it) promotional stunt. It offered to pay
got through all the songs, it would be 30 minutes and she could $1 to anyone who signed up as an official sponsored athlete.
stop. It was very SoulCycle-ish—working out because someone (Real track-and-field sponsorships are notoriously meager; a
is yelling at you, vs. someone running for the love of running.” 2012 MarketWatch survey found that 80 percent of runners
Brooks hadn’t considered this kind of customer before. “They ranked in the top 10 for their events made less than $50,000 a
just want us to make running easier,” Caprara says.
year. Brooks’s sponsorship stunt is roughly equivalent to adding
They also wanted to look cool. Brooks had been so focused one professional runner to its roster.) More than 60,000 people
on designing shoes for avid runners that the entire athleisure, have signed up and subsequently peppered social media with
sneakers-to-work trend had passed it by. Nike and Adidas AG tongue-in-cheek posts about their sponsorship deals. They share
couldn’t sell their black-knit and white-soled sneakers to the their 4-mile runs and 9-minute miles. Sometimes they’ll use the
juice-cleanse crowd fast enough, while most of Brooks’s best- #brooksendorsed or #brooksathlete hashtags on pictures of
selling shoes still looked like something you might have seen on themselves wearing Brooks shoes (but often other companies’
a Mall of America power walker in 1998.
clothing). The Levitate has been popping up with increasing
So Brooks set about creating lighter, sportier shoes. It updated frequency on these sponsorees. A few weeks ago a woman in
its colors—a lot of black, some white with gray, a little neon. In London used them to run on a treadmill while watching Netflix.
2017 “they finally came out with a shoe, the Revel, that’s basi- A man in Maine went for a walk in them. “They’re so light,”
cally the first time they’ve made something really visually appeal- gushed one new fan, Marisol Beck, 22, in Carlsbad, Calif., who
took up running in 2016.
ing,” says Lamb of Fleet Feet.
Beck had never heard of Brooks before then. A boyfriend
Brooks also built a shoe for those who wanted to run but
needed a literal push. In 2015 it asked the German chemical got her into running, and she liked it so much she continued
company BASF SE to invent a material that, when you ran, gave even after he became an ex. For a while she ran in Fila but
you a little bounce. BASF came back with a polyurethane foam— switched to Brooks because she liked the way they looked and
the type of compound running shoes were made of 20 years ago, felt. She now owns two pairs but admits she’s hardly the combefore gels and air bags became trendy—that was so springy it petitive runner the company is known for outfitting. Mostly
felt as if it were pushing your foot forward. Running brands love she just runs around her neighborhood, at about 10 minutes
assigning futuristic names to their proprietary materials; Nike has a mile. In June she ran her first 5K. In 2018 she wants to try a
the Lunarlon, Asics Corp. has FlyteFoam. Brooks went with the marathon. “A few months ago, I never would’ve even called
vaguely scientific-sounding DNA Amp. “Then we shaved down myself a runner,” she says. I don’t have the heart to tell her
the heel so it was more like a racing flat and runners landed that, technically, she isn’t one. 45
All
Bloomberg Businessweek
46
As a liquidity crisis continues, bank customers queue up
in Bulawayo on Dec. 27. Zimbabweans must wait long
hours to withdraw money from their accounts
The
January 8, 2018
Zollars
In
The
World
47
Robert Mugabe is gone.
The mess he created remains.
What will it take to fix Zimbabwe?
By Matthew Campbell
Photographs by Jekesai Njikizana
Bloomberg Businessweek
usisa Moyo can’t wait to get out the door. It’s the middle
of a Monday afternoon, and the chief executive officer
of Zimbabwe’s United Refineries Ltd. is striding briskly
out of his crushing plant—a vast rectangular structure
with red brick walls and a corrugated metal roof. In theory, this
is where millions of soybeans at a time can be cleaned, heated,
cracked, and pulverized to extract vegetable oil. Except today,
like most days, there are no soybeans and no workers; overhead, the steel catwalks are empty, and the line is silent apart
from the clatter of Moyo’s footsteps on concrete. “I don’t like
to be in there too long when it’s not running,” he says. “When
you’re a factory man, you want to hear the machines pounding.”
Trim, 42, and dressed plant-manager casual in gray chinos
and a short-sleeved button-down, Moyo exits into the pounding sunlight of Bulawayo, a decaying industrial city in southwest
Zimbabwe. Since 2012 he’s kept United Refineries afloat in one
of the world’s most unstable economies. Hyperinflation, corruption, and dereliction were hallmarks of President Robert
Mugabe’s reign—which ended with the 93-year-old dictator’s
sudden ouster in late November. Now, for the first time in almost
four decades, Moyo and other Zimbabweans are daring to hope
that their profoundly dysfunctional country can repair itself.
More pressingly, though, Moyo has to solve a money problem
that persists into the post-Mugabe era. It’s not that he’s broke—
United Refineries has more than enough in the bank to pay for
a trainload of soybeans awaiting release across the border in
Zambia. The issue is liquidity. Attempts to curb inflation have
restricted companies’ access to their funds, and Moyo’s ability
to import is determined weekly by a committee convened by
Zimbabwe’s central bank. “The most nail-biting moments of
my life are from Monday morning”—when Moyo makes his
request—“until Wednesday,” when the committee’s decision is
communicated, he says. Sometimes United Refineries is allowed
to use $350,000; sometimes it’s as little as $200,000, with no
apparent logic given. Moyo scrambles to allocate the funds as
best he can to keep some part of the refinery operation going,
and its workers in their jobs, until the nail-biting begins again.
“I believe there are immense opportunities here,” Moyo says
of Zimbabwe, where he’s remained after two of his three siblings, like millions of their fellow citizens rich and poor, left
years ago for a more normal life abroad. “But a lot of the time
I’m like, ‘Why do I put up with this rubbish?’ ”
Over his 37 years in office, Mugabe impoverished Zimbabwe’s
14 million people with a series of perverse economic experiments. Formerly the breadbasket for much of the continent,
today the country can barely feed itself, and a national railway
that once served as a crossroads for the region barely functions. Streetlights in Harare, the capital, long ago went dark. At
about $1,000, the country’s per-capita gross domestic product
is less than one-fifth that of neighboring South Africa.
