1 31 July, 2016

businessweekme.com

Algeria............DZD 215 Egypt..................EGP 10 Jordan....................JOD 2 Lebanon..............LBP 4000 Oman...................OMR 1 Saudi Arabia.........SAR 10 UAE.................AED 10
Bahrain.......................BHD 1 Iraq........... IQD 3200 Kuwait.............KWD 0.75 Libya........................LYD 3.5 Qatar.................QR 10 Syria............................SYP 200 Yemen..................YER 600
 People are still going out and
buying, the only difference is
that the indulgence level has
gone down a little
p40

They are doing everything No one should Once you start having
PHOTO ILLUSTRATION BY SJC, IMAGE:

they possibly can

have a monopoly growth and
on their own people start to work,
while waiting to bring in on the Republic youre on the
SHUTTERSTOCK

foreign partners and Ataturk right track

p14 p18 p30
 Cover
Trail

1 31 July, 2016
How the cover gets made

This week's cover story is about the

retail sector in the Gulf and some of the
Opening Remarks Climate change could upend fragile states like Syria and Venezuela 6 challenges it's facing at the moment.

Hmmm. Shopping. That's what

Global Economics you do when you need to buy
someone something. Like maybe
for their birthday.
The next debt crisis may be corporate 8

Brazils dream team faces an economic nightmare 10

US companies lag in the race to invest in Myanmar 10 Since when

was I
supposed to
Companies/Industries buy a
present for
Iran's oil comeback that startled doubters approaches a roadblock 14 my Art
Director?
Lebanon seeks a utility-scale solar boom to secure power supplies 15 Anyway,
more
options?
The Fab Lab Egypt team risks arrest to cultivate startups 16

Briefs: Boeing gets its big Iran deal; Abraaj branches out in South America 17

Oh there
Politics/Policy were plenty of
options.
Cufflinks, a tie,
Ataturks ideology is seen deleted as Turkey drafts a new charter 18 an iPad Pro...

In war and now finance, losses mount for Iranian ally Hezbollah 19

Deputy Crown Prince Mohammed bin Salman makes his pitch from Silicon Valley to Manhattan 20 OK, let's get
back to the
IMF says Gulf states must cut their deficits to keep their currency pegs 21 matter at hand. I
2 like the basket
idea. Just could
Technology do with a bit
more tweaking.

What works for wind power could also work under the sea 24

The Pentagon finds its not so easy to be a Valley bro 25 Look. It's not
as if you even
The world's top economists want to work for Amazon and Facebook 26 need to go to the
mall. There are
Innovation: Inflatable expansion modules for the International Space Station 28 plenty of online
shopping options.
That's mentioned
Markets/Finance in the feature,
right?

The super-rich Syrians waiting to return if the war ever ends 30

'Easy on the nuts' in Egypt as the dollar crunch and inflation bite Ramadan 31 Of course. As for the cover, maybe
go back to the metal basket. Just
Facing slower growth, UAE bank deals may just be starting 32 bring it to life a little bit please.

1 31 July, 2016

Features
businessweekme.com

Retail Therapy The region's shopkeepers face up to their challenges 40

Traffic Below Marty McFly, meet the engineers building cars that really fly 46
COVER AND COVER TRAIL ILLUSTRATIONS BY SJC

A Conversion in China A reporter sees the way of 760 million WeChat devotees 52

Etc.
Whole Foods aims its 365 store at millennials, who want an experience, not just groceries 57 Algeria............DZD 215
Bahrain.......................BHD 1
Egypt..................EGP 10
Iraq........... IQD 3200
18 Jordan....................JOD 2
Kuwait.............KWD 0.75
Lebanon..............LBP 4000
Libya........................LYD 3.5
Oman...................OMR 1
Qatar.................QR 10
Saudi Arabia.........SAR 10
Syria............................SYP 200
UAE.................AED 10
Yemen..................YER 600

00_cover.indd 1 27/06/2016 16:59

Marketing: Perfumers want your signature scent to be a mix of fragrances that can run $295 each 60
Here you go. Now where was I with that
What I Wear to Work: Doug Lloyd prefers a basic wardrobe (that turns out to be not-so-basic) 62 birthday gift list?

How Did I Get Here? Lorenzo Fertitta grew up Las Vegas and went global with the Ultimate Fighting Championship 64
 Index
People/Companies

20
Mohammed bin PepsiCo 12
Salman tours the
United States Petrofac 30
Pinterest 48
Pros & Partners Capital 53
Quid 26
RAW 43
Recep Tayyip Erdogan 18
Riad Salameh 19
RiseUp 17
Robert Bigelow 28
Robin Mehta 43
Romero Juca 10
Ron Burkle 59
Ronaldo Mouchawar 42
Satya Nadella 20
Saudi Aramco 20
Sebastian Thrun 47
Shayne Nelson 33

32
National Bank of
Abu Dhabi

Shinzo Abe 12
Simplex 16
Souq.com 42
SpaceX 46
ABC Aung San Suu Kyi 10 Emaar 42 Greek Campus 16 Mark Zuckerberg 20

Abdel-Fattah El-Sisi 32
Ayman Asfari
Ban Ki-moon
30
21
Emirates NBD
Eni
33
14
Gulf Marketing Group
HAGL Group
42
12
Martin Sommer
Mehmet Ucum
21
18
TUV
4 Abu Dhabi Commercial Barack Obama 21 Eric Allison 51 Henrique Meirelles 10 Michel Temer 10 Tencent 52
Bank 32 Barclays 14 Expedia 52 Houzz 28 Microsoft 8, 20, 25 Terrafugia 49, 51
Abu Dhabi Islamic Bank 32 Bashar al-Assad 19, 30 Facebook 20, 25, 52 Instacart 58 Midstates Petroleum 9 Tesla 48
Adel al-Jubeir 20 Bijan Namdar Zanganeh 14 ITG group 16 Miquel Pancorbo 42 Total 14
AeroMobil 51 Blom Bank 19 TPG 12
Aerovelo
Ahmed El Alfi
51
16
Boeing
BP
51
14
JKL Uber
UBS Group
26, 52
33
Airbus 51 Cham Holding 31 JadoPado 42 Ultimate Fighting
Changi Airport Group 12 Jeff Bezos 46 Championship 64
Charles Vinick 25 Jeff Turnas 59 Union National Bank 32
Cisco Systems 20 Jeffrey Lacker 9 Vimpex 31
Coca-Cola 12 Jerome Powell 9 Vipen Sethi 42
Costco 59 Jim Dehlsen 24
46
Cravia
Credit Suisse Group
44
33 16
John Kerry
Kaushik Soni
12, 21
41
Larry Page
WXYZ
Fab Lab Egypt KFC 12 Walid Hajj 44

30 DEF Khaled Al Jaser 44

Krispy Kreme Doughnuts 12
Mohammed Abuelhagag
Mustafa Kemal Ataturk
16
18
WeChat
Whole Foods Market
52
58
Waleed Zaabi Daniel Glaser 20 First Gulf Bank 32 Kroger 59 Nabil Kuzbari 30 Woodside Petroleum 12
David Macadam 44 FitTime 53 Landmark Group 42, 43 Nicols Maduro 6 Xi Jiutia 53
Deputy Crown Prince Ford 12 Lilium Aviation 51 Omar Kassim 42 Yelp 52
Aldi 58 Mohammed bin Salman 43 Francois Delattre 21 LinkedIn 26 Yoli 53
Alibaba 54 Dilma Rousseff 10 Lorenzo Fertitta 64
PQRS Yongnam Holdings 12
Amazon 26, 52, 58 Doug Lloyd 62
GHI Zaykabar 12
Apple
Aquantis
8, 25
24
E-volo
Edeen El Bendari
51
17 General Motors 12
MNO Paul Moller
Paul Sciarra
47
48
Zee.Aero
Zhang Xiaolong
46
52
Arabian Centres 44 Elizabeth Musmanno 60 Goldman Sachs 14 Majid Al Futtaim 44 PayPal 52 Zhu Xiaoxiao 53
Ash Carter 21, 25 Elon Musk 46 Google 8, 25, 46 Mansueto Almeida 10 Peabody Energy 9 Zillow 28

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 Opening
Remarks
When
The
State
Wilts
Away
By Lois Parshley
Venezuela was unravelling even before
Hugo Chvez died in 2013. The situa-
tion has only got worse since. Despite
having the worlds largest oil reserves,
6 inflation has soared to 500 per cent, the
murder rate is the highest in the world,
and chronic shortages of food, water,
and medicine make daily life a struggle.
A man was recently burned alive outside
a supermarket in Caracas for stealing
the equivalent of $5. The country has
been on a downward spiral for so many
years, says Cynthia Arnson, director
of the Wilson Centers Latin America
Programme, you wonder what is going
to be the final straw.
Recently, it looked like it might be
the weather. Six months ago, a devastat-
ing El Nio-induced drought damaged
crops, left the capital short of drinking
water, and caused rolling blackouts.
In April, as a lack of rain crippled the
Guri hydropower project, the countrys
biggest electricity supply, President
Nicols Maduro announced a two-day
workweek for civil services. (He also
suggested women stop using blow-
dryers: I always think a woman looks
better when she just runs her fingers
through her hair and lets it dry natu-
rally.) In May, Maduro changed the
countrys time zone by half an hour to
In weak nations, save power. Drought and electricity
cutbacks have created a new moment
environmental stress that will have its own dynamic, Arnson
can tip society into says. The level of inefficiency and
catastrophe breakdown of public services has been
so rampant that any natural disaster has
been magnified.
Youve got a mess, to put it mildly,
says political scientist Thomas Homer-
Dixon, associate director of the Waterloo
Institute for Complexity and Innovation.
Where institutions are not capable,
severe environmental stress can tip
society into catastrophe quickly.
Thats not just true in Venezuela. In
2007 an extreme drought in Syria baked
fields until they became deserts, destroy-
ing crops and driving families from their
homes. The rain didnt come back for
three years. Rural populations fled to
cities, adding to the social tensions that
eventually sparked the uprising in 2011.
Years of violence followed, leading to the
refugee crisis thats besetting Europe.
Last spring, Colin Kelley, a meteorologist
at the University of California at Santa
Barbara, linked the droughtSyrias
worst in 900 yearsto global warming.
A drought of the severity and duration of
the recent Syrian drought, Kelley wrote
in a paper published at the Proceedings
of the National Academy of Sciences,
has become more than twice as likely
as a consequence of human interference
in the climate system.
Of course, social uprisings are com-
plicated things, and Kelley reignited a
debate on just how climate affects con-
flict. People for the most part dont
fight over environmental resources,
says Homer-Dixon. What happens is
that you get internal dislocations in

society. People dependent on scarce
resources become poorer and may move
in large numbers.
Theres abundant potential for such
dislocation in Venezuela. The weather
has only exacerbated the countrys
economic crisis. Last month, Maduro
issued a state of emergency granting
himself unilateral power over the
economy. He threatened to seize idle
factories. Arnson now fears violent
protest may be likely.
Powerful groups, especially in
corrupt states, use their power to
capture resources, says Homer-Dixon.
You get a polarisation of wealth, a
weakening of state capacity, and urban
stress. Although these kinds of changes
are indirect effects of a drought, they are
often the tipping point for social con-
flict. We are seeing these things around
the world now, Homer-Dixon says. As
environmental stresses get worse, [their
effects] become more common.
Global water shortages are pre-
dicted to decrease global gross domes-
tic product by as much as 14 per cent
by 2050, according to a recent report
by the World Bank, which predicts
that this severe hit will spur conflict
and migration across the Middle East,
Central Asia, and Africa. Even resource-
rich countries previously considered to
ILLUSTRATION BY 731
have stable economies, such as Brazil
and Russia, have become more suscep-
tible to environmental disequilibrium.
Last year production of coffee, one of
Brazils most important commodities,
fell 15 per cent as a result of drought. A
lack of rain in Russia this fall damaged a
quarter of its cereal crops. The last time
the countrys harvest failed, rising global
prices contributed to the Arab Spring in
countries dependent on imported grain.
Even the self-proclaimed Islamic States
political power may soon be affected by
drought. As water levels in Lake Assad
in Syria plummet, Raqqa, the groups
stronghold, is facing severe shortages.
Last year, ISs press officer, Abu Mosa,
told Vice News that it would consider
attacking Turkey to gain access to addi-
tional water resources.
Climate science has an explanation
for why environmental forces can have
this kind of destabilising effect. Angel
Muoz, a postdoctoral research associ-
ate at Princeton, says, Risk is just a mul-
tiplication of hazard by vulnerability.
Muoz, who grew up in Venezuela and
moved to the US to study climate risk
management, explains that a drought
is a hazard, but what actually created
this years mess was Venezuelas lack of
what he calls adaptive capacity. The
drought was predicted months before it
beganneighbouring Colombia started
water rationing in September 2015.
Although Venezuela has far more natural
resources than its neighbour, Colombia
is not in such dire straits. A societys
vulnerability is at least as important as
the hazard, Muoz says.
As a result, when weak states
Venezuela and Syria
offer a grim vision of how
the world might react to
a warming future
face environmental catastrophes
like drought, you might see the col-
lapse of authoritarian regimes, as you
did during the Arab Spring, Homer-
Dixon says. But theyre probably
going to be replaced with something
just as bad, because a deeply divided
society is still dealing with a materially
stressed situation.
If thats the case, Venezuela and
Syria offer a grim vision of how the
world might react to a warming future.
In almost all conflict, Homer-Dixon
says, a weak and corrupt state cant
evolve market mechanisms to respond
to scarcity. This means dysfunction
tends to have a snowball effect: Scarcity
reinforces corruption, which polarises a
political system and increases inequal-
ity. Then everyone slides down the
slope together, Homer-Dixon says.
What that means for Venezuela now
is that even the return of rain could
be devastating. Meteorologists are
predicting a La Nia effect will bring 7
ample precipitation to the region
they could go straight from drought
to fast floods, Muoz says, because of
degradation of public resources such as
roads and sewage systems. The govern-
ment is unlikely to be prepared. A high-
ranking official in Venezuelas military,
who didnt want to be named for fear
of retaliation, says little is being done to
strengthen the aging infrastructure. We
have so many resources, he says. Its
incredible that were in this situation.
Hes contemplating leaving the country,
fearing a coup. People dont have the
patience to see if things get better.
No one knows when Venezuela will
finally implode. Some factors are more
visible in hindsight; just as analysts
failed to see the risk of subprime debt
in 2007, so far scarcitys economic and
geopolitical impacts have gone largely
unacknowledged. Behaviour, however,
can often be predicted based on models.
In a warming world, its a difficult situ-
ation to build liberal institutions, says
Homer-Dixon. Im very worried. With
Venezuela specifically in mind, Arnson
asks, Who defines when the beginning
of the end has begun? <BW>
Parshley is a freelance journalist and
photographer.
 Global
Economics

The Next D
1 31 July, 2016

Companies are borrowing money faster than theyre making it

Managers face pressure to cut capital spending and inventories
Consumers burdened by their large
mortgages and maxed-out credit
cards laid the groundwork for the last
US recession. This time, companies
may play that role: Enticed by super-
low interest rates, they increased
total debt by $2.81 trillion over the
past five years, to a record $6.64 tril-
lion. In 2015 liabilities
8 jumped $850 billion,
50 times the
increase in cash
holdings by S&P
Global Ratings
reckoning. Lagging
profits and mounting
defaults are other danger
signs. Although these finan-
cial vulnerabilities arent
likely to lead to another
downturn soon, econ-
omists say they point
to potential risks for an
expansion approaching its
seventh birthday.
Companies have been adding to
their debt, and their debt has been
growing more rapidly than their
profits, says John Lonski, chief econ-
omist of Moodys Capital Markets
Research Group. That imbalance
in the past has usually led to prob-
lems once growth begins to flag.
Some are concerned thats
already happening, as evi-
denced by cutbacks in cor-
porate spending and
hiring. Case in point: the
news that employers
GETTY IMAGES (7)
in what economists at JPMorgan Chase
worry is a sign of increased company
caution. Also, April marked the third
straight month of falling orders for
business equipment. The $62.4 billion
figure, which excludes defence and
aircraft orders, was the lowest in
five years, prompting Neil Dutta of
Renaissance Macro Research to label
business investment pathetic.
The similarities between the pre-
recession debt binge by consum-
ers and company borrowing today
are striking. Like households, cor-
porations are using the money for
short-term purposes rather than for
preparing for the future. A wide gap
exists between a handful of ultra-
rich companies and the rest of
corporate America.
The record $1.84 trillion of cash
on company books is heavily
concentrated among Apple,
Microsoft, Google, and
other
tech
giants, shows a study
released in May by S&P ana-
lysts Andrew Chang and David
Tesher. Companies that dont
have big cash reserves might find
it harder to meet debt payments when
interest rates rise. Take away the
$945 billion the 25 richest companies
rated by S&P hold, and the picture
doesnt look particularly pretty for
the bottom 99 per cent of nonfinan-
cial corporations. Their cash on hand
as a percentage of
the debts
they
owe is

expanded payrolls in
May at the slowest
pace since 2010,

Debt Crisis
at
its
lowest
level in
a decade,
according to S&P.
More than 50 US com-
panies have defaulted on
bonds or loans so far this
year, double the number in the same
period in 2015. Among the companies
that have missed payments, accord-
ing to S&P: Peabody Energy and
Midstates Petroleum.
For the most part, companies arent
pouring the money they borrow into
capital expenditures to increase effi-
ciency and capacityinvestments
that could boost profits down the
road. Instead, much of it has gone
to finance share buybacks, dividend
hikes, and acquisitions.
Since 2009, S&P 500 companies
have spent more than $2 trillion to
repurchase shares, helping sustain
a rally in which stock prices almost
Days of Easy Money
Debt of nonfinancial US companies rated by S&P
Average corporate
bond yield*
5.75%
31/1/2006
tripled. Mergers and acquisitions
worldwide jumped about 28 per cent
last year, to $3.5 trillion, according to
data compiled by Bloomberg.
If you put yourself in the seat of
someone responsible for manage-
ment of a company, they see weak
demand, Federal Reserve Governor
Jerome Powell said in a 26 May
appearance at the Peterson Institute
for International Economics in
Washington. They can cut costs,
and they can buy back their
stock, and they can make their
numbers that way for a period of
time. McDonalds sold $6 billion
of bonds at the end of last year to
help finance higher dividends and
share buybacks.
Buybacks and takeovers are
starting to tail off as companies
feel the effects of falling profits.
S&P 500 earnings from continu-
ing operations fell 7 per cent in
the first quarter of 2016 from
a year earlier, data com-
piled by Bloomberg show.
After stripping out energy
More than one-
third of the value
of US GDP $8t
$6t
$4t
4.58% $2t
$0
31/12/2015
Investors expect
miracles from Brazils
dream team 10
The race is on for
Myanmar 10
companies affected by weak oil prices,
earnings were still down 1.4 per cent.
There is newly intensified, broad-
based pressure on business to cut
capital spending and inventories,
David Levy, chairman of consultant
Jerome Levy Forecasting Center in
Mount Kisco, New York, wrote in a
report to clients in May.
Earnings are being squeezed by 9
lagging worker productivity and
mounting labour costs as rising
demand for workers forces com-
panies to pay more. Corporations
*MOODYS US CORPORATE BOND YIELD INDEX OF LONG-TERM INVESTMENT GRADE NONFINANCIAL CORPORATE BONDS
also are confronting lower
economic growth expectations.
Richmond Federal Reserve Bank
President Jeffrey Lacker says he
now pegs the potential expansion
rate of the US economy at 1.5 per
cent. Thats half the average
pace in the quarter-century
that preceded the
December 2007 start
of the last recession.
Lonski of
Moodys says its
premature to
predict that
the US is
DATA: S&P GLOBAL RATINGS, MOODYS
heading

