November 13, 2017

p62
 November 13, 2017

1
THULI DLAMINI/THE TIMES/GALLO IMAGES/GETTY IMAGES

52  Marching against corruption on Sept. 27 in Durban, South Africa

 CONTENTS Bloomberg Businessweek November 13, 2017

 IN BRIEF
6 The Apple in the Paradise Papers Delhi is even smoggier than Beijing Carter Pages excellent adventure

 REMARKS  VIEW
10 Emmanuel Macron is off
8 Saudi Arabias purge could reorder to a good start, but
the Middle East hes running a marathon,
not a sprint

BUSINESS TECHNOLOGY FINANCE

1 2
12 Winners and losers
in the House tax bill
14 SpiceJets strategy to
get more Indians ying:
Skip the runway
15 Bringing Chinas ancient
2 21
herbal remedies into the
21st century produces
some deadly side effects
19 Teaching Alexa 25 The billionaire
to tell awful cricket investor vs. the
jokes in Hinglish crown prince
20 Snapchat discovers a 27 Republicans consider
sinister downside to secrecy redistributionof wealthy
colleges money
Broadcom pursues
Qualcomm in the biggest 28 Holding cash in a record-
tech takeover ever setting stock market is a
great idea. And a bad idea
22 Undocked share bikes:
Brilliant innovation or 30 Sometimes the i in IPO
nightmarish eyesore? stands for itty-bitty

ECONOMICS POLITICS FOCUS/

THE CLOUD

32 South Korea is 38 Mysterious moves 45 Microsoft and others

nding the Olympics
a hard sell
34 The multimillionaire taking
over at the Fed
35 Brexit could be a boon for
courts on the Continent
36 Venezuela puts an alleged
drug trafficker in charge of
debt talks
from Steve Bannons try to narrow the
moneyman gap with Amazon
Web Services
40 Trump goes to Asia
and learns that bilateral
48 Have you heard the one
trade deals are tough
about the coders and
the lightbulb?
41 The sexual harassment
reckoning continues, now
50 On Singles Day, Alibaba
in the labor movement
seeks to lure shoppers
and conquer the cloud
42 Suing private prison
operators to halt exploitation
 CONTENTS Bloomberg Businessweek November 13, 2017

PURSUITS How to Contact

Bloomberg
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62 Everything you always

wanted to know about taxes Correction:
The table accompanying The Japan

but were afraid to ask That Cant Keep Up (Business,

Oct. 23, 2017) erroneously listed
U.S. Steel among top Kobe Steel
customers.

14 22 38 52

Ajay Singh Anne Hidalgo Robert and Thuli Madonsela

Rebekah Mercer

Bloomberg Businessweek (USPS 080 900) November 13, 2017 (ISSN 0007-7135) H Issue no. 4546 Published weekly, except one week in January, February, April, July, and August, by
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 IN BRIEF

Asia Europe
Syria announced Donald Trump sent mixed Lebanon Prime NATO updated
messages on North Korea
it would join the during his Asian trip, saying Minister Saad its command
Paris climate it would make sense for Hariri structure for the
Kim Jong Un to come to
agreement, leaving the negotiating table but resigned rst time since the
the U.S. as the only also attacking his regime on Nov.4, Cold War, putting
for turning the country into
United Nations a hell no one deserves. citing an alleged cyberdefense
member outside assassination on the same
the accord. plot against him. footing as land, air,
and sea defense.

Tencent The Paradise Papers

leak showed that Apple
Holdings acquired sought to preserve its low
a 12 percent tax rate after a change in
Irish law closed a loophole
6 stake in Snap. the company had previously
exploited. The tech giant
ultimately transferred two
subsidiaries to the island of
Jersey, which does not tax
foreign companies.

The announcement came hours after

Snaps shares plunged 22 percent
in reaction to disappointing third-
quarter earnings.  20

Iran rejected accusations SilvioBerlusconi

from Saudi Arabia that it
had supplied Yemen with a helped
missile for the purpose of orchestrate
attacking the country. The
Saudi military intercepted a win for
a missile fired by Yemen his center-right
on Nov. 4.  8
coalition in Sicily.

The four-time Italian prime minister will

Schools were closed in New Delhi as air pollution reached levels 10 times attempt to lead the government again
those in notoriously smoggy Beijing. after general elections next year.
By Jillian Goodman Bloomberg Businessweek November 13, 2017

Americas
British retail had its Republican Senator
worst October since 2008.
Household spending for the
John Cornyn of Texas said
hed work with Democrats
Unfortunately,
month slowed to its lowest
rate in more than a year.
to close loopholes in
background-check I am the biggest
legislation after a Nov. 5
U.K. year-over-year spending growth shooting in his home
state left 26 dead.
embarrassment
4.4%
1/1/17
surrounding
3.8%
1/1/16 the campaign.
2.4%
10/1/17
Trump campaign adviser Carter Page, in early November testimony on his 2016
DATA: BARCLAYCARD contacts with Russia that was unsealed by the House Intelligence Committee

Total agreed to The New York Times
reported that the U.S.
acquire Engies Department of Justice will
assets in liqueed require Time Warner to sell
its Turner Broadcasting
natural gas, System division, which
Tiffany was widely Democrats
pilloried for its Everyday
Objects collection, which put up a strong
includes a tin can made showing in
of sterling silver and vermeil
on sale for $1,000. state and local 7

making the French includes CNN, HBO, and elections on Nov. 7,

other networks, before it
energy company approves the companys especially in
the industrys planned sale to AT&T for Virginia, where
second-largest
$85.4b the party won a
hotly contested

INDIA: DOMINIQUE FAGET/AFP/GETTY IMAGES. HARIRI: MOHAMED AZAKIR/REUTERS. BERLUSCONI: MARCO LUZZANI/GETTY IMAGES.
player.
race for governor.

Priti Patel, the U.K.s
secretary for international
development, resigned after
disclosing that shed held
unauthorized meetings with
Israeli officials in September.
Haaretz reports that Patel
also traveled to the disputed
Golan Heights, a violation of
diplomatic protocol.
PATEL: BAZ RATNER/REUTERS. CAN: COURTESY TIFFANY & CO. MUGABES: PHILIMON BULAWAYO/REUTERS
About 2,500 Nicaraguans
will lose protected Africa
immigration status in the
U.S. The Department
of Homeland Security South Africas FirstRand
extended protections for agreed to buy London-based
Hondurans, however, and is bank Aldermore for
reviewing the status of those
from Haiti and El Salvador.

$1.4b
Zimbabwe President
Robert Mugabe ousted his
vice president in an apparent
move to make room for his
wife, widely seen as his
intended successor.
 REMARKS

When Disruption

Is a Royal Prerogative
  REMARKS Bloomberg Businessweek
With the kingdoms oil wealth
dwindling, the Saudi heir purges his
rivals and the elite. But to what purpose?
By Peter Waldman and Glen Carey
It makes sense to be cynical about Crown Prince Mohammed bin
Salmans ostensible crackdown on corruption in Saudi Arabia.
Among the 11 princes, 4 ministers, and dozens of well-known
businessmen arrested were some of the 32-year-olds last poten-
tial rivals to the Saudi throne. The move also smacks of an asset
snatch. Police nabbed 3 of the Arab worlds 10 richest men,
including investor Prince Alwaleed bin Talal (page 25), the bil-
lionaire best known for rescuing Citicorp in 1991 and making
big bets on Apple Inc. and 21st Century Fox Inc. But was it only
a Machiavellian power play? Or is this the start of a dramatic,
go-for-broke attempt to transform a country thats resisted
change for decades?
Prince Mohammed seems to be playing the equally ruthless
roles of autocrat and reformer. The millennial has been out-
spoken about his bold plans to modernize Saudi society and
wean the kingdom from fossil fuel. Now, Prince Mohammed
has locked up globe-trotting tycoons and other dynastic rivals,
sending shock waves across the desert and around the world.
Since Saudi Arabias founding in 1932 by his grandfather,
Abdulaziz Al Saud, successive kings have sought consensus
among the familys thousands of princes, balancing religious,
princely, and tribal factions to maintain stability in the worlds
largest oil supplier. Decisions were made at a glacial pace, often
capped with generous payouts for anyone left unhappy. Prince
Mohammed has smashed that conservative status quo in an
act, he no doubt believes, of creative destruction.
This is a man of dead-certain belief in himself, who told this
magazine in a long, autobiographical interview in April 2016
that his childhood experiences among princes and potentates
were more valuable and formative than Steve Jobss, Mark
Zuckerbergs, and Bill Gatess. So, he wondered aloud, if I work
according to their methods, what will I create? Now we know
his disruptive potential.
The princes unprecedented arrest of a whos who of Saudi
society is a first stab at fulfilling his vow to hold the corrupt
accountable. I confirm to you, no one will survive in a cor-
ruption casewhoever he is, even if hes a prince or a minis-
ter, Prince Mohammed said in a televised interview in May.
The vow has now become a Twitter sensation among Saudis
under the age of 30, who make up 70 percent of the popula-
tion, the demographic bulge the prince has made his base.
Theyre still plenty skeptical of Prince Mohammed and his
father the king, who recently visited Moscow with 1,500 retain-
ers, his own carpets, and a golden escalator for his Boeing 747.
No one imagined the crown prince would go so far. The
takedown, set up by his father, King Salman, through a new
anticorruption commission that Prince Mohammed chairs,
LUCA LOCATELLI
rounded up his most visible potential adversary, Prince Miteb
bin Abdullah. A favored son of the late King Abdullah, who
died in 2015, Miteb, 65, commanded the Saudi National Guard,
November 13, 2017
which, until his arrest, had been the last military branch not
under Prince Mohammeds control.
Other detainees included princes and ministers who have
been linked to questionable, if not corrupt, transactions. Prince
Turki bin Nasser, for example, is infamous for his involvement
in the so-called Al Yamamah arms deal between Britain and
Saudi Arabia, a massive sale that led to corruption probes in
the U.K. and the U.S. Adel Fakeih, a top economic policymaker
before his Nov. 4 arrest, was mayor of Jeddah during a flood in
2009 during which scores of people died because of the failure
of infrastructure, apparently shoddily made. Dozens of people
were convicted of criminal charges including bribery, but not
Fakeih, who was never charged and went on to serve as a min-
ister in Riyadh for an additional half-dozen years.
Ever since the floods, Abdullah Jaber, a popular Saudi car-
toonist, has drawn caricatures of Fakeih, without naming him,
to symbolize the toll of corruption on Saudi Arabia. He couldnt
believe his eyes when he read Fakeih had been arrested and that
the Jeddah flood case had been reopened. I still cant absorb the
greatness of what has happened, Jaber said in a Twitter post.
In total, the government froze bank accounts of the more than
three dozen men detained, putting about $33 billion of personal
wealth at risk. Three of the detainees, Alwaleed among them,
own three of the largest privately held television networks in
the country. Saudi authorities also moved to freeze the private
accounts of hundreds more suspected of corruption but not yet
arrested. The crackdown is Prince Mohammeds strongest blow
yet at the rentier state, the system of gatekeepers, sinecures, and
9
handouts thats sapped the incentive in Saudi Arabia for entre-
preneurship to flourish, the prince has said.
The question now, for hopeful Saudi and foreign investors,
is whether the prince builds on the anticorruption momentum
with new rules to open up an economy until now dominated
by princes and their cronies as well as wealthy families. Ayham
Kamel, a director with Eurasia Group, says the crackdown will
help. Mohammed bin Salman is in effect taking steps to sepa-
rate the Al Saud family from the state, Kamel wrote in a note
on Nov. 6. The process of destroying old elite networks that
monopolized access to profitable contracts bodes well for the
business environment.
Robert Jordan, the former corporate lawyer who served
as George W. Bushs ambassador in Riyadh, said if Prince
Mohammeds anticorruption campaign is real, it will add cred-
ibility to the Saudi business posture, to its operations, and to
the potential IPO of Aramco, the Saudi national oil company.
If it turns out to simply be a power grab, he told Bloomberg
Television, then I think it will hurt the Saudis in the long run
and certainly hurt this crown prince.
One downside, of course, is more repression, wielded by a
headstrong prince cocksure he knows whats best for society. He
told Bloomberg last month that a $500 billion city he wants to
build on the Red Sea represents a civilizational leap for human-
ity, with a bayside community to become like the Hamptons in
New York. While the prince has reined in the religious police and
taken the once-unthinkable step of allowing women to drive, hes
shown little interest in participatory governance. The govern-
ment has promised a transparent judicial process for the detain-
ees but still hasnt disclosed specific charges against any of them.
The one positive thing is that maybe things will get more
equitable, more meritocratic, says a young Saudi management
  VIEW Bloomberg Businessweek
consultant who, tellingly, declines to be named. Its also scary.
Theres no due process, and people can disappear.
Some Saudis are nervous that Prince Mohammeds belli-
cose campaign against Iran will lead to war. Nerves frayed on
Nov. 4 when a missile fired by Houthi rebels in Yemen was shot
down on its way to Riyadh, the farthest encroachment yet into
Saudi territory by a Houthi-fired missile. The Saudis blamed
Iran for supplying the missile and said they reserved the right to
respond. Iran rejected the allegation and accused Saudi Arabia of
threatening an attack. The kingdom has also intensified its anti-
Iran rhetoric over proxy conflicts in Iraq, Syria, and Lebanon.
Confrontations will widen with Irans unchecked expansion,
Abdulrahman Al Rashid, a prominent columnist for the news-
paper Asharq Al-Awsat, wrote on Nov. 7. Strengthening local
militias in unstable countries remains the only path forward.
The prince is racing the clock. When he and his father came
November 13, 2017
spending and reduced subsidies for energy and water, ground-
ing the economy to a halt. With little prospect that oil prices will
rise much higher, the country has only about four more years at
its current rate of deficit spending until its currency reserves are
depleted. Four years is not a long time; time is running out,
says Ziad Daoud, an economist with Bloomberg Intelligence.
Recent history doesnt bode well for anticorruption reformers,
Daoud says. Chinese President Xi Jinping instituted a similar
purge for a few years, only to backtrack on economic reforms
after some of his rivals had been vanquished, the economist
says. And each time the prince has assumed more power, such
as in June when he usurped his older cousin as crown prince,
hes given generous handouts to the public.
This time could be different. You never know, Daoud says.
Now that Prince Mohammed has unrivaled and unprece-
dented power, he may forge ahead with his reform agenda.
to power in 2015, oil prices had recently plummeted, leaving the
country in imminent danger of a budget meltdown. They slashed
VIEW
10
Next Steps in
Macrons Reforms
The French president has made a good start,
but theres a long way to go
Emmanuel Macron has accomplished
more in six months than his predecessor
managed in five years. Trouble is, thats
a low barand the president will need to
keep pushing if Frances economy is to
achieve its full potential.
Macrons first phase of reforms
addressed the countrys 3,000-plus pages
of labor rules. The changes are aimed
at lightening the burden of regulation
on employersfor instance, by letting
more of them negotiate terms directly
with employees. The new rules are valu-
able, especially for the small and midsize
companies that account for almost half of
Frances workforce. Theyll also make it
easier for multinationals to fire workers
at struggling French subsidiaries, while
encouraging them to hire more workers
when times are good.
Yet these changes, welcome as they
Its highly uncertain.
With Vivian Nereim and Alaa Shahine
and hes embarking on a more ambitious
second phase of reforms to help tackle
the unemployment rate, which has stood
at about 10 percent for years.
Europes cyclical recovery has
helped to get joblessness down a bit
lately, but around a quarter of Frances
young people are still looking for work.
Government spending isnt the issue. It
already spends generously on finding
jobs for the unemployed. The real obsta-
cles are housing and skills.
Affordable homes are in short supply,
especially in the cities where jobs are
more plentiful. And the system of subsi-
dized accommodation often ties workers
to particular placesin many cases with
nontransferable lifetime rights. France
also needs to build more low-cost housing
and supporting infrastructure in disad-
vantaged areas. At the moment, local

To read Jonathan Bernstein on
Trumps 2020 prospects and Megan
McArdle on the tax plans impact on
universities, go to Bloombergview.com
Skills should be the other priority.
The education system has failed to deal
effectively with low levels of literacy and
a lack of skills for the digital economy.
Vocational training has also been weak
plagued by a huge number of compet-
ing approaches and run by officials who
see little value in apprenticeships, which
have proved effective elsewhere.
Macron is making a start on broader
educational reformreducing class sizes
in poorer areas and giving universities
more autonomybut this wont yield
quick results. Reforming the appren-
ticeship program may be the best way to
improve the job prospects of the young.
The most successful apprenticeship
programs, such as those in Germany and
Switzerland, emphasize on-the-job train-
ing and encourage businesses to help
devise the programs. Frances system
relies more on classroom instruction.
This approach fails to reach the students
who most need help, and participation of
unskilled youngsters has been dropping.
Macron wants to simplify the system
and get employers more involved. This
might not be easy: It will mean reduc-
ing the role of Frances powerful educa-
tion ministry. Its essential nonetheless.
This second phase of reform, even
more than the first wave, will upset some
unions and a lot of civil servants accus-
tomed to getting their way. Macron needs
are, dont go far enough. Macron agrees, authorities often block new construction. to stick with it. 
 LOOK AHEAD CEO John Flannery details his Target on Nov. 15 will release its Scripps Networks shareholders
turnaround plan at General Electrics third-quarter earnings, a window on Nov. 17 vote on its $11.9 billion

1 investor conference into U.S. retail health sale to Discovery Communications

B The House Tax Cut:

Who Gets What
U Two-thirds of the $1.5 trillion in tax cuts proposed by House Republicans would
go to business, one-third to individuals. Hedge funds would keep a key tax break.

S
Homebuyers would lose one. But its just a bill. Even if the current plan passes the
House, it cant survive intact in the Senate, which has stricter rules against adding
to long-term decits. Heres a list of winners and losers. By Peter Coy

I
N
E
12
S Total tax reductions

S Personal $0.5t
All told, the top 1 percent of households would get the biggest percentage gain in after-tax income.

Tax brackets
Top rates for most would fall, costing
$1.1 trillion in revenue over 10 years.
The rate for the highest incomes
stays at 39.6 percentexcept, oddly,
its 45.6 percent for dollars earned
between $1 million and $1.2 million.
Standard deduction
The standard deduction roughly
doubles, to $24,000 in the case
of a married couple. But personal
exemptions of $4,050 per person
would go awaybad news for
big families.
Pass-throughs
Theres a new 25 percent rate for
people who report business income on
their personal returns. They currently
pay the personal rate on this so-called
pass-through business income. (Only
part of their business income gets the
new break.)
State and local
The bill eliminates the deduction
for state and local taxes, except for
$10,000 a year in property taxes. Bad
for high-tax blue states such as
New York, New Jersey, and California.
ILLUSTRATION BY KURT WOERPEL. DATA: REVENUE ESTIMATES FROM U.S. CONGRESS JOINT COMMITTEE ON TAXATION
Mortgages
Taxpayers would be able to deduct
interest on up to $500,000 in new
mortgage debt, vs. $1 million now. And
no more deductions for new home-
equity debt or loans on second homes.
Alternative
minimum tax
The AMT was designed to make sure
the rich dont use loopholes to avoid
taxes. Without it, Trump would have
paid $31 million less in 2005. It dies in
the new plan.

Higher education Adoption expenses Estate tax

The bill kills the deduction for inter-
November 13, 2017 est on student loans, repeals two
tuition tax credits, and ends the
Edited by tax-free status of employer tuition
James E. Ellis reimbursements.
The proposal to eliminate the tax
credit for adoption expenses saves
just $4 billion over a decade and has
raised a furor among the religious right.
The bill doubles, to $11 million, the size
of an estate that can be distributed to
heirs tax-free. After ve years, what
Republicans call the death tax would
go away entirely.