The task of reversing this destruction falls to Emmerson
Mnangagwa, Mugabe’s former vice president and political
protégé, who has pledged to break with the old regime’s
worst policies. “We must accept that our challenges as a
nation emanate, in part, from the manner in which we have
managed our politics, both nationally and internationally,”
Mnangagwa said shortly after assuming the presidency. “We
have an economy to recover, a people to serve.” While his
early moves have won praise from reformers, it’s hard to
overstate the difficulty of restoring a nearly rogue state to
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January 8, 2018
normal membership in the international financial community.
Still, reasons for optimism include Zimbabwe’s natural
resources: platinum, lithium, huge areas of highly fertile land.
And despite Mugabe’s many depredations, investments in
schools and universities during his rule yielded some of the
highest rates of literacy and education in Africa. A 3 millionstrong diaspora, concentrated in Johannesburg and London,
is a potent source of skills and investment. A new beginning
isn’t at all out of the question.
Zimbabwe’s success or failure will be relevant for more
than its own citizens. A quarter century after the fall of the
Soviet Union began what was supposed to be a golden age of
democratic prosperity, more countries are headed toward
autocracy—Hungary, Poland, Turkey, to name a few—than away
from it. Zimbabwe could go either way. But if its people manage
to reconstruct a functioning state from the wreck Mugabe left
them, it could serve as a template for the day when economic
reality catches up to Venezuela, North Korea, or even Russia—
that is, places where strongmen have attempted to contort the
laws of financial physics to their own ends. And if Zimbabweans
can’t fix their system, their country will stand as evidence that
when a bad leader stays in charge long enough, a nation can
be broken beyond repair.
ven by the standards of colonial Africa, Rhodesia
was a nasty place for its black majority. In 1965,
Ian Smith, the white-supremacist leader of what
was then a British colony, declared independence
rather than bend to demands from London to
enfranchise the bulk of the population. “The white
man is master of Rhodesia,” he declared, “and he intends to
keep it.” Smith seemed willing to bear any price to maintain
white rule—his regime was a global pariah, shunned by virtually every country except apartheid South Africa—and in the
early 1970s a sporadic guerrilla campaign by black activists
intensified into open warfare. Mugabe, a former teacher who’d
joined the wave of leftist revolutionary movements sweeping
the continent, emerged as one of the heads of the Zimbabwean
rebellion. In 1979, Smith was forced to relinquish power. It was
a moment hailed by activists around the world; for the official
handover, Bob Marley, though stricken with cancer, flew into
Harare (then known as Salisbury) to sing Get Up, Stand Up with
the Wailers in a stadium packed with jubilant citizens of the
new, black-led Republic of Zimbabwe.
Mugabe was elected in 1980 as its first leader. His tendencies were clearly autocratic—his party, Zanu-PF, was never seriously challenged, and internal rivals acquired a habit of dying
in car accidents. But Mugabe remained genuinely popular well
into the 1990s, thanks to investments in health care and education and a welcoming attitude to foreign investment that
allowed business to flourish.
Later in the decade, though, as the economy flagged
and Mugabe’s popularity slid, he needed a new cause to
rally supporters. He found it in land redistribution. About
4,500 white farmers still controlled the best agricultural land,
and Mugabe began tolerating and then encouraging its “resettlement” by black Zimbabweans. These scenes were chaotic
and occasionally violent, extending in a few cases to murder.
Dispossessed farmers received little or no compensation and
fled the country in large numbers.
E
Bloomberg Businessweek
Moyo’s cooking-oil factory
in December. With limited
access to foreign capital, his
company is operating well
below capacity
The land seizures were the beginning of Zimbabwe’s descent
into an economic abyss. Agricultural output collapsed as highly
efficient commercial farms reverted to subsistence cultivation,
with production of key crops falling by more than half from 1999
to 2005. With a government that had shown it wouldn’t respect
property rights, the country became a no-go zone for foreign
investors almost overnight. For Mugabe, this presented a serious
new problem. Always eager to ensure the broadest possible base
of support, he’d created a vast civil service that enjoyed generous pay and benefits, as well as a web of subsidies for the businesses of key allies.
To keep funds flowing in the absence of real growth, he
ordered the Reserve Bank of Zimbabwe (RBZ) to print money,
leading to hyperinflation on a scale reminiscent of the Weimar
Republic. In 2008 the unofficial rate of price increases reached
98 percent per day. On paydays, workers rushed to shops to
spend what they could before the paper became worthless; the
Harare stock market shut down, unable to meaningfully price
shares. The RBZ repeatedly created tiers of banknotes, culminating with a 100-trillion Zimbabwean dollar note that remains
the highest-denomination bill issued in at least half a century.
The madness paused between 2009 and 2013, when Mugabe
was forced to share a measure of power with a more grounded
opposition party; among other reforms, Zimbabwe abolished
its currency and effectively switched to the U.S. dollar. But an
incorrigible Mugabe soon rigged an election and resumed extravagant spending. This time, however, his central bank could no
longer print new money. Zimbabwe’s only way of obtaining large
amounts of U.S. dollars was to export goods or attract foreign
investment, but with growth plunging, not nearly enough cash
was coming in. To avoid economic paralysis, the RBZ began
injecting electronic dollars into the banking system and issuing
domestic bills called “bond notes” to ease the shortage of physical money. They quickly became better known as “zollars.”
Inside Zimbabwe, an RBZ-created zollar in either physical
or electronic form is officially valued at one-to-one with U.S.
currency; no one outside the country shares the central bank’s
assessment. An electronic balance in Zimbabwe can’t be used
to make dollar payments abroad, which is why Moyo is unable
to use his zollars to import soybeans. The fiction doesn’t really
hold up domestically, either. Every day at dawn, Zimbabweans
line up at banks to withdraw as much hard U.S. currency as
they are allowed; the greenbacks emerge from ATMs filthy and
frayed from overuse. One local financier was recently told by
a teller that all he could access was $20—in the form of 200 10¢
Zimbabwean “bond coins.”