Global Economics
into a recession as employers are
still adding workers to their payrolls,
albeit at a slower rate. Yet the pres-
sure on companies is a risk factor
thats worth watching, he says.
Rich Miller, with Tara Lachapelle
The bottom line US companies may have gone
overboard borrowing at cheap rates to fuel stock
buybacks, dividends, and acquisitions.
Fiscal Policy
Brazils Temer Has
A Budget Hole to Fill
Investors are expecting miracles
from the acting president
Youre having to do this...exercise
with a very weak economy
Investors are bullish on Brazil. The
countrys Bovespa equity index is up
almost 19 per cent this year, while the
real has gained 13 per cent against the
10 dollar. One big reason for the rally:
President Dilma Rousseff has stepped
aside as she awaits an impeach-
ment trial, which has allowed Vice
President Michel Temer to take over
as acting president.
The financial community expects
Temer, a member of the Brazilian
Democratic Movement, to pursue
more market-friendly policies than
Rousseff, who hails from the Workers
Party. Goldman Sachs, in a research
note to clients, dubbed his economic
cabinet, led by Finance Minister
Henrique Meirelles and Economic
Monitoring Secretary Mansueto
Betting on a Change in Brazil
Change since 31 December, 2015
Brazilian real
against the US
dollar
Bovespa stock index
1/1/2016 7/6/2016
Markets are getting
ahead of
themselves. Youre
not going to find a
silver bullet.
Almeida, the dream team. Desmond address such long-term issues
Lachman, American
The political transformation as social security, all without
Enterprise Institute
in Brazil is creating huge invest- further depressing growth.
ment opportunities, says Jan Youre having to do this
Dehn, the head of research at whole exercise with a very
Ashmore Group, an emerging- weak economy, he says. If
markets investor. the politics are very difficult
Yet the list of problems Temer and now, how much more difficult are they
his team must tackle is daunting. In going to be in a few months time if the
the first three months of 2016, gross economy keeps sliding?
domestic product shrank 5.4 per cent Temer must also grapple with a
year-on-year, extending a recession mounting national debt, which climbed
that began in 2014. The unemployment to 4 trillion reais last year67 per
rate is 11.2 per cent, its highest since at cent of GDP. Interest payments hit
least 2012, and the central bank is strug- 464 billion reais in 2015. Debt is on
gling to tame inflation, which is running course to top 80 per cent of GDP within
above 9 per cent this year. Markets two years, according to Lachman.
are getting ahead of themselves, says While Brazil has foreign currency
Desmond Lachman, a former deputy reserves of $376 billion, such high debt
director at the International Monetary levels are worrisome for a country that
Fund whos now at the American missed foreign debt payments in the
Enterprise Institute. Youre not going 1980s and received an IMF bailout in
to find a silver bullet. 2002. Economies really suffer when
The new government has also already emerging-market governments accumu-
been tarred by scandal. Budget Minister late too much debt, says Koon Chow,
Romero Juca was forced to step down in a London-based strategist at Union
May over allegations he wanted to block Bancaire Prive. They tend to have
a probe into graft and money launder- more turmoil, he says, and asset
ing. Fabiano Silveira, the minister of prices are more volatile.
transparency and control, resigned the Jonathan Levin and Ye Xie
same month after local press published
The bottom line The acting president has little
a recording of a conversation in which room to manoeuvre as he tries to revive the
he criticised the graft probe known as Brazilian economy.
Carwash and offered advice to a politi-
cian under investigation.
A priority for Temer and his advis-
ers is reining in a budget deficit of
603.7 billion reais ($179 billion), which Emerging Market
amounts to more than 10 per cent of
GDP. Thats the second-highest level in
The Land Rush
the Group of 20, after Saudi Arabia. The In Myanmar
administration has proposed putting a
cap on federal spending, throttling back
Asian money pours in, but
the costly government pension system,
sanctions limit US investment
and withdrawing money from Brazils
sovereign wealth fund to pay for gov- Its one of the few remaining
ernment operations. largely untapped markets
30% Making a significant dent in the deficit
wont be easy. Cut discretionary spend- After decades of military rule,
15% ing, and theres the risk of a backlash Myanmar at last has a democratically
from an already frustrated electorate. elected government. Longtime oppo-
0 Raise taxes, and the recession could sition leader Aung San Suu Kyis party
deepen. Privatise government compa- took charge in March, with her ally
-15% nies? Beware the wrath of the unions. Htin Kyaw becoming president and
And any attempt to reform social secu- the Nobel laureate herself serving as
DATA COMPILED BY BLOOMBERG

Former President
Luiz Incio Lula da
Silva briefly detained in
corruption probe
Biggest party quits
ruling coalition
rity will take decades to have an impact foreign affairs minister. In response,
Two more parties on the nations balance sheet. the US last month announced a partial
abandon Rousseff
government
Lachman says that to put the rollback of economic sanctions first
Senate votes to
economy on a healthy path, Temer imposed in 1990 in an attempt to
suspend Rousseff and needs to trim the deficit by at least get the countrys generals and their
hold impeachment trial 5 percentage points of GDP, plus cronies to relax their hold on power.
 Global Economics
Coca-Cola
Pizza Hut
KFC
12
The new policy will make it easier for
American companies to do business in
Myanmar. However, it doesnt go far
enough for Khin Shwe, the founder of
Zaykabar, a construction company
thats on a US blacklist of Myanmar
businesses and individuals. Now that
the country has freely elected leaders,
he says, they should lift sanctions.
For Myanmar, a lot rides on whether
and when the US further relaxes trade
and investment restrictions, which
include travel bans and asset freezes
targeting companies and individuals
associated with the old regime. Two-
thirds of its 53 million people live in
the countryside, many without elec-
tricity. Annual per-capita gross domes-
tic product is $1,200. Myanmar is one
of the few remaining largely untapped
markets in the world, wrote ana-
lysts Ong Kian Lin and Kasamapon
Hamnilrat of Malaysias RHB Research
Institute in a 31 May report.
That may not last long. The
Asian Development Bank projects
Myanmars economy will expand
8.4 per cent this year and 8.3 per
cent in 2017, making it Asias best
performer. Foreign direct invest-
ment was a record $9.48 billion in the
fiscal year ended March. Most of the
money is coming from other parts
of Asia. Japans JGC and Singapores
Yongnam Holdings and Changi
Airport Group are part of a consor-
tium that in January
signed an agreement
to build a $1.5 billion
airport in Yangon,
Myanmars biggest
city. Vietnamese
real estate devel-
oper HAGL Group in
March started work on
a $230 million residen-
tial and office devel-
opment in Yangon,
having already opened
a $440 million hotel
and office complex last
year. Japanese Prime Minister Shinzo
Abe has pledged 100 billion yen ($935
million) in loans to fund infrastruc-
ture projects.
The interest among investors is
tremendous, says Romain Caillaud,
senior director covering Southeast
Asia for FTI Consulting in Singapore.
There is really a lot of hope.
The countrys oil and gas industry
draws one-third of all foreign direct
investment. Australias Woodside
Petroleum early this year announced
two offshore gas discoveries, and
Chinas Guangdong Zhenrong
Energy and local partners in April won
approval for a $3 billion oil refinery with
a capacity of 100,000 barrels a day.
US companies have been tiptoeing
in. After Aung San Suu Kyis party took
part in the 2012 elections, President
Obama lifted a ban on most Myanmar
imports and allowed American com-
panies to form partnerships with
local businesses, so long as they dont
appear on the sanctions list compiled
by the US Department of the Treasury.
Coca-Cola and PepsiCo now have
bottling plants in the country, while
Ford and General Motors have
opened dealerships. Krispy Kreme
Doughnuts announced plans last
August for 10 shops, and private
equity firm TPG in December bought
half of Myanmar Distillery, which
sells a popular brand of whiskey. The
countrys first fast-food restaurant,
KFC, opened last year. There are still
no McDonalds or Starbucks.
With the latest easing of sanctions,
announced in May, US companies can
have dealings with seven formerly
blacklisted state-owned enterprises,
use the main port, and work with
state-owned banks. The policy change
will make life a lot easier for com-
panies hoping to enter oil and gas,
mining, power, and real estate, says
Tom Platts, a partner in Singapore
with the law firm Stephenson
Harwood. We are going to see more
US interest in Myanmar.
Still, American companies continue
to face obstacles. Sanctions create an
unlevel playing field, says Judy Benn,
executive director of the Myanmar
chapter of the American Chamber of
Commerce. The restrictions against
working with companies or people
associated with the junta have hand-
cuffed US companies, she adds, esti-
mating the policy puts about 75 per
cent of the economy off-limits. Even
something as simple as wiring money
is a challenge, says Aye Thiha, chief
executive officer of Yangon-based
Thiha Group, which has joint ventures
with Thai partners to operate pizza
and ice cream shops, as well as a steel
pipe factory. You have to prove youre
not on the sanctions list, he says. US
banks dont want to go through the
headaches, so they opt out of it.
On 22 May, US Secretary of State
John Kerry met with Aung San Suu
Kyi in Naypyidaw, the capital, and
said further easing of sanctions would
depend on progress in democrati-
sation. The US also has concerns
about the treatment of the Rohingya,
Muslims who are longtime residents
but whom the government says arent
citizens. Aung San Suu Kyi herself
isnt demanding the US remove all
restrictions. We believe that if we are
going along the right path, all sanc-
tions should be lifted in good time,
she told reporters after meeting with
Kerry. That time, she added, will
come soon. Bruce Einhorn and
Chris Blake
The bottom line Despite a gradual easing of
sanctions, large sectors of Myanmars economy
remain off-limits to US businesses.
LAUREN DECICCA (3)
global-economics
12016
31 July, 2016
Iran is struggling to secure the investment it needs to take its oil recovery further
By the end of this year Iran will be maxed out
Iran easily beat expectations with its
speed in boosting oil exports after the
lifting of sanctions. Without an injec-
tion of cash and the easing of remain-
ing trade barriers, the recovery may
have run its course.
When restrictions on Irans oil
exports were relieved in January follow-
ing a nuclear pact with world powers,
analysts from Goldman Sachs Group
to Barclays doubted it could return to
previous levels this year. The Arabian
Gulf state defied the sceptics with a 25
per cent surge in production and aims
to reach an eight-year high of 4 million
barrels a day by year-end. They have
surprised most market participants
with the speed theyve been able to
resume production, says Antoine Halff,
a senior fellow at the Center on Global
Energy Policy at Columbia University in
New York. But to exceed pre-sanctions
levels would require investment and
technology and thats a much longer-
term proposition.
Returning to world markets after
more than three years of isolation,
Iran is seeking more than $100 billion
of investment from international part-
ners to rehabilitate its oil industry
and ultimately reclaim its position
as OPECs second-biggest producer.
Still, companies are waiting for Iran
to approve the contract model to
be used in deals and for clarity on
remaining US sanctions before re-
entering the country.
Since limits on crude sales were
lifted, exports have doubled to about
2 million barrels a day, flowing again
to previously prohibited markets in
Europe, where Royal Dutch Shell and
Total resumed purchases. Production
reached pre-sanctions levels of 3.6
million barrels a day in April and
maintained that level in May, the
Paris-based International Energy
Agency estimates. Irans own figures
have output climbing to 3.8 million
barrels a day in May, with plans to hit
4 million by the end of the year and
ultimately reach 4.8 million within
five years, Oil Minister Bijan Namdar
Zanganeh said on 3 June in Vienna.
With Total, Eni and BP having
expressed interest in developing
Irans resources, Zanganeh predicts
 Through the chaos,
Egypts youth build a
tech scene 16

Briefs: Boeing gets

They are doing its Iran deal; A Qatari
everything they owner for Balmain 17
possibly can on their
own while waiting to
bring in foreign
the first deals with foreign com- partners. The risk now acknowledged last month
panies will be signed within is that its not that the oil contract
sustainable.
three months. Bjornar Tonhaugen, models need further revi-
While oil analysts concede analyst at Rystad sions. The big question
that Iran surpassed their initial Energy for the Iranians is: Are
forecasts, they arent convinced they going to get all the
its greater ambitions will be realised investment they want? Daniel
soon. Qamaar Energy Chief Executive Yergin, vice chairman of consult-
Officer Robin Mills and independent ing firm IHS, said in a Bloomberg
consultant Peter Wells, who both have Television interview. Companies are
experience working in Iran, say that going to be very cautious about making
sustaining a level of 3.6 million to new commitments to Iran. No one
3.8 million a day is more realistic. Oil wants to run afoul of US sanction law.
Ministry officials didnt immediately A series of output disruptions from
respond to requests for comment Nigeria to Canada and Venezuela has
on whether output would plateau meant that the extra Iranian oil has Were expecting the first big util-
without the added spending. been easily absorbed by the market ity-scale solar development to begin
Iran will need billions of dollars of rather than depressing prices, says in 2017, says Pierre El Khoury, direc-
investment and foreign technology to Mike Wittner, head of oil-market tor of the Lebanese Center for Energy
boost reservoir pressure to expand research at Societe Generale in New Conservation in Beirut. Were also
capacity at its aging wells, which were York. Crude futures recovered to more planning to build wind and hydro.
already suffering output declines than $50 a barrel last month, almost The Mediterranean country thats
before sanctions took hold, accord- double the 12-year low reached in dependent on imported fossil fuels
ing to the IEA. Even with an influx of January. With Irans comeback almost for its power wants to double the
investment, an increase to 4 million complete and global demand rising, share of renewable energy to 12 per 15
barrels a day wont happen before traders are starting to wonder how cent by 2020. Its
2021, the agency predicts. They are much world markets will tighten in also looking to
doing everything they possibly can
on their own while waiting to bring
in foreign partners, says Bjornar
2017, he says. By the end of this year
Iran will be maxed out, Wittner says.
Is it bullish? Yeah. When I look around
12% reduce energy
demand by 5 per
cent by boost-
Tonhaugen, an analyst with Rystad the world and I need a bit more OPEC ing efficiency,
Energy in Oslo, an oil consultant that crude, I ask myself where its going to according to the
advises more than 600 clients. The come from. Anthony DiPaola and Lebanon is aiming to agency. Lebanon
risk now is that its not sustainable. Grant Smith double the share of suffers from black-
Iran can boost capacity by 300,000 renewable energy
outs, says Hassan
The bottom line Irans oil comeback, which has by 2020
barrels a day in the next few years surprised analysts with its pace, may already be Harajli, energy
from deposits in the West Karoun area over as investors stay away. and environment
near the Iraqi border, says Tushar project manager at the United Nations
Tarun Bansal, an energy analyst Development Programme in Lebanon.
at consultants FGE in Singapore. Outside of Beirut, some people have
Zanganeh, in an interview with power cuts for nine hours a day. Diesel
Iranian magazine Seda Weekly pub- generators and storage is expensive so
IRAN PHOTO ILLUSTRATION BY LA CHINA M, IMAGE: SHUTTERSTOCK; LEBANON: AFP

lished on 11 June, said the country
can add 700,000 barrels a day from
these fields over five years. However,
attracting foreign capital will be a
struggle when a model contract for
oilfield investment isnt ready and as a
slew of US sanctions remain in place,
FGEs Bansal says.
Even after dropping sanctions on
Irans oil sales, the US still prohib-
its transactions related to the Islamic
Republic from being conducted in
dollars, restrictions imposed because
it accuses Iran of human-rights abuses
and sponsoring terrorism. Zanganeh
Renewable Energy
Lebanon Wants Solar
Energy to Shine
The aim is to reduce blackouts
and fossil fuel imports
Outside of Beirut, some people
have power cuts nine hours a day
Lebanon plans to bulk up on renew-
able-energy assets beyond just rooftop
solar in a move that could wean reli-
ance on fossil fuels and avoid blackouts,
according to a government agency.
theres a big demand for solar.
To date, Lebanons renewable-energy
industry has focused on solar panels
for commercial buildings and facto-
ries, spawning dozens of local instal-
lation companies. The largest systems
have capacities ranging from 100 to 600
kilowatts, smaller than the utility-scale
solar-power plants being built else-
where the region.
The countrys first megawatt-sized
project was commissioned last year
in a joint venture between Lebanese
developers Phoenix Energy and
ASACO GTC. Photovoltaic panels
 Companies/Industries
with planned 10-megawatts capacity
will be installed over the Beirut River
in the so-called Solar Snake project.
A second utility-scale project in
Southern Lebanon is being developed
by ECOsys, a subsidiary of the ITG
group, is expected to come online in
the third quarter with a capacity of 1.1
megawatts, according to manager Elie
Maalouf. Its mostly about the eco-
nomic benefit, saving on electricity,
says Maalouf, who projects his busi-
ness could grow to 8 megawatts or 9
megawatts in 2017 from 1 megawatt
last year. Were seeing an exponen-
tial increase.
The central bank of Lebanon has
allocated as much as $150 million
credit for solar this year through
the National Energy Efficiency and
Renewable Energy Action programme.
Working with local commercial banks,
it has lent $420 million since 2013,
according to LCECs El Khoury. The
national energy efficiency loans bear an
interest rate of 0.6 per cent, with matur-
ities stretching to as many as 14 years.
They also include a four-year grace
16 period. The programme is supported
by the European Union and the French
Development Agency. The European
Investment Bank is also working with
local Lebanese banks to provide 50
million euros ($56 million) for renew-
able energy and efficiency projects. Its
in the early stages of assessing direct
project finance, according to spokes-
man Khaled El Nimr.
Progress has been quick on com-
mercial and industrial rooftops, and
activity is picking up in other seg-
ments, says Dario Traum, an analyst
at Bloomberg New Energy Finance,
which is currently conducting a survey
of Lebanon for its Climatescope
Diesel
research project.
generators and Utility-scale is
storage is the next step.
expensive so
theres a big
Combined with
demand for solar. the plummeting
Hassan Harajli, costs for photovol-
United Nations
Development
taic panels, Lebanons
Programme solar resources, its
ready access to capital
through remittances and its well-edu-
cated population means the country
could rapidly ramp-up renewable
capacity, he says. Anna Hirtenstein
The bottom line Lebanon wants to reduce its
dependence on fossil fuels and avoid blackouts by
developing renewable energy.
Innovation
The Brave Nerds of
Cairo
Young Egyptians are developing
their own tech scene
If you want to make something,
its like a treasure hunt
At a shared workspace in central
Cairo, a 15-minute drive from the Nile,
Mohammed Abuelhagag is working on
a stem cell incubator. The bottom half,
housing the motors, is made of laser-
blackened wood. The top, where the
stem cells will be grown, isnt done yet.
Sensors to track humidity, tempera-
ture, and air quality have yet to clear
customs. Here in Egypt, if you want
to make something, its like a treasure
hunt, says Abuelhagag, 29.
Hes a regular at Fab Lab Egypt, a
home for aspiring developers thats
become an early building block of the
countrys tiny but growing tech scene.
In the five years since the so-called
Twitter revolution drove President
A few years ago,
people didnt
know what a 3D
Hosni Mubarak from printer was.
Today, theyre
power, startups, incu- building their
bators, and angel inves- own.
tors have sprung up
like shoots of grass
Omar Elsafty,
Fab Lab Egypt
after a drought.
The revolution showed me what
people can achieve when they work
together, says Hisham Khodeir, a soft-
ware engineer who helped found Fab
Lab in 2012.
When I visit in March, a young
couple is slouched on beanbag chairs,
watching videos on cell phones. A man
fiddles with wiring at a workbench.
Aser Nabil, 21, one of the labs first
members, shows me a wooden drone
hes been working on, then he walks
me through the rest of the room: 3D
printer, laser cutter, a machine to print
circuit boards. Nabil ends the tour at a
rack of jigsaws, drill presses, and grind-
ers. Anything that can cut you, bruise
you, or burn you is here, he says.
Since the revolution, violence and
political crackdowns have kept tour-
ists and investors at bay. The countrys
bureaucracy can also be punish-
ing, and not just when dealing with
customs. The World Bank ranks Egypt
131st out of 189 economies in ease of
doing business. Our regulatory frame-
work is like our archaeology, says
Ahmed El Alfi, a venture capitalist
from California who opened a Cairo
tech hub called the Greek Campus
in 2013. Education can also be a chal-
lenge. When an entrepreneur named
Ahmed Shaaban set up Simplex, a
company making machines for wood-
working and stone carving, he had to
Abuelhagag (left),
Elsafty (centre),
and Nabil take a
break in Fab Lab
Egypt
 Companies/Industries

literally educate the market. About

half of our customers didnt know how
to use a computer, Shaaban says.
Then theres the police. Hobbyists
Briefs By Rahul Odedra

and professionals alike hesitate to

carry their tech projects around Cairo,
where cops could mistake them for
bombs. In February, two interns at a
Boeing Signs Iran Deal
hardware company called Integreight
were arrested, possibly because they
were carrying chips, and detained
Iran Air has signed a deal with Boeing for
for two months. Somebody once got 109 jetliners, marking the first transaction by
arrested for carrying a voltmeter,
says Amr Saleh, Integreights chief
the US planemaker since sanctions were lifted
executive officer. Saleh recently built in January. The agreement covers narrow- and Adeptio, led by Emaar
Properties chairman
a game featuring a large, red count-
down clock. When he brought it to the
wide-body aircraft, including 737 and 777 mod- Mohamed Alabbar, has
agreed to buy Kuwait

office, he was careful to keep it tightly els, according to the airline, The Iranian state Food Company for
$2.36 billion. Known
wrapped in a bag.
Fab Lab Egypt has twice been visited
carrier will obtain the planes through a lease- as Americana, the
company operates KFC

by men its members presume are police.
Both times, they inspected equip-
ment, asked some questions, and left.
In Egypt, you dont know who came
exactly, says Omar Elsafty, the
labs general manager.
Yet the countrys challenges
also suggest its potential.
When you have a lot of needs,
a lot of gaps, a lot of problems
to solve, you dont need to
be very innovative, says Saif
Edeen El Bendari, a manager at
RiseUp, which organises annual tech
conferences.
Last year the lab started making
enough moneythrough member-
ships, workshops, and equipment
rentalsto pay a few salaries and
start setting up in other cities. Some
regulars are starting businesses. A
few years ago, people didnt know
what a 3D printer was, Elsafty says.
Today, theyre building their own.
Abuelhagag, a former medical student
who treated wounded protesters in
Tahrir Square in 2011, plans to use his
ILLUSTRATION BY NADIA M; DAVID DEGNER FOR BLOOMBERG BUSINESSWEEK
purchase agreement, pending clearance from and Pizza Huts in the
Middle East and Africa.
the US and Iran. Boeing said any contracts with Irans air-
lines will depend on US government approval. The agree-
Egyptian billionaire ment follows a $27 billion order
Naguib Sawiris, who
controls a majority by Europes Airbus Group in
stake in Orascom, says
hes prepared to invest January H Abraaj Group,
in Oi after the Brazilian 17
wireless carrier one of the largest private equity
filed for bankruptcy
protection on $19 investors in developing markets,
billion in debt.
plans to double its assets under
management in Latin America to about $1.5 billion over the
next five years. Abraaj, which opened its first Latin America
fund in 2008 and has invested solely in the so-called Pacific
Alliance countries which include Mexico, Colombia, Peru and
Chile, will begin to look at Argentina and Brazil for deals. f
Mayhoola for Investments, an investment fund backed by
the emir of Qatar, has acquired French fashion house Bal-
main, adding the brand to a roster of labels that includes CEO
Italys Valentino. Financial terms were not Wisdom

new engineering skills to create ana- disclosed, though a person familiar with
tomical models for med students. He
also hopes to turn his stem cell incuba-
the matter said Mayhoola agreed to pay
tor into a cheap, open source research close to 500 million euros ($563 million).
kit. Tech, its something you can actu-
ally have an effect on, he says. Maybe
The acquisition of 100 per cent of Balmain For Turkish, life is much
easier. You know why?
this is how you can change the world, from shareholders including Frances Hiv- Because we have so many
finally. Stephan Faris destinations. You can cut
elin family will allow the brand to acceler- your prices to one location,
The bottom line Despite a lack of resources and I can go somewhere else. I
the spectre of the police, a tech scene is gradually ate its development by opening new stores can share.
emerging in Egypt. Turkish Airlines CEO
around the world, advisers Bucephale Fi- Temel Kotil waves off
concerns about an
nance said in a statement. imminent price war
companies-and-industries
 Politics/
Policy
1 31 July, 2016
Erdogan Takes on Founder
Ataturks Legacy
Public servants in Turkey may no longer be bound to the nations secular roots
No one should have a monopoly on the Republic and Ataturk
Turkeys leaders plan to remove ref-
erences in the constitution binding
public servants to the ideology of
the nations secular founder Mustafa
Kemal Ataturk, as part of a compre-
hensive overhaul of the state, its
principles and institutions under
President Recep Tayyip Erdoan.
The prevailing view is that there
should be no reference to any spe-
cific ideology in the new constitu-
tion, Mehmet Ucum, a chief adviser
18 to Erdoan, says in an interview at
the presidential palace in Ankara.
Its thought to be more appropriate
if the consti-
tutions preamble states that Mustafa education system develop the nations
Kemal Ataturk is the founding leader youth according to the principles of
of the Turkish Republic. Ataturk, who died in Istanbul in 1938.
The omission will be controversial The government may spend most of
in Turkey, where Ataturks legacy is this year working on a new constitu-
viewed as the untouchable bedrock tion, readying a skeleton draft this
of the mostly Muslim nations sec- month before submitting it for public
ularist structureand a key refer- debate, with a final draft submitted to
ence for its historically close ties to parliament in December, Ucum says.
Western democracies. Both Erdoan Erdoan will insist on holding a public
and the ruling AK Party, which rose referendum on the subject whether or
from Turkeys Islamic political move- not the ruling party gets the 367 votes
ment and have ruled for the past 14 necessary to pass it through parlia-
years, have pushed back against parts ment, he says.
of a legacy that they view as oppres- The constitution is just a beginning,
sive and anti-democratic. The found- Ucum says,
ing of the republic became a project
of pro-Western, enlightened, mod-
ernist nation-building at the
expense of religious people
who were branded as funda-
mentalists and excluded
from politics, Ucum
says, speaking from an
office decorated with a
traditional Ataturk por-
trait facing off against
one of Erdoan on
the other side of
the room. Ucum
equates govern-
ing modern Turkey
according to 20th-cen-
tury principles with
trying to send an e-mail
through a typewriter.
Under Turkeys current
constitution, lawmakers and the
president are required to swear alle-
giance to a secular state and the
principles and reforms of Ataturk,
who is described as the nations
immortal leader and unrivalled
hero. Additional articles of
the charter require that the