Businessweek.com
 BUSINESS Bloomberg Businessweek
Business
Most affected
Federal revenue change over Proposal
10 years, in billions of dollars
Cuts the corporate tax rate to
Corporations 20 percent from 35 percent and
eliminates the corporate alternative
 $1,500 minimum tax.
Companies can continue to shelter
Real estate prots from one deal by investing the
proceeds in another.
No change
Requires companies to pay a tax on
Cash-rich companies foreign prot of 12 percent if held
abroad as cash or 5 percent if its
 $223 been reinvested.
Ends taxation of companies foreign
Multinationals prot, but slaps a 20 percent tax on
payments to foreign affiliates to stop
 $61 them from shifting prots abroad.
Limits the use of past net operating
Money losers losses to reduce taxable prots.
 $156
The Joint Committee on Taxation
Homebuilders doesnt break out revenue gains
from reducing the mortgage interest
??? deduction (facing page).
Limits the deductibility of net interest
Car dealers expense to 30 percent of Ebitda. For
future borrowing only.
 $172
Eliminates the 50 percent tax credit
Drug companies for the cost of clinical trials of drugs
for rare diseases.
 $54
Allows companies, through 2022,
Equipment makers to deduct the full cost of equipment
from taxes in the year of purchase.
 $25
Puts a 1.4 percent tax on the
Colleges endowment income of wealthy
private colleges and universities
 $3 (page 27).
November 13, 2017
$1t
Effect
The bills most costly tax break brings the U.S. rate in
line with or lower than those of peer nations, reducing
the incentive for companies to move abroad.
Developers like the Trump Organization would benet
from the preservation of these 1031 exchanges.
Theyll also keep a tax break on carried interest.
Backers say companies that repatriate would
invest and hire more. Critics call it a giveaway to big
business that produces a one-shot revenue gain.
The government would lose $205 billion in taxes on
dividends from foreign units but gain $266 billion
from three measures to stop erosion of the tax base. 13
Protable companies sometimes acquire money-
losing ones and use the targets past losses to lower
their taxes. That would be harder under this bill.
Its not just buyers who are upset about the reduction
in mortgage interest deductibility. Builders are
lobbying to remove the provision from the House bill.
This provision is understandably unpopular with
businesses such as car dealerships that borrow to
buy inventory and have low margins.
Proponents say pharmaceutical companies make
plenty of money from so-called orphan drugs
without the added inducement of a tax credit.
The full tax break is upfront instead of spread over
the useful life of the equipment, giving customers a
big incentive to buy over the next ve years.
House Ways & Means committee tax writers say
parity requires that well-off schools get treated the
same as private foundations.
  BUSINESS
No Runway? No Problem
Indias SpiceJet wants to buy 100 seaplanes to bypass decrepit airstrips
Mihin Rosie regularly travels from her job in south-
ern India to her hometown in the far eastern state of
Arunachal Pradesh, bordering Tibet and Myanmar.
She loves catching up with relatives, but the journey
is a hard slog. The 29-year-old government employee
flies from Bengaluru (formerly known as Bangalore)
to Guwahati, takes a train to Ziro, then rides a bus or
car to her family in Hapolian 18-hour expedition.
Air service between Guwahati and Hapoli could save
her 15 hours, she says. But the rural towns dont have
modern airports, let alone scheduled service.
Now, SpiceJet Ltd., a fast-growing Indian budget
carrier, wants to open up the globes third-biggest
aviation market to help travelers such as Rosie. That
means targeting the 1 billion Indians97 percent of
the populationwhove never flown, either because
they cant afford it or because they dont live near a
functioning airport.
14
The airline is in talks with Japanese construction
and aviation company Setouchi Holdings Inc. to buy
about 100 amphibious Quest Kodiak planes that can
land anywhere, including on water, gravel, or even
an open field. The deal, valued at about $400 million,
would help SpiceJet capitalize on Prime Minister
Narendra Modis ambitious plan to connect the vast
nation by air without waiting for billions of dollars
in upgrades to colonial-era infrastructure.
Airports are in short supply in India, says
SpiceJet Chairman Ajay Singh. Lots of the growth
in India is happening in small markets, but those
small markets have little or no connectivity. So we
are looking for a solution where we can get flights to
places where no airports exist. While negotiations
continue, Setouchi plans to conduct a demonstra-
tion water landing in November, says Go Okazaki,
an executive managing director in the overseas busi-
ness division.
Indias airlines flew 100 million domestic passen-
gers last year, making it the No.3 market behind China
and the U.S. To handle growth, India will need at
least 2,100 new planes worth $290 billion in the next
20 years, Boeing Co. estimates. In 2015, Modi unveiled
a plan to bring aviation to most remote parts of the
nation. The government program subsidizes airfares
while offering free landing and aircraft parking rights
to airlines. Modi envisages domestic ticket sales quin-
tupling in the next decade, to half a billion transac-
tions annually.
Only about 75 of the 450 areas designated by
the government as an airport or airstrip currently
Bloomberg Businessweek November 13, 2017
handle commercial flights. That exacerbates the
stress on major airports in New Delhi, Mumbai, and
Bengaluru, where hardly any new landing slots are
available. Infrastructure at most of the dormant
airportsrunways, control towers, terminals, and
maintenance shedshas suffered decades of neglect,
making many of the sites unusable. Thats where
SpiceJets amphibious strategy comes in. The Kodiak
Domestic passenger
aircraft, which can seat either 10 or 14 people, is departures in 2016
capable of taking off or landing on a 300-meter strip
of water or land and has a range of 1,000 kilometers U.S. 719m
(621 miles)about the distance between Mumbai China 436
and Bengaluru. India 100
The sales agreement with Setouchi could be final- Japan 97
ized in as soon as three months, SpiceJet says. The Brazil 89
planes, made by the Japanese companys Sandpoint, Indonesia 80
Idaho-based Quest Aircraft Co. unit, could allow
SpiceJet to land at as many as 300 of Indias unused
airports, according to Okazaki. The basic logic for
this is that in India, we need last-mile connectivity,
Singh says. The amphibian plane opens up a lot of
areas, creates a lot of flexibility.
The Kodiak planes could also be deployed to
tourist sites such as the western lake town of Udaipur,
where the airport is far away from the main city,
Singh says. High-end tourists use amphibious aircraft
at exotic locations all over the world, says Amber
Dubey, a New Delhi-based partner and India head of
aerospace and defense at KPMG. Theres no reason
why it cant be successful in India.
Still, hurdles remain before SpiceJet can start
scheduling amphibious flights. The government
doesnt allow single-engine planes to fly commercially
because of safety concerns, and any airline trying to
operate amphibious aircraft will likely face opposition
from environmental groups and local communities,
as well as nongovernmental organizations concerned
about effects on fishermen, Dubey says.
 The Quest Kodiak
can hold as many as
14passengers and land
on water or in fields
COURTESY QUEST AIRCRAFT
 BUSINESS
Indias aviation regulators are studying whether
to allow such planes into the commercial fleet and
are reviewing a list of about 20 proposed landing
sites, a government official says, asking not to be
identified because of government rules. Decisions
are likely by yearend, the official says. Indias avi-
ation secretary, R.N. Choubey, didnt respond to a
request for comment.
A deal with Setouchi would cap a spending spree
by SpiceJet. In September, Bombardier Inc. said it had
concluded a firm purchase agreement with SpiceJet
for as many as 50 Q400 turboprop airliners, valued
at $1.7 billion. The airline also asked for competitive
bids that month from Boeing and Airbus SE for wide-
body aircraft, Singh told Bloomberg Television, indi-
cating that the company plans to offer discounted
long-distance flights to markets including Europe.
Once local communities support seaplane oper-
ations and the benefits become visible, we may see
seaplanes take off all over the vast Indian coastline,
Dubey says. Its a revolution waiting to happen.
Anurag Kotoky, with Iain Marlow, Kiyotaka
Matsuda, and Hannah Dormido
THE BOTTOM LINE About 1 billion Indians have never been on an
airplane. Discounter SpiceJet is trying to expand service beyond
the 75 airports in the nation that handle commercial flights.
The Dark Side of
Chinese Medicine
Officials are alarmed over a
$13 billion market in herbal injectables
Early on a snowy winter morning in January 2012,
Wu Xiaoliang, a 37-year-old farmer, stopped by
his local doctor for a headache remedy. At a small
clinic near his village outside Quzhou, in eastern
China, he received two injections made from tra-
ditional Chinese herbs. Hours later, villagers saw
him struggling to prop himself up on his moped as
he drove home. By noon, he was dead.
What killed Wu was later described in an autopsy
report as a drug allergy. But doctors couldnt pin-
point what he was allergic to, because the shots he
was given contained dozens, if not hundreds, of
different compounds extracted from two herbs.
For centuries, Chinese have bought plant and
animal parts from herbalist clinicseverything
from simple ginseng to slices of deer antlerand
boiled them into bitter soups to treat colds, strokes,
and even cancer. Now the traditional medicine
sector has modernized along with the rest of the
country, with domestic manufacturers turning
age-old recipes into fast-acting injectable drugs.
Bloomberg Businessweek November 13, 2017
Chinese medicine injections generated sales of For the
$13 billion last year, according to researcher
majority
Forward Industries Institute. And publicly held
traditional medicine companies worth billions of of these
dollars have thrived on the mainland. chemicals,
Yet the industrys ascent has also raised public- their
health concerns. More than a hundred different
properties and
injections based on traditional recipes are sold
in China, some without stringent human trials. their safety
Doctors often prescribe them in an array of to the human
untested combinations. Adverse reactions, from body are not
skin rashes to fatalities such as Wus, doubled last
properly
year, to about 133,000, from 2011, according to
government data. evaluated
Having struggled for decades to rein in the
sector, the government has recently begun pushing
for an overhaul of regulations, requiring manufac-
turers to demonstrate that their injections are both
effective and safe. But the process could take up
to a decade, given the complexity of these intra-
venous pharmaceuticals. For the majority of these
chemicals, their properties and their safety to the
human body are not properly evaluated, and some
of them are not even discovered yet, says Justin
Wu, associate dean at the department of medicine
and therapeutics at the Chinese University of Hong
Kong. If you just focus on this point, I dont think
traditional Chinese medicine injections can pass
15
through any regulatory authority outside China.
Drugmakers such as China Shineway
Pharmaceutical Group, Guangxi Wuzhou Zhongheng
Group, Tianjin Chase Sun Pharmaceutical, and
Livzon Pharmaceutical Group are among the biggest
public companies that generate substantial revenue
from traditional injectables. They maintain their
injections are safe and the problems arise from
incorrect use by doctors.
Chinese medicine is based on centuries of prac-
tical experience. It was traditionally taken orally,
giving the digestive system a chance to shield
patients from harmful chemicals. Injecting the
concoctions into the bloodstream can heighten
side effects. Because many injectables based on
Chinese medicine havent been evaluated in strict
scientific clinical trials, the reactions they cause in
the body arent fully known.
When Shineway first registered its traditional
medicine injections in the 1990s, no clinical studies
were needed, according to Chen Zhong, a vice pres-
ident for research and development and quality at
the company, which describes itself as the nations
largest maker of these types of shots. In recent
years, Shineway has invested in postmarket mon-
itoring to track allergic reactions and has found
its treatments highly safe, he says. But the drugs
approved decades ago are still sold and havent had
to undergo full-fledged testing in subsequent regu-
latory reforms, according to Chen, who adds that
only after 2008 were three stages of human trials
required to win approval for therapies.
  BUSINESS Bloomberg Businessweek November 13, 2017

Chen reckons that fewer than 10 percent of the

shots being sold by the traditional medicine indus-
try have undergone this kind of stringent review.
He compared the shortfall of scientific studies to
skipped classes: The lessons we missed before, we
can make up from now on, step by step.
In developed countries such as the U.S., drugs
must go through several stages of review, often
involving thousands of patients. China has insti-
tuted similar requirements for chemical medicines,
but its regulators in the early 2000s allowed thou-
sands of therapies based on questionable data to
be sold, leaving a legacy of poorly tested treat-
ments, the government has acknowledged. The
safety problem of traditional Chinese medicine
injections has always been rather serious, Forward
Industries analyst Ke Sufang said in an email.
In August, the head of the China Food and Drug
Administration, Bi Jingquan, declared that when
traditional therapies are prepared with contem-
porary methods, the results should be reported,
reviewed, and regulated as modern medicine.
They must also show greater benefits than risks in
clinical trials, he said. In May the agency pledged
to reassess the quality of all marketed injections
within the next decade, a follow-up to a 2009 review
of the industry that made little headway. The China
FDA didnt respond to interview requests.
16
Shineway, which started as a chemical drug-
maker, developed 11 traditional injections from
1993 through 1995 to boost growth. They were seen
as symbols of the modernization of the ancient
science. Clinical trials were needed for new drugs,
but the requirements were very simple, Chen says.
And Shineway was copying existing products, so
it didnt have to do even the easier tests under the have approval to sell. Shineways website says its  Many traditional-
remedy injectables
regulatory requirements of that time. version relieves internal heat, reduces phlegm, havent gone through
Now, Shineway boasts $160 million in sales and promotes the restoration of consciousness. strict clinical trials
annually from injectables and a market value The drugmaker touts it as a remedy for a wide
of about $770 million. Its annual report states array of conditions: fever, stroke-induced paral-
evidence-based medical research is also being ysis, acute hepatitis, pneumonia, and brain hem-
carried out. Its top foreign investors as of mid-2017 orrhage. Qingkailing logged the highest number
included funds run by London-based Schroders Plc of adverse reactions from 2011 to 2015, according
and Norways Skagen AS. Skagen and Schroders to the China FDA, which didnt list the manufac-
declined to comment. Its competitor Livzon, which turers of the batches involved. Shineways Chen
has a market value of $5.1 billion, says injectable says the product is safe and a monitoring program
versions of traditional therapies act faster and found just 118 adverse events in 30,840 cases when
help patients who cant take the drugs orally. The it was used over five years. The company says its
company says its main injectable, used by cancer the largest seller of the injection and borrowed the
patients, was registered in 1999 after three phases usage instructions directly from an ancient recipe.
of trials and was found safe with adverse reactions That, however, was intended for oral use.
in fewer than 0.2 percent of cases. Livzons interna- Even though it wasnt studied in late-stage
tional investors this year included funds managed trials, doctors prescribe Qingkailing for fevers,
by UBS Group AG, which declined to comment. colds, comas, and strokes based on their own
Chinese medicine has inspired lifesaving discov- experiences, Chen says. Physicians who dont
GIULIA MARCHI/BLOOMBERG