Black-market moneychangers can easily be found on street
corners, charging a premium to convert bond notes to U.S.
bills. Three traders I asked in Bulawayo in early December were
demanding fees of as much as 30 percent, or $13 in bond notes
for $10 back in U.S. cash. When I pulled out a U.S. $5 bill to pay
for drinks in a fast-food joint in Chegutu, a dusty town southwest of Harare, a man in a suit and tie shot between me and
the cashier and tried to swipe his bank card to pay for my purchase. He proposed I give him the cash—a small-scale zollar/
dollar arbitrage.
Zimbabwe cannot have an imaginary internal currency
forever if it wants to return from beyond the edge of the map
of established economic theory. (One example of the current
illogic: The Harare stock market tends to rise on bad economic
news, because domestic investors view shares as a hedge
against zollar inflation.) Citizens know a reckoning is inevitable and will almost certainly be painful. The country’s economy
is built on “a grand illusion,” says John Legat, a Harare-based
investor. “At some point you’ve got to say, ‘Sorry guys, we’ve
been telling you it’s a dollar, but it’s not.’ ”
n Dec. 7, Finance Minister Patrick Chinamasa rose in
Parliament to present the first budget of the post-Mugabe
era. For Zimbabwean reformers, much of the speech was promising. Symbolically, Chinamasa promised to slash the bloated delegations Zimbabwe sends to international meetings and banned
business-class travel for all but the most senior officials. More
significantly, he pledged broad spending cuts and suggested an
end in most sectors to the Mugabe policy of “indigenization,”
which forced businesses to transition to majority ownership by
black Zimbabweans and was often used to benefit political allies.
More intractable problems remain. Zimbabwe’s government is a patronage machine of astonishing scale, with 300,000
employees whose wages alone eat up almost 100 percent of
the country’s tax revenue. The state owns about 100 largely
dysfunctional companies, from Air Zimbabwe Ltd., currently
barred from flying to the European Union on safety grounds,
to the Zimbabwe Electricity Supply Authority, which can’t
produce enough power to keep the lights on. Whether such
companies are restructured or privatized, large job losses are
certain, further exacerbating poverty in the short term. There’s
also the question of bribes and other forms of corruption,
which the new government has said it will confront aggressively. That’s one thing at the lower levels, but it may be a different story when investigations lead to senior officials.
Almost every economic prescription for Zimbabwe, though,
starts with the dual-currency conundrum, and the potential fixes
are unpalatable. According to the RBZ, at the end of October the
country’s commercial banks held about $6.4 billion in deposits,
underpinned by just $40 million in foreign cash. Restoring the
zollar to true parity with the U.S. dollar probably would require
a huge injection of capital, for which there is no clear source.
The World Bank and International Monetary Fund won’t lend to
Zimbabwe because the country is in arrears on past financing. No
private investors are apparent. A U.S. bailout of a smallish, hardto-spell African country where few direct American interests are
at stake isn’t remotely on the radar of the Trump administration; and China’s foreign-investment priorities are biased toward
hard infrastructure that provides work for its companies—not
shoveling funds into what could be a black hole. Ultimately,
even if a miracle recapitalization did occur, it wouldn’t solve a
fundamental liability of using the U.S. dollar: Such a strong currency makes Zimbabwean exports uncompetitive.
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49
Bloomberg Businessweek
50
The most prominent alternative is a forced devaluation,
officially acknowledging the fact that $1,000 notionally on
deposit in a Zimbabwean bank is worth far less. (No one quite
knows by how much; estimates of the true exchange rate range
from 1.2 zollars to 7 zollars per greenback.) Socially, this would
be explosive in a country whose citizens have already lost their
savings once in recent memory. But economically it might be
essential, if it enables the restoration of a Zimbabwean currency that makes its exports more attractive.
The scale of the work required to revive the economy in
Zimbabwe is most apparent outside Harare, in the vast tracts
of rural land—the country is just smaller than California—where
two thirds of its people live. The highway to Bulawayo runs
through what was once some of the country’s most productive
farmland—but today is largely fallow, flat expanses of ragged
grass extending almost to the horizon. Here and there, huts
abut small patches cleared from the scrub, where farmers grow
subsistence crops of corn or potatoes.
One of the few farms still functioning efficiently belongs
to Anthony Mandiwanza, a Harare-based businessman who
bought his roughly 200-hectare spread in 2001. (He says he paid
a fair-market price to an aging, white farmer who wanted to
part with the land and its title.) On a cloudy Sunday morning,
Mandiwanza, a stout 62-year-old in pale green cargo shorts,
shows off neat rows of corn and bushy groves of mango trees.
He pauses in a field of verdant tomato plants, bending to inspect
what looks like a knee-high bird feeder—in fact, a trap for pests
that mimics the scent of female insects. “We’re sitting on really,
really fertile land,” Mandiwanza says, gesturing in a rough circle
over his bald head. Though he complains that importing new
equipment is currently “mission impossible” because of the currency shortage, his property still boasts well-maintained tractors and combines; if Mandiwanza can find an outside investor,
he’d like to irrigate the whole place, potentially doubling output.
Mandiwanza’s spread could pass for a farm in almost any
developed country—if not for its neighbors. Immediately across
the property line are shacks belonging to smallholders who
were resettled on the land of an exiled white farmer and now
work the soil with hoes and spades. It’s like peering over the
fence and into another century.