The founding of the
and the government will screen or
change thousands of laws and regu-
Mehmet Ucum, a
lations to reshape the bureaucracy in
the five years following a new charter.
Anti-democratic institutions includ-
ing Turkeys judiciary and military
still hold the power to pose a great
threat to elected governments, despite
considerable erosion in the AK Party
era, he says. There is a need to safe-
guard the system with a new constitu-
tion and a presidential system under
Erdoan, who in 2014 became the first
person to be publicly elected to that
office, Ucum says. Previous presidents
were selected by parliament.
The government also plans to change
the electoral system, the adviser says.
One option would be to divide the
nation into 550 regions of equal pop-
ulations, with voters in each choosing
a representative for the 550-seat legis-
lature. Another would be to divide the
nation into 450 regions, each with one
representative, and appoint another
100 proportionally among political
parties that receive at least 1 per cent of
the national vote. The powers of local
administrations will be strengthened
and theyll have more say in policy
making, Ucum says. The people may
be given the right to propose legisla-
tion to parliament, call for a referen-
dum on a law or dismiss a lawmaker
based on performance, he says.
Under a presidential system, law-
makers would focus on legislation and
would not be appointed as ministers, he
says. The parliament, however, would
have strengthened oversight in such a
system, including on budget matters,
he says. The president could express
his view on bills but wouldnt be able to
propose a bill to the legislature himself.
Erdoan knows that under the current
system, he could get the ruling party
to pass any bill he wanted, Ucum says.
Erdoan is not asking for that, he
says. His insistence on the presiden-
tial system is aimed at preventing this
system from potentially producing an
authoritarian regime.
Requests from some members of the
nations Kurdish minority for greater
local authority could be met via consti-
tutional modifications, though would
fall short of demands for regional
republic became a
project of
pro-Western,
enlightened,
modernist autonomy, which is
nation-building. out of the question,
chief adviser to Ucum says. Such calls
President Erdoan are made under the
provocation of terror-
ist organisations, he
says, in a reference to the PKK,
or Kurdistan Workers Party, and its
affiliates. The constitution will recog-
nise the right to live in the mother
tongue, says Ucum, a motion that
would primarily impact Kurdish speak-
ing citizens whove suffered from pro-
hibitions on using their native language
in Turkey. Anyone will have the right
to learn and write in their mother
tongue. From now on, the new consti-
tution itself is the peace process for all
of society in Turkey.
After intial reports sparked crit-
icism of the plans to downplay
Ataturks ideology in the constitution,
Ucum responded in a post on Twitter.
No one should have a monopoly
on the Republic and Ataturk, he
said. Both the Republic and Ataturk
belong eternally to Turkish society,
not to elitist fascists. Selcan
Hacaoglu and Firat Kozok
The bottom line Turkeys move away from its
secular roots under the AK Party is set to continue
with the rewriting of the countrys constitution.
Party Financing
Irans Ally Hezbollah
Feels a Funding Pinch
A US law makes bankers wary of
dealing with the militant group
Theres a possibility of Hezbollah
really feeling alienated
Iran may be emerging from the grip of
western sanctions, but one of the most
formidable militant groups it funds is
paying the price. As Hezbollahs battle-
field casualties mount in Syria, a US law
passed in December that forbids banks
from dealing with the Shiite group is
hitting its vast network of social services
in Lebanon like never before. The legis-
lation aims to prevent Hezbollah from
MBS makes his
economic and political
pitch in the US 20
Some advice for Gulf
states trying to keep
their currency pegs 21
reaping any financial benefits following
Irans nuclear accord last year. Nurses
and doctors, administrators and teach-
ers are being frozen out of the banking
system as lenders close the accounts of
hospitals, media companies and chari-
ties linked to Hezbollah.
The services are crucial to
Hezbollahs popularity as the groups
involvement in Syrias conflictwhere
its part of an alliance with Iran, Russia
and President Bashar al-Assadlingers
on. While the tide of the war has
shifted in favour of the regime, hun-
dreds of Hezbollahs fighters, as well
as several top commanders, have been
killed. This is the most difficult period
for Hezbollah since it was born, says
Bilal Saab, senior fellow for Middle
East security at the Washington-based
Atlantic Council. Theyre in transi-
tion from a local actor into a regional
power, and the outcome is quite uncer-
tain for them. Can they survive some-
thing like this? 19
The US legislation was enforced
by the Lebanese central bank in
May, leading to a rare public spat
between Governor Riad Salameh and
Hezbollah. The former Merrill Lynch
banker said it was the only way to
guarantee the stability of banks, the
backbone of the struggling economy
in the Arab worlds most indebted
nation. One hundred accounts have
been closed, he told CNBC last month.
On 9 June, Hezbollah said Salamehs
position was ambiguous and suspi-
cious and we totally reject it.
Tension soared further on 12 June
when a bomb targeted Blom Bank, one
of the countrys largest lenders, trigger-
ing speculation it was linked to the law.
There has been no claim of responsibil-
ity. Hassan Fadlallah, one of Hezbollahs
13 lawmakers, declined to comment on
the law and calls to two other parlia-
mentarians were unanswered.
Founded in 1982 to fight Israels
occupation of southern Lebanon,
Hezbollah is considered a terror-
ist organisation by the US. The law
gives us yet more tools in our cam-
paign to destroy Hezbollahs finan-
cial networks, Adam J. Szubin, acting
US under secretary for terrorism and
AFP (2)
financial intelligence at the Treasury
 Politics/Policy
Department, told a Congressional
committee on 25 May. The group is
in its worst financial shape in decades.
I can assure you that, alongside our
international partners, we are working
hard to put them out of business. Its
network mainly serves impoverished
areas, including three hospitals, 12
health centres as well as 20 infirmaries,
according to a 2009 study published
by the Middle East Policy Council.
One company, Jihad Construction, is
involved in rebuilding areas damaged
by Israeli strikes or recent bomb
attacks linked to the Syrian war. The
20 depth of the groups coffers is harder
to estimate.
Salaries are now having to be paid
in cash. Recipients, including those
with mortgages and loans, risk being
cut off from the Lebanese banking
system. When a doctor applied for a
mortgage at a Beirut bank recently,
he was turned down because most
of his income came from a hospital
linked to Hezbollah. The banker who
handled his request said the lender
was acting in accordance with the law.
The person declined to be identified
by name because of the sensitivity of
the issue.
The US law raised concerns in
Beirut this year because of its poten-
tial impact on the banking indus-
try. Delegations from parliament and
the central bank went to Washington
This is the most for talks with US
difficult period for officials earlier
Hezbollah since it
was born. Theyre in
this year and
transition from a US Treasury
local actor into a Department
regional power, and
the outcome is quite
Assistant Secretary
uncertain for them. Daniel Glaser
Can they survive visited Lebanon
something like this?
Bilal Saab, senior
in May. Mark
fellow at the Atlantic Meadows, the
Council North Carolina
Republican
congressman and member
of the conservative Freedom
Caucus who was co-spon-
sor of the bill, Public Law 114-
102, says he met twice with a
few bankers and made adjust-
ments to his proposal. We
made sure they knew we were
going after the bad guys,
Meadows says.
In the background, Iran
will make sure Hezbollah
can cope with the US action,
according to Mohammad Marandi,
associate professor at the University
of Tehran. The only institution that
may be affected is a hospital and of
course that is in the heart of Beirut and
it shows the Americans have no shame
when it comes to dealing with innocent
people, says Marandi.
Hezbollahs Lebanese Shiite base,
which rarely challenged its deci-
sions, is getting more agitated as the
economy almost grinds to a halt fol-
lowing the influx of more than 1 million
refugees from Syria. The war in Syria
has made Hezbollah forget peoples
economic and social woes, accoun-
tant Mohammed Bazzi, 34, says in an
interview in the southern town of Bint
Jbeil, which welcomes its visitors to
the capital of resistance and libera-
tion. I supported Hezbollahs resis-
tance against Israel, but politically the
party has proved to be a total failure.
The group, led by Sayyed Hassan
Nasrallah, has navigated international
pressure since the 1990s. In a May
speech eulogising a top commander
killed in Syria, he recognised that
Hezbollah could be at a crossroads but
said it would eventually prevail.
While the latest law wont lead
to Hezbollahs demise, it makes it
harder for them to operate, says
Jonathan Schanzer, a former terror-
ism finance analyst at the US Treasury
Department. Theres a possibility of
Hezbollah really feeling alienated,
Schanzer, vice president for research
at the Foundation for Defense of
Democracies, says from Toronto. Not
just from the other sectarian actors
in Lebanon but actually from its own
Shiite population. Donna Abu-Nasr,
with assistance from Dana Khraiche and
Laura Litvan
The bottom line Hezbollah is struggling to fund
its social programmes in Lebanon following the
passing of a US law limiting its access to finance.
Facebooks Oculus Rift virtual-
Foreign Relations
Saudi Prince Makes His
Pitch Across America
MBS visits Washington, Silicon
Valley and New York
I would describe the meetings as
very, very positive
After a week in Washington, Saudi
Arabias deputy crown prince headed
west to meet with technology execu-
tives in Silicon Valley and then to New
York to pitch his nations new eco-
nomic plan to Wall Street investors.
Deputy Crown Prince Mohammed Bin
Salman wanted to discuss how Saudi
Arabia can benefit from innovations
spawned in California and then talk
with New York investors about oppor-
tunities, including with the state-
owned Saudi Arabian Oil Company,
according to Saudi Foreign Minister
Adel al-Jubeir. The kingdom plans an
initial public offering of the worlds
largest oil company, known as Saudi
Aramco, which the prince expects to
be valued at more than $2 trillion.
In the second week of a US trip
aimed at improving ties with gov-
ernment officials and drumming up
investment, Prince Mohammed Bin
Salman met Facebook Chief Executive
Officer Mark Zuckerberg for the first
time. Photos released by the princes
office showed him wearing jeans and
a blazer while touring the Menlo Park,
California, campus with Zuckerberg
and trying on an Oculus Rift virtual-
reality headset. Prince Mohammeds
stops in the San Francisco Bay Area
included visits with Microsoft CEO
Satya Nadella and executives of Cisco
Systems. The prince signed memoran-
dums of understanding with Microsoft
and Cisco that provide for training
Saudis and helping to expand the king-
doms technology industry.
The deputy crown princewho is also
Saudi Arabias defence minister and
the son of King Salmanarrived on 22
June in New York to meet with
more investors before return-
ing to Riyadh. Back home,
the prince is leading Saudi
Arabias biggest-ever eco-
nomic shakeup, moving to
Prince Mohammed tries
reality headset
 $100b Additional non-oil revenues Saudi Arabia is looking to generate by 2020

cut subsidies and diversify the economy

away from oil by generating an extra
$100 billion in non-oil revenue by 2020.
But he also took care of geopo-
litical business on his trip. Prince
Mohammed spent the first week of his
trip in Washington, where he talked with
Fiscal Policy
Gulf States Have Some
More Tightening to Do
Politics/Policy

combined budget gap in the GCC

President Barack Obama, Secretary of
State John Kerry, Defense Secretary Ash
Carter and senior intelligence and con-
gressional officials. I would describe the
meetings as very, very positive, al-Jubeir
told reporters at the Saudi Embassy in
Washington. The aim was to exchange
views and ideas on issues of the day on
challenges that our two countries face in
the region and the world, he said.
On 22 June, he met at the UN with
Secretary-General Ban Ki-moon, who
travelled the following weekend to
Kuwait to encourage stalled peace talks
in the war in Yemen, where Saudi Arabia
heads a military coalition fighting Shiite
Houthi rebels. A Saudi-led coalition has
carried out air and ground offensives in
Yemen since March 2015, battling Houthi
rebels that the Gulf Arab states accuse of
being tools of Iran. Almost 6,500 people
have been killed in the Yemen violence,
and 2.8 million others are displaced,
according to the UN.
The UN briefly blacklisted Saudi
Arabia over the killing of children in
Yemen, after a UN report said the Saudi-
led coalition was responsible for 60 per
cent of child deaths and injuries in the
conflict last year. Last month, Ban went
public with a complaint that the Saudis
forced him to remove them from the
list, prompting an outpouring of criti-
cism. Saudi Arabia and other Gulf Arab
states had threatened to cut various
funding to UN programmes, Ban said,
forcing him to acquiesce in taking
them off the blacklist.
Now there are some signs that a
breakthrough is close in the Yemen
negotiations held in Kuwait, and Bans
presence there could contribute to
success, UN officials said. The talks are
The IMF recommends further cuts
to maintain currency pegs
It is not impossible, if it is done
gradually
Gulf oil exporters must cut spend-
ing and narrow their budget short-
falls to keep their currencies pegged to
the dollar, the International Monetary
Fund has said. While substantial
foreign assets have allowed the six
members of the Gulf Cooperation
Council to fix the value of their cur-
rencies to the greenback, keeping the
status quo comes at a price as lower
crude prices strain public finances, the
lender said in a report titled Learning
to Live with Cheaper Oil.
When a country faces prolonged
fiscal and external deficits, policy adjust-
ment must come from fiscal consoli-
dation measures, the IMF said in the
report authored by Martin Sommer,
deputy chief of its regional studies divi-
sion. Maintaining the currency pegs will
require sustained fiscal consolidation
through direct expenditure cutbacks and
non-oil revenue increases, it said.
As investors increased bets that cur-
rency fixes may become too expensive to
maintain, the United Arab Emirates and
Saudi Arabia renewed their commitment
to their pegswith the latter also said to
ban betting against its currency. Gulf oil
producers budgets swung from surplus
to deficit as Brent crude fell by as much
as 75 per cent from June 2014 to January
this year, before a partial recovery in
recent months.
Even after cutting spending, the
regionwhich also includes Kuwait,
Qatar, Bahrain and Omanas well as
Algeria is expected to reach $900 billion
for the 2016-2021 period, and repre-
sent 7 per cent of their gross domestic
product in the final year, the IMF said.
Their debt-to-GDP ratio is expected to
rise to 45 per cent in 2021 from 13 per
cent last year as governments issue debt
to plug their budget gaps.
Foreign assets give governments
varying amounts of fiscal space to
cope with lower oil prices, with Kuwait,
Qatar and the UAE enjoying sizable
buffers to finance more than 20- to 30
years of projected deficits, the IMF said.
Even so, the GCC and Algeria need a
fiscal adjustment of about 10 to 15
per cent of gross domestic product,
with every $10-increase in the price of
oil reducing that amount by about the
equivalent of 4 per cent of GDP, the IMF
said. The lender expects oil to rebound
to about $50$55 a barrel by the end of
this decade, based on futures markets.
GCC members can tackle imbalances
via non-oil income and public-spend-
ing measures, the report said. A value- 21
added tax of 5 per cent would raise
the equivalent of about 1.5 per cent of
the regions GDP, while better public
investment efficiency could save the
equivalent of about 2 per cent of eco-
nomic output, it said.
Fiscal consolidation is no easy task
given the rigidness in government spend-
ing on wages and social benefits which
are seen as part of an implicit social
contract between Gulf oil producers
and their citizens, according to the IMF.
Philippe Dauba-Pantanacce, a senior
economist and global political analyst
at Standard Chartered in London, says
retrenchment is imperative in order
to imagine a post-oil economy. It is a
major challenge for countries where
the populations have come to see the
state as the essential provider of basic
utilities, jobs and in a way, status. he
OFFICE OF DEPUTY CROWN PRINCE MOHAMMED BIN SALMAN

Time to reign it in?

at a critical juncture and the parties Fiscal balances of GCC states (per cent of GDP) says. But it is not impossible, if it is
need to engage seriously and show done gradually. Taxation comes with
flexibility to find a durable peace, 2014 accountability and in that sense the
Saudi Arabia

Frances UN Ambassador Francois 2015 implicit social contract will progres-

Delattre says. The secretary generals sively evolve. Onur Ant
Bahrain

Oman

efforts are important to bring parties

The bottom line Gulf states need to make further
together to produce results, he says. public spending cuts if they are to keep their
Kuwait

Qatar

UAE

Nafeesa Syeed and Kambiz Foroohar currencies pegged to the dollar, the IMF says.