eries such as artemisinin for malaria, which won a
researcher from the country a Nobel Prize. Yet the
shift toward injectables has introduced more com-
plexity. Take a popular injection called Qingkailing,
which Shineway and several other companies
follow the labeling, he says, are a major cause of
the adverse reactions. Hui Li
THE BOTTOM LINE Widely used traditional Chinese medicines
were long taken orally. As many have begun being delivered by
injection in recent years, drug reactions have increased.
 LOOK AHEAD Razer, a maker of gaming
hardware, tries to raise as much as
$545 million in a Hong Kong IPO
Trying to Speak
Indias Language(s)
Amazon is racing Apple and Google to appeal
to consumers in local terms
About a year after bringing its hit Echo speakers
to foreign markets such as the U.K. and Germany,
Amazon.com Inc. is starting to ship the voice-
controlled hardware to India. In that time, teams
of linguists, speech scientists, developers, and
engineers have given the Echos virtual assistant,
Alexa, a decidedly local makeover.
This Alexa uses Hinglish, a blend of Hindi and
English, and speaks with an unmistakably Indian
accent. She knows Independence Day is Aug. 15,
not July 4, and wishes listeners Happy Diwali and
a prosperous New Year! She refers to the living room
as the drawing room and will add jeera (cumin),
haldi (turmeric), and atta (flour) to your shopping
ILLUSTRATION BY THOMAS COLLIGAN
list. And her cricket jokes are truly, authentically ter-
rible. We wanted our devices to talk, walk, and feel
Indian, says Parag Gupta, head of product manage-
ment for Amazon Devices in India. Alexa is not a vis-
iting American. She has a very Indian personality.
Like Amazon, Apple Inc. and Google are trying
to better appeal to Indias 1.3 billion people by
Cisco reports earnings. Investors Microsoft hosts its annual
will be looking for evidence that its developer conference,
recent string of deals will pay off Connect(); 2017, in New York
T
E
C
H
N
O
L 19
O
G
training Siri and Google Assistant in the countrys
heterogeneous languages and subcultures, making
their talking gadgets sound more natural in Indian
Y
homes. The job starts with Hinglish, which borrows
vocabulary and grammar rules from both of its com-
ponent languages and sometimes fuses words to
make a combined term whose meaning can seem
counterintuitive. Its a new challenge for artificial
intelligence: understanding a sentence that mixes
two languages, using contexts that cant be simply
deduced by synthesizing the systems understand-
ing of each tongue.
Until now, Silicon Valleys efforts to expand in
India have mostly remained in the cities, where
British English is more prevalent, but thats changing
as companies with a billion or more users hunt for
November 13, 2017
their next billion. Hinglish is particularly import-
ant as technology spreads to Indias hinterland, Edited by
where cheaper smartphones are making the inter- Jeff Muskus
and David Rocks
net much more accessible. Many of the users signing
up for social networks, e-commerce sites, and Businessweek.com
  TECHNOLOGY
mobile payment services are first-generation lit-
erates obsessed with Bollywood movies and cricket
matches. Silicon Valleys English isnt quite their lan-
guage; neither is the Queens.
Global companies realize that India has several
populations, each the size of entire countries in
Europe, that cant be cracked open with American
English, says Ravi Gururaj, a startup founder
in Bangalore who helped create the investment
group Harvard Angels India. They have to adapt
with Hinglish.
Amazons U.S. peers have similar efforts in the
field. A Hinglish-speaking Google Assistant began
powering Googles messaging app Allo last year,
around the time Apple began placing ads for native
Hindi and Indian English speakers to supplement Siri
with culturally appropriate dialog for India. The iOS
version loaded on Apples latest iPhones includes a
Hinglish setting for Siri; in August, Chief Executive
Officer Tim Cook told local newspaper Business Line
that Apple is thinking through every single way to
improve its virtual assistant for Indian consumers.
At Amazon, CEO Jeff Bezos has pledged to spend
$5 billion in India as he battles local e-commerce rival
Flipkart Online Services Pvt. Ltd. Part of that money
is covering thousands of hours of work by develop-
ers and scientists to improve Alexas understanding
of blended languages and idioms and to tweak her
20
accent, says Gupta, the Amazon Devices manager. The
Echo now incorporates Indian intonations, pauses,
even local humor. Alexa can answer Hinglish ques-
tions such as What is your good name? (meaning
your given name); play music from the Bollywood
blockbuster Dil Chahta Hai; and recount stories from
the ancient Panchatantra childrens fables such as The
Cunning Hare and the Witless Lion or The Cobra and
the Crows. We dont want local customers to have to
change their behavior to use our devices, Gupta says.
For the Indian market, Amazon has also cut
Echos price by 30 percent, and its worked with
Snapchat Has a
Child-Porn Problem
Last year a 13-year-old Illinois boy learned an old,
painful lesson about online relationships. After
swapping messages with someone who claimed to
be a 19-year-old woman in search of nude photos,
he eventually sent an indecent video of himself.
When he had second thoughts and tried to break
off contact, she threatened to post the video pub-
licly. He told his parents instead, and they called the
police. The culprit turned out to be a 24-year-old
Bloomberg Businessweek November 13, 2017
outside developers to add some 10,000 skills to  A Jeff Bezos photo op
at a Bangalore shopping
Alexasummoning cabs through Ola, recommend- mall, 2014
ing Deepika Padukone movies, finding the perfect
recipe for Hyderabadi biryani. By comparison,
the first Echos on sale in the U.S., in 2014, offered
just 13 skills.
Local knowledge is only growing more important.
A study published this spring by Google and accoun-
tant KPMG found that Indias internet population now
mostly speaks only Hindi or another local language
(234 million people, vs. 175 million English speakers
in the country), and a large chunk of that majority
would rather use voice controls than type. Google
and KPMG estimated that the Indian-language user
base will rise to 536 million in the next four years, and
that Indias Hindi-speaking users alone will overtake
its English-speaking internet users. In that market,
sounding like an American robot or chatbot can
never work, says Gururaj, the technology investor.
It will be lost in translation. Saritha Rai
THE BOTTOM LINE U.S. tech companies are trying to
differentiate themselves in India by localizing their virtual
assistants and other services more than they typically do.
Investigators complain
that the apps privacy makes
creeps tough to track
man in California who had used similar sextor-
tion tactics to exploit five other boys.
MANJUNATH KIRAN/AFP/GETTY IMAGES
While pedophiles have been taking advantage of
kids online for about as long as theres been an inter-
net, law enforcement officials say tactics employed
by the 24-year-old Californian are becoming more
common in at least one way: He found the 13-year-
old on Snapchat, which he told police had become
his preferred venue for obtaining child porn.
 TECHNOLOGY
Across the U.S. there are at least six similar
criminal cases against pedophiles who used
Snapchat to exploit teens for sexual gratification
or, in one case, to exploit her own children for
money. Although all social networks struggle to
varying degrees with this issue, the incidents have
led investigators to single out Snapchat as a danger
because, they say, the service is especially popular
among young people, and its disappearing messages
make evidence tougher to find.
Predators know that they can contact kids on
Snapchat, says Melissa Travis-Neal, an investigator
with the Oklahoma attorney generals office. They
know this is the popular app that kids are on. They
both use it to contact kids and they use it to send and
receive child pornography, and they think theyre
not going to be tracked. An investigator with the
Idaho attorney generals office, who asked not to be
named because of the sensitive nature of his work,
says his team cringes when they hear Snapchat is part
of a case, because of the added difficulty of catch-
ing suspects.
Snapchat parent Snap Inc. says it uses both staff-
ers and automated systems to protect childrenand
all 178 million usersfrom unwanted messages, but
it wouldnt provide details. The company, which
announced an overhaul of its platform on Nov. 7 after
reporting disappointing earnings, is just beginning
to shake Snapchats early image as a sexting app. It
says its simplifying its forms for reporting abuse.
We will continue to develop new tools and practices
to help keep the community safe, says spokesman
Noah Edwardsen. While such incidents are rare, he
says, theyre no less evil and abhorrent than when
they happen anywhere else, and the company works
closely with law enforcement to address them.
Social networks such as Facebook and Instagram
accounted for 54percent of the 1,631 such cases sur-
veyed last year by the University of New Hampshires
Crimes Against Children Research Center, but
more-private messaging apps such as Snapchat and
Kik were the next-likeliest avenue for contact, at
41percent. All of the digital technologies can be
abused by the bad guys, says Parry Aftab, a cyber-
security lawyer who advises companies and gov-
ernment agencies. Snapchat tends to be used by
single traffickers, small neighborhood groups of
child molesters. The creeps.
In April a tipster led law enforcement to a Snapchat
account distributing child porn. They traced the IP
address to the Guthrie, Okla., home of a 36-year-old
man, where they discovered hundreds of explicit
images of children on his electronic devices. His
case is pending. In another case, a 12-year-old New
Hampshire girl told investigators shed used Snapchat
and Kik to send numerous explicit photos of herself
and her 10-year-old sister to a 33-year-old man in Fort
Wayne, Ind., at his request.
In August sheriffs deputies in Maricopa County,
Ariz., charged a 28-year-old mother with multiple
Bloomberg Businessweek November 13, 2017
child sex crimes for allegedly using Snapchat to
broadcast herself molesting her 3-year-old son and
6-year-old daughter in exchange for a viewers money.
Other cases involving pedophiles using Snapchat
have been filed in Idaho, Missouri, and Wisconsin.
Facebook, while hardly free of child porn or solic-
itors, has stronger channels for reporting abuse,
says Aftab, the cybersecurity lawyer, who advised
the company on creating some of those protocols Predators
in 2005. Facebook Inc. says it uses artificial intelli- know that
gence software to flag worrisome material based on
words and phrases associated with child exploitation they can
and works with law enforcement and its own profes- contact kids
sional investigators to track down people searching on Snapchat
for such terms. they think
Photo and video evidence often disappears
from Snapchat before police can find it, says theyre not
Adam Wandt, a professor of public policy at the going to be
John Jay College of Criminal Justice in New York, tracked
who advises a program on digital forensics. Snap
says that given investigators requests, it will pre-
serve files sent to and from particular accounts.
Kik Interactive Inc., which offers users messag-
ing thats as anonymous as an old-school AOL
chat room, says it also assists law enforcement as
needed. Company spokesman Rod McLeod says Kik
is expanding its safety team and investing in soft-
ware that can help better identify and catalog trou-
21
bling material. Christie Smythe, with Sarah Frier
THE BOTTOM LINE While Facebook and Instagram remain the
likeliest venues for cases of sextortion, investigators have singled
out privacy-centric Snapchat as a potential problem.
Why Qualcomm Is Fighting the
Biggest Tech Takeover Ever
Broadcoms $105 billion offer isnt
enough to sway the 4G chips king
Qualcomm Inc., the leading maker of phone
chips, is preparing to fend off a $105billion take-
over attempt by rival chipmaker Broadcom Ltd.,
according to people familiar with Qualcomms
plans. The bid represents a 28percent premium
over Qualcomms value before Bloomberg broke
the news of the offer on Nov.2. It would also be the
biggest acquisition in Silicon Valley history, dwarf-
ing the $67billion DellInc. paid for EMC Corp.
two years ago.
Whats at Stake
The proposed transaction would merge two top-10
chipmakers to make $112billion Broadcom the
third-largest, behind Intel Corp. and Samsung
  TECHNOLOGY
Electronics Co. The combined business would
become the default provider of chips essential to
the billion-plus smartphones sold each year, with
tight control over the supply chain for Wi-Fi and
cellular modem chips. This complementary trans-
action will position the combined company as a
global communications leader, Hock Tan, presi-
dent and chief executive officer of Singapore-based
Broadcom, said in a Nov. 6 statement.
Why Qualcomm Is Resisting
Qualcomms leadership will tell shareholders to
reject Tans offer as too low, say people famil-
iar with the companys plans. The bid values
Qualcomm at about 21.2 times trailing 12-month
earnings before interest, tax, depreciation, and
amortization, compared with a median multiple
of 22.5 for similar deals in the industry, according
to data compiled by Bloomberg. Qualcomm said
in a Nov. 6 statement that it would assess the pro-
posal in order to pursue the course of action that
is in the best interests of Qualcomm shareholders.
The company has hired Goldman Sachs Group Inc.,
the worlds leading defender against hostile take-
overs, to advise it on the deal.
Potential Benets for Qualcomm
The smartphone chip kings hefty licensing fees,
22
including for patents covering the basics of how
mobile phones work, have come under threat as
governments around the world take notice of its
tight grip on the market. Qualcomm has had to
pay billion-dollar fines and lower its fees in China
and South Korea in the past couple years, and it
faces similar probes in Taiwan, Europe, and the
U.S., as well as a protracted legal battle with Apple
Inc. Broadcom may be able to offer a fresh face to
regulators and Apple.
Cons
An acquisition by Broadcom would pose regulatory
challenges. Antitrust concerns aside, Broadcoms
foreign origins could be a problem. It was known
as Avago Technologies Ltd. until 2016, when Tan
capped a three-year string of purchases by paying
$37 billion for the original Broadcom in San Jose.
While the San Jose office is technically co-headquar-
ters, the Committee on Foreign Investment in the
U.S. has closely scrutinized and delayed a different
Broadcom takeover effort.
The Trump Factor
Broadcom may be able to speed through federal scru-
tiny this time, following a Nov. 2 announcement
with Donald Trump in the Oval Officethat
Broadcom will officially move its headquarters to
the U.S. Ian King
THE BOTTOM LINE A unified Broadcom and Qualcomm would
dominate the design and manufacture of essential phone chips,
but Qualcomm has reason to be wary of the takeover offer.
Bloomberg Businessweek November 13, 2017
A Bike-Share
Invasion
From China
Dockless systems are challenging
older operatorsand ooding cities
Until last summer, bike-sharing in Munich was
an orderly undertaking: Two competing systems
offered a total of 2,400 two-wheelers that riders
could pick up at about 100 locations around the
city. Then in September, after a company called
OBike dropped 7,000 bright yellow rental cycles on
sidewalks and streets across town, residents began
complaining about bikes piling up outside subway
stations and clogging parking spots. Things began
spiraling out of control, says Florian Paul, the city
official who oversees cycling programs. It just over-
whelmed people.
Companies such as OBike, based in Singapore,
and Chinas Ofo and Mobike, are moving aggres-
sively into cities across Europe and the U.S. with
app-based services that let customers find the
nearest bike and leave it wherever they want
*SERIES B FUNDING IS UNKNOWN. DOESN'T INCLUDE INTERIM ROUNDS FOR WHICH DATA HAVEN'T BEEN DISCLOSED; DATA: CB INSIGHTS, CRUNCHBASE
after use. That contrasts with older programs
such as New York Citys Citibike and Pariss Vlib,
which require users to pick up and return bikes at
docking stations. Id rather grab and drop off my
bike wherever I want, says Victor-Jules Lefranc, a
21-year-old student in the French city of Lille, who
rents from GoBee.bike, a Hong Kong company that
launched a dockless service in Lille this fall.
While most U.S. and European bike-sharing is Ofo has raised at
overseen by local governments, the newcomers least $1.3 billion over
are strictly privateand extremely well-financed. five rounds of venture
funding
Ofo and Mobike have deployed 13 million cycles
worldwide after raising a total of $2.3 billion from $700m
backers such as Chinese internet giants Alibaba
Group Holding Ltd. and Tencent Holdings Ltd.
Docking station systems are very expensive to
expand, while we are immediate and flexible, 350
says Chris Martin, vice president for international
expansion at Mobike.
His company started operating in Washington,
D.C., in September and is also in the U.K., Italy, and 0
the Netherlands. Ofo has bikes in seven U.S. metro A B* C D E
areas and three in Britain and plans to start in the
Continent by yearend. GoBee operates in France
and Italy and says its in talks with more than 20
European cities. And OBike, which already rents
cycles in a half-dozen countries across Europe,
said on Nov. 9 that its adding 10 more.
  TECHNOLOGY
European cities are starting to push back as the
companies sometimes start renting bikes without
consulting local authorities. Amsterdam ordered
dockless sharing companies to remove their bikes
from the city by Nov. 3, saying it needs time to
develop regulations. Paris Mayor Anne Hidalgo has
summoned the operators to a Nov. 16 meeting to
explain how theyll handle abandoned and damaged
cycles. Bikes are piling up, says Catherine Baratti-
Elbaz, head of a panel that oversees Pariss bike- and
car-sharing programs. We need to be vigilant and
supervise these companies.
In China, where many of the newcomers got
their start, cities have struggled with a surplus of
shared bikes. The central Chinese city of Wuhan,
with a population slightly larger than New York
Citys, has some 700,000 shared bikes, vs.
Citibikes 10,000 and the 24,000 offered by Vlib
in Paris. As tangled piles of discarded bikes have
appeared on sidewalks and in parks and public
squares, authorities in Beijing, Shanghai, and at
least five other cities have barred operators from
adding to their fleets.
Established bike-share programs may struggle
to compete with upstarts that avoid the costs of
docking systems, says Alexander Dyskin, a trans-
portation consultant at Roland Berger GmbH
in Dsseldorf. Mobike, for example, charges
$1 for 30 minutes in Washington, while the
government-sanctioned Capital Bikeshare charges
$2 for 30 minutes or $8 for a 24-hour pass. Still,
cities must find a way to cooperate with dockless
AP IMAGES
Bloomberg Businessweek November 13, 2017
operators because they offer a more sophisticated
business model that increases convenience for
riders, Dyskin says.
Bluegogo, another Chinese startup, drew crit-
icism when it began renting last winter in San
Francisco without alerting local authorities and later
removed its bikes from the city. To have somebody
come in and dump bikes without pulling a permit
or talking to anybody was controversial, says Jason
Henderson, a San Francisco State University profes-
sor who studies urban mobility. But, he says, many
low-density neighborhoods arent served by Ford
GoBike, the city-authorized provider, making them
fertile territory for the new systems.
Dockless operators say theyre working to avoid
the problems experienced in China. Some charge
extra fees to renters who dont return bikes to
designated locations. Ofo plans to encourage U.S.
customers to do the right thing by giving dis-
counts to people who report abandoned bikes
and banning those who leave them in inappropri-
ate places, says Grace Lin, the companys U.S. vice
president. And after the outcry in Munich, OBike
says its been working with authorities to ensure
compliance with local regulations. The company
is trying to learn from its mistakes, says Paul, the
city bicycling chief. Were observing the situation
very carefully. Carol Matlack, Stefan Nicola, and
23
Ania Nussbaum, with Joost Akkermans and Yuan Gao
THE BOTTOM LINE Upstart bike-sharing systems have raised
billions in capital and deployed millions of cycles. But European
cities are starting to push back against the chaos.
 Mobike, Ofo, and
other bicycle-sharing
apps are replicating
the glut of bikes in
Shenzhen (pictured)
in European and
U.S. cities
 LOOK AHEAD Shareholders of 21st Century Fox
vote on a proposal to eliminate its
dual-class stock structure
Saudi Arabias best-known
investor has been swept up in an
anticorruption crackdown
When the Saudi king had dozens of powerful princes
and businessmen arrested on Nov. 4 in a crackdown
on corruption, none of the names grabbed global
attention quite like that of Prince Alwaleed bin Talal.
The worlds 61st-richest person, the royal is prac-
PIERO CRUCIATTI/ALAMY
ticed at grabbing attention. For decades hes been a
celebrity on Wall Street, known for his sizable stakes
in companies such as Citigroup, Apple, Twitter, and
Lyft and a tabloid-friendly embrace of excess. The
owner of a 282-foot superyacht he bought from
Salvator Mundi by Leonardo da The Singapore Exchange plans
Vinci will be auctioned at Christies. to bring back its lunchtime trading
Its estimated value is $100 million break, which it ended in 2011
3
F
I
N
A
N
C
E 25
Donald Trump, Alwaleed flies around in a retrofit-
ted Boeing 747 and has a zoo at his private palace.
The defining feature of Riyadhs skyline is Kingdom
Centre, a 992-foot-tall glass edifice he built in 2002
that serves as his headquarters. Its curved sky bridge
is visible across much of the city. The tower is 9 miles
away from where Alwaleed and others are rumored
to be detained at the Ritz-Carlton. (He owns the rival
Four Seasons across town.) Other detainees, such as
the former head of the countrys powerful National
Guard, are a more direct political threat to the purges
initiator, Crown Prince Mohammed bin Salman, but
November 13, 2017
Alwaleeds global influence is palpable. Hes been
charged with money laundering, bribery, and extor- Edited by
tion, according to a senior Saudi official. Pat Regnier and
Jillian Goodman
Alwaleeds $17 billion fortune is comparatively
self-made, as princely fortunes go. As he tells it, his Businessweek.com
  FINANCE
investment group, Kingdom Holding Co., which has
a market capitalization of $8 billion, was seeded in
1979 with a $30,000 gift from his father and a home-
equity loan. At first he kept to the typical dealings of
entrepreneurial princes: trading land and acting as
a key man for foreign companies seeking a foothold
in the kingdom. But around 1990, Alwaleed began
buying shares in Citigroup Inc. predecessor Citicorp,
whose balance sheet had taken a hit from soured real
estate loans. In February 1991, Chief Executive Officer
John Reed asked for a cash infusion, and Alwaleed
sunk another half-billion dollars into the bank, bring-
ing the size of his holdings to almost $800 million.
Over the next two decades, the prince scooped up
stakes in dozens of high-profile companies, includ-
ing Saks, News Corp., and Netscape. He developed a
taste for hotels, acquiring some of the worlds most
prestigious properties, from the Plaza in New York
to the George V in Paris. In 2007 he teamed up with
Bill Gatess private investment company to take the
Four Seasons hotel chain private in a $3.4 billion deal.
By the turn of the century, Alwaleed was often
referred to in the press as the Warren Buffett of
Arabia, a comparison he embraced. His stake in
Citigroup had soared more than 190 percent in the
10 years through 2001, but many of his investments
were duds. He invested $345 million in ill-fated Euro
Disney in 1994 and binged on dot-com companies
26
at the peak of the 2000 bubble. In 2005 he sold the
bulk of his stake in Apple Inc., telling Bloomberg at
the time that the benefits of the iPod and all the
good moves Steve Jobs has made have already been
put in the price.
Alwaleed upped his Citigroup stake in
November 2008, even after shares had plummeted
in the financial crisis. As of December 2016, he owned
about 4.7percent of Twitter Inc., according to regula-
tory filings by the social media company. He was an
important ally of Rupert Murdoch as a large holder
of 21st Century Fox Inc. voting shares, but Bloomberg
data show that he recently sold his stake.
Alwaleed hasnt neglected investing in his home
market, and its likely hes done well with those
investments. The Saudi stock exchanges benchmark
index has more than tripled since 1994, powered
by an oil boom that pushed prices above $100 a
barrel before waning in recent years. As of June 30,
Alwaleed valued his investments in the Middle East,
including equities, the media company Rotana
Group, and Saudi land, at almost $6.5 billion.
Demanding and conscious of appearances
including his standing on global rich listsAlwaleed
has had something of a mixed reputation outside
the kingdom, says Marcus Chenevix, an analyst at
investment research firm TS Lombard in London.
International investors see him as a man who talks
a very big game and sometimes performed, but
often didnt, he says. Still, Alwaleed has been for
much of the world an unofficial ambassador of Saudi
Arabia and its spending power. Hes been modern
Bloomberg Businessweek November 13, 2017
and outward-looking, if sometimes ostentatious, in a
country better known for secrecy and severe conser-
vatism. Alwaleed has pushed for the right of Saudi
women to drive and work. He hired the countrys
first female pilot to fly his private jets, and most of
his staff are women.
Such views make it all the more unusual that he
was targeted in the crackdown, says Jane Kinninmont,
an analyst at Chatham House, a London-based think
tank. The 32-year-old Prince Mohammed, the heir
to the throne whos seen as wielding most of the
power in the kingdom, has made liberalizing Saudi
Arabias stringent religious strictures a cornerstone of
his agenda. In public, Alwaleed has only praised the
crown prince. Still, there might be some mistrust of
someone who has a track record of being outspoken.
Prince Mohammed could also be wary of Alwaleeds
branch of the royal family. The billionaires father,
known as the red prince, was exiled in the 1960s
for criticizing the royal family.
Other billionaires
The decision to arrest the countrys most promi- detained in the sweep
nent global investor, a partner of Gates and a friend
to Murdoch, seems risky at a moment when the
crown prince has been courting foreign capital. The
kingdom is trying to sell a stake in its state-owned
oil company in what could be the largest-ever initial
public offering.
The shares of Alwaleeds Kingdom Holding fell
21percent in the four days following the first reports
of the crackdown. But gauging the financial fallout
from the arrest is complicated by the opacity of
his holdings. Kingdom Holdings free float is only Mohammed Al Amoudi
5 percent, which makes it more difficult for inves- Wealth $9.9b
tors to trade shares. The company also doesnt Controls an empire
with investments in
specify the exact size of its public stakes, and many
Africa, Saudi Arabia,
of Alwaleeds interests fall below the disclosure and Europe, including
threshold and dont have to be reported in filings. Swedens largest oil
refiner.
The billionaire often invests personally in equities,
alongside Kingdom Holding. Hes declined repeated
requests for details on his public and private assets.
In a Nov. 6 statement, Kingdoms CEO said the
company enjoys a solid financial position.
The biggest unanswered question is whether
Alwaleed is a victim of a brash attempt by Prince
Mohammed to consolidate power or just another
corrupt royal at long last brought to heel. The gover-
nor of the Saudi Arabian Monetary Authority said on
Nov. 7 that they froze personal bank accounts of indi-
viduals in the crackdown but not those of their com- Saleh Kamel
panies. If that were to change, it would indicate the Wealth $3.7b
crown prince was angling to take down a rival, says His holding company
owns businesses in
Kinninmont. The government is very much trying sectors including health
to send a message that these arrests are about clean- care and snack food.
ing up to make a better environment for investing, Founded Al Baraka
Banking Group.
she says. If they were to seize Alwaleeds stakes in
major international companies, that would really
muddy the waters. Devon Pendleton
THE BOTTOM LINE Alwaleeds large investments have included
Citigroup, Apple, and Twitter. Now hes been arrested in a still-
mysterious political drama.
  FINANCE
Cant
Touch
This
Many top universities have huge wealth that isnt taxed. For now
A threat that U.S. private colleges and universities
have dreaded for years just got closer to reality:
Republicans in Congress want to tax rich endow-
ments. The sweeping 400-page tax bill unveiled on
Nov. 2 includes a 1.4 percent levy on private schools
investment income. Its one of many ways the bill
is trying to raise money to partially pay for slashing
corporate rates and other cuts. The tax could apply
to private institutions with endowments of more
than $250,000 per full-time student, according to
a later amendment to the bill. That group includes
about 70 colleges and universities.
Regardless of the final shape of the taxor even
whether it passesits clear that Washington has
its eyes on the pile of money that colleges have
amassed. About 800 endowments together hold
more than $500 billion, led by Harvard with
$37.1 billion. Thanks to a strong market, many
schools are richer than ever, and they dont pay
taxes on their investment earnings. Their funds
have become major players in the financial markets,
with investments in hedge funds, venture capital,
AL ALMOUDI: HANS BERGGREN; KAMEL: AMR ABDALLAH DALSH/REUTERS; PRINCETON: ALAMY
and real estate.
This isnt the first time Congress has looked at
endowments. The focus has sometimes been less on
taxing schools than on pushing them to use more
of their money to help offset ever-rising tuitions.
After a U.S. Senate Committee on Finance hearing
in 2007, Chuck Grassley, an Iowa Republican, merely
mentioned the idea of requiring a 5 percent annual
spending rate for colleges. That whiff of a threat
seemed to spur changes. Within months, about three
dozen colleges said they would spend more on finan-
cial aid. Schools including Harvard, the University
of Pennsylvania, and Pomona College adopted mea-
sures to replace loans with grants, which dont
need to be repaid. Still, the wealth at some schools
remains a tempting target for lawmakers. If we
look at major universities, they havent done a very
good job of explaining why theyve accumulated this
Bloomberg Businessweek November 13, 2017
money, says Henry Hansmann, a Yale Law School  Princeton
professor and economist.
The current proposal would tax large endow-
ments regardless of an institutions spending rate.
It has its roots in a 2014 plan from Dave Camp, the
former chairman of the House Ways and Means
Committee. Camp, a Republican, says he wanted to
put endowments on the same footing as foundations.
27
Depending on how much they spend annually on
grants, charitable activities, or other qualifying pur-
poses, foundations pay either 1 percent or 2 percent
in tax. Under the new bill, both foundations and
endowments would pay 1.4 percent. When you
have similar activities, why should they be treated
differently under the tax code? asks Camp, now a
senior policy adviser with PricewaterhouseCoopers
LLPs tax practice.
Colleges say this tax proposal would only leave
them with less money to spend. They generally try
to spend from the returns from their endowments, One could
and the tax would take a bite out of that. If we have make a long
to send millions of dollars to the federal Treasury, list of how they
thats millions of dollars we cant spend on financial
could spend
aid, academic programs, or research, says Robert
Durkee, vice president of Princeton, which has an it in the public
endowment of $23.8 billionor almost $3 million interest
per student. Durkee says Princeton plans to spend
more of its endowment to fund an expansion of the
student body and that it provides aid to 60 percent
of its undergrads. The endowment funds more than
half the schools operating budget.
Berea College in Kentucky is unusual for having
a relatively large endowment while enrolling only
low-income students who pay no tuition. Jeff
Amburgey, its vice president for finance, says the
tax could cost the school about $1.9 million annually
and mean enrolling 48 fewer students each year. It
would have a negative impact on what we are trying
to do here at Berea, he says.
Mark Schneider, a vice president at the nonprofit
  FINANCE
group American Institutes for Research, has pro-
posed that money raised from taxing endowment
could be redistributed to community colleges or
regional state schools. This bill doesnt do that, while
it does cut taxes paid largely by high earners. Still,
Schneider is happy to see the idea on the table. Its
about time, he says.
Colleges should be warned that they need to
justify their wealth, says Leon Botstein, president
The Funds That Are Stuffed With Cash
As stock markets rise, some value managers prefer not to buy
28
Charles de Vaulx knows keeping 40 percent of his
fund in cash is hurting results. But as far as hes con-
cerned, there arent many stocks to buy. Being fully
invested has zero appeal right now because stocks
are so expensive, says de Vaulx, whose $8.3 billion
IVA Worldwide Fund trails the MSCI All-Country
World Index by a big margin this year. We are
willing to underperform while the party goes on.
He has company. Several prominent value
investorsincluding the managers of the First Eagle
Global, AMG Yacktman Focused, FPA Crescent,
and Longleaf Partners mutual fundshave been
keeping 20 percent to 40 percent of assets in cash
for months, in some cases for more than a year. The
average equity fund holds 3.2 percent of assets in
cash, according to Morningstar Inc. The hoarders
are convinced that at some point equities will slump
and theyll have a chance to scoop up bargains.
With global markets having returned more than
200percent since the financial crisis low in2009,
prices seem inflated to them, and not just in the
U.S. Valuations are high across the world, says
Matthew McLennan, head of value investing at First
Eagle Investment Management and co-manager of
the Global fund.
That hasnt stopped the markets from continuing
to climb. The S&P 500 index and the MSCI All-Country
World Index are both up more than 15percent this
year. The cash-heavy funds, which include some
top performers in previous years, are trailing their
benchmarks in 2017. And some investors are losing
patience with managers who stay on the sidelines.
Bloomberg Businessweek November 13, 2017
of Bard College, which has an endowment of about
$61,000 per student. One could make a long list of
how they could spend it in the public interestgiving
more scholarships, the quality of instruction, and to
help, for example, bridge the connection between
high school and college, he says. Janet Lorin
THE BOTTOM LINE The Republican tax proposal seeks to
impose a 1.4 percent levy on the investment income of college
endowments, some of which are worth tens of billions of dollars.
No one wants to be a high-cash manager, says Jayme
Wiggins of the Intrepid Endurance Fund. It can be
very painful from a business perspective. Wigginss
is an extreme case: His fund is 79 percent in cash
because he thinks small companieshis specialty
have never been more expensive. The funds assets
have shrunk more than 75 percent from their peak in
early 2012 as investors have taken money out.
De Vaulx has also been hit by redemptions, Share of IVA
Worldwide Funds
though he says theyve diminished this year. People assets that were in
who know us know the drill, he says. It is not as if cash as of Sept. 30
we are doing something we have never done. Both
de Vaulx and co-manager Charles de Lardemelle 40%
worked at First Eagle with Jean-Marie Eveillard, an
investor known for his willingness to lean against
a trend. Asked during the dot-com boom why he
wasnt joining the stampede into technology stocks,
Eveillard said, I would rather lose half my share-
holders than lose half my shareholders money.
Lawrence Glazer, who helps oversee $2.5billion at
Mayflower Advisors in Boston, says hes familiar with
de Vaulxs style and long-term record and remains
comfortable sticking with him. He expects to earn
respectable returns during rallies and outperform
when markets turn down. The problem is, markets
havent turned down in a long time, he says.
ILLUSTRATION BY SAMMY STEIN
Some investors and advisers dont think stock
fund managers should hold so much cash, even
when markets look expensive. Michael Rosen,
who works with institutional clients at Angeles
Investment Advisors in Santa Monica, Calif., says
most investors prefer to make their own asset
  FINANCE
allocation choicesdeciding for themselves
whether stocks are worth the riskand dont want
to pay equity-fund-level management fees on idle
money. (Some funds with high cash stakes charge
1percent of assets or more per year.) Rosen also con-
siders the strategy of going to cash a form of market
timing. Very few people in history have been able
to do that effectively or consistently, he says.
First Eagles McClennan, echoing other cash-
heavy managers, says he isnt trying to time the
market, just looking for good investments and attrac-
tive prices. The managers of Longleaf Partners,
which has 29percent of its $3.3billion in cash,
have compiled lists of stocks theyre willing to buy if
prices fall enough. In a third-quarter letter to inves-
tors, the firm said it identified 15 companies almost
cheap enough. When a funds cash stake gets high,
the pressure to buy can be strong, the team wrote,
but it is generally the time to maintain the most
discipline because the opportunities are likely to
get better. Charles Stein
THE BOTTOM LINE High equity valuations around the world
have some value managers waiting for a chance to buy. Not all
their clients are so patient.
30
The Small-Time
Market for Mini-IPOs
These itty-bitty stock offerings have
a short, rocky history
Two executives were convicted of filing false tax
returns, while a third was accused of selling unregis-
tered stock. But tiny companies with ties to the three
of them have now gone public, part of what may be
the zaniest little market on Wall Street: mini-initial
public offerings.
The companiesseven so fararent exactly blue
chips. One made its debut on the New York Stock
Exchange with a value of just $43 millionless than
3 percent of the market cap of a typical NYSE-listed
companymostly from individual investors. A couple
of the securities firms bringing the companies to
market have checkered records. These offerings
are extremely difficult to police, says William Galvin,
Massachusetts top securities regulator. Not that the
IPOs are illegaltheyre just seriously risky invest-
ments. All have lost value since going public; the
average loss was about 40 percent.
Mini-IPOs grew out of the Jumpstart Our Business
Startups Act, a 2012 law that was supposed to elim-
inate red tape and spur the economy. Under the
laws Regulation A+ rules, adopted in 2015, very small
companies can sell shares with limited disclosure
Bloomberg Businessweek November 13, 2017
requirements and seek money from shallow-pocketed
investors even if the securities dont trade on a
major exchange. The Trump administration wants
to increase the maximum size of these offerings to
$75 million from $50 million. The U.S. Securities and
Exchange Commission declined to comment.
Yet theres little evidence the JOBS Act has encour-
aged many IPOs. Companies can raise plenty of
money from private equity and venture capital rather These
than go public, as seen in the drop in stock offer- offerings are
ings since the mid-1990s. Regulatory hurdles play a
much smaller role in discouraging IPOs, says Robert
extremely
Bartlett, a law professor at the University of California difficult to
at Berkeley. police
Fat Brands Inc., owner of restaurant chains includ-
ing Fatburger and Ponderosa Steakhouses, went
public last month on the Nasdaq Stock Market with a
$24 million offering. Shares have dropped 27 percent
since listing. We believe investors responded very
favorably to our IPO, and we dont expect the first
two weeks of trading to be indicative of how we will
be measured, the company says.
Chief Executive Officer and founder Andy
Wiederhorn, a former Wall Street dealmaker, served
a 14-month sentence in 2004 and 2005 for filing a false
tax return at a previous business, Fat Brands said in
an SEC filing in September. My settlement with the
government and the related conviction trace back
to a business restructuring that occurred in 1998,
almost 20 years ago, Wiederhorn said in a statement
to Bloomberg. The SEC and Nasdaq had no objec-
tion to my role as CEO and I believe investors take
comfort in that.
ShiftPixy Inc., an Irvine, Calif.-based company
with an app that connects businesses with part-time
workers, promoted its $12 million offering on Twitter,
Instagram, Facebook, and Cheddar, a livestreaming
financial network aimed at millennials.
Cary Hartline, 22, bought stock in ShiftPixy after
reading about it on an online investor board. Only
after shares fell 8 percent for no apparent reason did
the Dallas social media manager start researching the
company: He found that co-founder Stephen Holmes
received a 15-month prison sentence in 2003 after a
business hed run filed false tax returns. And in 2013,
Alabama barred Scott Absher, now ShiftPixys CEO,
from selling securities on civil claims that he pitched
unregistered investments that failed to produce
promised earnings. He denied the allegations but
didnt provide a formal response, an SEC filing shows.
ShiftPixy and its senior management team have
fully adopted and embraced the SECs highest-level
of disclosure requirements, said in-house counsel
Mark Absher, the CEOs brother, in an emailed state-
ment. Nevertheless, I was completely blindsided,
says Hartline. I cant believe these companies exist.
Matt Robinson and Benjamin Bain
THE BOTTOM LINE Rules designed to encourage IPOs have
resulted in a handful of small offerings from some operators with
shady pasts and very little else.
 LOOK AHEAD Japan releases preliminary Round ve of Nafta negotiations Number crunchers convene in
third-quarter GDP gures gets under way on Nov. 15 in Washington for an IMF forum on
Mexico City measuring the digital economy