The neighbors aren’t likely to suddenly start farming at
21st century scale. When Mugabe allowed the seizure of commercial farms, he didn’t give formal ownership to the new
occupants; the land is controlled by the state. That means millions of people like Mandiwanza’s neighbors have no title to the
fields they work, which makes it mostly impossible to borrow
from banks or foreign investors for capital improvements. The
establishment of a functioning system of land tenure, with clear
ownership and property rights that can’t be arbitrarily abrogated by the state, is so necessary, and so complicated, it can
almost make a reformer momentarily forget about the zollar.
ugabe’s private office used to occupy the doubleheight 14th floor of Zanu-PF’s Harare headquarters—a leaden, concrete skyscraper with
a triangular crown. Now the space belongs to
Mnangagwa, a leader who claims he can transform a system of which he’s been an intimate part for his entire
political career. As countries from Russia to Egypt have learned,
one authoritarian system can easily be replaced by another.
M
January 8, 2018
Mugabe’s Crazy Cash
Zimbabwe’s foreign cash holdings
$400m
300
200
Zimbabwe uses the U.S.
dollar, which makes its
exports more expensive
and less competitive—
contributing to a dire
shortage of hard currency.
100
0
10/2013
10/2014
10/2015
10/2016
10/2017
Worst episodes of hyperinflation* in recent history
Country
Year
Hungary
Zimbabwe
Yugoslavia
Serb Republic
Germany
Greece
China
Free City of Danzig
Armenia
Turkmenistan
1945
2007
1992
1992
1922
1941
1947
1922
1993
1992
Days it took prices to double
0.6
1.0
1.4
1.4
3.7
4.3
5.3
6.5
12.5
12.7
0
100
Zimbabwe appears
again further down the
list, thanks to another
spike in inflation in
September 2017.
200%
$12
Tracking the untrackable zollar
10
Here’s one rough proxy for the
dollar/zollar exchange rate. Equity
in Old Mutual Plc., a U.K.-based
financial group, trades in both
Harare and London. When shares
purchased on the former exchange
cost more than on the latter, it
implies the “dollars” in Zimbabwean
accounts don’t go as far as the
dollars in London.
8
6
4
2
Zollar worth less
0
Zollar worth more
–2
12/2015
12/2016
12/2017
*RANKED BY DAILY INFLATION RATE. DATA: STEVE HANKE AND ERIK BOSTROM, RESERVE BANK OF ZIMBABWE
Mugabe’s removal was as much the product of internal party
intrigue as popular discontent. It resolved a toxic rivalry between
Mnangagwa—who headed a faction known as Lacoste, after
his revolutionary nom de guerre, “Crocodile”—and First Lady
Grace Mugabe, 52, who’d sought to succeed her husband. The
Zimbabwean military was instrumental in his coup, and has
been rewarded. Mnangagwa put two senior military figures in his
cabinet; one of them, the new foreign minister, commandeered
an early morning news broadcast in full camouflage to announce
Bloomberg Businessweek
the seizure of power. The head of the army, Constantino
Chiwenga, became vice president on Dec. 23. Highway roadblocks, a long-ubiquitous feature of Zimbabwean life, where
police officers extracted “fines” from motorists, have in recent
weeks been taken over by troops with Kalashnikov rifles slung
over their shoulders. Whereas Mugabe was usually escorted in
public by police guards, Mnangagwa is generally accompanied
by a uniformed soldier.
The new administration has a model for expanding prosperity while remaining firmly in political control. “We look
forward, naturally, to China in terms of our development path,”
Chinamasa tells me in Harare. “They’ve been able to take out
of poverty something like 300 million people. That is a feat not
many countries have been able to achieve, and that means we
have no choice but to look to them for guidance and direction.”
He’s speaking after a signing ceremony for a 1.45 billion-yuan
($223 million) Chinese financial-assistance package. Two-thirds
is for a low-interest loan to upgrade shabby Robert Gabriel
Mugabe International Airport, and much of the remainder is
a grant to fund the construction of a new Parliament building,
which will be erected by Chinese contractors.
Although Mnangagwa has said elections planned for later
this year will meet international standards, his democratic
credentials are slim. For many Zimbabweans, he’s associated
with one of the ugliest episodes of Mugabe’s reign, a 1980s
purge that led to the murder of some 20,000 civilians, mostly
members of the Ndebele ethnic minority, by the new national
army. Opposition politicians have accused Mnangagwa, who
was minister of state security at the time of the massacres, of
being deeply involved, an allegation he has denied. Much of
his government career was spent in security-related positions,
including overseeing the much-feared Central Intelligence
Organisation, and he was behind crackdowns on political
opposition that kept Mugabe’s grip on power unchallenged.
Mnangagwa’s allies insist that he’s a democrat at heart. “He’s
seen what it is to raise and grow a dictator, and he doesn’t want
to go that way,” says Larry Mavima, an entrepreneur and close
friend of the president who sits on Zanu-PF’s central committee.
Western governments have called for the establishment of
genuine democracy. For now, stability may be enough. The
U.K., which shunned Mugabe, has said it’s willing to work with
the new government, and U.S. Secretary of State Rex Tillerson
called the dictator’s resignation “an extraordinary opportunity.” One unsettling model for the future Zimbabwean government is Rwanda, where President Paul Kagame—whose regime
has been accused of murdering political rivals abroad and suffocating dissent at home—remains more or less acceptable to
Western donors and investors thanks to market-friendly economic reforms.
In the longer run, the increasing Chinese influence in Africa
may allow Mnangagwa to simply pay less heed to Western
norms. At the signing ceremony for the construction package,
China’s ambassador said Beijing views itself as an “all-weather
friend” to Zimbabwe. Money from China will flow whether or
not Zimbabwe progresses toward democracy.
D
ecay, both man-made and natural, is just part of
Zimbabwe’s environment. In Bulawayo, where Moyo
has his factory, the city center is ringed with abandoned, overgrown industrial facilities. Spurs to the
January 8, 2018
national railway are carpeted with ankle-high grass. An old
power plant looms menacingly over the main shopping district,
its six huge concrete cooling towers occasionally sloughing off
jagged chunks. Zimbabwean economist John Robertson wrote
of his country in November: “Descriptions of the damage done
to its productive sectors, its indebtedness, its struggling power
and railway services, its destroyed savings ... could easily apply
to a country that had suffered a defeat at war.”