The bottom line The man in charge of Saudi

Arabias economy and military is trying to woo US
political and technology power-brokers. DATA: IMF politics-and-policy
 Supporting Partner Strategic Partner

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 1 31 July, 2016

Jim Dehlsen, a 79-year-old wind-energy

pioneer who sold one turbine company
to Enron and took another public, has
spent his life thinking about the best
way to make blades turn in the sky. For
his latest effort, hes flipping a turbine
upside down and plunging it hundreds
of metres deep in the ocean. There,
marine currents rotate the 27-metre
long blades to pull power from the sea.
Aquantis, Dehlsens Santa Barbara,
California, company, will start deploy-
ing turbines in 2018 in waters near
Wales and the Isle of Wight. Its most
ambitious project is a 200-megawatt
field of marine turbines in the strong
Gulf Stream off the coast of Florida,
due to come online in 2019 or 2020.
The worlds oceans remain relatively
untapped as an energy source, com-
pared with wind and solar. By 2030,
Dehlsen says, marine energy could
serve 8 per cent or 9 per cent of US
power needs. The oceans are the
24 major remaining potential for renew-
able energy, he says. Getting on that
now is really urgent.
It took wind at least 15 years to
become a viable, cost-effective
resource. In the late 1970s, when sci-
entists first started experimenting with
wind turbines, people laughed at you
and said, Wind will never work, says
Robert Thresher, a research fellow
at the National Renewable Energy
Laboratory in Golden, Colorado. In the
80s and 90s, the industry settled on
the three-blade turbine design consid-
ered the standard today. Many aspects
of turbine design can be applied to the

FROM LEFT: PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (2); ILLUSTRATIONS BY 731
oceans, adjusted to handle the slower,
heftier fluid dynamics of seawater.
Aquantis is developing systems to
capture energy from waves, from tidal

Just Turn It
currents, which switch direction twice
a day, and from gyre, or steady, cur-
rents. Much of Dehlsens obsession

Upside Down
A wind-power pioneer wants to tap the oceans for energy
Were trying to create a major energy resource from the oceans
these days is with the Gulf Stream.
Its constant current can rotate tur-
bines day and night, allowing Aquantis
to squeeze more power out of each
turbine. That will cut the price per
kilowatt-hour. Because the stream
flows all the time, its probably the one
that can become cost-effective most
easily, Thresher says.
Aquantis, which isnt the first

company to design underwater tur-
bines, wants to lower the cost of
marine energy. Dehlsen says deploy-
ing an Aquantis devicetowing it
out to sea, filling it with seawater
ballast, then anchoring itruns
about $347,000 per turbine. The
rotors two blades can with-
stand huge volumes of water
moving as fast as 4 knots.
The topmost part floats just above the
surface, and the rest of the equipment
is held in place with mooring lines to
the ocean floor, making it quicker to
deploy and cheaper to maintain. Repair
crews take an elevator down the shaft.
Rival turbine makers dig deep into the
ocean floor to anchor the machinery
so that it can withstand the strength
of the currents; their repairs require
raising the structure to the surface.
That pushes up the cost significantly,
Dehlsen says, to about five to seven
times more than Aquantiss.
Dehlsen plans to install his turbines
in a few test sites and sell power to the
grid. He sees a second revenue stream
in marine turbines housing data
centres for the worlds tech giants,
using the turbines shaft as a storage
area for racks of servers. That can save
companies money on air condition-
ing by using cold ocean water to cool
the equipment. Aquantis designed
and built a pilot test chamber for
Microsoft that housed a data centre
underwater for 105 days off Californias
San Luis Obispo pier last year. The test
was a success, Microsoft said, with
minimal ocean heating and no leaks or
hardware failures. Dehlsen is reaching
out to Apple, Facebook, and Google
about similar efforts.
Dehlsen is courting tech compa-
nies and investors while trying to lock
down test sites from the north coast of
Brazil to Cape Agulhas, on the south-
ern tip of Africa. Little testing has
taken place in the US. Aquantis has
won Department of Energy grants but
no venture capital. Dehlsen has self-
funded a lot of the work; additional
income comes from projects like the
data centre programme. His track
record in renewable energy reassures
potential partners, says Charles Vinick,
Aquantiss chief executive officer. Jim
is seen as the father of American
windthat opens the door.
Marine turbines face some chal-
lenges, such as concerns over
unknown environmental effects.
Their blades could strike whales
or create noise that confuses sea life.
Dehlsen says studies conducted in the
UK show turbines are safe for fish and
marine life. The bigger challenge, he
says, is creating marine energy that is
cost-competitive. He expects to get to
less than 10 a kilowatt-hour in three to
five years. (Wind energy hovers from
3 to 8 a kilowatt-hour, solar from 4
to 7, and conventional gas from 5 to
8.) In renewable energy, people get
enthusiastic about an idea, and yes,
maybe you can make electricity. But
if its 8 a kilowatt-hour, so what? he
says. Dont even bother.
Dehlsens best argument may be
a slide in his presentation about the
urgency of global warming. The
time thats left in which we can make
a change is relatively short, he says.
Five to 10 years, and youre beyond
being able to stem it. Ellen Huet
The bottom line Aquantis says marine energy
could serve 8 per cent or 9 per cent of US power
needs by 2030.
Military
Can the Pentagon
Learn to Be Flexible?
A Defence programme tries to
partner with tech companies
They had a hard time trying to
shake loose funding
One of Washingtons biggest bureau-
cracies reaches out to do business with
Silicon Valleys agile and impatient
Help wanted:
Economists fluent
in tech 26
Innovation: Inflatable
stations extend
astronauts space 28
entrepreneurs. What could go wrong?
Plenty, based on the initial strug-
gles of the Defense Innovation Unit
Experimental, or DIUx, the California
technology outpost thats a pet project
of Department of Defense Secretary
Ash Carter. DIUxs role is to scout for
new technology and help startups
quickly get contracts with the Pentagon,
Carter has said, without specifying the
kind of projects hes seeking.
Since DIUx was created last summer,
only 3 of 20 projects in its pipeline have
gone into contract, an eternity consid-
ering a successful venture capital pitch
can generate almost instant funding.
The whole point of Silicon Valley is
to be risky, says Herbert Lin, a cyber
research fellow at Stanford University.
But the Pentagons procurement and
acquisitions people generally want to
remove risk from the process, he says.
DIUx has been so hobbled by the
Pentagons red tape and cautious
decision-making that last month Carter 25
replaced its director and brought
the California officelocated on the
grounds of the Moffett Federal Airfield
in Mountain Viewunder his personal
control, adding a second location in
Boston. Were taking a page straight
from the Silicon Valley playbook,
Carter said of the projects relaunch.
It took them a while to get organ-
ised, to get funding, support, to get
office space, says Andrew Hunter,
a senior fellow at the Center for
Strategic and International
Studies in Washington. Even the
offices wireless internet connec-
tion took time to get switched on, says
Ben FitzGerald, a senior fellow at the
Center for a New American Security,
who previously worked as an execu-
tive for technology companies with
defence contracts.
The Valley has viewed the national
security establishment with suspicion
since Edward Snowdens disclosure
of secret surveillance by the National
Security Agency. The distrust has been
compounded by the FBIs fight with
Apple and other technology compa-
nies over encrypted data. Not every-
one in Silicon Valley is going to want to
do business with DOD, says Hunter, a
former Pentagon acquisition official.
 Technology

The idea that getting a contractfor
software, a device of some kind, or a
servicecould take a year or more just
didnt translate to Silicon Valley-speak.
While Carters PhD in theoretical
physics gives him scientific credibility
in Silicon Valley, he followed a long line
of military brass whose tech tourism
was scoffed at by locals. Generals would
tour Facebook, Google, Palantir, and
then call it a day, with no follow-up
on how interested companies could
close a deal with
the government,
worked with DIUx. When it was time to
get moving on a contract, they had a
hard time trying to shake loose funding
from the services, because they didnt
have their own pots, he says.
The Defense Department is request-
ing $30 million in new funding for
fiscal 2017, Carter said in May, to
direct toward nontraditional com-
panies with emerging commercially
based technologies that meet our mil-
itarys needs. But the House-passed
version of the annual defence policy
bill would eliminate that money.
the project, Bailey and his co-authors
matched public records of 525,000
home sales to anonymised data for
1.4 million Facebook users.
The daylong meeting, held at the
Federal Reserve Bank of San Francisco,
was the first formal gathering of tech
company economists, according to
NABE Executive Director Tom Beers,
and included numerous stars of
the consumer internet. Hal Varian,
the Google economist who helped
develop the AdWords marketplace,
was there; Keith Chen, of Uber, pre-

$30 million
says Jackie Space,
a former US Air
Force officer whos
now a partner at
Amount the Defense
BMNT Partners,
Department requested a technology
for new funding incubator that
for fiscal 2017, to
spend on emerging
focuses on national
technology security. A lot of
companies felt
that it was just a waste of time.
Major Roger Cabiness, a Defense
Department spokesman, in an e-mail
that since opening last summer, the
26 office, apart from the three projects
already on contract, had 17 projects at
various levels of negotiation with differ-
ent agencies/entities.
Some veteran Pentagon contrac-
tors say DIUx moves faster than the
established Defense bureaucracy. Bob
Goodson waited a year for the Pentagon
to complete each of its first three con-
tracts with the data-mining and visu-
alisation company he co-founded. In
March, the company, Quid, pitched an
idea to DIUx, and by May the Air Force
was using its analysis software.
In rebooting DIUx, Carter replaced
its first director with Raj Shah, a
former F-16 pilot and combat veteran
who headed a technology startup,
and brought in Isaac Taylor, who had
worked at Google on research projects
including Google Glass and self-driving
cars. Carters willingness to shake
things up resonated with technology
entrepreneurs, according to Lin, the
Stanford professor who is a former staff
scientist for the House Armed Services
Committee. In Silicon Valley, the first
time you do anything, you expect stuff
to go wrong, he says.
The unit had to scrounge for funds
from the military services, according to
Sonny Sinha, a former US Department
of Homeland Security official whos
The retooled innovation office may
have only months to prove itself, in
Washington and in Silicon Valley, before
the next president takes office and
Carter is replaced. DIUx needs to show
that its worth keeping in that form
so that they have enough institutional
strength to continue on their own after
the secretary leaves, the Center for a
New American Securitys FitzGerald
says. Nafeesa Syeed
The bottom line A year after opening an outpost
in Silicon Valley to partner with tech companies,
the Pentagon is having a hard time closing deals.
Human Resources
Algorithms Arent Just
For Coders
Tech companies are on a hiring
spree for economists
There are these new companies
with tonnes of digitised data
At an April meetup organised by the
National Association for Business
Economics (NABE), a Facebook
researcher named Michael Bailey pre-
sented a working paper suggesting that
a buyer in Detroit might be willing to
pay more for a home if he had lots of
Facebook friends living in a high-priced
housing market like San Francisco. For
Its Not All Keith Chen
Academic Head of economic
research
A sampling of research
Dynamic Pricing
papers presented
in a Labor Market:
at a meetup of tech
company economists Surge Pricing and
in April Flexible Work on
the Uber Platform
19 pages
sented a paper on the companys
surge-pricing policy that refuted
earlier research that said taxi drivers
wont work in the rain. Economists
from Amazon.com, Netflix, and
LinkedIn elaborated on their work as
well. It was like a geek dream come
true, says Nela Richardson of the real
estate brokerage Redfin.
The meeting gave participants a
chance to trade notes about what its
like to be at the forefront of a trend in
the profession. US companies went on
an economist hiring spree in the late
1950s and 1960s, says Beers, as comput-
ers made econometric analysis possible
and companies sought experts to fore-
cast swings in the business cycle. Today,
businesses are once again ramping up
their hiring of economists, this time
spurred by a boom in web-generated
data and tools for storing and sorting it.
Their job is to extract insights that can
help businesses improve their products
or user experience. Some also produce
research to shape public policy. Now
you have all these new companies with
tonnes of digitised data, and not only
that, its data that describes human
behavior, says Andrew Chamberlain,
chief economist at the jobs and recruit-
ing website Glassdoor.
There were 11,500 economists
working in the private sector as of
May 2015, according to the Bureau
of Labor Statistics, up from 5,580 in
May 2010. Facebooks data science
team employs about 25 PhDs in
Randall Lewis Michael Bailey
Economic research Data science
scientist manager
Ghosting Ads: Social Networks and
Improving the Housing Markets
Economics of
Measuring Ad
Effectiveness
56 pages 74 pages
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 Technology

economics, says Bailey. Thats about

Innovation the same number employed at a large

US bank, NABEs Beers says.
Stan Humphries joined Zillow in
2005 to develop algorithms for estimat-

Inflatable Space Station ing home prices. When the housing

market started to crater, he emerged
as a favourite source for journalists
Form and function Innovator Robert Bigelow
looking for data and commentary.
The Bigelow Expandable Activity Module, Age 72
At a time when you still had indus-
or BEAM, is a 565-cubic-foot addition to the
Founder and chief
try people saying Yes, weve had
International Space Station designed to test
expandable-space-station tech. It was carried executive officer of Bigelow some correction in prices, but theres
aloft by a SpaceX Dragon cargo ship in April. Aerospace, a 130-employee nothing to see here, move on, Id be
company in North Las Vegas
the guy who came out and said, No,
were going to see another two years in
1. Origin Expandable housing recession; heres why, says
habitat technology Humphries, whose current title is chief
Launch Bigelows
began as part of NASAs analytics officer and chief economist.
TransHab programme.
expandable station modules After the programme Publishing data-driven research
are made of as many as 30 was cancelled in has become a popular strategy for
layers of high-strength fabric,
including Kevlar. They take
2000, Bigelow, a web marketplaces and listings sites
hotelier, began working
up 3.6 cubic metres when to commercialise to showcase their depth of knowl-
compressed for launch. the technology. edge about a particular industry. That
includes home renovation startups
such as Houzz and BuildZoom, and
jobs sites like Indeed and Glassdoor.
More data is generally a good thing,
says Bill McBride, who blogs about the
28
2. housing market at Calculated Risk, but
it pays to consider where it comes from
Inflate Once in orbit, and how its compiled. Some of the
the modules fill with private data is garbage, he says. Its
air from onboard tanks
to expand to their
5' 10'' not that the people producing it are
intended size. The not as smart or that they dont do hard
fabric resists impacts work. The motivations are different.
from micrometeoroids
and debris more
In the early days of the data boom,
effectively than standard tech companies sought to entice big
aluminium designs. brains by allowing them to keep one foot
in academia, says Susan Athey, a former
Funding Bigelow says hes chief economist at Microsoft who now
invested about $290 million in
his company. NASA contracted
teaches at Stanford. Recently, Amazon
with him to develop BEAM for has emerged as an exception to that
$17.8 million. rule, says Athey: It keeps a tight leash
on research produced by its in-house
Customers Bigelow economists. Nonetheless, its managed
Aerospace is in talks to attract a team whose size and quality
with NASA to add rivals the economics departments of top
Price Bigelow a 340-cubic-metre
plans to charge commercial module universities, Athey says, in part because
$25 million for to the ISS and with the company offers access to unique
two to three individual nations data. I cant run an experiment on a
months use of and corporations
each third to lease more free- couple of million people at Stanford. If
of a module. flying modules. you want to be aware of what interesting
questions are out there, you almost have
Next Steps to go and work for one of these compa-
Astronauts inflated BEAM in late May for a two-year test. Bigelow plans to nies. Patrick Clark
ILLUSTRATION BY 731 (3); NASA (2)

launch a pair of commercial modules in 2020. Given the finite storage in

The bottom line The giants of the web are
a rocket, you get a lot more living space with an inflatable, says Jeffrey assembling teams of economists that rival those
Hoffman, a former NASA astronaut and professor of aeronautics and at banks and universities.
astronautics at MIT. And in a collision with space debris, he says, an inflatable
could actually be more survivable. Michael Belfiore
Markets/
Finance
1 31 July, 2016
Super-Rich
Syrians
Wait for
Wars End
High-profile investors line up to rebuild the country
Everything is easy once you have stability
The destruction of Syria looks as
total as in any civil war of the last
century: whole towns have been lev-
elled, road and water links severed,
schools and hospitals in ruins, mil-
lions of people killed or exiled and
the $60 billion economy left for dead.
Yet, with the conflict in its sixth year
and bombs hitting government-con-
trolled areas that previously were
barely touched while airstrikes pound
neighbourhoods held by rebels, the
prospect of rebuilding the country
isnt daunting Syrian real estate inves-
tor Waleed Zaabi. If only a peace set-
tlement werent so elusive, he says.
Everything is easy once you have sta-
bility, says Zaabi, 51, sipping Arabic
coffee at the hotel he owns in Dubai.
He described the negotiations taking
place in Geneva, in which hes been
involved, as just a movie. Once you
start having growth and people start to
work, youre on the right track.
Only the most optimistic diplo-
mats see an imminent end to the
war in Syria. But when it happens,
the country will need wealthy Syrian
migrs to bolster the reconstruction
effort and jump-start the economy
Asfari declined requests for an inter-
view, while Kuzbari said he stands
ready to invest in the humanitarian
aspect of rebuilding Syria.
Those investors would lend a tre-
mendous amount of legitimacy to
the reconstruction process, says
Samer Abboud, associate profes-
sor of history and political studies at
Arcadia University near Philadelphia.
There are lots of opportunities.
Certainly theres money to be made.
Their wealth and potential influence
draw comparisons to the late billion-
aire prime minister of Lebanon, Rafiq
Hariri, who drove the rebuilding of
Beirut and the rest of the
country after the 15-year
civil war ended in 1990.
While Syria is compli-
cated by the interests
of Iran and Russia on
Assads side and the
Saudis and US on the
other, there are simi-
larities at least with the
task ahead.
before foreign busi- Since protests against
nesses consider any Assad, 50, descended
investment. With close into war in March
to $200 billion esti- 2011, at least 280,000
mated to restore people have died, half
the economy to the Syrian popula-
its prewar size, the tion have fled their
rewards could be huge, homes and about $80
though so could the billion of wealth has
potential losses. been erased, accord-
Several names come up ing to a World Bank
as possibly playing a role report in April. Assad
in shaping the country, said last month that
PHOTO ILLUSTRATION BY SJC, IMAGES: SHUTTERSTOCK (2); AFP (1), BLOOMBERG (1), AAFC
financially and even politi- he will liberate every
cally. Zaabi, a member of the inch of Syria. More
High Negotiations Committee deadlines for reach-
meeting with the United Nations ing an initial agree-
and opposed to President Bashar ment this summer
al-Assad, is among them. look less and less
Theres also Ayman Asfari, 57, likely to be met and
the chief executive officer of Assad is more likely
London-based oil services to remain in power
group Petrofac, and Vienna- in some form. But
based paper-manufacturing every time theres
magnate Nabil Kuzbari, 79. a hint of a possible
Asfari has been an out- settlementmost
spoken critic of Assad recently the
while Kuzbari once negotiations in
had business ties Geneva started
to the ruling family. with a lot of