Disinterest at Home
E
C
O Nu
N
O
M No Chinese Tourists
32
I
C 2018 Winter
S The Winter Games in South Korea
may fall victim to geopolitical tensions
and corporate scandals
At the 2014 Winter Olympics in Russia, foreign jour-
nalists delighted in documenting Sochis state of
unreadiness, posting pictures on social media of
missing manhole covers, dirty tap water, and piles
of construction debris. South Koreas Pyeongchang
wont be the butt of those kinds of jokes. About
four months before the Feb. 9 start of the Winter
Olympics, a reporter watched as construction
workers put the final touches on the 35,000-seat
outdoor stadium where the opening and closing
ceremonies will be staged.
Still, it will take more than world-class engineer-
ing to pull off a successful games. Organizers are
about 70 percent short of their 1.1 million ticket sales
November 13, 2017
target. One factor that may be affecting attendance:
Edited by Most of the sports venues lie less than 60 miles from
Cristina Lindblad and the border with North Korea, which has ramped up
David Rocks
rocket launches and nuclear tests in the past year.
Businessweek.com All in, the Olympics will cost South Korea about
14 trillion won ($12.6 billion), including spending on
roads, railways, and stadiums. Thats more than the
8 trillion won to 9 trillion won Seoul projected in
2011 when Pyeongchang beat Munich and Frances
Annecy in the competition to become the host city,
but nowhere near the $51 billion spent on the Sochi
Gamesthe most expensive in history.
Despite the lower price tag, South Korea still has
a lot riding on the 2018 Olympics. Transforming
Pyeongchang into a winter tourism destination
and raising the nations profile in the world could
translate into almost $40 billion in economic ben-
efits over 10 years, according to projections issued
by Hyundai Research Institute, a local think tank,
in 2011. As part of the preparations, the government
has poured $10 billion into infrastructure upgrades,
including extending a high-speed rail network into
the heart of the ski areas. The hope is that this will
bring an influx of Chinese skiers, who have flocked
to Japanese resorts in recent years. Seoul is less than
two hours flight time from Shanghai and Beijing, and
a soon-to-be-completed train line will cut the travel
time between Incheon International Airport and
Pyeongchangs slopes in half, to about two hours.
  ECONOMICS
clear Threat
Olympics
Unfortunately for the games organizers, geo-
politics may keep foreign sports fans away. The
number of international visitors to the country is
down 24 percent this year. Kim Jong Uns nuclear
ambitionsand attempts by South Korea and its
allies to contain themare mostly to blame. Angered
by Seouls deployment of a U.S. missile shield to
guard against an attack from the North, Beijing
Kims most important allybanned package tours
to South Korea earlier this year. Almost half of all
arrivals in 2016 came from China. Hyundai Research
has acknowledged that its earlier projections on the
economic impact of the games dont reflect current
tourism trends. South Korean President Moon
Jae-in and Chinese President Xi Jinping plan to
meet on the sidelines of the Asia-Pacific Economic
Cooperation summit in Vietnam on Nov. 10-11 to try
to patch up their differences.
Drawing an overseas crowd to the 2018 Games
AHN YOUNG-JOON/AP PHOTO
may prove easier than getting South Koreans to
show up. Organizers have buyers for 56 percent
of the 320,000 tickets reserved for international
spectators but only 22 percent of the 750,000 tickets
set aside for domestic fans have been sold. Tickets
Bloomberg Businessweek November 13, 2017
for cross-country skiing, a sport that lacks a strong
following in South Korea, can be had for as little
as $18, but figure skating, which is hugely popular,
can command prices of around $500. Premium
tickets for the opening ceremony can fetch as much
as $1,350. The tickets are too expensive for ordi-
nary people like me, says Gu In-mo, who works at
a motel near the stadium. Ill just watch on TV.
The secretary general for the Pyeongchang orga- Most venues lie within
60 miles of the border
nizing committee, Yeo Hyung-koo, said in an Oct. 12 with North Korea
interview that ticket sales were running below
expectations, but that the history from past games
is that the pace picks up in the final three months.
South Korea has a good record of protecting ath-
letes and spectators at previous events, but North North
Korea
Koreas past actions give cause for worry. The year
before the 1988 Summer Olympics in Seoul, agents
from Pyongyang bombed a Korean Air flight, killing
all 115 passengers and crew. In 2002, when South
Korea and Japan co-hosted the soccer World Cup, South
Korea
North Korean patrol boats crossed into disputed
waters, sparking a naval clash that sunk one South
Korean ship and claimed the lives of six sailors.
With its growing technical sophistication, North
Korea doesnt have to rely on its military to disrupt
next years games. This time it could easily launch a
Demilitarized zone
cyberattack, which is cheap to execute and difficult
to trace back to a perpetrator, says Mason Richey, Seoul 33
associate professor of international politics at Hankuk Olympic
University of Foreign Studies in Seoul. The organiz- venues
ers of the 2018 Winter Olympics declined to reveal
the size of the security force that will be deployed.
The U.K. is reportedly drawing up evacuation
plans for its team in case tensions escalate.
Other nations, including France and Germany,
have expressed reservations about sending their
athletes. Pyeongchang organizers say no team has
withdrawn, and President Moon has urged North
Korea to send competitors.
South Koreans, lacking champions with the
star appeal of figure skater Kim Yunawho won
gold in Vancouver in 2010 and silver in Sochihave Including roads,
railways, and stadiums,
instead been captivated by corruption scandals. the Olympics will cost
The biggest of them led to the ouster of the presi- South Korea about
dent from office and landed her and the heir to the
Samsung empirea corporate partner of the world- $12.6b
wide Olympic movement and next years gamesin
jail. Theres a broad consensus that unless theres
a big change in the runup to the games, theyll be
seen as a failure, no matter how you look at it, says
Kim Yu-kyoum, a professor of sports management
at Seoul National University. The biggest problem
with Pyeongchang is that it doesnt have a message
to send to the publicboth at home and overseas
on why these games are meaningful and what Korea
can achieve through the event. Jiyeun Lee, with
Kanga Kong and Hannah Dormido
THE BOTTOM LINE Organizers of the 2018 Winter Olympics
in South Korea, which start on Feb. 9, are only about 30 percent
toward their goal of selling 1.1 million tickets.
  ECONOMICS
Reading
Jerome Powell
Trumps Fed chair nominee isnt an
economistand hes very, very rich
Ever since Donald Trump officially nominated
Jerome Powell on Nov. 2 to be chairman of the
Federal Reserve Board, Wall Streeters and others
have been scouring his bio for clues on what type of
U.S. central banker hell be. Heres what we know:
Powell has a personality that veers toward consen-
sus building. The Wall Street Journal has dubbed
him Mr. Ordinary. Hes not an economist, though
hes been involved in financial markets as a banker,
investor, and policymaker for a while. And hes
very, very rich.
Powells understated persona has led some to say
there are few clues to how hell act as Fed chief. But
theres more to go on than people have suggested.
The first thing is being Mr. Ordinary. Personality
matters, says Laurence Ball, an economist at Johns
34
Hopkins University whos written papers on the char-
acter traitsand effectivenessof Ben Bernanke and
other policymakers. Ball says Bernankes shyness,
for instance, prevented him from seeing the financial
crisis coming and acting more quickly when it did.
Similarly, Powells centrist tendency is a concern.
Ball says the Fed is an institution that by its nature
pulls people to the center. Forcefulness matters,
he says. The Fed could use more mavericks.
Powell might also not be as much of a dove on
interest rates as Trump and others think. In June he
spoke about the continued need to increase them.
Shortly after he joined the Fed, he pressed Bernanke
to limit and set an end date to quantitative easing
the bond-buying program meant to help stimulate the
economy. Hes since been a supporter of the program.
Whats more, historically, Fed chairs who were
bankers or chief executive officers have tended to
keep rates higher than those who were economists.
William McChesney Martin Jr., a banker who headed
the Fed from 1951 to 1970 and whos seen as one of
the more successful modern chairs, was famously
hawkish. He likened the Fed to a host who pulls away
the punch bowl just as the partys getting started.
Net worth
Alan Ben
Greenspan Bernanke
$4.5m $2.7m
1998 2005
Paul Volcker
$143k
1982
Bloomberg Businessweek November 13, 2017
Others see Powells lack of an economics back-
ground as a good thingif it means he will com-
municate in plain language. Fed statements have
gotten longer and more complicated over the past
two decades. A 2014 study from the St. Louis Fed
found that earlier U.S. central bank monthly state-
ments required the equivalent of only a ninth-grade
reading level. Now you might need as much as three
years of post-college education to understand them.
The Fed definitely has a communication problem,
says Vincent Reinhart, chief economist at Standish
Mellon Asset Management Co. and a former top
economist at the Fed. A non-economist who can
explain the banks policy to Washington and the
rest of the world would be a positive.
Still, Reinhart says, theres probably a reason we
havent had a Fed chair who wasnt an economist
in a while. The job these days is to signal the future
path of interest rates. Thats something Janet Yellen
did very well. Predicting rates is hard to do, and
models that economists use are increasingly tech-
nical. The risk is that a non-economist becomes
only a user of the recommendations the Feds staff
economists provide, Reinhart says. A Greenspan
or Bernanke or Yellen had the ability to push back.
Powell
Lastly, Powell, who spent time as a top banker
on Wall Street and a dealmaker at private equity
firm Carlyle Group LP, is probably far richer than
many realize. Most reports have pegged his wealth
at as much as $55 million. But Powells most recent
disclosure says he received as much as $1 million in
income from the Vanguard Total Stock Market index
fund in the past year. Its dividend yield has been
1.7 percent over the past 12 months. Based on the
dividend, his stake in the fund alone could be worth
$58.5 million, pushing his total potential wealth to
more than $112 million. (Powell also sold a portion
of his stake in 2017, but his disclosure doesnt say
how much income was generated by that sale.) He
declined to comment for this article.
Fed policy arguably could be shaded because one
of the most important people in the economy is also
among the top 0.1 percentalmost 800 times richer,
even after adjusting for inflation, than Paul Volcker
was when he headed the central bank. Perspective
matters. For example, when the Fed under Bernanke
lowered interest rates to near zero and kept them
there during the financial crisis, critics contended
he was hurting savers. But the only savers hurt were
those who were relatively rich and had most of their
money invested in relatively short-term bonds or
certificates of deposit. Any savers with a portion
COURTESY FEDERAL RESERVE
Janet Yellen Jerome Powell
$14.6m $112.3m (estimate)
2014 2017
 ECONOMICS
of their wealth in the stock market ended up doing
fine in the Bernanke era. Bernanke shrugged off the
criticism. Would someone worth 40 times as much
do the same if a similar crisis occurred?
The wealth gap is one of the biggest issues facing
the U.S. The Fed can play a role in trying to narrow
that difference, or at least limiting its growth. One
way is by regulating Wall Street, from limiting com-
pensation to vetting products offered to Main Street
investors. But Powell is expected to loosen regula-
tions. When the leadership of the Fed cant relate
to what its like to lose your job and then not be able
to pay your rent, thats a problem, says Dean Baker,
co-director of the liberal Center for Economic and
Policy Research. Stephen Gandel, Bloomberg Gadfly
THE BOTTOM LINE The little thats known about Powell
provides tantalizing clues to what he might do as the next
Fed chair.
Coming Soon to Paris:
Lawsuits en Anglais
After Brexit, European cities aim to
steal corporate litigation from London
For decades, London has been the place to go for big
commercial disputes in Europe. Even when compa-
nies based outside Britain sue one another, the cases
are often argued in London, such as one brought by
UBS AG against Leipzigs water utility and another
between Libyas sovereign wealth fund and French
bank Socit Gnrale SA. In anticipation of Britains
exit from the European Union, cities on the Continent
are stepping up efforts to lure those cases to their
own courtsby copying some U.K. legal practices
and even offering proceedings in English. At least
one European country has to be able to process inter-
national commercial litigation, says Guy Canivet, a
former chief justice of the French Supreme Court
who wrote a report on Pariss jurisdiction post-Brexit.
Its a matter of sovereignty.
When signing deals, companies typically agree on
the jurisdiction that will hear potential disputes, and
London became a leading destination because of its
role as the capital of global finance and because its
rulings are valid across the EUan edge that could
evaporate once Britain leaves the bloc. London is
stepping into the shadows, says Roman Poseck, pres-
ident of the appeals court in Frankfurt, where offi-
cials plan to have an English-language panel in place
by January. Frankfurt wants a piece of the pie.
The Europeans say their courts are faster and
cheaper than Britains, in part because they allow
many proceedings to be conducted via written
Bloomberg Businessweek November 13, 2017
briefs. In London, virtually all arguments must be
made orally. And after Britain leaves the bloc, the
Europeans say theyll offer speedier decisions in cases
that require fast actionsay, authorizing the seizure
of assets that might be spirited out of the country.
While London rulings could still stand across the
EU, theyll likely need to be certified by a national
court of an EU member, which will inevitably slow
things down. Companies once chose London as a
matter of reflex, says Peter Bert, a lawyer at Taylor
Wessing in Frankfurt whos also admitted as a solici-
tor in England. We dont see that anymore. Theres
much more reflection before making a choice.
Frankfurt says its considering features inspired
by U.K. tribunals, such as more extensive court
transcripts and a stronger role for attorneys in the
pacing of proceedings. Amsterdam was already
working on a special chamber for international dis-
putes before Britain said it would quit the union.
And Brussels and Paris are promoting courtrooms
staffed by business-savvy former bankers and engi-
neers. In England, its the best lawyers who become
judges, says Jean Messinesi, president of the Paris
Commercial Court. In France, its top entrepre-
neurs and senior managers at companies.
The Continents fight isnt only with London,
since many cases heard in the U.K. involve non-
European companies. Those might well stay in
35
London or move to other global litigation hubs such
as New York, Singapore, or Dubai. Dublin, which
of course already offers proceedings in English, is
another potential rival.
The Law Society, which represents solicitors The
in England and Wales, is urging the British gov-
international
ernment to negotiate a Brexit deal that would
protect the status of U.K. courts and has launched language
a public-relations campaign extolling Londons of business
advantages for litigants. The international lan- will remain
guage of business will remain English, says Simon
English. And
Davis, deputy vice president of the Law Society and
an attorney with Clifford Chance in London. And English law
English law will remain the law of choice, particu- will remain the
larly in relation to financial institutions. law of choice
In a bid to maintain Londons leading role, U.K.
Prime Minister Theresa May in August backed off
a vow that EU courts wouldnt be given any say in
U.K. matters. The goal now is to maintain strong ties
to the EU legal system, perhaps similar to those of
non-EU members Switzerland and Norway, whose
court rulings are enforceable across the bloc.
Even that could be unacceptable to Eva Khne-
Hrmann, justice minister of the German state of
Hesse, home to Frankfurt, whos argued against
being too accommodating to the British. We cant
allow the U.K. to cherry-pick in Brexit negotiations,
she says. We need rules that favor our own courts.
Karin Matussek and Gaspard Sebag
THE BOTTOM LINE European cities trying to woo commercial
cases away from London are promoting advantages such as
speedier court proceedings and business-savvy judges.
  ECONOMICS
How to Do a
Debt Restructuring
Tareck El Aissami, Venezuelas vice president, has
summoned bondholders to a Nov. 13 meeting in
Caracas as the country prepares to restructure its
crushing debt. Turnout is likely to be sparse.
Thats because investors accepting El Aissamis
invitation could run afoul of the U.S. Office of
Foreign Assets Control. U.S. sanctions prohibit
Americans from accepting new bonds that
Venezuela would issue as part of a restructuring.
Also, El Aissami has been designated a narcotics
trafficker under a 1999 law known as the Kingpin
Act; any officer of a U.S. corporation who deals with
him faces the risk of prosecution, which could result
in fines of as much as $5 million and 30 years in jail.
They are basically assigning the discussion with
bondholders to the most radioactive member of
the Venezuelan government, says Daniel Lansberg-
Rodriguez, a lecturer at Northwesterns Kellogg
School of Management. Thats not a figure you can
imagine people in New Yorkhedge funds, bankers
36
sitting at a table with, trying to hash out some sort
of a refinancing or a restructuring.
In naming El Aissami to head the talks,
President Nicols Maduro may be trying to drum
up support inside the U.S. for easing sanctions, says
Robert Koenigsberger, chief investment officer at
Gramercy Funds Management LLC, which dumped
its Venezuelan bonds a year ago. There will be
finger-pointing that wed love to restructure our
debt, but those Yankees wont let us do it. Go talk
to Donald Trump, and when he removes sanctions,
we can talk, he says.
That could soften the political impact of a default,
which many observers have been expecting for years.
Maduro says U.S. sanctions have made it impossible
for the country to obtain new financing to roll over its
debts, which total an estimated $140 billion. On Nov. 2
he announced that his country would make a final
$1.1 billion payment and then start talks on restructur-
ing. Until now, Venezuela has had a record of paying
its creditors despite a plunge in the price of oil, the
source of 95 percent of the countrys export revenue.
Investors willing to hold the countrys bonds have
been richly rewarded: Yields recently soared to a
record 40.8 percentage points over U.S. Treasuries.
The sanctions were imposed by Congress in 2014
in response to the Maduro governments antidemo-
cratic tendencies and have been ratcheted up since
President Trump took office. In February, the U.S.
Department of the Treasury designated El Aissami
a drug trafficker, saying he had control of planes
that flew more than 1,000 kilograms (2,205 pounds)
Bloomberg Businessweek November 13, 2017
Through its choice of
negotiator, Venezuela may have
found a way to delay a default
of cocaine out of Venezuela and coordinated ship-
ments with Mexicos Zetas drug cartel. El Aissamis
office didnt respond to calls. Hes publicly denied
the allegations and offered to hand himself over to
authorities if anyone can produce proof.
The son of Syrian and Lebanese immigrants, El
Aissami was the leader of a leftist student move-
ment at a university in Mrida when he met Hugo
Chvez, a cashiered military officer whod led a
failed coup. In the years after Chvez was elected
president in 1998, El Aissami worked as a legislator
in the National Assembly and at the interior minis-
try. In 2012 he was elected governor of Aragua state,
where he quashed attempts by the opposition to
mount a referendum to oust him from office. As
vice president, a post hes held since January, he  Protesters in Caracas
burn an effigy of Vice
also heads an Anti-Coup Commando unit whose President El Aissami,
mission is to root out traitors and double-crossers whom Washington has
across the political spectrum. The campaign has labeled a drug kingpin
landed several of the governments critics in jail.
The blame-the-gringos gambit may stave off a
final reckoning, allowing the Maduro government
to keep control of its oil-producing assetswhich,
in the event of a default, could be seized by credi-
torsand use its dwindling stock of foreign reserves
to pay for food and other social aid. This is much
more of a political play than a financial one, says
Jos Guerra, an opposition lawmaker who heads the
National Assemblys finance commission. They need
some sort of relief, cash flow. They have no other
FERNANDO LLANO/AP PHOTO
way to finance imports. Patricia Laya and Andrew
Rosati, with Ben Bartenstein and Fabiola Zerpa
THE BOTTOM LINE To buy time and preserve precious
reserves, Venezuela has extended American bondholders an
invitation many have no choice but to refuse.
 LOOK AHEAD Republican Governors Some 20 EU countries will sign a
Association annual conference new defense pact to jointly develop
5 begins on Nov. 15 military hardware
P
O
L
Shake-Up at the
I
Bank of Bannon
T
I
38
C
S
Robert Mercer is stepping
back from his hedge fund, but his
political activism will continue
When it landed on the morning of Nov. 2, the state-
ment from hedge fund manager and Republican
megadonor Robert Mercer read like a goodbye letter.
Not only was he stepping down as co-chief execu-
tive officer of his New York hedge fund Renaissance
Technologies LLC, but he also was selling his stake in
Breitbart News and renouncing his support for Milo
Yiannopoulos, the alt-right provocateur hed previ-
ously funded. Mercer even seemed to distance himself
from the man his political fortunes are most tied to
his longtime adviser, Breitbart Chairman and former
White House strategist Steve Bannon. From time to
time, I do discuss politics with him, Mercer wrote of
November 13, 2017 Bannon. However, I make my own decisions with
respect to whom I support politically. Those decisions
Edited by do not always align with Mr. Bannons.
Matthew Philips
It was a rare public statement from the famously
Businessweek.com reticent, 71-year-old computer scientist, one that left
President Trump attends the East Asia
Summit in the Philippines, where hell
meet President Rodrigo Duterte
Washington and Wall Street buzzing over whether
the man who essentially bankrolled the national-
ist insurgency that put Donald Trump in the White
House was having second thoughts.
Among Mercers adversaries, his words were read
as a rebuke of Bannon and a break from his nation-
alist politics. I think this is a perfect testimony to
the toxicity of Steve Bannon and what hes trying
to do to the Republican Party, says Josh Holmes,
former chief of staff to Senate Majority Leader Mitch
McConnell, whom Bannon has vowed to dethrone
by backing outside challengers in Republican prima-
ries next year. An activist group that had been pres-
suring universities and retirement funds to pull their
money from Renaissance to protest Mercers political
spending also saw the statement as vindication. It
seems like our work is done pressuring Renaissance
investors over Mercers role, says a representative of
Sleeping Giants, a group of anonymous activists that,
since forming after last years election, says it has
persuaded thousands of companies to stop advertis-
ing on Breitbart, arguing the site promotes racism.
A rift with Mercer would certainly complicate
Bannons latest assault on the GOP establishment.
Mercer has been Bannons main patron since they
  POLITICS
first met in 2011. But a split may not be whats hap-
pening. Viewed in a broader context, Mercers
announcement suggests that, far from abandoning
the Republican insurgency and stepping away from
politics, hes freeing himself to be more involved.
Two sources familiar with his thinking say his deci-
sion to reduce his role at Renaissance is part of a
plan to participate more aggressively in Republican
Party politics ahead of the pivotal midterm elections.
Mercer did not respond to requests for comment.
More than anything, Mercers statement is a
confirmation of his outsize influence in conser-
vative politicsand the trouble that created for
him inside Renaissance. Although the recent cam-
paign to pressure investors to pull money from
Renaissance likely hadnt caused it serious financial
harm, it did promise to keep the notoriously secre-
tive trading firm in the spotlight. In recent months,
Jim Simons, Renaissances 79-year-old founder and
a major donor to Democratic causes, urged Mercer
to step down, according to two people familiar with
the matter. Simons wasnt as concerned about the
financial impact of Mercers activities as he was
about their effect on the firms morale and recruit-
ing efforts. I appreciated Bobs willingness to take
this step, Simons said on Nov. 6 while attending a
fundraiser for the New York Public Library.
Trumps election established Mercer and his
middle daughter, Rebekah, as the preeminent
patrons of the partys anti-establishment wing.
Theyve channeled family money into a series
of interlocking causes overseen by Bannon. In
addition to Breitbart, theres the Government
Accountability Institute, a research group estab-
lished in 2012 whose president, Peter Schweizer,
wrote the best-selling 2015 book Clinton Cash, which
tarnished Hillary Clinton ahead of the 2016 presi-
dential election. Theres also Cambridge Analytica,
a data and analytics firm used by the Trump cam-
paign, and Glittering Steel LLC, the production
company run by Rebekah and Bannon that makes
movies and political ads. The Mercers even helped
install Bannon atop the Trump campaign during
its final stretch. In December, surrounded by hun-
dreds of guests at Mercers mansion overlooking
Long Island Sound, the president-elect thanked
the father-daughter duo in person.
Like conservative industrialists Charles and
David Koch and liberal investor George Soros,
Mercer has become so well-known that opponents
use his name as a bludgeon. In early November,
a TV ad from the New York State Democratic
Committee flashed Robert and Rebekah Mercers
faces on the screen, noting their donation to a
ANDREW TOTH/GETTY IMAGES
Republican candidate in a county race and describ-
ing them as the same people who bankrolled
Trumps social media bot army and Steve Bannons
extremist Breitbart News.
For Renaissance, the notoriety has been
unprecedented and unwelcome. In February, one
Bloomberg Businessweek November 13, 2017
Renaissance partner, David Magerman, went public
with his criticism of Mercer. His views show con-
tempt for the social safety net that he doesnt need,
but many Americans do, Magerman told the Wall
Street Journal. He later filed a lawsuit alleging that
Mercer had made racist comments. Renaissance
is contesting the suit, and Mercer in his Nov. 2 state-
ment vehemently denied any racial prejudice.
By stepping down as co-CEO and leaving the
firms board, Mercer takes the heat off his col-
leagues, even though he plans to continue working
alongside them as a researcher. Selling his Breitbart
stake may blunt attacks, too, though the holding
will stay in the familyhes selling it to his three
daughters, formalizing an existing arrangement. Mercer family 2017
political donations
Rebekah has always taken the lead in dealing with
Breitbart. Also, the Mercers have never marched
in lockstep with Bannon. Under Bannons direc-
$1m
Rob Astorino,
tion, Breitbart News championed Trump last year, incumbent Westchester
County executive in
while Mercer bought some $13 million worth of ads New York, who lost
for Texas Senator Ted Cruz, switching to Trump on Nov. 7
only after hed won the GOP nomination. This year,
Mercer contributed the maximum amount to House $668k
Republican National
Speaker Paul Ryan, a frequent target of Breitbarts Committee
venom. And Mercer and his wife have poured more
than $1.6 million into Republican Party accounts.
Mercer apparently sat out the Republican Senate
$475k
National Republican
Senatorial Committee
primary in Alabama this year, where Bannons can-
39
didate, Roy Moore, defeated a challenger heavily
funded by the party establishment. But in other
$475k
National Republican
states, Mercer has backed Bannons slate of can- Congressional
Committee
didates hostile to McConnell. In Arizona, he gave
$300,000 to a PAC supporting Kelli Ward, a hard-
right former state senator who was mounting an
$300k
Kelli Ward, a Bannon-
attack on incumbent Senator Jeff Flake. Rather than endorsed candidate
for Senate in Arizona
face Ward, Flake announced plans to retire at the
end of his term. In Mississippi, Mercer put $50,000
behind Chris McDaniel, who calls Senator Roger
$150k
Attack ads against
Wicker one of McConnells merry band of yes men Democratic Senator
Elizabeth Warren
and is considering challenging him next year.
In November, as part of his effort to spark a
revolt against McConnell and his establishment GOP
$50k
Chris McDaniel,
allies, Bannon is giving speeches in Michigan, New considering a primary
run against Republican
Hampshire, and South Carolina. Hes recruiting Senator Roger Wicker
renegade candidates to challenge every Republican in Mississippi
member of the Senate up for election in 2018, save
for Cruz. While its unclear whether Mercer will
continue to put money behind Bannons hand-
picked candidates, he doesnt appear to be retreat-
ing from electoral battles. His critics are going to
be disappointed because, at the end of the day, Bob
is going to continue fighting for what he believes
in, says Brent Bozell, whose conservative Media
Research Center is funded by Mercer. This is a
man who could have chosen a long time ago to sail
away on his yacht and not worry about a thing.
Zachary Mider and Joshua Green
THE BOTTOM LINE As publicity-shy Republican megadonor
Robert Mercer relinquishes his management role at Renaissance
Technologies, questions arise about his political agenda.
  POLITICS
Trump Hunts for
Trade Deals in Asia
Instead, North Korea and other issues
dominate the rst stages of the presidents trip
Donald Trumps withdrawal from the 12-nation Trans-
Pacific Partnership has put the U.S. in a difficult posi-
tion when it comes to Asian commerce. That was
apparent in early November when the president
embarked on a tour of East Asia that took him to
Japan, South Korea, and China, with further stops
planned in Vietnam and the Philippines. Trump was
greeted with pomp, circumstance, and promises to
buy more American goods, but the White House
didnt report any progress on the market-opening
measures the U.S. has long sought.
In Japan, Prime Minister Shinzo Abe ducked
40
any talk of major trade concessions, even though
Trump kept bringing the topic up. The president
had to settle for a white baseball cap emblazoned
in gold with the message Donald & Shinzo, Make
Alliance Even Greater. In South Korea, which has a
free-trade agreement with the U.S. that Trump has
repeatedly criticized, trade took a back seat to con-
cerns about the threat from North Korea. In China,
President Xi Jinping flattered Trump with state
visit-plus treatment, including trips to the opera
and the Forbidden City, as well as eye-catching prom-
ises. The White House was expected to announce
more than $250 billion in business deals.
Trump campaigned for the White House on his
ability to go one-on-one with foreign leaders to strike
better trade agreements. He prefers bilateral agree-
ments to multilateral ones like the TPP, which he
called a disaster and a rape of our country. But
now that its time to deal, hes finding that trading
partners arent so pliable after all.
One problem for Trump is that the leaders of
Japan, South Korea, and other nations cant be seen
by their voters as caving in to American demands,
says William Reinsch, a former president of the
National Foreign Trade Council and a distinguished
fellow at the Stimson Center, a Washington think
tank. Reinsch once wrote an opinion piece called
Bilateral, Shmilateral.
Multilateral talks provide more chances for coun-
tries to come away happy, because the concessions
they want dont all have to come from a single party.
Country A concedes something to B, B concedes
Bloomberg Businessweek November 13, 2017
to C, and C concedes to A. In the TPP, for example,
Japan agreed to take more dairy imports, helping
New Zealand, while it received concessions from
other countries on its manufactured exports, Reinsch
says. Another advantage: In a big group the U.S. can
win points without anyone else obviously giving
in. Countries making concessions can muddy the
waters a little bit rhetorically, he says.
When presidents do announce trade deals on
trips, its generally because lower-level officials on U.S. merchandise
trade deficits in 2016
both sides have put in a lot of work in the preced-
ing months. Theres no evidence thats happened
China $347b
under Trump. There seems to be more of a focus on Japan $69b
making a political point about trade deals vs. improv- Vietnam $32b
ing them, says Joshua Meltzer, a senior fellow at the South Korea $28b
Brookings Institution. Philippines $2b
North Korea, not trade, seems to be occupying the
lions share of Trumps attention in Asia. While he
isnt the first American president to end up putting
diplomatic and security imperatives above U.S. com-
mercial interests, hes been more explicit about it
than most. In April he told the Wall Street Journal
FROM LEFT: JONATHAN ERNST/REUTERS; LEON NEAL/GETTY IMAGES; DATA: INTERNATIONAL TRADE ADMINISTRATION
hed offered Xi better trade terms in exchange for
help on North Korea.
To be fair, trade liberalization is a tough nut to
crack. Especially trade with China. Xi, having seen
the political turmoil generated by fake news on social
media in the U.S., is determined to keep Americas
 Trump with Xi at the
Forbidden City on Nov. 8
 POLITICS
digital giants out of China. Xi will also continue to
protect the state-owned enterprises and technol-
ogy sectors that China regards as key to its future.
It really isnt clear to me what could be done about
those by even an ideal American negotiating team,
says Gary Clyde Hufbauer, a senior fellow at the
Peterson Institute for International Economics.
The absence of the U.S. from the TPP just makes
matters worse. China is rushing to fill the gap left
by the U.S. Its 16-nation Regional Comprehensive
Economic Partnership includes Japan, India, and
South Korea but excludes the U.S. Michael Sekora,
who worked on U.S. technological security in the
Reagan White House and now runs Quadrigy, a con-
sulting company, said he sensed a leadership vacuum
in the Pacific recently while visiting government offi-
cials in Australia, Colombia, and Malaysia. They said,
We dont want to get in bed with China, but we dont
have any choice, Sekora says.
China is playing a long game. At the Communist
Party congress in October, Xi outlined plans to
make the country a global leader in terms of
comprehensive national strength and interna-
tional influence by 2050. Trump seems to be
more focused on the daily news cycle. Says Yukon
Huang, a senior fellow at the Carnegie Endowment
for International Peace in Washington: This con-
trast between a very short-term focus on issues
against a China which tends to think very long-
term is an interesting challenge in a global environ-
ment where we are talking about relative decline.
Peter Coy, Enda Curran, and Justin Sink
THE BOTTOM LINE Trump boasts of his dealmaking prowess,
but bilateral trade talks with Asian partners arent likely to yield
big wins for the U.S.
Unions Confront
In-House Harassment
Labor groups AFL-CIO and SEIU
are hit by sexual misconduct scandals
Americas post-Harvey Weinstein sexual harassment
reckoning is roiling the labor movement. Amid a
flurry of resignations from top officials at two of the
countrys biggest labor groups, dozens of current and
former organizers and staffers say the groups leaders
too often fail to protect their staff from abuse or take
sufficient action in response, creating toxic cultures
that have alienated promising young organizers.
The recent wave of departures began with Scott
Courtney, an executive at the Service Employees
International Union and architect of the Fight for
$15 campaign to raise pay for fast-food workers.
Bloomberg Businessweek November 13, 2017
On Oct.23, Courtney resigned during an internal
investigation into alleged sexual misconduct and
abusive behavior. People who worked for Courtney,
whose career spanned decades, say he was known
for repeatedly dating subordinates, one of whom
he recently married. The investigation also led the
SEIU to terminate two other senior staffers. Another
Fight for $15 leader, Kendall Fells, resigned on Nov.2.
Fells declined to comment. Courtney didnt respond
to a request for comment.
Earlier this year, Terry Stapleton, the AFL-CIOs
chief budget officer, was disciplined for sexual harass-
ment allegations, according to people familiar with
the process. Stapleton, who oversaw employees
expenses and travel, allegedly sent a secretary lewd
messages and urged her to come to his hotel room
during a March meeting of the executive council.
He also allegedly suggested that if she had a sexual
relationship with him, he could protect her job at
the organization, where dozens of people had been
laid off in February. Stapleton did not respond to a
request for comment.
According to the AFL-CIO, Stapleton was sent for
mandatory training at his own expense, moved to a
Courtney
different office, and suspended for two weeks without
pay. But Stapleton, a longtime friend of federation
President Richard Trumka, remained in his senior
staff role at the AFL-CIO until he resigned on Nov.6,
41
a few days after Bloomberg News inquired about the
previously unreported allegations.
Union leaders say they take the issues seri-
ously. As the premier organization for working
people, we recognize that we bear a special respon-
sibility to lead by our actions and example, the
AFL-CIOs top officers said in a statement the day
Stapleton resigned. Two weeks earlier, Trumka had
told reporters the AFL-CIO has a zero-tolerance
policy on harassment, noting that at its March
executive council meeting the federation approved
new policies on the issue, including a stronger code
of conduct. SEIU Executive Vice President Leslie
Frane says her union has been swift and decisive
in investigating recent allegations and has expanded
its training for staff and its channels for reporting
abuse. We are incredibly grateful to the people
who have come forward, says Frane.
Current and former employees say years of warn-
ings havent been heeded. In 2000 dozens of employ-
ees presented concerns about Courtney in writing
to national leaders, according to people who par-
ticipated. Former AFL-CIO staff also say the federa-
tion failed to respond to a 2015 draft report from an
outside consulting group, copies of which werent
shared widely with staff, that related employees
accounts of rampant harassment issues.
Some aspects of union organizing can make it
easier for bad actors to get away with abuse, says
Janice Fine, a labor studies professor at Rutgers
University and former organizer. Organizers are loyal
to the workers the union represents and loath to
  POLITICS
do anything that could be perceived as damaging
to a campaign. Theres still this idea that in order to
do it, you have to work 24 hours a day, you have
to be willing to move, you have to put work above
all other things, says Fine. Sexual harassment is a
reason women organize, says Kate Bronfenbrenner,
a former organizer and now a lecturer at Cornell
Universitys labor relations school. But it can be
a reason women dont organize. Josh Eidelson
THE BOTTOM LINE Two of the countrys biggest labor groups,
the AFL-CIO and SEIU, have been hit with a flurry of high-profile
resignations after claims of years of sexual harassment.
A Captive
Labor Market
42
Detainees claim Geo Group
forced them to work for free
On Nov. 15 the 10th Circuit Court of Appeals in Denver
will hear arguments in a case that could change the
future of the $5 billion private prison industry. Judges
will decide whether a district court was correct in
February when it certified a class action on behalf of
around 60,000 current and former detainees who are
suing Geo Group Inc., one of the largest U.S. private
prison companies, for allegedly violating federal
anti-trafficking laws by coercing them to work for
free under threat of solitary confinement.
The case was first filed in 2014 by a group of immi-
grants who had been detained at an Immigration and
Customs Enforcement facility run by Geo in Aurora,
Colo. Their key claim rests on the assertion that Geo
violated the Trafficking Victims Protection Act, a
law designed to stop human traffickinga scourge
many associate with sexual exploitation by gangs, not
with government contractors treatment of detained
immigrants. Their lawsuit argues that Geo violated
the laws prohibition on using threats to obtain labor.
It would be forced labor for someone to say,
Well arrest you for not working for me, says David
Bloomberg Businessweek November 13, 2017
Seligman, who represents the plaintiffs. Its simi-
larly forced labor to say, Were going to remove you
from all contact with other people. The lawsuit
also argues that Geo, through an optional work
program that pays $1 a day, violated common law
against unjust enrichment, since extensive use
of low-paid detainee labor has saved the company
money; it employs only one janitor in Aurora who There is,
isnt in custody, the plaintiffs say.
almost by
Geo says the case lacks merit and that its being
denition,
scapegoated over whats really a public-policy
dispute. Geos status as a government contractor a focus on
puts it in the position of having to answer for what maximizing
are essentially grievances against congressional and
prots and
DHS/ICE policies, the company said in a March
court filing. In a 2015 motion, Geo said the traffick- shareholder
ing claim was absurd, because the anti-traffick-
ing law wasnt meant to apply to federal detainees
value
who are lawfully kept in the custody of the govern-
ment. In its motion for an appeal, Geo wrote that the
class certification poses a potentially catastrophic
risk to Geos ability to honor its contracts with the
federal government.
The lawsuit is one front in a long-running battle
over the existence of private prisons. Critics say
letting companies run detention centers and prisons
reduces accountability for potential abuses and that
the profit motive encourages excessive cost-cutting.
There is, almost by definition, a focus on maxi-
mizing profits and shareholder value at any pub-
licly held private business, says David Lopez, who
served as general counsel of the Equal Employment
Opportunity Commission under President Obama
and will argue for the plaintiffs before the 10th
Circuit. I dont think the private prison industry
really is differentits just its product is different.
Conservatives say private companies outperform
the government. Theres certainly no way having
the highly problematic ICE come in and take over
management of these facilities is going to improve
conditions, because the ones they already run are
terrible, says Adrian Moore, vice president of the
libertarian Reason Foundation.
In August 2016, President Obamas Department
of Justice said it would phase out its use of privately
run federal prisons. The next day, a Geo subsidiary
donated $100,000 to a super PAC supporting Donald
Trump. This year Trump reversed Obamas private
prison policy and awarded his administrations first
detention center contract to Geo. The companys
stock price has risen about 70 percent since Trumps
election. If the case proceeds as a class action, it will
threaten other private prison companies that use
inmate labor. This case is what we call a business
model case, says Brandt Milstein, who represents
ILLUSTRATION BY TOMI UM
the plaintiffs. Another way to say that would be an
existential threat. Josh Eidelson
THE BOTTOM LINE Private prison companies have flourished
under President Trump, but a class action could undermine their
access to cheap labor provided by detainees.