Still, for a place that to outsiders is almost a byword for
chaos, aspects of daily life in Zimbabwe can be remarkably
orderly. Harare may be run down, but it’s rarely dangerous;
violent crime is far more prevalent in Johannesburg. And some
institutions remain robust. The auditor general’s office produces regular reports on state companies that pull no punches,
and the court system has a number of respected judges dispensing fair verdicts. The roads, railways, and power grids
may be decrepit, but they exist, including in rural areas, and
can thus be revived—something that can’t be taken for granted
in much of Africa.
In an open-air restaurant in Harare in December, I overheard a group of businessmen on their lunch break making
caustic jokes about Mugabe and his wife, including an unflattering impression of “Gucci Grace,” as she’s known because of
her expensive tastes, ordering around the help. A few weeks
earlier, doing so could have landed them in jail, or worse.
Mugabe’s absence seems surreal to many Zimbabweans; no
one under 50 can really remember a leader other than the
man who ruled their country for more than seven years longer
than Stalin did Russia and who once claimed that “only God”
could remove him from power.
“My granddad, my dad, me, and my daughter, all four generations, we’ve had our lives managed downwards by the same
person,” says Evan Mawarire, a pastor and democracy activist who was despised by the old regime. For our meeting on a
Harare cafe terrace, he’s wearing a Zimbabwean flag tucked
into the belt of his gray slacks. He began carrying one at all
times a couple of years ago—an attempt, he says, to remind his
compatriots of the country’s founding values.
Mawarire had been predicting Mugabe’s downfall for a long
time. Yet he’s still a little dazed by the pace at which things
have changed. Toward the end of our conversation, he pulls
out his phone to flip between a pair of photos, taken less than
two months apart. In the first, taken after he was arrested
outside his church in September and charged with subversion
for criticizing Mugabe, he’s wearing a beige prison jumpsuit
and handcuffs. In the second, he’s standing on top of a military
truck outside the presidential palace, addressing the crowds
at the vast Harare rally that preceded Mugabe’s resignation.
Although Mawarire concedes that optimism comes uneasily to
a Zimbabwean dissident, he’s verging on ebullient. “I’m very
encouraged,” he says. In the days after the coup, “the one thing
that we as citizens thoroughly enjoyed was the freedom to do
what our constitution says we can do, to protest, to challenge
government policy. … It was amazing.”
Mawarire is under no illusions about the depth of the pit
in which Mugabe left Zimbabwe. Repairing the physical degradation is one thing; recovering from the psychic damage,
he fears, could take decades. “The abuse that we have gone
through runs deep,” Mawarire says. “He destroyed everything
we have.” —With Godfrey Marawanyika
51
P
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U
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Bloomberg
Businessweek
January 8, 2018
Edited by
Nikki Ekstein
At the Luxury Wadi Rum resort in Jordan, guests sleep
under the stars in semi-transparent domes
Salvador de Bahia’s once-abandoned city center, filled with
400-plus-year-old, kaleidoscopic Baroque buildings, has
been totally revitalized after a five-year, government-led historic preservation effort. Since its colonial days, this city of
2.6 million midway down Bahia’s laid-back coast has been
the beating heart of Afro-Brazilian music culture: A spirited choir and live percussion band accompany mass at the
Church of Nossa Senhora do Rosário dos Pretos, and jam
sessions erupt each Saturday at
sunset by the seaside Museum of
Modern Art. As for hotels, Brazil’s
Know the history:
sexiest hospitality brand, Fasano,
Salvador is said to be
will soon open its fifth outpost, in
the most African of
Brazil’s cities, dating
a former newspaper office in the
to its origins as a
Cidade Alta neighborhood. The art
center of the slave
deco-inspired Fera Palace, whose
trade. The first slave
rooftop overlooks Salvador’s azure
market in the New
harbor, is already open. Oh, and
World was founded
don’t forget the gleaming beaches.
there in 1558.
FROM LEFT: COURTESY BLACK TOMATO. UILER COSTA FOR BLOOMBERG BUSINESSWEEK. COURTESY FOUR SEASONS (2)
54
Luxury tour operators are finally sending adventurers to
Aysén, the least-populated region of Chile, to hike through
breathtaking ice fields, explore caves, and ride down rapids.
Further north, on pristine Lake Llanquihue, Hotel Awa—a
marvel of concrete and glass—makes a great home base for
fly-fishing and authentic cultural encounters.
Aysén
$$$$ less than $200; $$$$ $200-$350; $$$$ $350-$500; $$$$ more than $500
Prices reflect the average nightly cost of a high-end hotel and are based on Google Hotels data from the corresponding period in 2017.
Salvador’s old town
center, the Pelourinho
By the end of 2018, after $1 billion in new hotel
investments, Los Cabos, Mexico, will be teeming
with cosseting five-star resorts—not that it wasn’t
already. Coming soon: an ultra-high-end RitzCarlton Reserve and properties from Montage,
Nobu, and Luxury Collection. Perhaps the most
exciting is the Four Seasons (shown, left). Whereas
most of the peninsula’s resorts are set on rock
beaches that aren’t fit for swimming, this one is
on the tranquil and undeveloped East Cape; it’s a
perfect place for paddleboarding and kite surfing.
For those who’d rather explore ruins and ancient
cobblestone streets than hang out at a swim-up
bar, both Four Seasons (shown) and wellness
pioneer Six Senses are making their debuts in
Tunis, the ancient capital of Tunisia, which feels
like the Greek isles, minus the crowds. They’ll be
joined by an outpost of the Asian brand Anantara
(known for its epic honeymoon resorts) near the
desert oasis of Tozeur. Never heard of it? Star
Wars: Episode 1—Phantom Menace was shot
across its vast and dramatic dunes.