promise and a cease-fire
before stallingtalk turns
to the massive rebuilding
effort that will be needed.
Asfari said the only
solution in Syria is
a long transitional Waleed
period, one without Zaabi
Assad in power. In a
BBC interview dated
18 December, he called
his country a patient
today that is bleeding and
dying and unless people
see a credible transition,
then things wont come
to an end. He hasnt,
however, aligned himself
with the fragmented
opposition group. He said
at a Carnegie Endowment
for International Peace
conference two months earlier in
October that neither the regime nor
people in the opposition have any
political legitimacy.
The son of a diplomat, Asfari was
raised mostly outside Syria. Educated
in the US, he started working as an
engineer for a contractor in Oman
after graduating. The next Omani
company he worked for partnered
with Petrofac in 1986 and Asfari
worked his way up, amassing a per-
sonal fortune valued at $1 billion in
the Bloomberg Billionaires Index.
$200b
Petrofac has built gas plants in Syria.
Though he doesnt expect para-
dise after Assad goes, there is a tre-
mendous amount of goodwill by the
Syrians outside and they would want
to go back and invest in their country
and Ill be the first to do that, Asfari
said at the Carnegie conference. He
said there was a Syrian arrest warrant
for him in 2013 over claims he funded
Assads opponents, for supporting,
you know, so-called terrorists.
Kuzbari, by contrast, has remained
more neutral, according to Rashad al-
Kattan, a political and security risk
analyst and a fellow at the University
of St Andrews in Scotland. Kuzbari,
whose wealth stands at $300 million
based on the Bloomberg index, lives
in Vienna and said he would rein-
vest in his home country. Syria needs
Nabil
Kuzbari
trailblazing and fearless
entrepreneurs who are
willing to take the neces-
sary calculated risks to
rebuild the country, says
Kuzbari. Return on invest-
ment will be high, both in
terms of finances as well as
doing something inherently
positive and constructive. I
still believe that one can do
good, and profit at the same
time, he says.
His reception may
depend on whos in
Ayman charge. A Damascus
Asfari
native, he left Syria as
a youth to study engi-
neering before returning in
the 1960s to take over his
familys second-generation
paper business, now called
Vimpex. As recently as April 2011,
he also served as chairman of Syrias
Cham Holding, a sprawling conglom-
erate controlled by Assads cousin,
Rami Makhlouf. It was for that associ-
ation Kuzbari found himself slapped
with US sanctions on 18 May of that
year. He was removed from the list
after it was deemed there was no legal
merit, his lawyer said. For the hard-
line opposition, defecting from the
regime isnt good enough, you have
to publicly state youre against them,
says al-Kattan at St Andrews, whose
Centre for Syrian
Studies is partly
funded by Asfaris
foundation. He
hasnt made any
public statement,
with or against
the regime.
Cost of the Syrian Zaabi, a civil
conflict to the country,
according to President engineer by train-
Bashar al-Assad ing, comes from
Daraa, the city
where Assads
quashing of a demonstration triggered
the war. He left Syria in 1988 for a job in
the United Arab Emirates that included
a house, a car and 2,000 dirhams
($540) a month. Three years later, he
started his own business, building
small structures with shops on the first
floor and housing units on the second
Two UAE banks get
ready to merge. Whos
next? 32
before growing into a company that
includes real estate, contracting, hos-
pitality, industry and education units.
Zaabis empire is now valued at more
than $750 million by the Bloomberg
Billionaires Index, though he said his
net worth easily exceeds $1 billion.
Zaabi says it wont be enough just for
the war to stop for Syrian magnates to
return. There should be a transparent
government in place and rule of law to
reassure them, he says. Then the pri-
ority is education and healthcare for
the millions of children who have gone
without proper schooling and tens of
thousands have some kind of disabil-
ity from the war. Those who were 10
when the conflict began are now 15
and some of them have seen nothing
but murder and blood around them,
says Zaabi. What can we expect
from them? How can we deal with
them? Donna Abu-Nasr and Devon
Pendleton
31
The bottom line Wealthy investors are waiting on
the sidelines to pump money into Syriabut only
once the situation stabilises.
Inflation
A Food Price Surge Hits
Egypts Ramadan Feasts
An inflationary spiral adds to
citizens dissatisfaction
Prices have increased in an
unprecedented way
Twelve people are seated around the
dining table at Mokhtar Gamals house,
their mouths dry and bellies empty
after a day of fasting during the holy
month of Ramadan. Plates of food
fill the table, and all eyes are on the
stuffed grape leaves that are his wifes
specialty. Family and guests dig into
plates heaped with rice, grape leaves
and chicken breasts, washing it down
with pitchers of juice. A smile is fixed
on Gamals face, but his mind is on
one thing: How much this feast costs.
A quick mental calculation puts it at 10
per cent of his monthly salesmans
 pay of 3,000 pounds ($338). I
told my wife to take it easy on the
nuts when shes making desserts,
he says over coffee. Nut prices have
shot up.
That middle-class Egyptians like
Gamal must scrimp on nuts gives
a sense of the economic hard-
ships his country faces. Core
inflation is at a seven-year peak
and a foreign currency crunch is
impeding investment and growth,
driving Egypts central bank last week
to raise its benchmark interest rate to
its highest in at least a decade.
President Abdel-Fattah El-Sisi
has ordered authorities to stabi-
lise prices and his government is dis-
tributing discounted food, in a bid to
stave off the kind of dissatisfaction
with his leadership that erupted
into demonstrations just weeks ago.
Hes failed to quell militants based in
the Sinai peninsula whos attacks
have discouraged tourism. Critics
accuse him of curtailing liberties
and dissent, a charge he denies.
Annual core inflation soared to
32 12.23 per cent in May, two months
after the central bank ordered the
biggest one-time currency devalua-
tion in more than a decade. With
the pound officially trading at
a 25 per cent premium to black
market dollars, policy makers
on 16 June tried to rein in prices
by raising borrowing costs by 100
basis points, possibly setting the
stage for another devaluation.
The inflationary spiral has
made things especially tough during
Ramadan, when food prices generally
jump. Within the past three weeks the
cost of food has climbed, with a kilo-
gram (2.2 pounds) of rice, an Egyptian
staple, nearly doubling in some
markets to 9 pounds from 5 pounds.
Even before the holiday, they had
spiked nearly 50 per cent since the
start of the year, accord-
ing to the central bank.
Merchants took us by
surprise. How can prices
jump like this? asked Mahasen
Ali, a 45-year-old housewife.
What are people to do?
Higher duties on so-
called luxury items
such as nuts put them
further out of reach
for most. Egyptians
have also been bruised
by a 20 per cent increase in
the cost of locally pro-
duced medicines,
which the government
authorised to compensate
drugmakers facing higher pro-
duction costs as a result of the
weaker pound.
As Egyptians struggle with the
price increases, officials are asking
them to help stem the outflow of
hard currency. Television ads urge them
to curb energy use and buy local prod-
ucts to help cut the import bill and
shore up foreign reserves. At
$17.5 billion, reserves have only
started to inch up in the past
couple of months, though still
less than half of their levels on the
eve of the uprising that toppled
President Hosni Mubarak in
2011. Tens of billions of dollars
in cash infusions by Saudi
Arabia, United Arab Emirates and
Kuwait have tapered off because
of lower oil prices.
The government is also
looking to save by paring sub-
sidies that consume roughly a
quarter of the state budget. Its
also looking to boost tax revenue
by improving collection, and intro-
duce a value-added tax seen as a
key step to unlocking a long-
awaited $3 billion World Bank
loan. Combined with expecta-
tions of another devaluation, infla-
tion could rise toward 15 per
cent year-on-year during the
second half of 2016 as the govern-
ment moves ahead with reforms,
Bryan Plamondon, IHS Global Insights
Middle East economic analy-
sis director, said in an e-mailed
report.
Barely a month after pro-
tests against El-Sisis decision
to cede two Red Sea islands to
Saudi Arabia, the government is
aware of the need to avoid reigniting
public discontent. It has set up markets
selling discounted foodchicken and
beef, for instance, are going at
up to half the priceand the
military has been distributing
goods on the street.
Thousands lined up at a food
fair at the Cairo convention
centre, waiting to buy every-
thing from Ramadan staples
such as apricots and nuts to meat, rice,
sugar and cleaning products. A similar
fair was held in every one of Egypts 27
provinces. If it wasnt for this fair, we
wouldnt have been able to buy these
things, Adel Abdel-Baset, a 48-year-
old construction worker says, stand-
ing in one line while his wife waited
in another. Prices have increased
in an unprecedented way. Tarek
El-Tablawy and Tamim Elyann
The bottom line Egypts soaring inflation has hit
its citizens particularly hard during the holy month
of Ramadan.
M&A
Deal Talks Put a Focus
on UAE Bank Mergers
An NBAD and FGB marriage
would create a $170 billion bank
The UAEs banking space is quite
crowded
A potential merger between two of
Abu Dhabis biggest banks may just be
the start of consolidation in the indus-
try. Thats according to analysts from
EFG-Hermes Holding and Emirates
NBD, which say the United Arab
Emirates needs more tie-ups because
too many banks are serving a rela-
tively small population of 9 million and
growth prospects are limited. About
50 local and international lenders
face declining government spending,
slowing economies and falling asset
quality after a slump in oil, the regions
principal export.
In what would be the countrys first
major banking merger in almost a
decade, National Bank of Abu Dhabi
and First Gulf Bank said on 19 June
that theyre in talks on a potential
deal. Senior executives from the two
banks are reviewing the commercial,
structural and legal aspects of a possi-
ble combination, according to a state-
ment. This merger could pave the
way for more consolidation in the sec-
torAbu Dhabi Commercial Bank,
Union National Bank and Abu Dhabi
Islamic Bank, EFG-Hermes Holding
SHUTTERSTOCK
analyst Shabbir Malik said in a note
on 19 June. The UAEs banking space
is quite crowded, credit penetration
is high at about 100 per cent of gross
domestic product, while the credit
and macro growth outlook is soft.
Arqaam Capital, in a note to investors
Bid/Ask
on 20 June, also said that Abu Dhabi
Commercial Bank and Union National
Bank could team up in the future,
since both are controlled by Abu Dhabi
Investment Council.
A combination of NBAD and FGB
would mark the countrys first
major banking merger since
National Bank of Dubai and
Emirates Bank International com-
bined to create Emirates NBD in
2007. The Dubai banks chief execu-
tive officer Shayne Nelson has called
for further consolidation, saying too
many banks are serving a relatively
small population.
Bank liquidity in the six-nation
Gulf Cooperation Council, which also
includes Saudi Arabia, is tightening as
the oil slump slows deposit growth and
pushes governments to boost borrow-
ing. GCC governments may rack up a
combined budget deficit of about $140
billion this year if crude prices remain
in the mid-$40s, according to Emirates
NBD estimates.
A deal between NBAD and FGB
would create a lender with assets of
about $170 billion. NBAD is the UAEs
second-biggest bank by assets, while
FGB is fourth-ranked. A combination
would help them overtake Emirates
NBD as the countrys largest lender
and represent nearly a quarter of the
systems loans and deposits, according
to EFG-Hermes. Credit Suisse Group
is advising state-controlled NBAD
while UBS Group is working with FGB,
people familiar with the matter said,
asking not to be identified because the
information is private.
Consolidation would be posi-
tive for UAE banks from a return gen-
eration perspective, says Goldman
Sachs Group analyst Waleed Mohsin.
This is especially true given the frag-
mented nature of the market and the
current challenging macro environ-
ment. Stefania Bianchi and Archana
Narayanan, with additional reporting by
Arif Sharif and Dinesh Nair
The bottom line The UAE banking sector is ripe
for consolidation, which could be kicked off with a
deal between NBAD and FGB.

markets-and-finance
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Focus On
ADVERTISING
I f theres one industry that can be relied on
to find a silver lining in the economic storm-
clouds, its advertising. We always try to look
at things from a bright and positive perspec-
tivethats something you learn to do in this
part of the world, says Marc Ghosn, general
manager, UAE of MEC. That sentiment comes
as many clients are increasingly cautious
when it comes to deploying budgets.
Ad-spend in the MENA region may decline
11 per cent in 2016, according to a forecast
from MCN-owned research company Capella
(further declines of 5 per cent in 2017 and 5.8
per cent in 2018 are also forecast). With low oil
prices, caution crept into the market in the
second half of 2015, says Ziad Ghorayeb, head
of digital at Initiative (MENA), with semi-gov-
By Stian Overdahl
S1
Maintaining the pace
of digital change | S2
Advertisers and brands
look for viral hits | S3
ernmental organisations and banks the first to
SMILING
pull back. Global economy weakness has also
been a major factor, particularly with its effect
on in-bound tourism. With multinational cor-
While economic headwinds are porations having trimmed global budgets in
THROUGH
squeezing client spend, advertising
the face of that uncertainty, their Middle East
units are in lockstep. Some industries are
bucking the trend thoughthe UAE health-
THE
care sector is one standout, as the country po-
sitions itself as a major destination for health
tourism from the Middle East and Africa.
executives are embracing changes In some cases, budgets are being redirect-
SQUEEZE
ed. Ronald Howes, chief operating officer
of Memac Ogilvy MENA, says that while the
growth potential of the classical advertising
within the sector business is modest, his company has seen a
flurry of activity across its PR and social busi-
 Focus On
ADVERTISING
PEOPLE DONT LIKE
CHANGE OR RISK. WHAT
THEY DONT REALISE IS
THAT CHANGE IS GOOD
Eric Hanna, CEO, Grey MENA
ness units. Nevertheless, reduced spending
from GCC consumers is replicated on brands
spending power, says Eric Hanna, CEO of
Grey MENA. That means theyre looking for
value in everything they do, he says. As some
clients fall behind on sales objectives, theyre
foregoing brand equity building, and instead
turning to promotional, tactical work, says
Ramzi Haddad, managing director of Carat
UAE and Lower Gulf. Its a shame, because
brand equity, and products and promotions
are all interlinked. Ghorayeb is predicting
that brands will come back into the market
later this year to compensate for underspend.
I think it will reach a point, perhaps at the
end of Q3, where clients will realise theyve
been too cautious, and we will be extremely
S2 busy at the end of the year, he says.
In a tight market, companies are screwing
down on costs. Even where budgets are main-
tained, many are back-pedalling from commit-
ments and retainers, instead preferring proj-
ect-based and ad hoc work, which demands
a leaner, flexible and at the same time more
productive structure, says Joy Sahyoun, com-
munications director at AGA ADK.
Meanwhile, competitive pitches are
becoming increasingly crowded, with
sometimes seven, eight or even ten
agencies taking part; decision-making
is often procurement-led, says Howes.
While a great idea will get an agency on
the short-list, once there, negotiations
on cost start, which can be quite pro-
tracted and quite painful, says Howes,
creating a conundrum of where to
draw a line. Where do you stop the
negotiation because you feel that youre going
to compromise the reputation and quality cre-
atively or strategically, or in terms of quality of
implementation, that you dont want to attach
to your agency name? he says. Hanna says
they target pitches where they believe clients
are looking for new solutions, and where the
relationship with the clients existing agency
and the creative workhasnt evolved, while
encouraging his team to present new work to
their existing clients unbidden. People dont
like change or risk. What they dont realise is
that change is good.
In an industry where executives experi-
enced the global financial crisis first hand,
that sentiment rings true. Ghosn says that
what emerged from 2009 was a smarter way
of doing business. When youre under pres-
sure, you try to be creative. Youre no longer
in the comfort zone, so you think different
and react. Currently, the advance of digital
is creating new trading opportunities. Across
the board, media agencies are hiring creative
directors and building content teamstheyre
increasingly becoming one-stop shops for
clients because they know clients want a ho-
listic solution, says Haddad. MEC has a ded-
icated content unit, Wavemaker; as well as
investing in data scientists, theyre hiring cre-
ative talent and content specialists. Magic
happens when they sit alongside each other,
says Ghosn. Its like getting the left and right
sides of the brain to merge.
The instantaneous response required for
digital and social media also means that agen-
cies are often best-placed to deliver content.
Waseem Afzal, executive director of integrat-
ed solutions at OMD, says that its creative
command centres can respond to events in
real-time and ideate responses in just minutes.
Last year, when Facebook had a brief outage,
OMD turned around 12 campaigns in a space
of minutes, says Afzal. We spoke to our client
teams, we had the right resources in place and
mobilised them to come up with campaign-
able ideas in a very short span of time. Its
about us being opportunistic around events
and occasions as they take place.
Further consolidation is anticipated. As
clients want greater consolidation and sim-
plicity, big multinationals are fending for indi-
vidual agency budgets, often overlapping ser-
vices traditionally offered by specialised sister
agencies, says Tarek Miknas, CEO of FP7
MENA. Nevertheless, creatives are relaxed
about the challenge. If youre going to find
progress a challenge you will not progress
yourself, says Howes. Being able to navigate
the complexity and take a leadership posi-
tion is part of the challenge that makes the in-
dustry fun says Miknas. If it were perfectly
simple, anyone could do it.

PROGRAMMATIC I f the Middle East is a late-comer to digital advertising, its now making
up for lost time. Even with the overall market squeeze, there has been
double digit growth in spend on the digital channel in 2016, says Tony

FOR THE PEOPLE

Digital advertising is seeing double digit growth as
sophisticated data tools boost performance. But
brands that arent investing in digital transformation
risk being left behind
Bourached, head of digital media at Mindshare. Across the MENA region,
spend on digital now makes up around 12-15 per cent of the total, says
Tarek Sheikhshabab, a vice president at Ipsos Connect, though in the
UAE the figure may be as high as 20 per cent.
More money being poured into digital is partly a result of larger online
audiences, but is also being driven by the increased effectiveness of ad-
vertising digitally, in part because of sophisticated tools that media agen-
cies are using to boost the impact and relevance of adverts. Specifically,
growth in programmatic buying of advertisingwhere agencies purchase
advertising via trading desks to target particular audience segments,
rather than buying general inventory on a website or platformis playing
a big role in the growth of digital spend, says Matthew Robarts, region-
al MDMEA at Effective Measure. The company collects anonymous be-
havioural and demographic information about visitors to MENA websites
that have opted into its data co-op. The data is modelled and can be used
by agencies to precisely target audience segments, while a share of the
revenue generated is returned to the publishers, says Robarts.
Every brand that has a business transactional event sitting on digital
has completely embraced programmatic, says Waseem Afzal, executive
director of integrated solutions at OMD. It is the use of data that primar-
ily creates a differentiated ap-
proach, he says. Data is what
transforms a media buy into an
actionable audience buy, that de-
livers against business KPIs.
Programmatic buying has
been widely used globally for a
number of years, but a number
of factors have lead to it taking
off more recently in the Middle
East. The digital capabilities of
clients themselves is significant,
and recently more and more
brands have been developing
these proficiencies, says Ziad
Ghorayeb, head of digital at Ini-
tiative (MENA). Whereas once
many clients were reluctant to share their
own data with media planners, or lacked
basic tools such as data collection on their
websites, the region is now aligning with
whats happening globally, says Ghorayeb.
Obviously were very late in the region, but
its better late than never. Media agencies
are also piling into what is a growth space,
says Ramzi Haddad, managing director of
Carat UAE and Lower Gulf. Programmat-
ic buying is more efficient because it works
against a specific audience base, resulting
in better results for clients, including much
better acquisition costs; and at a time when
businesses are increasingly focused on the ef-
fectiveness of their advertising budgets, that
means theyre diverting more of their spend
into digital, says Haddad.
Yet the data-intensive nature of program-
matic buying means theres a clear advantage
for big international companies with sophis-
ticated digital infrastructure, or local com-
panies that have invested heavily in digital
transformation. Thats because when plan-
ning campaigns, agencies need to tap into
client datasuch as CRM or tracking visitors
to its websitethat can then be used to re-
market to an audience segment or further
SO YOU WANT A HIT?
Growing consumption of video online means that a viral advertising
hit is at the top of many brands wish lists
I ts the stuff that marketers dreams are
made of: A viral video that goes around the
world, racking up millions of views and pro-
viding untold exposure. Yet while clients
may ask for a hit video, or expect millions of
views in the first view days, creative and mar-
keting agencies are quick to pour cold water
on outsized aspirations from brands. A hit
used to create look-alike pools, namely a
wider audience with similar characteristics,
Afzal explains. We can then target these
segments across screenswhether desktop,
mobile, social or videowhile maintaining ef-
fective levels of frequency.
In addition, the use of second and third
party data, often from cookies that anony-
mously measure online behaviour, opens
up a dazzling world of possibilities. For
example, a campaign for an automotive
brand can target users that have recently
visited a website to research new car purchas-
es, while third-party suppliers of informa-
tion allow agencies to target desired audience
segments, such as people who have bought a
DATA IS WHAT TRANSFORMS A
MEDIA BUY INTO AN ACTIONABLE
AUDIENCE BUY, THAT DELIVERS
AGAINST BUSINESS KPIS
Waseem Afzal, executive director of integrated solutions, OMD
may not be the best thing for a product, says
Haitham Al-Hajji, managing partner at Ku-
wait-based Caviar Group. I dont always rec-
ommend going with the ingredients wed
normally go with in a hit for a product. Al-
Hajji is well placed to break down those in-
gredients: Caviar has produced a significant
number of successful television commer-
one-way ticket to Dubai as well
as booked a lengthy hotel stay,
suggesting theyre planning on
settling in the emirate and may
be in the market to buy a car.
Digital is no longer just used to
drive engagement, it now direct-
ly implicates brand and busi-
ness growthgetting cars out of
showrooms or getting SKUs off
shelves, says Afzal.
But as the sophistication ac-
celerates, companies that are
not digital ready are at risk
of being left behind, unable to
accrue the benefits of digital ad-
vertising, warns Mindshares
Bourached. While in certain sectors, such as
e-commerce, competition is driving digital
transformation, generally there is a lag
among companies in MENAdespite the fact
that consumers in the region are themselves
ready, says Bourached. Digital transforma-
tion is not happening across the board at a
client level. He says that the large growth in
digital advertising currently taking place will
force executives to realise that they should
be investing in a complete digital transfor-
mation, and in turn drive growth in digital
media investment. Brands dont have the S3
luxury of time before they consider their
setup, and how theyre connecting with the
new generation.
cials for companies in the region, including
the recent No More Drama series for a UAE
telco, which used Hollywood director Harald
Zwart to riff on popular movie genres includ-
ing King Kong. Humour and music are two
of the most sure-fire ways to command viral-
ity, says Al-Hajji, but these arent always ap-
propriate for certain brands. And whatev-
 Focus On
ADVERTISING
er the approach theres no guaranteeing how
a video will be receivedeven extraneous
factors such as the publics mood at the time
when the video is launched can affect perfor-
mance. What we do is part art, part science.
Part of it is magic. I say magic because the
results are not reproducible, says Al-Hajji.
Nevertheless, more and more creative
agencies in the Gulf are capable of producing
magic. Ronald Howes, chief operating officer
S4 of Memac Ogilvy MENA, says that across the
board hes seen a big improvement in the
quality of creative and strategic thinking in
the region over the past five years, some-
thing which he puts down in part to
young people taking a more active
and confident role in communica-
tions. Its Dubai office has produced
video work which captured global
attention, such as its The Autocom-
plete Truth advert for the UN (which
received 1.2 billion impressions) or
its Dark Iftar video for Coca-Cola.
Were seeing that our campaigns are
going global quite quickly and quite easily,
says Howes. Meanwhile, although Arabic
is the fourth most-popular online language
globally in terms of users, there remains a
lack of quality Arabic content, says Tarek
Miknas, CEO of FP7 MENA. This opens op-
portunity to anyone with a little creativi-
ty, a camera and a strong desire to express.
Equally, its opens a huge opportunity to all
communication agencies across our region.
Within the video segment, there has been
a shift to local agencies as brands look for
local insights and local know-how, says Al-
Hajji. In Kuwait, more than 70 per cent of
all TVCs [television commercials] are being
executed by local agenciessmall, non-tradi-
tional, creative agencies that have no inter-
national affiliations.
It comes as MENA is emerging as a vora-
cious consumer of video: Views on YouTube
from the audience in the region reached 500 and more exhaustive data on audience be-
million in 2015, an 88 per cent year-on-year in- haviour than is available from television.
crease from 315 million in 2014, according to Running multiple creatives from a single
data supplied by Waseem Afzal, executive di- campaign on any given video channel and
rector of integrated solutions at OMD. Audi- analysing the corresponding audience and
ences are also increasingly viewing videos behavioural data allows a more educated de-
on platforms such as Facebook and Twitter. cision about which piece to run for a tele-
Video has also become the current curren- vision campaign, says Marc Ghosn, general
manager, UAE at MEC. Au-
dience data can also be
used to refine and plan
future content. For the
popular Maggi Diaries web-
series which was launched
on YouTube, audience
numbers, data and con-
sumer engagement helped
improve the format for
the second and then third
season, evolving into a long
form content segment that
cy of consumption across all social platforms, is being aired on MBC1. Taking some of the
says Afzal, noting trends such as the emer- guesswork out of video campaigns has the
gence of a second prime time on Facebook potential to save clients significant amounts
between 2 a.m. and 5 a.m., when usage rises of money, says Ghosn.
200 per cent or more compared with average Nevertheless, for Al-Hajji, there remains
day time figures. Video-on-demand service a reliance on instinct, and he describes
Shahid is also attracting significant insight as all-important. Whats the insight
viewership with its premium Arabic you can get that the others cannot get? This
content, says Afzal. Still, a lack of stan- is where it gets tough, he says. Sometimes
dardised metrics across these plat- a simple idea can produce big results. For
forms creates real challenges for Viva, they produced a musical video about
agencies, he says. For OMD, the drive dish exchanges during Ramadan and the ev-
is to be able to provide clients with a er-present problem of a dish not being re-
holistic view of the opportunities for a turned. Al-Hajji describes the video as re-
video campaign, as well asmore im- minding society to embrace the spirit of
portantlya measure of its success. forgiveness of Ramadan, and to not allow
That success can be calculated by combining our little peeves to disturb our relation-
elements that include overall brand uplift, en- ships. The insight struck a chord with
gagement, total viewership, and even view- people and went viral, so much so that
ability of videos, says Afzal. people reference it now when theyre
Digital viewing of videos is also helping to sending off a dish, says Al-Hajji. You never
refine content choices, by providing quicker know whats going to touch people.
WHAT WE DO IS PART ART, PART
SCIENCE. PART OF IT IS MAGIC. I SAY
MAGIC BECAUSE THE RESULTS ARE NOT
REPRODUCIBLE
Haitham Al-Hajji, managing partner, Caviar Group
40

Tough economic times are testing

the regions retailers. How can they
keep their tills ringing?
PHOTOGRAPH ILLUSTRATION BY CREDIT TK