The Cloud
How to
Catch
Amazon
Microsoft and Google turn to
salesmanship and AI
Its hard to think of a business Amazon.com Inc.
dominates as convincingly as the market for
cloud computing services. Andy Jassy, chief
executive officer of the companys cloud division,
Amazon Web Services Inc., likes to brag that his
outt has several times as much business as
the next 14 providers combined. Amazons next-
ILLUSTRATION BY DOROTHY GAMBRELL
largest cloud competitor, Microsoft Corp., is less
than one-fth Amazons size in terms of sales
of infrastructure services, which store and run
data and applications in the cloud, according to
research rm Gartner Inc. Google, the No. 3 U.S.
cloud services provider and the second-largest
F
O
C
U
S
company in the world by market value, makes
one-fteenth of Amazons cloud revenue.
AWS effectively dened the notion of cloud
computing, says Gartner analyst Ed Anderson.
Its perceived as the cloud leader and pace-
setter. AWS generated $4.6 billion in sales in
the most recent quarter. Every year, it intro-
45
duces dozens of features and products to retain
its edge.
But Amazon isnt invincible, and the qualities
that made the division so successfulthe plat-
forms self-service nature and its deployment of
software and services that Amazon had used for
its enormous retail operationcan also be seen
as vulnerabilities, at least as far as Microsoft
and Google are concerned. Microsofts cloud
unit, Azure, has managed to win over customers,
including Bank of America Corp. and Chevron
Corp. in recent weeks, by focusing on the sorts
of salesmanship and relationship-building skills
not always prized at Amazons Seattle headquar-
ters. Theres not one default choice, says Kurt
DelBene, Microsofts executive vice president
for corporate strategy and planning. Were not
going to get to a place where any one vendor is
that default choice.
Microsoft is at the leading edge of todays
game-changing cloud-based technologies, CEO
Satya Nadella wrote in his autobiography, pub-
lished in late September. But just a few years
ago that outcome seemed very doubtful. As
part of Nadellas catch-up strategy, Microsoft
has transformed its sales force into a roving R&D
November 13, 2017
lab and management consultancy. Startups get
introductions to potential investors and prospec- Edited by
tive partners and customers. Big companies get Dimitra Kessenides and
Max Chafkin
access to a sales team that helps market the
Businessweek.com
  FOCUS / CLOUD Bloomberg Businessweek
cloud apps they build on Azure to their own customers so
they can make a buck on the software they use in-house.
The sales team includes 3,000 dedicated software engi-
neers who can build applications for prospective clients
during sales calls, demonstrating on the spot what they can
do for them. I cant send people to a customer anymore to
give a PowerPoint presentation, says Judson Althoff, exec-
utive vice president for Microsofts worldwide commercial
business. Once a customer signs on, Microsoft engineers
can be deployed to the client the next day.
Bill Braun, Chevrons chief information officer, says
Microsoft impressed him by showing off machine learning
software that will allow his company to analyze volumes of
data from oil production equipment to detect tiny changes in
temperature or vibration, early signs of faulty equipment, or
other problems. They understand the enterprise, he says.
Microsofts sales team made the pitch with the help of
HoloLens, the companys new augmented-reality headset.
When paired with Microsofts cloud software, the headset
allows Chevrons senior engineers to virtually oversee the
work of software technicians around the globe as they
install equipment.
For years, Microsoft representatives have sold the com-
panys signature Windows and Office software that clients
install on their computer networks. More recently, theyve
moved some of those clients to Office apps in the cloud.
Clients accustomed to those cloud applications may be
46
more likely to go with Microsoft when they decide to replace
their own data centers and servers with public cloud infra-
structure, says Gartners Anderson.
An existing relationship was why candymaker Mars Inc.
chose Microsoft instead of AWS last year. Our philos-
ophy is to drive deeper relationships with partners we
already have, says Paul LEstrange, Marss chief tech-
nology officer. We didnt have that same sort of relation-
ship with AWS. Google is trying to set itself apart with
TensorFlow, software that makes it easier to build arti-
cial intelligence apps, and with Kubernetes, a software
system which helps companies better manage their data
in the cloud (page 48).
Even Google, a company that has been generally aller-
gic to using people for anything a machine can do, has seen
the value of having a human sales force. In late 2015 it hired
corporate software veteran Diane Greene, a Google board
member and co-founder of VMware Inc., Dell Computers
cloud computing subsidiary, to run its cloud business. Shes
been building a cloud sales force from scratch. Google
recently announced a partnership with Salesforce.com Inc. to
take advantage of the latters list of preferred cloud providers.
Both Google and Microsoft have sought to exploit
another of Amazons perceived weaknesses: that other
parts of its empire compete bitterly with prospective
cloud customers. Amazons retail rivals, including Wal-
Mart Stores Inc. and Bangalore-based Flipkart Ltd., dont
want to see their Amazon cloud payments lining the coffers
of the retailer that could ultimately put them out of busi-
ness, says Gartners Anderson. Flipkart signed up with
Microsoft in February. According to a June report in the
November 13, 2017
Cloud infrastructure services revenue, 2016
Others Amazon
$9.1b $9.8b
Google
$500m
Rackspace Alibaba
$484m $675m
Micro-
soft
$1.6b
Slowest-growing Fastest-growing
Wall Street Journal, Wal-Mart has been telling its tech sup-
pliers not to use AWS. Wal-Mart didnt respond to a request
for comment. CEO Jassy says AWS treats all its cloud cus-
tomers, including many Amazon retail rivals, equally.
After several years on AWS, Lush Ltd., the U.K.-based toi-
letries company, jumped to Google Cloud in November 2016.
Lush has sued Amazon, claiming the company is using
Lushs trademarks to sell rival bath goods.
Were not particularly keen on Amazon as a company, so
wed prefer not to work with them, says Jack Constantine,
Lushs chief digital officer. Amazon declined to comment
on the lawsuit.
Its not a surprise to us that every large tech company
in the world is interested in building a replica of what AWS
has done, says Jassy. Whether or not its feeling the pres-
sure, the company is spending more time cultivating rela-
tionships with top executives and CIOs. Its hosting dinners
with prospective clients to address their concerns in more
intimate settings and bringing more of a human touch to
these relationships. Theyre making themselves accessi-
ble, says Adam Johnson, CEO of IOpipe, which provides
monitoring and troubleshooting services to businesses
running on AWS.
Its reputation as the market leader means those exec-
utives and chief technologists tend to lean toward AWS
when all else is equal. Its early leadAWS beat Microsoft to
the market by four yearsgives the company an automatic
edge. And Amazons cloud services are seen as the safe
bet, no small thing in an age of hacks and denial-of-service
attacks. Sometimes even when a company thinks it can
claim a win over AWS, it cant broadcast the victory. In
March, Google published a blog post announcing that
Airbnb Inc., a longtime AWS client, had agreed to use a
Google cloud service for AI. The following day, Airbnbs
name was scrubbed from the post. Airbnb and Google
declined to comment.
So for the near future, at least, AWS looks like it will
continue to rule a market that Gartner expects to gener-
ate $89 billion in sales by 2021, up from $35 billion today.
Theres a humongous amount of growth in front of us,
Jassy says. This is the biggest technology shift of our life-
times. Dina Bass, with Spencer Soper and Mark Bergen
THE BOTTOM LINE Microsoft has taken enough customers from market
DATA: GARTNER
leader Amazon to create a viable cloud business; Googles cloud gains have
been slower.
 Explainer What Is Kubernetes - or, How Many Co