As a conflict-free corner of the Middle East, Jordan has
experienced double-digit tourism growth over the past
12 months. The upward trajectory has been spurred by an
influx of public and foreign money bolstering infrastructure:
The Jordan Trail, a long-distance hiking route from Umm
Qais in the north to Aqaba in the south, was created by the
government’s adventure travel wing. The 400-mile expedition strings the best of the nation’s natural highlights into a
New dome suites at Jordan’s Sun
City Camp, in Wadi Rum
journey of biblical proportions—it’s meant to take 40 days
and 40 nights—cutting through the jagged Dana Biosphere
Reserve and the rock-hewn city of Petra before ending at the
Red Sea. Trekkers are encouraged to stay in Bedouin camps
and eco lodges along the way, whether they tackle the entire
trail or one of eight 50-mile-long sections. A highlight is Wadi
Rum, aptly referred to as the Valley of the Moon, which now
has luxurious bubble-dome camps scattered throughout its
pockmarked sandstone recesses. Explore
the landscape by camel, on foot, or via
four-wheel drive during the day, then stargaze from your bed at night. And don’t
forget Jordan’s capital: By May, Amman
will welcome two new hotels, a W and a
St. Regis, offering a plush way to bookend
your dusty desert explorations.
The V&A Museum of Design Dundee
Few international travelers have heard of this river town 60 miles
north of Edinburgh. Locally it’s best known as the 19th century
center of the jute trade and the (supposed) birthplace of orange
marmalade. But later this year, Scotland’s first design museum,
the V&A Museum of Design Dundee, will open on the city’s
waterfront. Showcasing the region’s wide-ranging design legacy—
including Hunter boots and Dennis the Menace cartoons—it’s just
one piece of a $1.3 billion revitalization project on the River Tay
that will also include a new train station, art installations, and
an urban beach. You can also arrive by ship: Azamara Club
Cruises and Crystal Cruises will make their first calls here in July.
When food is woven deep into a city’s
fiber, no major real estate development
there will be complete without attentiongrabbing restaurants. That’s clearly the
case in New Orleans, which celebrates its
tricentennial this year. The Crescent City is
welcoming a slew of hotels in the resurgent
Central Business District, notably the
polished Nopsi and the quirky Catahoula,
each with its own buzzy restaurant. Come
fall, Ti Martin, chef of the 125-year-old
Commander’s Palace, will launch the New
Orleans Culinary & Hospitality Institute,
a place for intimate workshops on Creole
cooking. In Singapore, the historic Raffles
Hotel will soon come off its first renovation
since 1991—and there are plans to introduce
outposts from three celebrity chefs,
including Alain Ducasse, to its acclaimed
slate of restaurants and bars. Nearby, the
glassy Andaz opened in October with
342 rooms and five restaurants arranged
in a sort of high-end hawker court (shown)
on the property’s 25th floor. Meanwhile,
Washington, D.C., has morphed into one of
the most thrilling food scenes in America,
thanks most recently to its $2.5 billion
District Wharf. The project is already home
to chef Fabio Trabocchi’s stylish Spanish
spot Del Mar; it will soon welcome a spinoff
of Union Market’s Rappahannock Oyster Bar
and an Italian restaurant-market hybrid from
Nicholas Stefanelli.
57
FROM LEFT: GABRIELA HERMAN FOR BLOOMBERG BUSINESSWEEK. ROSS FRASER MCLEAN. COURTESY ANDAZ HYATT
Look familiar?
Wadi Rum is
best known as
the backdrop
for Lawrence
of Arabia. But
it’s also been
a cinematic
stand-in for
the red planet
in films such
as Mission to
Mars and The
Martian.
Toast sandwiches at Tivoli Corner’s the Bird and the Churchkey
FROM LEFT: ULF SVANE FOR BLOOMBERG BUSINESSWEEK. VOVA POMORTZEFF/ALAMY. TIM LAMAN/NATIONAL GEOGRAPHIC/GETTY IMAGES
The one knock on Copenhagen—consistently ranked one of the world’s best
places to live—is its shortage of top-tier accommodations for visitors. Sure, the
opulent D’Angleterre, a grand dame on the central Kongens Nytorv square,
is fit for royals and celebs with entourages. But if you wanted something
more restrained, until now there were few options that married excellent
service with smart Scandinavian design. Hotel Sanders, a high-end boutique founded by Danish dancer Alexander Kolpin, opened in November
with claw-foot tubs in retro rooms and a concierge who can get you behindthe-scenes access at the ballet. It’s a 15-minute walk from the world-famous
restaurant Noma, which reopens in February with a focus on local seafood.
There’s also the Nobis Hotel, with 77 loftlike rooms in the lavish, landmarked
Royal Danish Academy of Music. It opened in October a stone’s throw from
Tivoli Corner, a sprawling new food hall (soon to be flanked by iconic design
shops such as Illums Bolighus) next to the Tivoli Gardens amusement park.
The market collects some of the region’s favorite eateries, ranging from
Kadeau, a stall featuring produce from the island of Bornholm, to the Bird
and the Churchkey, which makes superb open-faced sandwiches.
Where you’ll climb: The Julian
Alps, named after Julius Caesar,
rise along the border with
Italy and include Slovenia’s
only national park.
Looking for the next Iceland? This pristine mountain playground has leapt
out of obscurity as a host of fiercely
creative locals cast a spotlight on its
extraordinary natural bounty. Ales
Cesen, one of the world’s most accomplished Alpinists, will soon open a
climbing academy offering customized
expeditions through the craggy Julian
Alps. Adventures such as rappelling
down cliffs near Lake Bled or navigating the labyrinthine Skocjan cave
system are easily accessible from the
castle-topped capital of Ljubljana,
where a minimalist Intercontinental
Hotel just opened. Carve out time for
a visit to Hisa Franko, where star chef
Ana Ros applies New Nordic precision
to local ingredients such as river trout,
chestnuts, and meadow-grazed lamb.
This might be Melania Trump’s home
turf, but Ros is the country’s first lady.