By Stian Overdahl
 41

S
ummer is going to be very tough, says Furqan Athar, a re-
tailer and director of strategy and planning at shopping mall
consultancy McArthur + Company. But after summer, people
earn money to spend money. They like to be taken care of and
pampered, they like to buy things because it makes them feel like theyve
earned it. Retailers in the Gulf will be hoping Athar knows what hes talking
about. 2016 has been a tough year so far: Economic deceleration and uncertain-
ty at home and abroad has eroded consumers willingness to spend. The high-riding
dollarto which most of the currencies in the six-nation Gulf Cooperation Council are
peggedhas curtailed the spending power of tourists from countries in Europe, Africa
and the CIS, affecting the shopping hub of Dubai especially, but also the wider region. Eco-
nomic turmoil in Russia and China has seen a drop in visitors from these countries, who have
traditionally been big spenders in Dubais glitzy malls. Those who live in the emirate are spend-
ing less as they watch and wait for resolution to the bout of economic uncertainty. [Residents are]
nervous in terms of the futuretheyre making purchases for necessity rather than making emotion-
al purchases, says Mahboob Murshed, managing director of Alpen Capital.
In Saudi Arabia, the regions largest economy, point of sales data show that while sales volumes have
continued to grow, sales valueswhich have traditionally tracked volumesare headed in the opposite di-
PHOTOGRAPH ILLUSTRATION BY CREDIT TK

rection, suggesting consumers are becoming more price conscious and that there has been quite a lot of dis-
counting by retailers, says James Reeve, deputy chief economist at Samba Financial Group. Retailers of luxury
goods are most affected, with some estimating that the market in Dubai may be down by as much as 40 per cent.
People are still going out and buying, the only difference is that the indulgence level has gone down a little, says
Kaushik Soni, managing director at Tejori Gems. The weakness in the luxury market reflects the global trend, he says,
as some experts warn that the world is facing a sustained period of low growth.
Despite the current downturn, however, retailers are convincing themselves that the Gulf will soon return to its spend-
happy ways. Sima Barazi Haroun, who operates Boom & Mellow, a boutique in Town Centre Jumeirah, says while her sales
 are steady, she believes the overall market will soon pick up.
Women in general get bored and need to shop, she says.
Savvy shoppers may have picked up a bargain: With stock
ordered in advance, many retailers were caught out by
the suddenness of the market decline in 2016, and dis-
People are
counted excess inventory to move it off the shelves,
says Miquel Pancorbo, president of Gulf Market-
still going out
ing Groups sports division, which includes re-
tailer Sun & Sand Sports. A veteran of the cy-
and buying, the
clical retail industry, his view is that retailers
tend be overly optimistic about timelines for
only difference is
recovery, and hes predicting that the market
will return to strength in 2017, although not
that the indulgence
until the second half of the year. Theres no
single cause for the slump, he says, but rather
level has gone
a basket of different factors. When one or two
of these are addressed the market will rebound,
down a little
because theres no structural damage to the retail
marketplace in the Middle East, he says.
And not everyone is claiming to feel the pinch: In
their mid-market segment, Landmark Group hasnt
experienced any significant change in consumer spending
habits, says CEO Vipen Sethi. As the region continues to attract in-
ternational events, governments promote tourism and investment
in infrastructure and technology continues to pour in, this vision-
ary thinking opens up strong business opportunities, drives visitor
numbers and continues to propel consumer confidence, he says.
In the UAE, retailers should be well-placed to weather the
storm, having enjoyed a continuous up-cycle since 2010, accord-
ing to Matthew Green, head of research and consultancy UAE at
CBRE. Additionally, Gulf retailers typically enjoy wide margins:
Earning 8 to 9 per cent at an earnings before interest, taxes, de-
42 preciation and amortisation level is perfectly achievable for a
well-run retail business in the GCC, says Paul Foley, managing
partner of Foley Retail Consulting, whereas 5 to 6 per cent is
a very good figure in saturated markets. Retailers need to be
able to absorb a 15 to 20 per cent drop in sales and remain prof-
itable, says Athar. Even if sales drop 30 per cent they should
be able to break even. Businesses that are poorly-run, poorly-
capitalised or with less attractive brands will suffer most, and
Athar is expecting consolidation to take place.
P
ancorbo too is predicting increased M&A activity as busi-
nesses with low marginality or a small consumer base
start to struggle. When the market is soft, mergers and
acquisitions happen, and [it] is the right moment for leaders
to invest. The food and beverage sector is also set to receive a
shake up. Naim Maadad, CEO of Gates Hospitality, says while
the market is still relatively healthy, a consumer focus on value
for money and a flight to quality has already forced a number
of closures in 2016. From now until the end of the year there
will be a lot of casualties, he says.
Head office expenses, marketing and staffing are all obvious
costs to trim, but theres also pressure on mall rents, a signifi-
cant overhead for many retailers. Athar says that lease rates are
being held steady or coming down on renegotiationin general
by 10-15 per centbut cautions theres no hard rule. Malls that are
less popular, on the outskirts of a city or facing declining footfall
due to changes in the population of their catch-
ment areas, will hold less negotiating power.
In Dubai, destination malls that attract
the bulk of the tourism and con-
sumer trade look to be performing
well says Greencertainly from
an occupancy perspective
though he cautions there
isnt much transparency in
the market around pricing
because many malls utilise
in-house leasing teams.
Meanwhile, the long tenor
of many lease contracts ef-
fectively insulates top tier
malls against swings in the
cyclical retail market in the
short term, says Sapna Jagtiani,
primary credit analyst for S&P
Global in Dubai.
Nevertheless, one of the key
metrics for any mall is the rent to sales
ratio, and Jagtiani says they anticipate down-
wards pressure on rent negotiations, especially for
luxury brands and jewellery. Turnover rent, which is linked to
retail sales, will definitely be under pressure, says Jagtiani,
though on average this makes up less than 10 per cent of a mall
operators revenue. Publicly-listed Emaar Malls recorded an oc-
cupancy rate of 96 per cent across its sites in 2015, while base
rent renewal rates clocked an increase of 25 per cent for leases
renewed during that year, said a company spokesperson. And in
the first quarter of 2016, its trophy asset The Dubai Mall received
over 20 million visitors, in line with visitor numbers of over 80
million last year. The heavy footfall is a reiteration of the fun-
damental strength of the retail sector in Dubai, demonstrating
that the global challenges have not significantly affected custom-
er spending, said the spokesperson. S&P expects Emaar Malls
to remain profitable in 2016, says Jagtiani; much of the space in
the Fashion Avenue expansion at The Dubai Mall, scheduled to
come online in 2017, has been pre-leased.
D
espite the squeeze on the retail sector, some players are
growing quickly, in turn putting further pressure on in-
cumbents to invest. Modern retailers are moving rapidly
into the convenience channel, which is still dominated by tra-
ditional traders, says Theres Hoyos, a Dubai-based analyst with
Kantar Retail. It estimates sales growth in the UAE convenience
channel through to 2020 will far outstrip the general market.
Meanwhile, e-commerce market leader Souq.com has ben-
efited from the downturn in the form of extra supply coming
onto the platform as retailers look for new sales channels, and
product listings across the site now number above 1.7 million,
says CEO and co-founder Ronaldo Mouchawar. Buyers are also
turning to online shopping in increasing numbers as they become
more value driven, he says. Last year Souq.com saw growth rates
between 45-60 per cent in most markets, while in Saudi Arabia
its business doubled. Online retailers may also fare better during
difficult trading conditions due to more flexibility around cost
structures and overheads, says Omar Kassim, CEO of online mar-
ketplace JadoPado. He sees opportunities arising out of cooler
economic conditions. We feel that is going to help us because
we have an efficient model versus where retail is at, and the
costs that are associated with retail in the markets that we are
looking to target, he says.
A recent study by Wells Fargo found that during downturns in
the US, online sales continued to grow even as traditional retail
shrank. Some segments [of e-commerce] seem to behave some-
what recession-proof, the report concluded. A number of fledg-
ling e-commerce operations are flourishing. I Saw It First, a fast-
fashion online retailer which launched year, has grown rapidly
in the first half of 2016, says co-founder Paris Golding, with the
company adding stock and growing its customer base. The route
to market for an online retailer is less onerous than opening a
physical store, says Golding, and overheads are also lower. Its
a more forgivable way to test out the market and build the audi-
ence, she says. Online retailers are also normally adept at mar-
keting their offerings via social media networks, a key skill when
it comes to connecting with customers, especially youth, and an
area where some traditional retailers struggle. On I Saw It Firsts
Instagram feed, the company posts photos of models and celeb-
rities wearing their brands, as well as reposting photos that cus-
tomers have taken of themselves wearing clothes that theyve pur-
chased. Other customers see that what theyre seeing is what
theyre going to get, and that builds a lot of trust, says Golding.
E-commerce is expected to continue to grow at a fast clip:
A report released in May by payments company PayFort calcu-
lated the total e-commerce spend in the UAE and Saudi Arabia
as $2.84 billion and $2.25 billion respectively (a figure that ex-
cludes purchase of airline tickets, travel or entertainment)
though much of this is with international e-tailers. By 2020,
e-commerce spend in both countries will surpass $8 billion, es-
timates PayFort managing director Omar Soudodi.
Yet brick and mortar retailers arent quietly ceding the digital
space; Robin Mehta, managing director of digital agency RAW, has
seen a surge in traditional retailers wanting to go online, sometimes
driven by a desire to combat declining store footfall. Gulf retailers
have lagged behind developed markets in the race online, which
can partly be put down to the popularity of shopping in malls,
he says. Yet consumer behaviour is shifting, with customers less
willing to buy an item the first time they visit a store, preferring to
research it online, where they are normally presented will multi-
ple shopping options. Typically, buyers will take the path of least
resistance and purchase online instead of returning to a store, says
Mehta. Its really important to close that loop down.
In industry parlance, omnichannel presents customers with
an experience integrated across all platforms, such as being able
to buy online and return an item in-store, or identical levels of
customer service online and in-store. While simple in theory,
omnichannel normally requires a complicated overhaul and in-
tegration of legacy processes, says Bhavishya Kanjhan, director
of Computer Care Group. But the investment is necessary, he
says. Customers expect thisthey do not understand how online
would function differently from the store, because
for them its the same company. Land-
mark Group, one of the largest retail
groups in the Gulf, is also picked as
having one of the most developed omnichannel offerings. Thats
not by chance: Sethi says that within the company there is a belief
that omnichannel retail is the future, with customers demanding
flexibility, while purchasing decisions are often made through
a combination of browsing online and purchasing offline, or
vice-versa. Shoppers in the GCC region are young, brand savvy
and increasingly prefer brands that really have an omnichan-
nel presence, allowing them to connect with the brands they
love in malls, through e-commerce and via social media, says
Sethi. As retailers we really need to bring it all together, to give
them the complete brand experience. But for many brands, the
stumbling block is capital. While there is a perception in some
quarters that being online is cheap, for a large retailer to build
an effective omnichannel requires a seven-figure investment
to get something serious up and running, says Mehta, with $2.5
million a typical initial budget. Meanwhile, as the online space
becomes more crowded and competitive, getting a return on
that investment becomes harder and harder. For some retail-
ers considering their online approach, from an ROI perspective
it may already be too late to build an omnichannel offering
from scratch, says Mehta.
Earlier this year Sun & Sand Sports launched its omnichan-
nel offering, though the decision to invest in building its online
presence was made in early 2015 when the market was riding
high. On the thorny question of ROI, Pancorbo notes examples
of retailers in the US that were shuttered after failing to make
the adjustment to online. For me, omnichannel and internet
is not an ROI conversation, its a right to exist from a strategic
standpoint. If I dont provide this omnichannel experience to
users there will be a date when my company will not be com-
petitive any more and I will be out of business, he says. At the
same timefrom an ROI perspectiveselling online is cheaper
than brick and mortar, especially in Dubai where rents are high, 43
while digital will also drive traffic to their physical stores, he
says. Would they re-evaluate that decision to spend now, given
the market drop? Pancorbo says that would likely be the case
if they were a smaller company, but their position in the UAE
market means they can afford it. We are cash rich and have a
leading position, he says.
W
hile the UAE is the most advanced of the Gulf retail
markets, its neighbours are undergoing significant
modernisation. In Qatar, as many as 10 new malls are
expected to open by the end of 2017a bid to stem Qataris pen-
chant for shopping overseas as well as to attract tourists in greater
numbers. But Saudi Arabia, with a large, growing population
around 65 per cent of its population of 32 million is under 25and
a retail sector still dominated by traditional businesses, is seen
as holding the greatest promise. Momentum for modernising the
retail sector received a shot in the arm in April with the release of
the Vision 2030 programme, authored by Deputy Crown Prince
Mohammed bin Salman, which calls for modern trade and e-
commerce to make up 80 per cent of the sector by 2020, from

just 50 per cent today. In essence, that will
require a wave of mall construction, though
Saudi Arabian and regional players are already
active in planning and construction. In Febru-
ary, Majid Al Futtaim announced it would spend
$3.73 billion building two new malls in Riyadh, in-
cluding the countrys first snow park. Currently there
is a deficit of mall services and experiences across the kingdom,
says David Macadam, CEO of the Middle East Council of Shopping
Centres. In Riyadh, gross leasable area per capita is currently just
0.27 square metres, compared with 1.3 square metres in Dubai.
Macadam views the kingdoms young population as creating sig-
nificant demand. A lot of things happen when you have that de-
mographic, he says. People are in their consuming years, are
creating new families, and so are setting up new homes.
Mall developers are also set to benefit from the tax on large un-
developed land plots within urban centres. Passed by the Saudi
Arabian cabinet in June, land prices could drop as much as 40 per
cent according to local media reports, helping to boost home owner-
ship. The cabinet also removed the limitation on foreign ownership
of equity in retail businesses, to allow 100 per cent foreign owner-
ship, up from the previous 75 per cent (certain exclusions, such as
the pharmacy sector, remain). Thats viewed as a significant
step. Theres little doubt that the limitation on foreign in-
vestment equity participation [in retail] did stop a lot of
investment into that area of the economy, says Grahame
Nelson, head of Al Tamimi & Cos KSA office. Khaled
Al Jaser, the CEO of Arabian Centres, a shopping mall
developer with 11 malls under construc-
tion across Saudi Arabia, de-
scribes it as a critical cata-
lyst for change, believing
44 that a steady flow of in-
ternational brands into
shopping malls will
rapidly become
a flood. For or-
ganised retail it
presents an un-
rivalled opportu-
nity to edge out small
traders and seize market share,
he says. Shoppers will benefit from
the increased variety of brands on
offerespecially those that cater to
youthand it will also help malls dif-
ferentiate themselves: Currently, 75
per cent of malls have an almost similar
tenant base with the same brands and
retailers, says Rani Majzoub, head of real
estate at KPMG Al Fozan & Partners. Greater
international investment would also bring com-
petition to the market and in turn increase the
market-wide efficiency and service quality of the
local players, he says.
Vision 2030 also announced major changes for
the entertainment sector, with a frank admission
that current cultural and entertainment opportuni-
ties do not reflect the rising aspirations of our citi-
zens and residents. It aims to double household spending on the
sector by 2030, prompting speculation from some quarters that this
could eventually see movie theatres opened across the country.
Meanwhile, the wave of changes is an opportunity for the retail
sector as a whole to evolve, says Imad Damrah, the regional direc-
tor of Colliers International KSA, while mall operators will be able to
develop destinations malls with increased options for entertainment
Fro
the m no
therend of tw until
e wi he y
and socialisa-
o f cas ll b e a ear
ualt
tion. They will
also benefit on lot
the financing side
from a more diverse tenant
i e s
base, since the concentration of retail
players within malls has been seen as a risk
factor by banks that lend to developers, says Damrah.
While low oil prices may have impacted consumer spend-
ing, footfall in Arabian Centres 18 malls remains high, says Al
Jaser. The massive expansion project the company embarked on
last year remains on schedule to deliver around 1 million square
metres of prime retail space over the next three years, and store
take-up is at a record high, he says. Many retailers are looking
to strike now. Pancorbo says the market is Gulf Marketing Groups
number one investment priority, with plans to open around 30
new retail locations in 2017. Most of its investment is directed to
shopping centres, as they sign off for locations through to 2019. Its
omnichannel offering is also geared to Saudi Arabia: The absence
of shopping options in many tier-two and -three towns means that
many consumers are buying online rather than driving long dis-
tances to the nearest major city, says Pancorbo.
Walid Hajj, executive chairman of franchising group Cravia,
says hes excited about the prospects of Saudi Arabia develop-
ing its mall culture. A Saudi national who grew up in Al-Khobar,
Hajj says that a shift towards a mall-oriented retail environment,
rather than street-side like it is today, makes sense given the
harsh summer climate. Increased leisure and entertainment of-
ferings will also encourage people to spend more time in the
malls. When they go out more they spend more. It will grow
the pie if anything, says Hajj. Cravia currently has four restau-
rants in Saudiincluding, in Riyadh, the busiest Five Guys res-
taurant globally, serving as many as 1,800 customers on a busy
dayand is aiming to have 10 sites operational by the end of the
year, with plans to add an additional 7-9 restaurants per year,
says Hajj. Shortage of capital may not be a problem: In May,
Fajr Capital announced it had acquired Cravia, with Hajj and
the wider management team to remain in place. A spokesper-
son from Fajr declined to reveal terms of the deal.
Foley, a Vienna-based retail consultant focused on emerg-
ing markets, says most international retailers will try to gain
a foothold in the other Gulf markets before moving into Saudi
Arabia, a challenging market to understand, while retailers
with a presence in the Gulf are best placed to succeed in the
kingdom. At the same time, he sees significant interest from in-
ternational private equity investors, potentially allowing mid-
sized, regionally-owned companies to grow and take advantage
of the opportunity to grow. Private equity houses want to be
able to take advantage of what everybody believes is going to
be a very interesting and positive story over the next 10 years,
says Foley. Hes bullish on the retail and F&B sectors across the
Gulf, expecting the shift from a traditional to modern format
will play out over the next five years, though in Saudi it will take
longer. With the ability and confidence to move into modern
malls, and the money to do so, it is conglomerates that stand
to benefit most, says Foley. If youre not part of first movers,
its very hard to muscle your way in, he says. Being there first
doesnt guarantee success, but its a critical part.
Pancorbo says Gulf Marketing Group is ramping up invest-
ment at a time when some competitors are constrained by the
impact of the down turn. We want to move fast to ensure that
we dominate Saudi Arabia, and in turn ensure we have a dom-
inant presence in the omnichannel space.
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 Global Tech Location Mostly US Story Ashlee Vance
Technology Aviation and Brad Stone

Larry Page is leading
efforts to make flying
cars. No, seriously
46
T
hree years ago, Silicon Valley developed a fleeting
infatuation with a startup called Zee.Aero. The
company had set up shop right next to Googles
headquarters in Mountain View, California, which
was curious, because Google tightly controls most
of the land in the area. Then a reporter spotted patent filings
showing Zee.Aero was working on a small, all-electric plane
that could take off and land verticallya flying car.
In the handful of news articles that ensued, all the startup
would say was that it wasnt affiliated with Google or any other
technology company. Then it stopped answering media inqui-
ries altogether. Employees say they were even given wallet-
size cards with instructions on how to deflect questions from
reporters. After that, the only information that trickled out
came from amateur pilots, who occasionally posted pictures
of a strange-looking plane taking off from a nearby airport.
Turns out, Zee.Aero doesnt belong to Google or its holding
company, Alphabet. It belongs to Larry Page, Googles
co-founder. Page has personally funded Zee.Aero since its
launch in 2010 while demanding that his involvement stay
hidden from the public, according to 10 people with intimate
knowledge of the company. Zee.Aero, however, is just one part
of Pages plan to usher in an age of personalised air travel,
free from gridlocked streets and the cramped indignities of
modern flight. Like Jeff Bezos and Elon Musk, Page is using his
personal fortune to build the future of his childhood dreams.
The Zee.Aero headquarters, located at 2700 Broderick
Way, is a 2,800-square-metre, two-storey white building with
an ugly, blocky design and an industrial feel. Page initially
restricted the Zee.Aero crew to the first floor, retaining the
second floor for a man cave worthy of a multibillionaire:
bedroom, bathroom, expensive paintings, a treadmill-like
climbing wall, and one of SpaceXs first rocket enginesa gift
from his pal Musk. As part of the secrecy, Zee.Aero employ-
ees didnt refer to Page by name; he was known as GUS, the
guy upstairs. Soon enough, they needed the upstairs space,
too, and engineers looked on in awe as GUSs paintings, exer-
cise gear, and rocket engine were hauled away.
Zee.Aero now employs close to 150 people. Its opera-
tions have expanded to an airport hangar in Hollister, about
a 70-minute drive south from Mountain View, where a pair of
prototype aircraft takes regular test flights. The company also
has a manufacturing facility on NASAs Ames Research Center
campus at the edge of Mountain View. Page has spent more
than $100 million on Zee.Aero, say two of the people familiar
with the company, and hes not done yet. Last year a second
Page-backed flying-car startup, Kitty Hawk, began operations
and registered its headquarters to a two-storey office building
on the end of a tree-lined cul-de-sac about a kilometre away

Propeller
 from Zees offices. Kitty Hawks staffers, sequestered from the
Zee.Aero team, are working on a competing design. Its presi-
dent, according to 2015 business filings, was Sebastian Thrun,
the godfather of Googles self-driving car programme and
the founder of research division Google X. Page and Google
declined to speak about Zee.Aero or Kitty Hawk, as did Thrun.
Flying cars, of course, are ridiculous. Lone-wolf inven-
tors have tried to build them for decades, with little to show
for their efforts besides disappointed investors and depleted
bank accounts. Those failures have done little to lessen the
yearning: In the nerd hierarchy of needs, the flying car is up
there with downloadable brains and a working holodeck.
But better materials, autonomous navigation systems, and
other technical advances have convinced a growing body of
smart, wealthy, and apparently serious people that within the
next few years well have a self-flying car that takes off and
lands verticallyor at least a small, electric, mostly autono-
mous commuter plane. About a dozen companies around the
world, including startups and giant aerospace manufacturers,
are working on prototypes. Furthest along, it appears, are the
companies Page is quietly funding. Over the past five years,
there have been these tremendous advances in the under-
lying technology, says Mark Moore, an aeronautical engineer
whos spent his career designing advanced aircraft at NASA.
What appears in the next 5 to 10 years will be incredible.