48
 By Mark Bergen and
oders Does It Take to Turn On a Lightbulb? Dorothy Gambrell

49
  FOCUS / CLOUD Bloomberg Businessweek
For Alibaba,
Singles Day Isnt Just
About Shopping
On Nov. 11, China celebrates Singles Day, a holiday dedi-
cated to the nations unattached. Its also the worlds largest
shopping festivaland a bonanza for internet giant Alibaba
Group. Up to 500 million consumers will visit sites run by
the company searching for discounts on items including
Bordeaux wine, UGG boots, SUVs, and high-end Japanese
toilets. Citigroup Inc. estimates that Alibabas sales during
this years event could reach 158 billion yuan ($23.8 billion).
For Alibaba, Singles Day will also be a demonstration
of how far its cloud business has come in eight years. At
the peak of activity, Alibabas servers may be tasked with
processing 175,000 transactions a second from its own
sites. Its the day when the largest amount of computing
power is needed in China, says He Yunfei, a senior product
50
manager for Alibaba Cloud.
Alibaba Cloud was founded in 2009 mostly to process
transactions for the parents e-commerce properties. Today
its network of server and storage farms sprawled across
ve continents and eight countries provides computing
power for millions of companies and is one of the fastest-
growing units of billionaire Jack Mas online empire. In the
runup to Singles Day, retailers will use Alibabas service to
gauge how much inventory to stock, which buyers to target
with ads, and how to improve on last years delivery times.
Alibaba dominates the Chinese cloudin part because
local regulators wont issue data center operating licenses
to foreign companies, curtailing the China ambitions of
Amazon.com Inc. and Microsoft Corp., the No.1 and No.2
cloud providers globally. JPMorgan Chase estimates
Chinas market could reach 152 billion yuan by 2021, with
Alibaba accounting for 60 percent of that, double its current
share. Its closest domestic rival, social media giant Tencent
Holdings Ltd., could account for 20 percent. The opportu-
nity is even greater, says He, when you consider that China
is on the cusp of mass migration to the cloud.
Alibaba Clouds more than 1 million customers include
government traffic-control centers, banks, car manufactur-
ers, and pig farms. Geely Automobile Holdings Ltd., whose
IT system runs on Alibabas cloud, relies on the service for
such functions as managing its sales data and conducting
virtual crash simulations. And last December, Geely ran a
one-hour marketing promotion on the service that resulted
in the sale of more than 2,000 Boyue SUVs. Shoppers moni-
tored when the cars were ready for delivery via mobile apps.
Another client, Royal Philips Electronics NV, has developed
November 13, 2017
The annual event is the
ultimate test of the companys
processing power
several apps for its health-care services in China using
Alibaba Cloud. And agriculture conglomerate New Hope
Group Co. relies on the service to monitor the temperature
of its hogs and how much to feed them.
A big selling point for cloud customers is so-called
elastic computing, a fancy way of saying that Alibaba clients
rent only the processing power they need and only when
they need it. If a customer wants 10,000 servers available
in half an hour, Alibaba can deliver. Think about it, 10,000
servers, He says. If you spent time just switching on the
machines, that might take longer than half an hour.
Alibaba has a long way to go before it challenges
Amazon. Last year it accounted for just 3 percent of the
market for whats known as infrastructure as a service
that is, the fastest growing part of the cloud market, where
companies rent servers to run their own apps and store
data in the cloud. That compares with Amazons 44 percent,
according to Gartner Inc. research. Still, Alibaba is pushing
beyond its home turf, setting up data centers in Japan,
Singapore, and the U.S. To lure customers, the company
is cutting prices by as much as 50 percent and touting
a world-beating track record thwarting hackers bent on
taking down websites.
Its also investing in state-of-the-art data centers. One
enormous facility, in Chinas eastern Zhejiang province, sits
on the banks of a huge articial lake. The off-white complex
looks like a giant server, with dark windowpanes and pro-
truding red pipes and blue cisterns. The structure sucks
and pumps water from the reservoir to cool down the many
servers that store code and applications for Alibaba and
its customers. The pumped water runs through a central
canal and eventually is sent back to the lake. In winter, the
water is used to heat the office. Amazon uses similar tech-
nology in its Seattle and Swiss data centers.
To bring down electricity costs, Alibaba is building server
farms in the grasslands bordering Inner Mongolia to tap
into wind energy, solar power, and the cool air that hovers
at an average 2.6C (37F) all year. First though, Alibaba has
to make it through Singles Day without crashing its cloud
ILLUSTRATION BY DOROTHY GAMBRELL
network. We use it as a drill, He says. It sharpens us.
Lulu Chen
THE BOTTOM LINE With China on the cusp of mass migration to the
cloud, Alibaba could double its share of the cloud services market there to
60 percent.
 Bloomberg Businessweek

THE MOST
IMPORTANT
ECONOMY
IN AFRICA, AND
A GOVERNMENT
BUILT BY
THE LIGHT OF
MANDELA, MAY
NOW FUNCTION
FOR THE
52
BENEFIT OF
ONE POWERFUL
FAMILY

BY
MATTHEW
CAMPBELL
AND
FRANZ WILD
 November 13, 2017

THE
BROTHERS
WHO
BOUGHT
53

A
A protester in Pretoria
COUNTRY
 Bloomberg Businessweek
THE AX HAS FALLEN
The Gupta compound in Saxonwold
The beginning of the end of Nhlanhla
Nenes political career came on a warm
Monday morning. He was catching up on
email in his office in Pretorias neoclassi-
cal Old Reserve Bank building, where he
was serving as South Africas minister of
finance, when his deputy, Mcebisi Jonas,
asked for an urgent meeting. Jonas had
been desperate to speak to his boss for
days, but what he wanted to tell Nene
was far too sensitive to discuss by phone.
Nene, a veteran trade union activist,
has heavily lidded eyes, the build of a
54
retired rugby player, and a preternat-
ural calm. He suggested to Jonas that
they step onto an adjoining balcony, the
better to avoid any listening devices.
There, Jonas began his tale.
The previous Friday, Jonas said, hed
been summoned to a four-mansion com-
pound in Johannesburg owned by the
Gupta familya clan of Indian-born
businessmen known to wield substan-
tial influence over South African politics.
Ajay Gupta, the eldest of three broth-
ers atop the family, was direct: Nene
was becoming a problem. He explained
that Jonas would soon replace Nene as
finance minister and, in that capacity,
would remove some senior officials
who were also standing in the familys
way. Gupta spoke in the future tense,
presenting Jonass appointment as a
fait accompli.
Jonas was staggered. The Guptas have
no governmental role, and ministers
serve solely at the discretion of the pres-
ident, Jacob Zuma. Jonas said as much
and made his way toward the door. As
he did, Jonas would later tell investiga-
tors, Gupta said his family could put
600 million rand, or about $43 million,
into an account of Jonass choice. And
if Jonas happened to have a bag with
him, he could have 600,000 rand in
cash right away. (The Gupta family
denies the meeting occurred.)
As Jonas recounted this story on the
balcony, Nene reacted dismissively. The
Guptas might be well-connected and
could roll over lesser officials, but the
idea they could depose a sitting finance
minister seemed absurd. Nonsense,
he told Jonas. Those guys cant remove
me. The best response, Nene said,
was to focus on their work. They had
a budget to prepare and Africas most
sophisticated economy to run.
Just over six weeks later, on Dec. 9,
2015, Nene was leaving a cabinet meeting
when he received a call from one of
Zumas advisers asking him to report
to the presidents office. Nene turned
around to return to the Union Buildings,
the sprawling hillside complex that
houses the presidential administration.
Zuma was waiting for him. Speaking in
a mix of English and his native Zulu, the
president stood as he told Nene he was
finished at the finance ministry, effective
immediately, and should start preparing
for a post at a government-backed bank.
Nene, returning to his car, texted Jonas:
The ax has fallen.
Within hours, Zuma named his new
finance minister: Des van Rooyen, a
member of Parliament from a small
town outside Johannesburg. It was
a strange choice. Van Rooyen was a
backbencher with no financial expe-
rience, and many officials had barely
heard of him. But theres evidence he
was well-known to the people who
really mattered. Phone records later
obtained by South Africas corruption
ombudsman placed Van Rooyen in the
vicinity of the Guptas compoundin a
wealthy enclave of Johannesburg called
Saxonwoldon at least seven occasions,
including the day before Zuma told Nene
he was out.
Since Nenes firing, long-standing
THE GUPTAS ALLEGED HOLD ON
PRESIDENT JACOB ZUMA HAS DRIVEN MUCH OF
SOUTH AFRICAN SOCIETY INTO OPEN REVOLT
November 13, 2017
questions about the scale of the Guptas
power in South Africa have exploded
into the most severe political and eco-
nomic crisis since the end of apartheid.
The family has been accused by activ-
ists and opposition politicians of stack-
ing the leadership of powerful state
companies, rigging bids in favor of
suppliers it controls, and even helping
orchestrate a planned $70 billion
nuclear-power deal with Russia, for
which it could supply vast quantities of
uraniumall while using an alliance with
Zuma to neuter law enforcement agen-
cies that would otherwise shut down its
efforts. Blue chip companies including
McKinsey, KPMG, and SAP have been
embroiled in whats fast becoming a
global scandal.
South Africans, trying to come to
grips with the astonishing scale of the
crisis, have adopted a once-obscure
political science term, state capture,
as a staple of even casual conversation.
It refers to the systematic perversion of
government policy to benefit moneyed
interests. It was first used widely to
explain what happened in Russia in the
1990s, when politically connected oli-
garchs bought public assets at knock-
PREVIOUS SPREAD: MUJAHID SAFODIEN/AFP/GETTY IMAGES; THIS SPREAD: LEFT: FELIX DLANGAMANDLA/FOTO24/GALLO IMAGES/GETTY IMAGES; RIGHT: AP
down prices. Yet previous examples
of state capture have almost always
involved a broad cast of protagonists:
an entire industry, for example, or
wealthy businessmen as a group. In
South Africa, it may have been pulled
off by a single family.
The Guptas are widely famous in
South Africa but also deeply mysterious.
They almost never speak in public. In a
rare appearance last year, Ajay Gupta,
a stout, floppy-haired figure in a black
suit and open-necked gray button-down,
told a hand-picked interviewer that he
wanted to give a straight answer.... PHOTO (1); BLOOMBERG (1); GETTY IMAGES (8); GCIS (1); NEWSCOM (1); ZUMA PRESS (1)
I am not a lobbyist. I am not a state
capturer.... I am a friend only. The
 ed
o int
p
Ap

DUDUZANE ZUMA
Hired by the Gupta
family in 2005 and
a shareholder or
director in many of
ESSOP PAHAD
their companies.
When he crashed his
Porsche into
Former government
a minibus in 2014,
official who helped
killing a commuter,
introduce the
his rst call was
Guptas to members
to Rajesh Gupta.
of South Africas
business and
political elite.
d
ce
AHMED JAFFER
Former country
BRIAN MOLEFE
O
chairman at KPMG;
on his watch the audit Former CEO of state
JACOB ZUMA rm assisted the
Guptas in their efforts
rail operator Transnet
and later of utility
MOSEBENZI
South Africas
president is facing
to buy the mining
company Optimum
Eskom, where he
was accused of
ZWANE
the biggest political from Glencore. A former provincial
systematically favoring
and economic crisis official alleged
Tegeta, the Guptas
since the end of to have helped direct
mining company.
apartheid, with CEOs government funds
After he resigned from
and street protesters to pay for a Gupta
Eskom, Zuma
calling for him wedding. As minister
gave him a seat in
to resign over his of mineral resources,
Parliament.
Gupta ties. Back he would later be
ed accused of helping
Tegeta buy Optimum

from Glencore.
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SALIM ESSA

d
Longtime Gupta family adviser
and a shareholder in many of their
DES VAN ROOYEN
Backbench MP who
ventures. Essa owned 60 percent
of the management consulting rm
replaced Nhlanhla Nene 55
as nance minister.
Trillian, which worked for Eskom
Phone records obtained
alongside McKinsey and received
by the corruption
what the utility has said may have
ombudsman placed him
been unlawful payments.
PTA BROTHERS repeatedly in the vicinity
of the Gupta compound.
Ajay, Atul, and Rajesh (aka Tony),
Fired
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through their investment vehicles

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THULI MADONSELA d

MMUSI MAIMANE
South Africas former
public protector, whose
report on the Guptas Leader of the opposition
substantiated many of Democratic Alliance.
the most provocative claims Maimane lodged a
about their inuence. citizen complaint that
helped prompt the public

PRAVIN GORDHAN NHLANHLA N protectors report

and has asked British
Finance minister until earlier this year; Finance minister until late 2015; authorities to investigate
he resisted nuclear-power plans that red weeks after his deputy said the McKinsey.
would benet the Guptas. Hes said to have Guptas offered him Nenes job on
presided over investigations into their tax the grounds that he was standing in
Aided affairs before being red by President Zuma. the way of their ambitions.