Triglav National Park in western Slovenia
Wildlife lovers are flocking to Borneo, home to most
of the planet’s 120,000 remaining orangutans. Newto-the-market operators such as Audley Travel and
G Adventures organize visits to Camp Leakey, a
conservation hub whose founder mentored Jane
Goodall and Dian Fossey, and to the villages of former
headhunters deep in the countryside. In Cambodia, don’t
just stick to Angkor Wat; a Rosewood is expected in
Phnom Penh early this year. By fall, Shinta Mani Wild will
have 16 safari-style tents near the elephants and tigers
of Southern Cardamom National Park, and privateisland retreats by luxury brands Alila and Six Senses will
open off the country’s southern coast. Want something
more urban? Tbilisi, the capital of Georgia, is drawing
comparisons to edgy, nightlife-centric Berlin before it was
widely popular. Come spring, the city will welcome its first
five-star hotel, Stamba, set in a Soviet-era printing house.
Beyond the capital, high-design properties are popping
up in the mountain town of Mestia, seaside Batumi, and
the wine country; there’s plenty of ground to cover.
59
Despite the increasingly long shadow cast by its neighbor
to the north, South Korea has an ebullient popular culture
that continues to soar. Music, food, and architecture—not to
mention February’s Winter Olympics in Pyeongchang—all
offer exciting excuses to pay a visit in 2018. The host country
is booming. Among the reminders of Seoul’s economic growth
are the newly completed Lotte World Tower, the fifth-tallest
building in the world, and Seoullo 7017, an elevated pedestrian “skypark” reminiscent of New York City’s High Line.
They join Zaha Hadid’s dramatic Dongdaemun Design Plaza,
which was completed in 2014 and draws tourists to shops, fine
dining, and rotating art exhibits. The always-cosmopolitan
neighborhood of Gangnam—which became shorthand for
excessive consumption through Psy’s Gangnam Style—is offering more places than ever to flaunt your wealth: There’s the
popular wine bar Louis Cinq; Toc Toc, with its market-driven
tasting menu; and a new eponymous restaurant by local sensation Hyun Seok Choi. The action isn’t limited to the capital.
A quick flight 300 miles to
the south, the volcanic
island of Jeju, with its
Unesco-protected biosphere reserve, is aiming
to boost domestic tourism
with a 600-acre entertainment megaplex called
Shinhwa World. Opening
in phases throughout
the year, it will feature
an amusement park with
roller coasters designed by film studio Lionsgate, a Four
Seasons resort, and a state-of-the-art concert space born out
of a strategic partnership with the biggest names in K-Pop.
The genre has never been more globally popular, with megawatt acts such as Twice and BTS notching hits on international music charts.
Your new ride: South Korea
just inaugurated the KTX
Gyeonggang high-speed train
line. It zips travelers from
Seoul’s Incheon Airport to
Pyeongchang in 86 minutes
flat—rather than the five hours
it used to take—and also
connects to the scenic port
of Busan.
FROM LEFT: SANGSUK KANG FOR BLOOMBERG BUSINESSWEEK. COURTESY NATURAL SELECTION.
COURTESY JEAN-MICHEL COUSTEAU RESORT
Dongdaemun Design Plaza, in Seoul
January 8, 2018
There’s more to Namibia than the scorched plains of Deadvlei or the alien
dunes of Sossusvlei you’ve seen in National Geographic. But with little tourism
infrastructure in this vast frontier of Africa, it’s been difficult before now to see
it all. Having drawn acclaim for its first lodge, Sorris Sorris, Namibia Exclusive
will unveil a four-camp circuit this August. In the works since 2009, it will offer
cultural exchanges with the Himba people in the north; prime views of chalkcolored elephants in Etosha National Park; and excursions to 2,000-year-old
rock carvings in Damaraland. Ten thousand miles and a world away, in downtown
Los Angeles, another decade-in-the-making venture is finally bearing fruit: In
2017, years of capital investment culminated in the first-phase openings of two
multiuse developments, Row and City Market South, which both feature a growing
roster of indie retail and culinary concepts. Joining them this month is an outpost
of New York’s standard-setting NoMad hotel, with 241 Italian-inspired rooms and a
restaurant by Eleven Madison Park’s Daniel Humm and Will Guidara.
Jean-Michel Cousteau Resort
Almost two years after Cyclone Winston
caused an estimated $1.4 billion in
damage, Fiji is back on its (bare) feet,
with sustainable luxury resorts reopening all over the archipelago. At Turtle
Island, 14 oceanfront villas—or bures, as
they’re called in Fijian—are fresh off a
redo that features natural materials such
as thatched coconut-husk roofs and driftwood light fixtures. In addition to more
contemporary interiors, the 25-room
family-friendly Jean-Michel Cousteau
Resort lays claim to Fiji’s first water reclamation plant; it also recently added coral
and clam restoration to its renowned
underwater education programs. These
refreshed classics are joined by two
billionaire-owned private-island retreats
that share a dedication to local food
sourcing: Wakaya Club & Spa, owned by
Seagram Co. heiress Clare Bronfman,
and Kokomo, the passion project of
Australian developer Lang Walker. One
exception to the region’s shrinking
carbon footprint is Nadi International
Airport on the main island of Viti Levu,
which is welcoming more and more
flights, including new nonstops from San
Francisco and Los Angeles.
Your impact: Only 110 of Fiji’s 322 atolls are
inhabited, even with its many privateisland resorts. In 2016 tourism pulled in
$1.7 billion—about 40 percent of gross
domestic product. That figure is forecast
to rise to almost 45 percent by 2027.
61
St. Kitts has pulled off a beach-escape hat trick: It feels
untouched while being both comfortable and convenient.
A quarter of it is preserved as American oceanic rainforest,
perfect for hiking through pristine wilderness, but the island
also offers the infinity pools and beachfront cafes travelers
hope for in a luxe vacation. After surviving last year’s hurricanes unscathed, the destination got a considerable injection
of glitz when the 126-room Park Hyatt opened in November.