Northern California in particular has had a long fascination

with flying cars. In 1927 a now mostly forgotten engineer
named Alexander Weygers first began thinking up the
design for a flying saucer that could zip between roof- 47
tops. In 1945 he received a patent for what he described
as a discopter, a vertical takeoff and landing (VTOL)
machine with room inside for passengers to walk around,
cook, and sleep. He depicted smaller versions landing in
pods atop buildings in downtown
Did you know? San Francisco. No discopters were
Los Angeles-based built, though its believed that
engineer Dezso the US Army, which paid visits to
Molnar is planning Weygerss compound in Carmel
to start a flying-car Valley, California, tinkered with
racing league in 2017 a prototype.
Today, the worlds premier
flying-car enthusiast is Paul Moller, 79, a professor emeritus
at the University of California at Davis. Fifty years ago, when
he was teaching mechanical and aeronautical engineering,
he developed a specific vision: an aircraft you could park in
your garage, drive a few blocks to a small runway, then take
skyward. He tested his first prototype, the XM-2, in 1966.
The XM-2 resembled a flying saucer with a seat at its centre
protected by a plastic bubble. It managed an altitude of 1.2
metres, while graduate students held it steady with ropes.
We were worried if the machine got out of control, we might

Heads
kill a few people, Moller says.
In 1989 his M200X made it to 15 metres above the ground.
Then came the M150 Skycar, the M400 Skycar, the 100LS, the
200LS, the Neuera 200, and the Firefly, all variations on the
same Jetsonian idea. In January 2000, Moller gave a speech on
flying cars at the Palo Alto Research Center (PARC), the birth-
place of the graphical user interface and, for nerds, sacred
ground. Afterward, an engineer in his late 20s walked
up and said he was interested in the concept but was
 sceptical that streetworthy personal aircraft were technically
feasible; at the time, Moller didnt recognise young Larry Page.
Moller kept trying. He says he burned through more than
$100 million developing his designs and declared personal
bankruptcy in 2009.
That same year, Moore, the NASA researcher, published a
paper describing a concept plane called the Puffin. Moores
big idea was to use electric motors, which are quieter and
safer and have far fewer moving parts than internal combus-
tion engines or conventional turbines. By going to electric
propulsion, you get rid of the vast majority of the complex-
ity, cost, and unreliability, Moore says. This is why com-
panies looking at this area arent insane. Moore credits Musks
Tesla and other automakers with advancing the technology.
Electric motors were mostly used in industrial settings where
they were stationary, and no one cared about their weight
that much, Moore says. It wasnt until the automotive indus-
try got interested that they started to get more lightweight.
Carmakers invested in other areas, too, that are helpful for
building small electric planes, particularly batteries and the
semiconductors that control them. Self-driving systems, like
the kind Google uses in its Koala cars, are perhaps a decade
away from mainstream use on the roads, but they may already
be good enough for the skies. Self-flying aircraft is so much
easier than what the auto companies are trying to do with
self-driving cars, Moore says.
Moores paper circulated, rekindling excitement. Sometime
in 2009, a small group of engineers had begun meeting in
Silicon Valley to discuss funding an electric-plane project. One
of them was JoeBen Bevirt, a mechanical engineer and entre-
48 preneur who had studied under Moller at UC Davis. Another
was Ilan Kroo, an aeronautics and astronautics professor at
Stanford. And another was Page. Although it initially looked
as if they might all team up, Kroo and Page broke off to start
Zee.Aero. Alone, Bevirt founded Joby Aviation, a company he
hopes will beat Zee.Aero to market and prove that his efforts
with Mollerand the older mans lifes workwerent in vain. perform wind tests while driving down a road at high speed.
Bevirt owns a 200-hectare compound near Santa Cruz,
California. To get there, you turn onto idyllic California State
Route 1 and drive past the boardwalk, a few blocks of strip
malls, and 24 kilometres of undeveloped, windswept coastal
dunes. Then you turn onto a dirt road, pass a lake and a grove
of towering redwoods, and walk through gardens overflowing
with lavender and roses. Its here that Bevirt has built a series
of workshops, plus housing for about half of his 35 employees.
Bevirt grew up nearby on an electricity-free commune
where his mother worked as a midwife and his father built
custom homes. From a young age, he learned his way around
toolboxes and construction sites, and was an avid reader. After
consuming the sci-fi classic The Forever Formula in elemen-
tary school, he decided he wanted to build the kind of per-
sonal aircraft the books hero flew and persuaded a friend to
help. We built lots of prototypes, but they always crashed
and burned, he says. They shifted to custom bikes.
The flying-car dream stuck with Bevirt as he entered
UC Davis in 1991 to study mechanical engineering, and he
quickly found himself working for Moller, building one proto-
type after another. Bevirt eventually concluded their shared
dream wouldnt be feasible until battery and motor technol-
ogy improved. He figured hed need to wait 20 years. Paul
had been working on this for 30 years, and he was 50 years
ahead of his time, he says.
Bevirt got his bachelors, and then a masters in
mechanical engineering from Stanford. He worked in
biotech after graduation, co-founding a company called
Velocity11 that built robots to sequence DNA. His next
company, called Joby (his childhood nickname), sold
camera accessories such as flexible plastic tripods. Joby
turned Bevirt into a multimillionaire. In 2008 he started
Joby Energy, a maker of airborne wind turbines whose
technology Google later acquired. The 20-year mark was
approaching, so in 2009 he also used some of his wealth
to buy the 200 hectares and start Joby Aviation.
Its headquarters is an engineers fantasyland. The focal
point is a large wooden building where two dozen workers
sit at a few rows of desks jammed with computers. Aside
from the clusters of large black monitors, the place feels
more like a barn than an office. Aircraft prototypes hang
from the ceiling, as does a thick climbing rope for exercise.
In the open kitchen, abutting a long redwood dining table
in one corner, a cook uses ingredients from the nearby
gardens to prepare three meals a day. While the smell
of a Malaysian curry fills the room, a banjo twangs from
speakers overhead.
The manufacturing happens at a series of buildings
about 90 metres downhill, past gardens and an outdoor
clay pizza oven. One of the buildings is an airy warehouse
with a giant oven insidebut this one isnt for pizza. Its
used to cure the carbon-fibre bodies of the planes and
looks like a Quonset hut. Former members of Oracles
Americas Cup sailing team, some of the worlds leading
materials experts, oversee the curing process, baking the
carbon fibre at about 90C. In another building, engineers
build cantaloupe-size electric motors; in a third, they test
electronics; in a fourth, they put the finishing touches
on wings and other parts. Out back, theres a large truck
with an extendible arm atop its trailer like a cherry picker,
which hoists propellers high into the air so engineers can
Robotic prototypes buzz around.
Bevirt funded Joby Aviation by himself until last year,
when he was joined by Paul Sciarra, one of the co-founders
of Pinterest. Sciarra grew up in New Jersey, taught himself to
code, hit it big with Pinterest, then went looking for some-
thing new to throw himself into. He, too, concluded that
electric motors and batteries appeared to have applications
well beyond the auto industry. The goal is to build a product
that impacts the lives of lots of people, Sciarra says. Not
just folks that are amateur pilots or wealthy, but everyone.
Sciarra and Bevirt hope to begin flying a human-scale
prototype plane later this year. They wont give the exact
specifications but suggest that it could hold, say, a family of
four and travel 100 miles or so on a full charge. The vehicle
looks like a plane-helicopter hybrid packed with propel-
lers, about eight mounted on the wings and tail. For takeoff
and landing, the propellers hang horizontally like a heli-
copters and rotate for forward propulsion once in the air.
Joby Aviation has already built smaller prototypes and has
models of the planes body, wings, and propellers scattered
about the manufacturing facilities. Bevirt and Sciarra see
the vehicle taking off from parking garages, roofs, or areas
alongside highways. They want to offer flights as an
Uber-like servicesummon a plane when you need it.
 Other Flying Cars in Development
Based in Woburn,
Massachusetts. Full-vehicle
Launch date*
parachute included,
just in case
2026
The TF-X
Maker: Terrafugia
Cost: $120,000; seats: 4
Prototype named
Transition has Still in the early stages of
already flown development, this flying car
should have a range
of 800 kilometres and cruise
as fast as 320 kph.

Pilots use a
joystick and clever
software to fly Charges
in two hours

Weighs 450
kilograms

2016
Volocopter
Maker: E-volo
Cost: $280,000; seats: 2
49
Prototypes have already flown.
Its all-electric for now
but will be sold as a hybrid to
increase flight times.

18 propellersbecause can
you ever have enough?
Looks like a
helicopter but makes
Needs just a few far less noise
hundred
metres to land Two football fields
of distance is
enough for liftoff

Will be able to
fly from, say,
2018-19
New York to Toronto AeroMobil 3.0
Maker: AeroMobil
Cost: $400,000+; seats: 4
Fits in a
standard parking This is a true flying car. It can
space and cruise down the road and
runs on petrol take off at a moments notice
as the wings spread out.

Built in Slovakia
Will start taking orders
this year *Launch dates obtained from companies. Handle with care.
 This is the fifth- Two-, four-, and six-
generation flying car seat versions planned
Launch date
Built at Mollers Moller has built
workshop
in Davis, California TBD
Moller Skycar
Maker: Moller International
Cost: $500,000 to $1 million; seats: 4

Paul Moller has been trying to make

flying cars for about 50 years. Investors have
1,288 kilometres of pumped more than $100 million
range at 208 kph into his largely troubled prototypes.

Max speed of
491 kph

Each wing has a dozen

ducted fan engines
Built in

2018 Gilching, Germany

Lilium Jet
Maker: Lilium Aviation Range of
Cost: $TBD; seats: 2 480 kilometres with
50 a max
The German startup plans to make speed of 400 kph
the worlds first all-electric VTOL jet.
It will be easy to fly, Lilium says,
with software doing much of the work.

More
fan engines
Funded by the
European Union
People will summon the
plane like an Uber Has teamed with NASA
on flying-car designs

2016
Joby
Joby expects to Maker: Joby Aviation
begin flying prototypes Cost: Rent as a service; seats: 2
by yearend
An early prototype of Jobys flying car.
Future vehicles will seat four and
look more planelike, with six propellers
positioned around the craft.
Built on a 200-hectare
compound in
Santa Cruz, California The all-electric plane should have a
160- to 320-kilometre range
 The Joby aircraft looks similar to other vehicles being
built around the world. In May the German company E-
volo conducted manned flights of its Volocopter, a two-seat
aircraft powered by 18 propellers. Other flying-car startups
include AeroMobil, Lilium Aviation, and Terrafugia. Even
Airbus has built a two-seater prototype at its Silicon Valley
labs, say two people familiar with the designs.
In 2013, Red Bull held one of its Flugtag competitions in Long
Beach, California. Flugtag is a televised spectacle where hob-
byists see how far they can launch their homemade flying
machines off a dock. Its more about entertainment than sus-
tained flightthe contraptions generally dive straight into the
water, and everyone laughs. At this one, though, a group called
the Chicken Whisperers stunned the assembled crowd. Dressed
in full-body baby-chick outfits, the team pushed its glider off
the dock and watched as it cruised 79 metres, breaking the
previous record of 70 metres. The chickens danced. They
clucked. They took a swim in the water. They were all Zee.Aero
employees in disguise, having fun, trying out some designs.
In the six years since its founding, Zee.Aero has hired some
of the brightest young aerospace designers, software engi-
neers, and experts in motor and battery hardware. Theyve
come from places such as SpaceX, NASA, and Boeing, and
theyre all chasing after the goal presented succinctly on
Zee.Aeros spare website: Were changing personal aviation.
At its outset, Zee.Aero was led by Kroo, the Stanford
aerospace professor. He wrote the original Zee.Aero patent,
No.9,242,738, which shows a strange-looking one-seater air-
craft with a long, narrow body. Behind the crafts cockpit,
rows of horizontal propellers run along both sides of the body
of the plane to handle the VTOL work. Theres also a wing at
the back with two more propellers that add forward thrust.
Zee.Aero worked on this design for a couple of years.
Small, computer-controlled versions of the aircraft were pho-
tographed by reporters and hobbyists sitting in the parking
lot at 2700 Broderick Way. None of the prototypes were big
enough to fit a human.
Over time, the company realised this might not be the
best design, according to three former Zee.Aero employ-
ees. Page also grew dissatisfied with the rate of progress. In
2015, Kroo returned to teach at Stanford full time but con-
tinued to advise Zee.Aero as principal scientist, while the
companys engineering chief, Eric Allison, took over as chief
executive officer. Under Allison, the company began work on
a simpler, more conventional-looking design, now coming
to life at the Hollister Municipal Airport.
Hollister is a city of about 35,000 nestled among garlic and
artichoke farms. Its airport is popular among amateur pilots
because of favourable winds and a lack of commercial air
traffic. Theres a flight school, a sky-diving business, and a few
run-down buildings. The least shabby structure is Building 19,
which has been taken over by a dozen or so Zee.Aero workers.
The airport is open for business from 8 a.m. to 5 p.m.
on weekdays, but Zee.Aero employees frequently run test
flights when no one else is around. Nonetheless, people
working at the airport have caught glimpses of two Zee.Aero
craft in recent months. Both have a narrow body, a bulbous
cockpit with room for one person upfront, and a wing at
the back. In industry lingo, the planes are pushers, with
two propellers in the rear. One of the prototypes looks
like a small conventional plane; the other has spots for
small propellers along the main body, three per side.
When the aircraft take off, they sound like air raid sirens.
The people at the airport havent heard Pages name
mentioned, but they long ago concluded Zee.Aeros owner
is super rich. Zee.Aero employees receive catered lunches
sometimes $900 worth of barbecue from Armadillo Willys,
a local chain. Recently, the company purchased a $1 million
helicopter to fly alongside the planes and gather data.
For Page, this project is deeply personal. Hes been known
to spend evenings with Musk, both men thinking aloud about
ways to fundamentally change transportation. Musk wants
to build an upscale electric VTOL jet;
Page wants the down-market version.
In an interview with a Bloomberg
Businessweek reporter a couple of
years ago, Page confessed that he
longed to take more risks like his
industrialist friend. He wanted to dabble
with new forms of investment outside the
confines of Google and back projects that focused
on atoms, not bits. Theres a lot of money going into internet
startup kinds of things, which is great, he said. But for some
of the real problems we face, I think we need other kinds of
investments, too. I have young kids, so I would like them to
be safe. Id like for pedestrians to be much safer. Id like for
blind people and old people and young people to get around.
The former Zee.Aero employees describe the company as
a fun place to work but dont downplay the serious expecta-
tions from Page. He wants the flying-car future, and he wants
it now. If the atmosphere grew tense with Kroos departure,
it didnt lighten up when the Kitty Hawk team arrived.
Kitty Hawk has about a dozen engineers, including some 51
Zee.Aero veterans. Others came from Aerovelo, a startup
whose claim to fame was winning the $250,000 Sikorsky
Prize in 2013, for building a human-powered helicopter
that could stay aloft for more than a minute. Kitty Hawk
employees include Emerick Oshiro, who did self-driving
car work at Google, and David Estrada, who handled legal
affairs for Google X. They all listed the company as their
employer on LinkedIn until they were contacted by Bloomberg
Businessweek, at which point they erased any mention of
Kitty Hawk from their profiles.
Page has drawn a line separating his two flying-car teams,
employees say. Its common for the Zee.Aero engineers to
speculate over lunch about what their Kitty Hawk counter-
parts are up to. The former Zee.Aero employees think Page
wanted to see if a smaller team could move faster, and the
added pressure on Zee.Aero didnt hurt. Two people say
Kitty Hawk is working on something that resembles a giant
version of a quadcopter drone.
Theres no guarantee that Kitty Hawks or Zee.Aeros or
anyone elses flying cars will ever take to the skies. There
are still technology problems to solve, regulatory hurdles
to cross, and urgent safety questions to answer. Page once
vowed to a colleague that if his involvement in the sector ever
became public, he might pull support from the companies.
Heres hoping thats not true. If nothing else, these proj-
ects show that bold, some might say far-fetched, invention
is alive and well in Silicon Valley. The place that spent the
past decade focused on social network apps has trained its
engineering powers on robots, cars, and now aviation. We
were promised flying cars, and instead what we got was
140 characters, a local venture capitalist once put it. Page
and his cohorts are trying to get us both. <BW>
The
Peoples
Republic
of WeChat
My full (and mostly successful)
immersion in Chinas everything app
Story Dune Lawrence,
with Lulu Chen
I
ve had WeChat on my phone
since a vacation to Beijing last
year, when friends there essen-
tially ordered me to download
it. More than 760 million people
use it regularly worldwide; its basically
how people in China communicate now.
Its actually a lot of trouble not to use
WeChat when youre there, and socially
weird, like refusing to wear shoes.
In China, 90 per cent of internet
users connect online through a mobile
device, and those people on average
spend more than a third of their inter-
net time in WeChat. Its fundamentally a
messaging app, but it also serves many of
the functions of PayPal, Yelp, Facebook,
Uber, Amazon, Expedia, Slack, Spotify,
Tinder, and more. People use WeChat to
pay rent, locate parking, invest, make a
doctors appointment, donate to charity.
The police in Shenzhen pay rewards
through WeChat to people who rat out
traffic violatorsthrough WeChat.
Its nothing special to look at, as far
as smartphone apps go. The first screen
that opens is the chat stream; a menu at
the bottom gets you to other areas, like a
WeChat wallet and a moments stream
for Facebook-like posts. Companies,
media outlets, celebrities, and brands
also open official accounts that you
can follow to get news and promotions.
The design stands out only for its rel-
ative simplicity and calm; the online
mainstream in China is overpopulated
with weird click-bait and manic GIFs.
Zhang Xiaolong, WeChats creator
and something of a cult figure in China,
has called WeChat a lifestyle. I rolled my
eyes when I first heard that. Then I went
back to Beijing in April.
My colleague Lulu Chen, who covers
WeChats parent, Tencent, has sent me
the phone numbers of some potential
contactsbut why call when WeChat is
so much easier? I use the chat function
to set up meetings during my visit. One
of my contacts mentions a WeChat con-
vention the day after I arrive, and so, on
a Sunday afternoon, I show up at the
Design Service Centre, an industrial-
chic space in the historic city centre.
 HE SCANS MY QR CODE. THE