GUPTA ANTAGONISTS

Bloomberg Businessweek
only capturing going on, he joked
in surprisingly rough English, was in
forcing him to talk. He spoke for less
than seven minutes.
In a statement, the Guptas said it is
patent nonsense to suggest that our
family has captured the South African
state, and that less than two percent
of their business is government-related.
The family runs its businesses and per-
sonal lives in an ethical manner, they
said, has never been criminally charged
anywhere, and would welcome a cred-
ible and independent inquiry into any
accusations against them.
The Guptas alleged hold on Zuma
has driven much of South African
society into open revolt. A broad spec-
trum of union and business leaders
have demanded the presidents resig-
nation; the head of Business Leadership
South Africa, a lobby equivalent to the
U.S. Chamber of Commerce, recently
called him a thief. Zuma has hung
on, empowered by a committed base
in the African National Congress, the
resistance-group-turned-political-party
that dominates South African politics,
56
and the loyalty of a large chunk of the
electorate. The ANC will convene in
Johannesburg in December to anoint
a successor. Zuma, facing term limits,
is pushing for his ex-wife to take over
which opponents claim would allow him
to remain in control behind the scenes
and avoid ever revealing the extent of
his ties to the Guptas.
Modern South Africa was built with
the best of intentions and a slate of admi-
rable institutions, by people determined
to create a new kind of country, leaving
behind racism, theft, and violence as
the defining principles of government.
As Zuma entrenches himself ever more
deeply, the question becomes whether
the entire post-apartheid project could
be at risk. If so, South Africa might come
to look more like Vladimir Putins Russia,
or even Robert Mugabes Zimbabwe,
than the Rainbow Nation promised by
Nelson Mandela after he emerged from
27 years in prison.
What you have here is not the strug-
gle of the kind we had before. It is not a
racial struggle, says Sipho Pityana, the
chairman of mining group AngloGold
Ashanti Ltd., who as a young ANC activ-
ist was tortured and sent into exile. It
is a struggle where the very country is
being stolen.
THE ONE WHO LAUGHS AS HE
GRINDS HIS ENEMIES
The headquarters of the Gupta
familys computer business
There is an almost fable-like quality to
the Gupta brothers story. Their father,
Shiv Kumar Gupta, was a trader of spices
and soapstone powders in Saharanpur,
a gritty industrial city on Indias north-
ern plains. As his sons, born in the late
1960s and early 70s, entered adulthood,
he sent each of them in a different direc-
tion to seek fortune. Ajay went to Delhi,
Rajesh to China, and Atul to Africa,
which Shiv Kumar believed was on the
verge of a transformational boom, like
the U.S. a century earlier. Atul arrived in
Johannesburg, South Africas largest city
and commercial capital, in 1993.
On first impression, it was an unap-
pealing place, a tangle of highways and
tatty malls. The citys defining archi-
tectural feature was (and remains) the
electric fencing that rings even modest
homes and businessesa constant
reminder of crime and the absence of
trust. Even so, Johannesburg was the
heart of a dynamic economy, blessed
with a youthful workforce, solid legal
and physical infrastructure, and fathom-
less mineral wealth. International sanc-
tions were being lifted before Mandela
was elected president in 1994. Foreign
capital was flooding in, and the razing
of racial laws that governed every eco-
nomic interaction during apartheid was
turning millions of black citizens into real
consumers for the first time.
After a stint selling shoes, Atul saw an
opening in the PC business. South Africa
was years behind the West in putting a
computer on every deskparticularly the
kind of cheap, reliable machines that new
black-owned businesses could afford. In
1994 he founded Sahara Computers Ltd.,
an importer and distributor of Windows
PCs. In a rare departure from the familys
HOW ITS DONE
The Guptas pursuit of
Optimum Coal showed South
Africans how the family operates.
Theyve been accused of
helping to engineer a crisis at
Optimum to force owner
Glencore to sell it on the cheap.
APRIL 2015
Brian Molefe takes over as CEO of
state-owned power company Eskom, which
is stuck in a dispute over coal pricing with
Optimum. He scraps a proposed compromise
and slaps Optimum with a huge ne.
JULY 2015
Glencore receives a letter from
KPMG on behalf of a mystery buyer, which
turns out to be Tegeta, the Guptas
coal-mining concern. Glencore refuses
to sell Optimum.
SEPTEMBER 2015
Government inspectors descend
on Glencore-owned mines across South
Africa, ordering temporary shutdowns
on safety grounds.
DECEMBER 2015
Glencore CEO Ivan Glasenberg,
realizing hes stuck in an unfair ght,
agrees to sell Optimum to Tegeta.
JANUARY 2016
Eskom begins paying Optimum more
for coal, switching shipments to a different
power plant to get around the terms of its
old contract with Glencore.
APRIL 2016
Tegeta is struggling to nance the
acquisition. Just before the sale is scheduled
to close, Eskoms board approves a
600 million rand advance payment to
Tegeta for coal deliveries.
 Bloomberg Businessweek
almost total public silence, Atul agreed in
October to answer written questions from
Bloomberg Businessweek about how the
Guptas built their businesses. We soon
discovered a market that was so domi-
nated by monopolies and other industry
cartels that we were able to undercut the
competition, he wrote. Ajay and Rajesh
Gupta shut down their interests else-
where to join Atul in South Africathe
ideal environment, he continued, for us
to disrupt and exploit as entrepreneurs.
Still, in these early years, little dis-
tinguished the three Guptas from thou-
sands of other chancers in a booming
economy. Their trajectory changed in 1996
with a single introduction. Essop Pahad
was a member of the post-apartheid
ruling class, a senior ANC party official.
He was planning a visit to India by the
deputy president, Thabo Mbeki, when
an acquaintance suggested that a young
Indian go-getterAtulshould come along,
in an accompanying business delegation.
The trip exposed Atul to high-level polit-
ical and corporate life for the first time.
Afterward, Pahad also befriended Ajay,
who struck him as ambitious, intelligent
he was gifted as a number cruncher, in
particularand committed to the success
of South Africa.
When Mbeki succeeded Mandela in
1999, Pahad made other introductions
that helped the Guptas enter the tiny
top drawer of South African society. In
2002, Mbeki sent a private jet to Mali
on a mission to protect the Timbuktu
Manuscripts, a library of priceless ancient
documents. Pahad invited Ajay to join the
tripthe lone newcomer among a depu-
tation of presidential officials and poten-
tial donors from the industrial elite.
Pahad later got Ajay onto the board of the
FROM LEFT: SIPHIWE SIBEKO/REUTERS; ALET PRETORIUS/GALLO IMAGES/GETTY IMAGES
International Marketing Council, a presti-
gious group of business leaders that pro-
moted South Africa abroad. Ajay has also
claimed he served on a panel of economic
advisers to Mbeki that included several
of the countrys richest men. (Mbeki
denied this last year.) By the middle of
the 2000s, Ajay and his brothers were
enjoying access to power they could have
scarcely imagined as the sons of a spice
trader in Saharanpur.
The Guptas nimbly turned access
into profit. They stepped up efforts to
sell Sahara computers and IT services
to public schools and other govern-
ment agencies. And they diversified into
mining, the mainstay of the South African
economy, by creating a coal company
named Tegeta Exploration & Resources
Ltd., which sold mainly to the state.
With a growing business empire to
protect, the Guptas hedged their politi-
cal bets at a moment when South Africas
politics began to fragment: The unifying
spirit of the Mandela years had cracked
into bare-knuckle infighting. Mbeki, an
austere, business-friendly conserva-
tive, was never much liked by the ANCs
left-leaning rank and file, and Zuma,
at that time the deputy president, was
shaping up as his successor. According
to a former senior security official with
direct knowledge of the matter, Ajay
Gupta continued to court Mbekis camp,
while Rajesh Gupta began to develop links
to Zuma.
In 2005 the brothers began putting
Zumas family on their payroll. They
hired his son Duduzane, then in his
early 20s, as an IT specialist; appointed
Duduzanes twin sister, Duduzile, as
a company director; and made one of
Zumas wives (polygamy is legal in South
Africa, and Zuma currently has four) a
communications officer.
Over the years, Duduzane became
an integral node in the Guptas empire,
both as a shareholder in uranium and
coal mines and a director in a string of
other companies. One recent visitor to
Rajesh Guptas office found Duduzane
sprawled across the couch, playing on
his phone. It was Duduzane who set up
Jonass Saxonwold meeting.
In 2005, Mbeki fired Zuma, and he
soon found himself not only unemployed
but facing rape and corruption charges.
(He was acquitted of the former; the
latter were thrown out, but the highest
appeals court ruled in October that
they can be reinstated.) Even so, Zuma
remained formidable. He ran intelligence
operations for the ANC in exile, giving
him thick files on his colleagues, and his
Zulu middle name, Gedleyihlekisa, trans-
lates roughly to the one who laughs as
he grinds his enemies.
At a turbulent ANC conference in 2007,
Zuma deposed Mbeki as party chief,
then won the South African presidency
in a general election two years later. His
intimacy with the Guptas was soon on
display. Zumas first state visit to Asia, in
June 2010, was to India. He took a suite
at the seaside Taj Mahal Palace hotel in
Mumbai, using its sitting room to meet
with investors. As they filed in, they found
November 13, 2017
the president accompanied at almost all
times by Ajay or Atul. According to a
person familiar with the trip, the local
Indians did not know what to make of
their former compatriots. As far as they
knew, the Guptas were nobodies.
THESEGUPTAGUYS NEEDYOURHELP
Maseko
As Zuma consolidated power, awareness
within the government of the Guptas
influence spread gradually, and then all
at once. Among the first to experience it
directly was Themba Maseko, who ran
the government office that coordinates
public-sector announcements and adver-
57
tisingan outlay of 600 million rand a
year. In late 2010, Ajay Gupta called
Maseko, asking if they could discuss the
familys entry into the media business.
The Guptas were starting a newspaper,
called the New Age, and a TV station.
The day Maseko was scheduled to go
see Ajay, his cellphone rang. He recog-
nized the number immediately, he said in
an interview, expanding on an account he
has previously laid out for investigators.
It was the switchboard at South Africas
presidential residence. Zuma came on
the line. These Gupta guys...need your
help, he said in Zulu. Please help them.
Maseko was alarmed. Why would the
president himself be involved?
Later, in a formal sitting room in
Saxonwold, Ajay explained to Maseko
what kind of help he had in mind: He
wanted the governments entire adver-
tising budget to be devoted to the Guptas
media holdings. Maseko tried to explain
that the request was inappropriate and,
in any case, beyond his powerother
officials and ministers could object. Ajay
brushed off that concern, Maseko said. He
left Saxonwold feeling queasy.
Soon Ajay called again. It was a
Friday night, and Maseko was looking
forward to a weekend out of town.
Ajay asked to meet Maseko first thing
 Bloomberg Businessweek
Monday. Maseko refused. Ajay, unac-
customed to that, declared that the
meeting should happen instead on
Saturday morning. Thats when I told
him to go f--- himself, Maseko says.
Who the hell is he? Hes not my boss.
I dont work for him.
Two months after that exchange,
Masekos boss called him into an urgent
meeting. Instructions had come down
from the president: Maseko was to be fired
or reassigned immediately. He was shuf-
fled to another department and resigned
shortly afterward.
Around the same time, three senior
intelligence chiefs, including the heads of
South Africas equivalents of the CIA and
FBI, were also removed with no public
explanation. The ousted head of domestic
intelligence later told the Mail & Guardian
newspaper that his organization had been
investigating whether the Guptas appar-
ent control of so many senior government
officials presented a national security
threat. Big agency or small, the pattern
was clear: Get in the familys way, and
your career could be cut short.
58
ROYALS
The tabloids discover the
Gupta family
The wider public discovered the Guptas
on a cloudy Tuesday in April 2013, when
a chartered Airbus A330 touched down
near Johannesburg. The jet, carrying
more than 200 Indians bound for the
wedding of a 23-year-old Gupta niece,
didnt land at OR Tambo International,
the regions commercial airport. It
touched down at the South African Air
Forces Waterkloof base, an ostensi-
bly ultra-secure facility that manages
transport and reconnaissance planes
THE BROTHERS WERE ENJOYING ACCESS
TO POWER THEY COULDNT HAVE IMAGINED AS
THE SONS OF A SPICE TRADER IN SAHARANPUR
and presidential flights. The Indian
nationals handed over their passports
en masse, without the nuisance of indi-
vidual screening.
As his extended family deplaned,
Atul Gupta was waiting by a red carpet,
wearing a pink T-shirt, a blue blazer, and
a broad grin. Dozens of Range Rover SUVs
were standing by to whisk the partygoers
in a convoy to Sun City, a high-end resort,
with a police escort flashing sirens to
clear traffic. For the Guptas Indian rela-
tives, the message was unmistakable: The
brothers may have never amounted to
much at home, but in their new country
they lived like royalty.
Although Indian weddings are rarely
less than lavish, Vega Guptas was excep-
tional. As her groom awaited her on a
flower- garlanded raft, synchronized
swimmers writhing in the pool beneath
him, the military landing was already
becoming a scandal. A local radio reporter
had gone on air to report on the unprec-
edented appropriation of Waterkloof,
and the story went swiftly viral. A guest
recalls the brothers darting around the
wedding, clearly agitated, taking call after
call to manage the fallout. In Pretoria, the
administrative capital, military officials
frantically pointed fingers at one another.
The Gupta family, in its statement, said
it followed official processes in arrang-
ing the flight and that no wrongdoing
was ever found.
South African media reported that
the Guptas had pulled off the landing
with the help of a little-known official
Mosebenzi Zwane, head of agricul-
ture in the rural Free State province.
According to emails from Gupta com-
panies later published by local news
outlets, Zwane also helped win govern-
ment approval for about 114 million rand
in annual subsidies for a dairy farm asso-
ciated with the Gupta family. But much
of the money never went to the farm.
November 13, 2017
Roughly 84 million rand of the govern-
ments cash moved through a chain of
Gupta-controlled companies to accounts
in the Middle East, and then two-thirds
of it returned to South Africa, in part
to pay wedding costs. This later proved
disastrous for the accounting giant
KPMG, which gave a clean audit to a
key company involved. (KPMG denies
that it facilitated money laundering
and has said it was deceived about the
funds source.)
The real scandal, however, was that
by the time of the wedding, 114 million
rand was a pittance compared with
other government transactions in which
the Guptas were deeply involved.
Major chunks of South Africas
economy remain in the hands of so-called
parastatalsgovernment-controlled com-
panies that deliver power, manufacture
weapons, and move freight. In early 2014
the state railway operator, Transnet SOC
Ltd., was shopping for $4.7 billion worth
of new locomotives. Bids from General
Electric Co. and Bombardier Inc. were
clear front-runners for diesel and electric
locomotives, respectively, according to a
person familiar with the process. But in
the final stages, Transnet decided to split
the contract, handing half to two Chinese
groups. Leaked emails would later show
that one of them had formed a partner-
ship with a company associated with the
Guptas. According to one person familiar
with the details, Transnet also increased
the price it would pay per locomotive by
more than 40 percent. Transnet said in
June that it is confident its procurement
process has sufficient checks and bal-
ances to guarantee integrity; the Guptas
said the deal had nothing to do with
their family.
After the deal, the railways chief
executive officer, Brian Molefe, was
moved to another lucrative job: running
Eskom Holdings SOC Ltd., the state
 Bloomberg Businessweek
utility that generates 95 percent of South
African electricity. With annual revenue
of more than 150 billion rand, its one
of Africas largest companies. As Molefe
arrived, Eskom was in the middle of a
dispute with Glencore Plc, the $71 billion
global mining company. (Peter Grauer,
the chairman of Bloomberg LP, is a
senior independent nonexecutive direc-
tor at Glencore.) Glencore owned an
Eskom supplier, Optimum Coal Holdings
Ltd., and wanted to improve the terms
of its dealrising costs, Glencore said,
had made the arrangement unprofit-
able. Eskom was sympathetic and was
working on a compromise. But after
Molefe took over as CEO, one of his first
acts was to scuttle the negotiations and
fine Optimum about 2 billion rand for
delivering what Eskom said was bad coal.
Seeing no short-term resolution,
Glencore prepared to place Optimum
in bankruptcy protection. Then, in July
2015, it received a surprising letter from
KPMG. An unnamed client wanted to
buy Optimum for a fraction of what
Glencore had paid four years earlier.
Glencore refused what it saw as an out-
rageously low price. It expected to even-
tually repair the rift with Eskom and
restore the company to health.
Soon Tegeta, the Guptas mining
company, stepped forward as the bidder.
And events showed that the family was
intimately involved with Eskom leader-
ship, making sure no pact with Optimum
was reached.
That September, says a person with
direct knowledge of the matter, Atul
Gupta went to see a couple of partners
at KPMG. He was holding an internal
Eskom document he shouldnt have had
access to: a letter from Glencore empha-
sizing that the company needed better
terms if it was going to be able to keep its
mine producing. Gupta asked KPMG to
draft a response for Molefes signature,
making it clear the utility would never
make peace with Glencore. The KPMG
FROM LEFT: COURTESY YOU MAGAZINE; COURTESY GCIS
executives refused, but they also failed
to alert their superiors or any govern-
ment agency to the underlying activity.
The Guptas were disrupting negotiations
between a state company and another
party so they could buy the resulting
wreckage at a great price. In an inter-
view, Molefe denied improperly helping
the Guptas, and said Eskom was in finan-
cial crisis at the time and was right to
stand firm against Glencore, a famously
tough negotiator. He said he didnt know
how Atul got the letter.
The same month, Zuma made a sur-
prising cabinet appointment. Zwane,
the obscure official whod helped the
Guptas plan their nieces wedding, was
named minister of mineral resources.
He was supported in his new role by
two advisers who, company records
show, had indirect business links with
the Guptas. Within weeks, according
to South Africas mining-industry asso-
ciation, government inspectors were
appearing regularly at Glencore mines,
finding fault, and ordering temporary
shutdowns. By December, Glencore
no stranger to geopolitical hardball
understood it was not in a fair fight. In a
meeting in Zurich with Zwane and Rajesh
Gupta, CEO Ivan Glasenberg agreed to
sell Optimum. Before the deal was even
completed, Eskom began paying more
for the coal. Spokesmen for Glencore
and Zwane declined to comment.
In South African business circles, a
firm impression took hold that Molefe
was in the Guptas camp. One local exec-
utive recalls attending a party at the res-
idence of Indias ambassador to South
Africa, held to celebrate the visit of an
Indian government delegation, that was
attended by both Molefe and the Guptas.
Speaking in Hindi to a visiting official,
one of the brothers motioned unmistak-
ably toward Molefe and referred to him
as a naukar. The word means, charita-
bly, servant. (The Gupta family called
this account nonsense.)
A CURIOUS PURCHASE
Ajay Gupta and Zuma
By early 2016, KPMG was beginning to
worry about the reputational risks of
working with the Guptas. In January
more than a dozen partners attended
a tense crisis meeting to discuss three
red-flag items: the episode with Atul and
November 13, 2017
the letter; another incident in which Atul
allegedly bullied a KPMG staffer into
dropping questions about a tax issue;
and a decision by a major South African
bank to shut Gupta-linked accounts
after flagging suspicious transactions.
Despite the trouble, KPMGs local chair-
man, Ahmed Jaffer, made the case with
others for keeping the Guptas as clients,
says a person present at the meeting.
( Jaffer says he cant comment because
of the terms of his subsequent departure
from KPMG.) KPMG also did the books
for Eskoma gargantuan account. Now
that the Guptas were so visibly tied to
the energy utility, firing them as clients
could also mean losing Eskom. Several of
Jaffers subordinates couldnt believe it.
After the meeting ended without a clear
decision, one of the partners turned to
a few others in dismay. Atuls possession
of the internal Eskom letter should have
been enough to sever the relationship,
he saidit was like an atom bomb. It
took another two months for KPMG to
cut off the Guptas.
Western consultants just couldnt
keep away from the Guptas affairs.
59
Not long before KPMG began to extri-
cate itself, McKinsey began pursuing its
own deal with Eskom to help implement
a modernization plan. McKinsey needed
a partner: A government program called
Black Economic Empowerment requires
overseas companies to collaborate with
businesses that have nonwhite owner-
ship. McKinsey ultimately worked along-
side a local consulting group called
Trillian, which incorporation documents
would later show was 60 percent owned
by Salim Essa, a shareholder in Tegeta
and other Gupta ventures. Numerous
people who have dealt with the family
say Essa is one of the Guptas closest
advisers. Essa did not respond to voice-
mail messages asking for comment.
By January 2016, Eskom was the talk
of McKinseys Johannesburg office. If
cost-saving targets were met, McKinsey
stood to earn billions of rand over
several years, with Trillian in line for a
substantial cut. The scale of the figures
unnerved some senior partners, say
people familiar with McKinseys oper-
ations. It wasnt clear what they could
possibly be doing to merit such com-
pensation. And McKinsey had begun
working with Trillian before it had
passed due-diligence checks.
A number of McKinsey executives
 Bloomberg Businessweek
supported the deal, but its biggest
backer was partner Vikas Sagar. In
February he wrote a letter to Eskom to
authorize it to pay Trillian directly for
work undertaken as part of the McKinsey
projectputting the imprimatur of the
worlds most prestigious consulting firm
on the potential transfer of state funds
to a Gupta ally. (A McKinsey spokesman
says the letter was inaccurate and that
Sagars permission did not constitute
approval from the firm for payments to
Trillian, with which it never entered a
formal contract. Sagar didnt respond
to several requests for comment.)
By March, Sagars superiors had had
enough, and stepped in to terminate
the Trillian relationship; the company
wasnt providing straight answers
about its ownership to McKinsey. A
few months later, Eskom scrapped its
overall McKinsey contract. For around
six months of work, McKinsey received
the equivalent of about $72 million,
and Trillian $40 million. The McKinsey
spokesman says the firm intends to pay
back the funds in question. A spokes-
man for Trillian didnt reply to requests
60
for comment.
There was at least one more avenue by
which money might flow from Eskom to
Gupta-connected companies. In 2010 the
familys investment company borrowed
about 250 million rand from a state bank
to buy a South African uranium mine.
It was a curious purchasethere was
no real buyer for the uranium, because
South Africa has only one aging nuclear
plant. In 2014, however, Zumas admin-
istration laid out a grand plan that would
make the mines value soar: He proposed
building six massive nuclear plants for
Eskom at an ultimate cost that could
exceed $70 billion.
The idea was controversial from
the start. In addition to immense
reserves of coal, South Africa has a
vibrant renewable-energy sector and no
obvious need for nuclear power. Zuma
has dismissed the criticism, arguing the
country needs to diversify its energy
sourcesand strategic alliances. In
2014, he and President Putin agreed
that Russias state nuclear agency,
Rosatom Corp., would provide tech-
nology for the plants.
The next summer, Zuma was back in
Russia for an economic summit, joined
by his senior ministersincluding Nene,
the then-finance chief. Toward the end of
the conference, according to two officials
who were present, Zuma cornered Nene
in a briefing room about the nuclear deal.
The president and several other ministers
demanded that Nene provide financial
guarantees that would allow Eskom and
Russias relationship to move ahead. Nene
refused; even under the most optimistic
projections, he said, a nuclear project of
the scale Zuma envisioned would severely
strain South African finances.
Zuma complained bitterly about
Nenes resistance, the summit officials say.
Not long afterward, Nenes deputy, Jonas,
found himself in the Guptas sitting room
at Saxonwold, being offered his bosss job.
WELLKILLYOU,WELLKILLYOURSON report went public.
Madonsela
At the Inanda Club, a polo ground on
the edge of Johannesburgs financial dis-
trict, Thuli Madonsela orders a green tea
with honey and opens up about the times
people have threatened to kill her.
The first was early April 2016. At the
time, Madonsela, a 55-year-old lawyer
who helped draft South Africas 1996
constitution, was serving as public pro-
tectora sort of national ombudsman.
The role features the finest impulses
of South Africas post-apartheid order.
Entirely independent of partisan politics,
the protector has the power to compel
testimony, subpoena documents, and
search buildings in response to citizen
complaints, and may investigate any
public-sector activity throughout a
seven-year term.
Madonsela was in Cape Town with her
kids to attend a jazz festival when her
phone pinged. It was an SMS that came
and said, some known gangster has been
contacted to contract a killer to kill me,
Madonsela recounts. Soon after, another
message: Well kill you, well kill your
sonwe know you take a walk in the
morning. Madonsela quickly ended
November 13, 2017
her daily strolls around her neighbor-
hood in Pretoria. Soon, cars that didnt
belong to anyone Madonsela could iden-
tify started parking outside her house
at all hours. She informed the police, to
little effect. Nothing was done to beef
up security, she says, because it was
their own people.
Shortly before the threats began,
Madonsela had decided the focus of her
last months in office would be a major
inquiry into state capture, in particular
the Optimum coal deal and the events
leading up to Nenes firing. Zuma sued
to block the release of Madonselas work,
which she completed the day before her
term ended, in October 2016. That legal
effort failed, and Madonselas 355-page
Cellphone records shed obtained
backed up Jonass account of being sum-
moned to Saxonwold and showed that
Zumas son Duduzane was in the area at
the same time. (Duduzane declined to
comment. In a rare interview in August, he
told the BBC he was not corrupt, and that
he thought the Guptas chose to work with
him because he is a likeable guy.) The
records showed Molefe, while in charge
of Eskom, called Ajay Gupta 44 times over
a seven-and-a-half-month period, while
an additional 14 calls went the other
way; Molefe also paid repeated visits
to Saxonwold. He says the calls to Ajay
Gupta were to sort out an issue related
to another mine the family controlled.
When it came to coal, Madonsela wrote,
the only entity which appears to have
benefited from Eskoms decisions about
Optimum was the Guptas Tegeta. In sum,
Madonsela says, there was a prima facie
case of state capture.
Coming amid what was already a
steady flow of new revelations about the
Guptas from South Africas feisty press,
the report was too much for the countrys
elite to ignore. Molefe soon resigned from
Eskom, and ANC heavyweights began
calling openly for Zumas resignation.
For a short time after Madonselas
report was released, the presidents
ouster seemed like a real possibility to
someuntil he went back on the offen-
sive. At the beginning of 2017, Molefe
was given a seat in Parliament. And in
March, Zuma fired Pravin Gordhan,
another in a chain of finance ministers.
Like Nene, Gordhan had resisted the
nuclear deal with Russia, and accord-
ing to two people with knowledge of the
 Bloomberg Businessweek
matter, hed presided over investigations
into the Guptas taxes.
On June 1, the first of a torrent of
stories was published by the amaBhun-
gane Centre for Investigative Journalism
and the Daily Maverick news website,
which had obtained a leak of emails
and documents from a Gupta company
server. The communications painted
a picture of an intimate partnership
between the Guptas, Duduzane, govern-
ment ministers such as Zwane, and para-
statal executives like Molefe. Around the
time Glencore agreed to sell the Optimum
mine to the Guptas, an email shows
Zwanes name on the passenger list for
a flight on their private jet departing from
Zurich to Delhi.
The leaks also precipitated a disas-
ter for the companies that had become
entangled with the Guptas. Eight top
KPMG executives, including Jaffer,
the country chairman, resigned. At
McKinsey, global managing partner
Dominic Barton apologized and Sagar
left the firm. And the German IT
company SAP SE has said its being inves-
tigated by the U.S. Department of Justice
over payments of about 94 million rand
to Gupta-controlled entities in exchange
for help winning business from Transnet
and Eskom.
The Guptas apparent grip on politics
is resilient, but their freedom of move-
ment has been significantly reducedand
doing business with them now carries
potentially fatal risks. Bell Pottinger, a
London public-relations company with
FROM LEFT: ANTONIO MUCHAVE/SOWETAN/GALLO IMAGES/GETTY IMAGES; GEORGE PHILIPAS/POLARIS/NEWSCOM
a long record of representing clients with
less-than-sterling ethical credentials, col-
lapsed in September after a campaign
blaming criticism of the Guptas on white
monopoly capital backfired. No major
South African bank is currently willing
to take the familys money, leaving only
the Bank of Baroda, a midsize Indian
lender, to handle their accounts. And
its seeking a court order for permission
to close them.
Still, real accountabilitythe kind that
comes in a courtroommay prove elusive.
Although financial regulators have iden-
tified at least 72 suspicious transactions
involving Gupta-linked companies, many
people with knowledge of the matter say
South African prosecutors, who answer
to the president, arent seriously inves-
tigating any of the transactions. Even if
prosecutions do occur, they wont solve
the broader problem of how to clean up
what many South Africans now view as
a brazenly corrupt state. If the Guptas
influence is as pervasive as some critics
say, the only practical solution might be
a Truth and Reconciliation Commission
style amnesty in exchange for coming
clean. You cant put an entire govern-
ment in jail, as the ANC acknowledged
two decades ago.
The Guptas maintain, with more than
a hint of racial subtext, that their critics
are merely resentful. They are busi-
nesses trying to hold on to their privi-
leged status and dominant positions
that many of them held during apart-
heid, Atul Gupta wrote in his responses
to Bloomberg Businessweek. The familys
greatest sadness, he said, is that this
potentially great country is being held
back by those same vested interests that
oppose economic emancipation.
THE SOUTH AFRICA OFTOMORROW
Protests are now constant
If it were up to me and I made the rules,
President Zuma told supporters at a rally
outside Johannesburg last year, speaking
in Zulu, I would ask for six months as a
dictator. Remove the constraints of the
democratic system, he continued, and
youd see wonders.
In South Africa, one of those con-
straints is term limits. Zuma must leave
office after a general election sched-
uled for 2019. His preferred succes-
sor is Nkosazana Dlamini-Zuma, the
mother of four of his more than 20 chil-
dren. She appears to be an even bet to
take over as president of the ANC at its
December conference, with her strong-
est challenge likely to come from Cyril
Ramaphosa, a businessman and the
current deputy president, who enjoys
the support of much of the countrys
financial elite.
The electoral dominance of the ANC
is such that the winner of its leadership
November 13, 2017
race will probably become the coun-
trys next president, but thats less a cer-
tainty than it once was. The Economic
Freedom Fighters, a splinter party led
by a former student activist, has pulled
away left-wing supporters. The more
genteel Democratic Alliance is making
a play for the center, after taking control
of the countrys three most important
cities in municipal elections last year.
The blocs leader, Mmusi Maimane, has
positioned himself as Zumas chief antag-
onist on the Gupta issue, lodging one of
the citizen complaints that prompted
Madonselas report and making a formal
request to the U.K.s Serious Fraud Office
for an investigation of McKinsey. (The
SFO has not announced the opening of
an investigation.) The Guptas, Maimane
says, are sordid people who found a
vulnerable country and took advantage.
With the government consumed
by scandal, South Africas economic
promise is slipping away. In April two
of the three global ratings agencies
downgraded the countrys debt to junk
status. The economy has exited a recent
recession, but growth isnt anywhere
61
near fast enough to raise living stan-
dards for the bulk of the population.
The threat of violent crime continues
to be elemental. OR Tambo airport has
seen a string of follow-home attacks in
recent weeks, including one in which a
busload of Dutch tourists was trailed out
of the terminal, flagged down by a man
dressed as a police officer, and robbed
at gunpoint. The murder rate in Cape
Town is almost 40 percent higher than
that of Detroit, and rising.
No one yet knows what kind of
country the South Africa of tomorrow
will be. There was nothing inevitable
about the orderly transition to democ-
racy that Mandela oversaw; in the 1980s,
some of his compatriots feared the end
of apartheid might split the nation in
two or even spark civil war. The new
society he helped build was blessed in
many ways: by its natural endowments,
the energy of its citizens, and the sophis-
tication of the institutions by which they
agreed to be governed. But Mandelas
charisma papered over enormous social
and economic divides. And as South
Africans are learning to their chagrin,
even the most thoughtfully constructed
institutions are ultimately only as prin-
cipled as the people who run them. 
With Sam Mkokeli
 Bloomberg Businessweek