The first five-star beach resort on St. Kitts, it’s on a secluded
white-sand cove near the island’s southern tip; suites with
private pools overlook the Caribbean Sea and the neighboring
island of Nevis, while the three-bedroom presidential villa has
a private chef and dedicated fitness area. The resort anchors
Christophe Harbour, a new 2,500-acre luxury development
and superyacht marina with boutiques that will give guests
the added benefit of high-end shopping. In terms of convenience, Delta has begun offering nonstop connections from
Atlanta and New York, making St. Kitts more accessible than
many of its Caribbean peers.
62
If Dubai comes off as the Las Vegas of the Middle East, Abu Dhabi is making a play to be its
Paris. The emirate’s new crown jewel is the billion-dollar Louvre Abu Dhabi where, beneath
a latticed steel dome by Pritzker Prize-winner Jean Nouvel, you’ll find 7th century Qurans,
20th century Picassos, and Leonardo da Vinci’s Salvator Mundi—yes, the one that recently
sold for $450 million. Other major institutions will join it in coming years, including Frank
Gehry’s Guggenheim Abu Dhabi and the Performing Arts Centre, by the late Zaha Hadid. But
don’t wait to visit: A growing number of luxury cruise ships are pulling into port, and for
families there will soon be the $1 billion Warner Bros. World theme park. Reserve a room at
Ian Schrager’s much-anticipated 244-room Edition, coming soon to the Al Bateen waterfront.
Watching the great migration in the Serengeti is such a popular bucket-list trip that the
region can feel as saturated with binocular toters as it is with thundering wildebeest.
Head to Southern Tanzania’s Selous and Ruaha game reserves, and instead of other
safari Jeeps, you’ll find the country’s largest giraffe population and one-tenth of Africa’s
lions. Stay with African trailblazer Asilia, which recently unveiled two posh camps,
Roho ya Selous (left) and Jabali Ridge. Perpetually mobbed Florence is confronting
overtourism at its most popular museums with seasonal pricing, early-bird tickets, and
a website that estimates waiting times. Prioritize the Vasari Corridor, a secret passage
the Medicis used to get from their Uffizi Gallery offices to the Pitti Palace. It opens to the
public in 2018 after a two-year renovation. Peak season for both destinations winds down
in November—a great time for minimized crowds and maximized value.
With reporting by Sara Clemence, Nikki Ekstein, Julia Eskins, James Gaddy, Carey Jones, Brooke Porter Katz, Sarah Khan, Kate Krader, Jen Murphy, Chadner Navarro, Brandon Presser, and Lindsey Tramuta
FROM LEFT: ROLAND HALBE. COURTESY ASILIA CAMPS AND LODGES. EVAN ORTIZ FOR BLOOMBERG BUSINESSWEEK
The Louvre Abu Dhabi
The table to book: Down the road from the
Louvre is one of Abu Dhabi’s best beachside
lunches: Sontaya at the St. Regis Saadiyat
Island Resort. Sit on the terrace and watch
the waves roll in while snacking on papaya
salad and red duck curry.
January 8, 2018
The view from a private plunge pool at the Park Hyatt St. Kitts
64
PAM CODISPOTI HAD A DILEMMA.
with American Express
Co., Citigroup Inc., and
She’d been brought on by
others scrambling to
JPMorgan Chase & Co. to
offer improved rewards.
develop a credit card for affluAmEx executives later
ent millennials in 2014—a time
when no one thought the group
lamented that the offer was
wanted credit cards.
a “full frontal assault” on its
“We found that just not to be
Platinum card, and noted a
true,” says Codispoti, who was prestemporary increase in attrition.
ident of Chase’s branded cards unit.
The introductory perks were
“What they were looking for was someenough to attract cardholders, but
thing different than what the market had
the real challenge lay in keeping them,
to offer at the time. They weren’t interested
Codispoti says. So JPMorgan transformed
in their father’s credit card.” So the 52-year-old
the Sapphire Reserve into a lifestyle, planexecutive and her team embarked on a listening tour
ning special experiences and working with celebin living rooms and coffee shops across America to find out rity influencers like Chrissy Teigen. Codispoti, who spent 18 years
what millennials wanted out of a premium card. The answer? at AmEx before joining JPMorgan, says the firm opted against
Something that offered flexible rewards for the categories they deploying any formal marketing campaign at first, choosing
cared about: dining and travel.
instead to rely on word of mouth. It was daring for the credit card
Chase’s response was the Sapphire Reserve. The $450-a-year giant, which has spent $13.2 billion on marketing in the last five
card came with a sign-up bonus of 100,000 reward points and years. Now, second-year branding students at Harvard Business
allowed holders to use them at a wide variety of hotels, air- School do a case study on the Sapphire Reserve.
lines, restaurants, and more. Holders were also rewarded extra
In 2017, Codispoti was promoted to oversee JPMorgan’s
network of 5,200 branches. Once again, she’s
for spending in those categories, and even given a
$300 annual travel credit. It was an instant hit with
been tasked with enticing millennials, who make
the target audience, who gobbled it up so quickly
up 61 percent of the consumer bank’s new customb. 1965, Suffern, N.Y.
that JPMorgan ran out of the metal used to mint it.
ers. Codispoti has visions of offering advice centers,
Mother of 5-year-old
“That these credits could be applied to stuff like
akin to Apple Inc.’s Genius Bar, where customers can
twin boys
Uber—no one had a product like that,” says Sanjay
discuss financial goals such as saving for retirement
Learned during
Sakhrani, an analyst at Keefe, Bruyette & Woods Inc.
or buying a first home. Millennials prefer to have a
her years at digital
“It forced others to change how they were thinkconversation about such things, Codispoti says. “So
startups not to be
ing about the product and who they were addresswe’re going to make the experience much more highprecious about ideas
ing.” The card kicked off an arms race in the space,
touch, much more interactive.” ILLUSTRATION BY SAM KERR
GAME CHANGER
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