The crowd is mostly young, a mix of
Chinese and expatriate, and the mood
is festive. Free wine stands three bottles
deep on the bar.
I drift by company displays and
find myself at the table for Yoli, a busi-
ness that offers a sort of speed dating
for English learners: 15-minute on-
demand tutoring sessions with native
speakers through WeChat. Two sheets
of paper taped to the table each bear
a pixelated QR code: Scan one to
become a teacher, scan the other to
become a student.
The Chinese term for this ritual,
sao yi sao, quickly becomes famil-
iar. Everyone and almost everything
on WeChat has a QR code, and sao yi
sao-ing with your phone is both con-
stant and strangely satisfying. James, a
tanned American with unruly blonde
hair who mans the Yoli table, is here
to host a workshop called How We
Built a WeChat App & Recovered Our
Development Costs Within 24hrs. He
scans my code, which gives him my
WeChat profile and also generates the
equivalent of a friend request; I accept,
and we agree to meet during the week,
skipping right over the old-fashioned
niceties of last names and business cards.
The presentations are about to start,
and jet lag is kicking in. I hurry to the
coffee counter for an iced Americano.
Theres a QR code in a plastic photo
frame. The woman ahead of me is scan-
ning it. I try it, andWeChat fail. Ive random shelves of books,
entered a credit card into WeChat, but
it wont work, and my WeChat wallet is
empty. I feel distinctly self-conscious
fumbling around for yuan. Ive been in
WeChat-era China one day, and already
cash money feels embarrassing.
On Monday, I take the subway to meet
Zhu Xiaoxiao, whos built a WeChat-
based fitness business. On the train,
I notice a woman moving methodi-
cally down the car, stopping to talk to
the other passengers. Is she begging?
Testifying? Only when she stops before
the woman next to me do I get it: Shes
asking for QR scans, trying to get follow-
ers for a WeChat official account.
Zhu is an open-faced, bulked-
up 25-year-old in a grey T-shirt, blue
shorts, and red sneakers. He left China
for school in England a skinny kid and
returned in 2012 a fitness buff with the
germ of a business planto make and
sell protein powder. He and a friend
developed a formula, set up manu-
facturing and a website, and began
marketing online. In late 2013, Zhu
started looking for investors, and the
next February he got 2 million yuan
roughly $300,000from a seed fund in
Beijing. At the urging of his investors,
he stopped selling the protein powder
and refocused on building a following
of health enthusiasts, opening a WeChat
official account that pushed articles on
exercise and diet and lots of pictures
of six-pack abs. The company, FitTime,
quickly racked up 400,000 followers
and an additional 9.8 million yuan in
funding, and launched a standalone app.
As WeChat boomed, Zhu developed
a fitness camp on WeChat, an alterna-
tive to expensive personal training in
a physical gym for people already on
WeChat all the time. Sign up, and you
get grouped into a chat with 15 people of
similar height and weight and a personal
trainer whos there to motivate you
(by message and emoji) to stick to the
diet and video workout plans. FitTime
charges 1,000 yuan for 28 days, and
more than 5,000 people have signed
up for at least one month.
Stories of sudden success on WeChat
abound these days, and Xi Jiutians is
another. Shes wearing oversize nerd-
cool glasses and bright-red lipstick when
we meet for lunch on Tuesday at Cafe
Groove. The place looks like something
out of my Brooklyn neighbourhood,
the mismatched chairs, the
Did you
even the prices$10-plus for know?
an avocado salad. This is all A court in the
familiaruntil I go to pay with province of Henan devoted to flower care at one
WeChat, and my credit card is is running a pilot
rejected again. Im definitely programme to
losing some face here. conduct trials on
Xi was an interaction WeChat
designer at Microsoft in
Beijing before getting laid off. She tried
designing a smartwatch, then consult-
ing for startups. She also began writing
on Zhihu, a site similar to Quora, about
makeup and skin care. In early 2015 she
opened Hibettermeas in, Hi, better
mea WeChat account devoted to the
same topics. After a couple of months,
her WeChat fans began urging her to
sell beauty products. Setting up a shop
on WeChats platform took her a couple
of days. Xi, like Zhu, had an easy time
finding funding when she began looking
last fall. Shed been at it about a week
when a friend of a friend put her in
touch through WeChat with Eric Tong
of Pros & Partners Capital in Shanghai.
After theyd messaged on WeChat for
TERM FOR THIS RITUAL, SAO YI SAO, QUICKLY BECOMES VERY FAMILIAR
about 15 minutes (a lot of their dis-
cussion was about tattoos), Tong told
her to stop her search and committed
4 million yuan.
Xi introduces us on WeChat, and
Tong responds instantly. But when I
try to set up a phone call, he ignores
me. People seem to talk on the phone
less than they used tothough theyre
happy to leave each other WeChat
audio messages. I ask, by chat, how
Hibetterme fits with what he looks for
in an investment. In a flurry of abbre-
viations, he says hes looking for pro-
fessionally generated content across
platforms like WeChat. Its an invest-
ment theme thats very, very hot,
thanks to the Papi impact. Papi is Papi
Jiang, known for her speed-talking
comedic video monologues. In April,
she auctioned off the first advertising
spot to appear in one of her videos for
22 million yuan. Um, bubble? Tongs
fund stands at about 200 million yuan
now. He expects to have 600 million
by the end of the year.
Even those who arent directly selling
things or running official accounts on
WeChat use it constantly for work. A
friend who runs restaurants in Beijing
operates his entire operation, almost
everything except eating and drink-
ing, on WeChat. He trades dish ideas
and discusses kitchen operations with
the chefs in one group, while
his accountant keeps him
informed of payments on
another. Theres even a group
of the restaurants. (WeChat
introduced a formal enter-
prise version in April.) Yoli,
the tutoring company, takes
the all-WeChat model to
extremes. James, the American I met on
Sundayhis last name, I finally find out,
is LaLonde; hes from Texasmoved to
Beijing to found a gaming company in
2011. He decided last August to combine
his interest in language learning with an
experiment in creating a business run
entirely on WeChat. It made sense; he
rarely left the app as it was. Hes met
Luke Priddy, one of his two co-found-
ers, only twice in person. Priddy lives in
New York and coordinates the growing
cadre of teachers. The average wait time
for a tutoring session is 20 seconds. The
tag line for teachers is teach on the
beach; Priddy once conducted a tutor-
ing session while floating in a pool.
On Wednesday, I need to get to
 Shanghai for a day of meet- on Change Style in my profile, it
ings and c ant dec ide What it goes from bad to worsea piece
whether to fly or take the looks like of toast? A cat? A pink car?
train. Buying train tickets Finally, some algorithm spits
with an app may not sound out a green, leaf-shaped design.
revolutionary, but in Ill take it.
China, I promise you, Ive also given up on using
it is. The intricacies of my credit card. Its accepted
buying tickets used to by WeChat, and Ive set up a
occupy whole sections PIN and all that, but I guess
of guidebooks and WeChat cant change the fact
require feverish strat- that few local businesses take
egising before holidays. international cards. WeChat has
Opening WeChat, I check given life in China a smooth-
the train schedules and get ness, a quality of efficiency I
Shake, which
to the point of booking never could have imagined.
connects the user
an overnight trainbut But for a foreigner like me,
with a random
then decide to fly. I cant at least, its still a work in
person to message
quite shake my fear of the progress.
with
Chinese train system. I message a Chinese friend
WeChat has made Beijing whos in the US on a fel-
a very different place from lowship and ask for a loan.
Year 2016, 516 million people delivered
32 billion red envelopes.
Midmorning, I go to the Global
Mobile Internet Conference in the China
National Convention Centre. Hundreds
of speakers, 20 summits, and a music
festivalits Chinas South by Southwest,
or trying to be. Im exhausted from
running from floor to floor to catch ses-
sions. I stop at a cafe on the second
floor to get coffee, my new WeChat
riches teed up.
They dont take WeChat. At a tech
conference.
I return to the conference the next
day to talk to E Hao, co-CEO of the
group that organises it. Im accosted
in the elevator by a young woman
who sees that Im foreign, explains
that her company organises exchanges
with foreign companies, and demands

I NOW HAVE 200 YUAN IN MY WECHAT WALLET

the city I lived in from Within minutes, hes sent to scan my WeChat QR code. Nice
2006 to 2009. Theres me two hong bao, or red to meet you! she sings, striding off
so much less standing in envelopesa play on the without ever telling me her name or
line and waiting, partic- red envelopes traditionally asking for mine.
ularly at the bank. Cash used to give gifts of money. E Hao is hoarse after a late night
used to be king. I paid They arrive as chat messages at the events opening gala at the
my rent in cash, my bills, that say, Good fortune Olympic Birds Nest stadium. His
every restaurant and shop. and good luck! Youve heavy metal band, CXO, newly formed
Now people shoot money received a red envelope. with various fellow executives, per-
54 around on their phones The basic Once I click on them, I have formed for the first time. He shows
(not all on WeChat, of message stream 200 yuan in my WeChat me his WeChat message stream:
course, but a lot of it). wallet. 3,015 unread messages. He says hes
Theres also a lot less Typically, you hand been relying on hong bao to thank and
getting lost. Taking a taxi out red envelopes of cash motivate his overworked employees
in China used to require to younger relatives and through the long days running up to
getting the driver to call friends during the Lunar the event, sending out 1,000 yuan at
your destination to verify New Yearto couples a time. He sends me 100 yuan to dem-
exactly where you were getting married, for chil- onstrate. Im not sure about the eti-
going. On this trip, everyone drens birthdays. Now quette. Is this for demonstration only?
I visit drops a map into a hong bao are usedI Should I send it back? I do, eventually.
message, with the location dont want to say willy-
pinned, and I show that to nilly, but sometimes just When I get back to New York, I join
the driver. The one time I for fun. a FitTime WeChat boot camp. The rest
get turned around, walking to The WeChat Its hard to tell whats of my group seems to be Chinese stu-
an interview, I open real-time wallet great strategy and whats dents studying in the US, including the
location in the WeChat con- luck in WeChats success, trainer, whos in Iowa. First, theres
versation Im having with my but this hong bao system is the horror of taking a selfie in spandex
host. She finds me on the map genius. The company wasnt first and sending it to a stranger, then
and guides me. with electronic hong bao; that the awkwardness of photo graphing
Nobodys too cool to use WeChat, would be Alipay, the payment plat- every meal, with one hand held in
or too uncool. Its how entire families form from Alibaba. But when WeChat a fist beside the plate for perspec-
keep in touch. A tech executive told me introduced its own system just before tive on serving size. If Im lucky, the
his mother, at 80-plus, uses it for every- the Chinese New Year in 2014, it trainer sends me a thumbs-up emoji
thing; a marketing entrepreneur said added a gaming element. When you in response. She frequently has to
his computer-illiterate parents and his send money to a group of people, one remind me of the rules, though: No
daughters, ages 3 and 5, use it. lucky winner within the group gets a kimchi, for exampletoo much salt,
bigger windfall than the rest, while a leads to bloating. The whole thing
By Thursday morning, Ive decided few get nothing at all. People love the is vaguely humiliating. On the other
something important: I dont like my element of chance, apparently, because hand, Ive lost a few kilos, and I now
QR code. The code WeChat randomly users of WeChats wallet jumped by know the characters for chia seeds in
generated for me looks like a piece of 100 million in a month. The figure is Chinese. And Im on WeChat all day
candy in a blue wrapper. When I click now 300 million. For Chinese New long. <BW>
HES SENT ME TWO HONG BAO, OR RED ENVELOPES.
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SCENT
WARDROBING BASIC FASHION UFCS LORENZO
FERTITTA

C OM E FOR THE
CA GE-F R EE EGG S ,
STAY F O R
T H E TE A B O T
Whole Foods courts
millennial shoppers with 365
By Joel Stein
 Etc. Marketing

W
hen the first 365 by Whole Foods Market opened store, with exposed beams and ducts. There
near me in Los Angeles, I went immediately, were no employees in sight, as if to say, Shop,
curious to see how millennials shop for food. Do dont shop, totally up to you, dude. (What
they just take photos of it? Do they look for items theyre actually saying is: fewer employees,
with their own names on them? Do they even less overhead, smaller costs to pass on.) Igor liked it imme-
buy groceries? Dont they just smash buttons diately. He liked that it was a third smaller than the Whole
on their iPhones until a cooked meal appears at their door? Foods he spent hours roaming as a screenwriters assistant;
Market researcher Mintel reported last year that 40 per cent that items were cheaper, closer to what he paid at Trader
of them dont even eat cereal Joes; that there were only a few choices
because it requires cleaning per product; and that the salad bar was
up afterward. priced by the container, not the pound,
The 365 concept is Whole making him reconsider his entire belief
Foods response to three system about avoiding items with a lot of
quarters of sales declines at water weight. He got way too excited that
stores open at least a year. prices were listed on digital tablets instead
The parent stores focus on of on chalkboards with photos of farmers
organic and local has been he gets it, farmers grow food, whatever.
copied elsewhere, cheaper. Its He didnt mind the absence of a butcher or
getting killed by Trader Joes a cheesemonger, or that the wine expert
and Aldi, because they offer was replaced by a screen where he could
lower prices; smaller, easy- search reviews of pinot noirs.

A F A K E INSTAG RAM ACC OU NT FOR TH E S T O RE G A IN E D

ATT E N T ION FOR FABRICATING A STORY THAT SIN G ER KIM GORDO N
H A D B E EN BIT T EN BY A C O YOTE IN T H E P A RKING LOT
to-navigate stores; and an ever-rotating selection of inven-
tive items covered in chocolate or Sriracha. Whole Foods is
a victim of its own success: It got shoppers to buy fresh gro-
ceries instead of stuffing their freezers. But that meant they
were going to the store more often, so they wanted to get out
faster, without having to choose among 100 olive oils. And
if youre going to
get them to drive
somewhere, the
We stopped at the TeaBot, where we chose personalised
blends, caffeine levels, and temperatures. Mine was based
on a mixture called Chai These Nuts. Then we went over to
a mural that said, Silver Kale. Igor made me pose with him
in front of it while another shopper took our photo. Its very
Instagrammable, Igor said. Thats why they put that in. He
didnt like the anagram, though. (Get it? Silver Lake, Silver
Kale?) I hate any advertisement that pretends to know me.
Youre not my friend. Youre a company. Dont try to have

PREVIOUS PAGE: ILLUSTRATION BY RAMI NIEMI

destination has to an inside joke with me.
feel like an expe- There seemed to be fewer shoppers at 365 who were Igors
rience they age than there were fortysomethings like me. Five minutes
cant get online. after we got there, we ran into my Generation X friend Bruce
Instacart and Gilbert, a music supervisor for shows such as Transparent
AmazonFresh and Orange Is the New Black, wearing a Joy Division T-shirt
have the com- with lead singer Ian Curtis replaced by Joey Tribbiani from
petitive advantage Friends. Sipping a cortado from the Allegro cafeit also serves
among folks who beer and winehe
want to stay on told us hed been
the couch, snack- there four times
ing on something i n t h e p re v i o u s
other than cereal. three days, partly
Sweet-potato wrap with fet a & ka

Whole Foods has signed 19 leases for 365 stores across the to check out the
country. It planted the first in the hipster-est section of LA, singles scene. I was
PHOTOGRAPH ILLUSTRATION BY CREDIT TK

Silver Lake, known for having a coffee shop/dog adoption here at 10 oclock
agency and a stop sign on which someones added Hammer last night, he said,
Time in graffiti. To get the perspective of someone in 365s which was appar-
target audience, I brought along my 27-year-old friend Igor ently peak time. He
Hiller; his millennial bona fides include doing improv at Upright hadnt shopped for
Citizens Brigade and having car insurance paid by his mother. groceries yet.
We were greeted outside with a sign that said, Free Air Thats cool with
Guitars. Walking in, we found a clean, well-lit, and colourful 365s president, the
le $

|O
4

ra n g
e-maple salmon with edamame quinoa pilaf & asparagus $10 | Sriracha soy-chicken skewers $6.99/lb. | Chimichurri beef skirt steak $12.99/lb. | Carrot dog $
 Etc.

very chill Gen Xer Jeff Turnas, whos
been with Whole Foods for 21 years.
We didnt set out to say we just want
millennials in our store, he says. We
set out to create a fun, new, fresh way to shop with
amazing prices. Turnas spent the past few years in
Europe and, with 365, is trying to copy the vibe that
makes supermarkets there more experiential. He
obsessed about the stores music; the playlist, which
you can subscribe to on Spotify (current followers: 50),
includes such songs as Odessa by Caribou and How Did
I Get Here by Odesza. (The website 365 team members
use for job information is called Backstage Pass; a You
Rocked It programme lets
them award points to co-work-
ers that can be redeemed for
gift cards.) And Igor was right:
Turnas added the mural after
the stylish company that pro-
vides 365s employee uniforms
told him the store needed
an Instagram attraction. I
liked Silver Save more than
Silver Kale, he says, prefer- version of itself: In February it opened a Main & Vine in Gig
ring a message that riffed on
prices. But we let the artist
do his thing.
Turnas is also cool with a
fake Instagram account made
for the store. Created by
27-year-old music video direc-
tor Jack Wagner, it gained atten-
tion for fabricating a story that
singer Kim Gordon had been bitten by a coyote in the parking
lot. It also posted a fake apology from a barista for inserting
indie rock cassette tapes into boxes of organic cereal. Wagner
started the account after walking to 365 every morning to get a
breakfast burrito and iced coffee. He, too, hasnt yet purchased
any groceries. We drank beers, Wagner says. We treated it regular wine, beer,
PHOTOGRAPHS BY JULIAN BERMAN FOR
in Arcadia, about 20 minutes
outside LA, I could see why.
You put a quarter in the
shopping cart dispenser to
rent one, getting your money
back when you return it, so
no worker has to play fetch.
There are no paper or plastic
bagsits BYOBand no one
to put what you buy into
them. Items are displayed
Costco-style, in the cases
they arrived in, and about 90 per cent are house brands.
Instead of 30 aisles, there are only five, but theres room for
constantly changing Aldi Finds such as chocolate-covered
pistachios and Sriracha kettle chips. The customer doesnt
have to walk in the store and have so many options and take
time to decide. Weve done that work for them, says Liz
Ruggles, Aldis marketing director. There are 1,500 Aldi stores
in the US, and the company says it plans to open 500 more
by the end of 2017.
More competition is coming. Kroger, the largest super-
market chain in the country, is working on its own cooler
Harbor, Washington, exactly the kind of city you want to audi-
tion in. Produce, which makes up half the stores inventory,
is in the interior aisles, not on the perimeter, an acknowledg-
ment that people are putting fresh ingredients centre stage
in their meal planning. A chef cooks at a table in the front of 59
the store, and you can
buy the ingredients to
re-create his dishes,
such as Mexican-style
corn; bacon, Brie, and
apple baguette sand-
wiches; and spiced
cherry grilled chicken
t h i g h s . T h e re a re

like a bar and pregamed there before a Memorial Day party. and cheese tastings,
Turnas says Wagners account might have bothered the exec- as well as a bar and
BLOOMBERG BUSINESSWEEK

utives who run Whole Foods, but not the folks at 365. Im not caf. Millennials want
sure its negative, Turnas says. He figures its an honour that to hang out in a cool
someone cared enough to mock the place. Still, supermarket environment and feel
analyst Phil Lempert, the food trends editor for NBCs Today like foodies, says Mike
show, says 365 is trying way too hard to be hip. Donnelly, Krogers
Its difficult enough to succeed even when youre not. executive vice presi-
Tesco, the hugely successful British grocer, started a US dent for merchandis-
chain called Fresh & Easy in 2007 and wound up lending ing, whos in charge of Main & Vine. Up to a point. They
Ron Burkle $234 million in 2013 to assume its liabilities; dont want bento boxes, Donnelly learned. People thought
Burkle closed all 150 stores last October. Fresh & Easy was they were too weird.
9 | Momofuku ssm sauce $5.99

intentionally unhip. Vegetables and fruits were wrapped In its first week, at least, 365 had this crucial hangout thing
in cellophaneit was supposed to make them look conve- down. When we went, Igor suggested we go to a tablet and
PHOTOGRAPH ILLUSTRATION BY CREDIT TK

nient and safe, but they were seen instead as gross. The
self-checkout lines were confusing. The lack of Sriracha-
and-chocolate-influenced products bored customers.
Aldi, however, has had great success as a no-frills
supermarket. (In a not-very-millennial move, Aldi, a
private company, declined to share its financials.) Its all
about speed and price, not Spotify playlists. Aldi is as
cheap as a grocery can be, and when I visited one alone
order bowls of quinoa, Brussels sprouts, and barbacoa. After
our names appeared on a giant screen and we picked up
our meals (no human interaction necessary), we ate at an
indoor picnic table next to my cart, which was filled with two
chimichurri-marinated chicken breasts ($5), two prepacked
Dover sole filets ($5), Beast burgers ($4.39), and Justins honey
peanut butter ($5). Ill be back. The figs were really cheap.
For the record, Igor didnt buy any groceries. <BW>
3 .9
i$

og
6 | Peanut power bowl $8 | Vegan veggie pizza $12 | Farmedtilapia with tequila-lime rub $8.99/lb. | Mixed summer squash noodles $4 | Potato-cheddar-jalape o pier
 Etc. Title
Marketing
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 What I Wear to Work Etc.

ATM ANTHONY

DOUG LLOYD
The sweater almost
THOMAS MELILLO matches your trousers.
I only ever wear maybe
four colours in a neutral
palette. I never check
bags when I travel, so I
53, founder and pack clothes I can rewear
creative director, Lloyd & Co., knowing theyll always
match something else.
New York Its all about efficiency.

What do you do? TOMAS MAIER

We help mostly
fashion brands express
who they are visually
and verbally.

ROLEX

How would you A.P.C.

62 describe your style?
I wear basic clothes.
When youre looking Sort of like white
at and evaluating sneakers that go
with everything.
them all the time, the I love that the Stan
last thing you want Smiths are generic.
to do in the morning Theyre devoid of
is think about what detail. Plus, theyre
comfortable enough
to wear. to wear all day.

So what is the
most colourful
Something tells me piece you own?
PHOTOGRAPH BY CHRISTOPHER LEAMAN FOR BLOOMBERG BUSINESSWEEK

your basic white tee I guess maybe a

isnt so basic.
It has just the right ADIDAS Helmut Lang camel
amount of slouchiness coat. I wore it for a
to make it feel cool season and never
without trying too again. Its actually
hard.
I like it with the sweater. a classic. I wonder
The sweater is functional,
effortless ease. Its one
where that coat is.
of the most comfortable
things you could ever
put against your body.

Interview by Jason Chen

 Etc. How Did I Get Here?

LORENZO FERTITTA
Chairman and chief executive officer, Ultimate Fighting Championship

With his father, Frank Jr (holding hammer), and

Education brother, Frank III (to Fertittas left), at the start of
construction on a tower at the Palace casino, 1990
On Thursday Id
fly to Las Vegas,
work the casino Bishop Gorman
Friday to Sunday, High School, Las Vegas,
class of 1987
and fly back
for Monday University of San Diego,
afternoon class. class of 1991

New York University

e stagnant. 3. I tell the fighters, Stick to what you do. Starting that restaurant or music label or clothing company almost never works out.
As a safety at Leonard N. Stern School
Bishop Gorman of Business, class of 1993

It was a family investment My dad pioneered casinos

Work
office. Riverboat gambling had Experience that catered to locals.
exploded, and we developed He built the Palace Station
opportunities around the country.
Hotel & Casino. When
64 19932000
President, CEO,
we wanted to expand, we
I was a Fertitta Enterprises knocked down a wall
commissioner 19962000 and added slot machines.
Commissioner,
when Mike Tyson Nevada State Athletic
At the MGM
bit Evander Commission
Grand during
Holyfields ear. 19972000
President, CEO,
UFC 84,
2008
Gordon Biersch
Brewing
We invested $3.5 billion in capital
in developing new projects around 200008
President,
Las Vegas, including Green Valley Ranch Station Casinos
and Red Rock resort, both in the suburbs.
2001
Present
With Ronda
Chairman and CEO, UFC
Rousey following
her victory
at UFC 170, 2014

The shareholder The UFC had baggage at the

agreement says that if time: John McCain had dubbed
me and [my brother] it human cockfighting. We
Frank cant agree, [Fertitta, brother Frank, and
friend Dana White] bought the
well have a sport business for $2 million. We have
jiujitsu match. Three 519 athletes from 44 countries,
COURTESY SUBJECT (5). GETTY IMAGES (1)

five-minute rounds. $600 million in revenue, and

41 live events a year. Weve also
launched UFC Fight Pass, a
Life Lessons streaming service that accesses
17,000 fights.
om

ec
1. Never be the smartest guy in the room. Surround yourself with talent. 2. Always push the limits. When you pat yourself on the back is when you b
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