Tax Revenue as a
Percentage of GDP
War Wa
62
War War

1791 1900
The Long, Absurd His
And Where We Go Fro
 November 13, 2017

20%

r
10
Reagan 63

0
2017
story of U.S. Taxes
m Here By Justin Fox
 President
Donald Trump
wanted to
call it the Cut
Cut Cut Act.
Congressional Republicans settled on the less catchy and
no more descriptive Tax Cuts and Jobs Act. What the legis-
lation that began making its way through the U.S. House of
Representatives in early November actually would do is sharply
reduce taxes for business while rearranging the personal
income tax with a mix of cuts and increases. House Speaker
Paul Ryan called the bill a game changer for our country.
The president said it was the rocket fuel our economy needs
to soar higher than ever before.
Thats a lot to expect from some changes in the tax code. But
then, here in the U.S. weve come to expect big things of our
income taxes. On the right, cutting them has been portrayed for
decades as a near-magical growth elixir. On the left, raising or
rearranging them is seen as essential to making society fairer.
And across the political spectrum, economic and social policies
64
have come to rely on carving credits, deductions, and other
exceptions out of the tax code to favor this or that behavior.
It can sometimes feel, in fact, as if we have lost sight of
the fact that the fundamental purpose of our tax system is to
raise revenues to fund government. That was the lament of
President George W. Bushs Advisory Panel on Federal Tax
Reform in November2005. But this bipartisan group of wor-
thies couldnt agree on how to raise those revenues either,
instead offering two plans with differing priorities. Both were
mostly ignored by Congress at the time, though some of the
recommendationssuch as shrinking the tax deductions for
mortgage interest and state and local taxeshave found their
way into this years bill.
Overall, though, it appears that the legislation will only
make it harder to raise revenue to fund government. The House
and Senate have passed budget resolutions clearing the way
for $1.5trillion in revenue losses over the next decade from
the tax changes. Thats $150billion a year to add to a federal
deficit that totaled a sinister-sounding $666billion, 3.5percent
of gross domestic product, in the just-ended fiscal year. All of
which is a longer way of saying that well almost certainly be
back at this once again in the all-too-foreseeable future, trying
to figure out a better way to fund the government.
Since 1981, the year of President Ronald Reagans big tax cut,
Congress has passed and presidents have signed 55 bills that
the Urban-Brookings Tax Policy Center counts as major tax
legislation. During the prior 36 years there had been just18.
In their essential text, Taxing Ourselves: A Citizens Guide to the
Debate Over Taxes, economists Joel Slemrod and Jon Bakija
dub the years since 1981 the modern tax policy era. Which
leads this exhausted taxpayer to wonder: What will it take to
make this era end?
Ominously, most previous U.S. tax eras ended with major wars
that required big increases in government revenue. Lets hope
it doesnt take that to break us out of the cut-reform-increase-
repeat loop were currently trapped in. But a tour of U.S. tax
history1 does at least offer the hopeful message that things
can change.
The no-taxes era: 1776-89. The first chapter of U.S. tax policy
was defined by the Articles of Confederation, which left the
national government to beg the states for money. Fixing this
was a major priority of the Constitutional Convention of 1787.
What substitute can there be imagined, Alexander Hamilton
wrote in Federalist Paper No. 30, but that of permitting the
national government to raise its own revenues by the ordinary
methods of taxation authorized in every well-ordered consti-
tution of civil government?
The tariffs era: 1789-1861. Some in the early republic had
proposed that the federal government should be able only
to levy external taxes, i.e., tariffs. While the Constitution
put limits on direct taxesat the time understood to mean
taxes on property, which became a key means of funding
state and local governmentsit made clear that more than
just tariffs were allowed. An early foray into taxing distilled
spirits sparked a rebellion, though, leaving customs duties
to provide almost 90percent of federal revenue from 1789
to the Civil War. Tariffs had the added benefit, as Hamilton
argued, of encouraging domestic industry. So from the begin-
ning, U.S. officials looked to tax policy to achieve economic
goals beyond just funding the government. But in the tariffs
era they did this in moderation, prioritizing revenue over
protectionism.
The tariffs-plus-sin-taxes era: 1861-1913. The War of 1812
PREVIOUS SPREAD DATA: HISTORICAL STATISTICS OF THE UNITED STATES, MEASURINGWORTH, OFFICE OF MANAGEMENT AND BUDGET
put a damper on trade, and thus on tariff revenue, forcing
Congress to turn temporarily to excise taxes (sales taxes on
specific goods, in this case mainly liquor). But it was the huge
costs of the Civil War that finally ended tariffs dominance. To
finance the war, the Union used its imagination, taxing income,
estates, liquor, tobacco, playing cards, and a variety of manu-
factured goods. (The Confederacy struggled to collect taxes
and in the end mainly just printed money.) Most of these taxes
were repealed not long after the war, but some remained to
help pay the bills. It wasnt that government had gotten all
that much biggerfederal spending settled back to about the
same level after the war as before, around 2percent of gross
domestic product. But customs revenue sputtered as protec-
tionist politicians from manufacturing states pushed tariffs
so high that they depressed trade. By 1913, customs duties
accounted for 45percent of federal revenue, and liquor and
tobacco taxes 43percent.
The income tax era: 1913-41. The Civil War income tax was
repealed in 1872, but the clamor for a legislative answer to
the explosion of economic inequality unleashed by indus-
trialization grew in the ensuing decades.2 Taxes became a
1 Derived chiefly from W. Elliot 2 Steven R. Weismans The Great
Brownlees Federal Taxation Tax Wars is an evocative account
in America. of these years.
Bloomberg Businessweek
national obsession: A single tax on land proposed by the
economic crusader Henry George gained a fervent follow-
ing; state after state enacted inheritance taxes. In 1894, a
Democratic-majority Congress imposed a tax on high earners
and corporations while reducing tariffs. A year later, in a bit-
terly contested 54 decision, the Supreme Court ruled this a
violation of the Constitutions limits on direct taxes, but the
unpopularity of that ruling helped nudge the partisan strug-
gle over taxes into a consensus.
By 1909 a Republican Congress and president, William
Howard Taft, were approving a corporate income tax designed
to get around the Supreme Courts ruling and a constitutional
amendment permitting a personal income tax. Four years after
that, the Democrats took control of Congress and the White
House and promptly imposed an income tax, a 2percent levy
on the top 2percent of the income distribution. The military
buildup for World War I brought an expansion of the tax to
about 15percent of households, with rates for higher incomes
topping out at 77percent. After the war, some Republicans
wanted to supplant this progressive taxa modern legisla-
tive adaptation of the Communistic doctrine of Karl Marx,
one senator called itwith a national sales tax. But Treasury
Secretary Andrew Mellon pushed instead to keep the income
tax while lowering the top rate, eventually to 24percent. With
the growth of government spending, to about 4percent of GDP
in the 1920s, and the advent of Prohibition (so long, liquor tax
revenues), corporate and personal income taxes had become
indispensable, with the former providing about a third of
federal revenue and the latter about a quarter.
The much-bigger income tax era: 1941-81. Income tax
revenue, reliant as it was on corporate profits and a narrow
base of high earners, collapsed in the Great Depression, spark-
ing a fevered search for alternatives. In 1932 a bipartisan deal
for a national retail sales tax was upended by a bipartisan back-
bench rebellion, with Congress opting instead for income tax
hikes and excise taxes on automobiles, furs, gasoline, radios,
refrigerators, and much more. (The states, meanwhile, turned
to general sales taxes in a big way.) The big new spending
program that was Social Security necessitated a payroll tax,
which started at 1percent of earnings in 1937. But the really big
changes came with World War II, which sent federal spendings
share of GDP flying past 40percent. Washington met the chal-
lenge by, first, borrowing lots of money and, second, making
the income tax a mass tax rather than one targeted at the afflu-
ent. The number of returns filed jumped from 7.6million in
1939 to 49.9million in 1945.
After the war, the taxes stayed. From todays perspective it
seems remarkable that voters didnt rebel against such a gigantic
increase. Federal revenue went from an average of 4.9percent
of GDP in the 1920s and 1930s to 17percent in the 1950s and
1960s. Vestigial wartime patriotism was key, at first. So was the
1943 shift to an ingenious, even diabolical invention: the auto-
matic payroll deduction, which made the tax both harder to
evade and less painful to pay. It never occurred to me at the
time that I was helping to develop machinery that would make
possible a government that I would come to criticize severely as
too large, too intrusive, too destructive of freedom, lamented
economist and conservative hero Milton Friedman, who worked
on the withholding plan in the wartime Treasury Department.
November 13, 2017
It also helped that decades of strong, broadly distributed
economic growth kept paychecks rising, despite the tax bite.
Plus, the things government was spending money oninterstate
highways, the space program, Social Securitywere popular.
The cut-reform-increase-repeat feedback loop era: 1981-
present. The revolt finally came three decades later. Economic
growth was sputtering, conservative political ideas were resur-
gent, and inflation was pushing taxation beyond acceptable
bounds, moving taxpayers into higher-rate brackets even when
their real incomes didnt rise. They reacted by, among other
things, electing Ronald Reagan president in 1980.
While Reagans dislike of taxes seems to have been visceral,
he had the backing of a group of supply-side political activ-
ists and thinkers3 who had coalesced in the 1970s around the
notion that trimming certain taxes, mainly on high earners and
businesses, would so stimulate economic growth and income
that the tax cuts might pay for themselves. The Reagan cuts
of 1981 in fact didnt pay for themselves, though this was in
part because Reagan insisted on cutting everybodys taxes.
LawrenceB. Lindsey, an economist who worked for Reagans
Council of Economic Advisers and was later George W. Bushs
top economic adviser, has estimated that lowering the rate
for the top bracket4 from 70percent to 50percent in 1981 did
bring an increase in net revenue as top incomes grew and tax
avoidance declined, and rate cuts for the next few brackets
(there were 17at the time) broke even. But most of the other
1981 provisions were revenue losers, with the indexing of all
65
brackets to inflation likely the biggest. Overall, Lindsey con-
cluded, economic growth and reduced tax avoidance recouped
about one-third of the bills estimated direct cost.
Big deficits arrived in the tax bills wake, followed by tax
hikes in 1982, 1983, and 1984. Then came the tax reform of
1986, which lowered rates and removed deductions in mostly
revenue-neutral fashionbut didnt put an end to tinkering
with the tax system. Multiple rounds of income tax cuts and
increases have come since. And whether or not Lindseys
one-third estimate is exactly right, its nice shorthand for
how Republican economistsas opposed to politicians and
propagandistshave justified tax cuts to this day. They dont
claim cutting taxes increases revenue, instead arguing that
bigger government distorts the economy more than smaller
government, high tax rates distort more than low rates, taxes
on capital (aka business) distort more than taxes on labor,
3 To name a fewthe 4 Tax progressivity
late congressman
Jack Kemp, the late Average federal tax rate, by income group
Wall Street Journal
editorial writer Jude 40%
Wanniski, and the
still very much with Top 1 percent
us (and probably on
cable TV news right
now) economist
81st to 99th
percentiles 20
Arthur Laffer Jr.
21st to 80th
Lowest 20
0
1979 2013
DATA: CONGRESSIONAL BUDGET OFFICE
 Bloomberg Businessweek
and taxes on labor distort more than taxes on consumption.
Extreme versions of this thinking have motivated political
proposals such as the flat tax championed in the 1990s by maga-
zine publisher and presidential candidate Steve Forbes, among
others, and the fair tax that radio talker Neal Boortz turned
into a cause in the 2000s. The Forbes flat tax was distinguished
as much by its total exemption of investment income as its
17percent rate; the fair tax aimed to replace the income tax
with a 23percent national sales tax.5
Both were reminiscent of the late-19th century intellectual
ferment that led to the income tax. Back then, the discussion
was driven by progressives looking to tax the rich; in recent
decades its been conservatives aiming to roll back taxes on the
rich and on business. There have been other voices in the post-
1981 tax debate, of course. Liberals and some conservatives have
pushed to maintain the progressivity of the tax code, techno-
crats have wanted to broaden the tax base, and deficit hawks
have campaigned for more revenue. But theyve mostly been
fighting rearguard actions, not setting the terms of the debate.
Those rearguard actions havent been fruitless, though. The
top income tax rate is 39.6 percent, much lower than it was
in 1981, and tax rates on capital gains and dividends are much
lower than that. But by the reckoning of the Congressional
Budget Office, these changes havent made the tax code less
progressive. Average federal tax rates have gone down for all
income groups since 1979, but the declines have been bigger
for those with low incomes than those in the top 1 percent. Yes,
there are exceptions to this increase in progressivity. State and
66
local taxes cancel out much of the effect, and other research
shows that the top 0.1 percent of earners have received a big
tax cut since 1979. Also, Congress has shoehorned into the
tax code what are effectively spending programs, such as the
Earned Income Tax Credit. But its still noteworthy how pro-
gressive the federal income tax remains.
Also noteworthy is how little the overall federal tax burden
has changed. From 1946 through 1980, federal revenue was
17percent of GDP. Since then its been 17.3 percent, on average.
The mix has shifted: Corporate income taxes and excise taxes
bring in a smaller share than they used to, while Social Security
and Medicare payroll taxes bring in more.6 The share owing
to personal income tax, though, hasnt budged much. All that
tax cutting, raising, reforming, and complicating since 1981
has landed uspretty much where we started.
Federal spending, on the other hand, hasnt stayed put.
From 1946 to 1980 it averaged 18.1 percent of GDP; since then,
5 During the 2012 6 Federal receipts
presidential
election, Republican Percentage of annual total
candidate Herman
Cain briefly made
Individual income taxes
waves with what he
called the 9-9-9 plan:
a personal income
tax, corporate
income tax, and Corporate income taxes
national sales tax at
a rate of 9 percent
eachall presented Social Security and Medicare taxes
as a prelude to the Excise taxes
fair tax. It seemed
like a footnote 1946 Other
even then.
DATA: OFFICE OF MANAGEMENT AND BUDGET
November 13, 2017
20.6percent. In the 1980s, defense and interest on the national
debt drove spending higher, while over the past decade its been
mainly Social Security, Medicare, and Medicaid. The persistent
gap between spending and revenue may well be the most import-
ant feature of the modern tax era. And while there have been
many political discussions about reining in entitlement spend-
ing, there seems to be very little public appetite for doing so.
his unwillingness to reduce federal spending is wor-
T risome if you think the government is inordinately
large. By U.S. historical standards, it is large indeed.
Compared with other industrialized countries today, however,
the U.S. spends and taxes rather modestly.7 Far from being the
worlds highest-taxed nation, as President Trump has said
again and again, the U.S. has the fifth-lowest total tax burden
federal, state, and local taxes as a share of GDPamong the 35
members of the Organization for Economic Cooperation and
Development, the wealthy nations club.8
The experience of other countries is too rarely invoked in
U.S. tax debates. In a book published in April, A Fine Mess,
journalist T.R. Reid attempts to rectify this. His entertaining
global tour shows that many of the impulses that have driven
tax cutters and reformers in the U.S. since 1981 have also shaped
tax policy elsewhere. Deductions have been eliminated, per-
sonal income tax rates have dropped, and corporate tax rates
have fallen even more. The U.S. statutory corporate tax rate,
in fact, is now almost the highest in world, which is possibly
where Trump gets his highest-taxed nation sound bite.
Other countries, though, have been able to enact such
reforms while imposing larger overall tax burdens thanks to
an extremely powerful device: the value-added tax.
The VAT, invented by a French bureaucrat in the 1950s, is a
broad-based consumption tax. Instead of being levied on the
final sale of a product or service, like a common sales tax, its
imposed at every step of production, with a refund for the tax
paid at the previous step. Heres a simplified example, bor-
rowed from an OECD primer, of how a 10percent VAT works:
A tree grower sells timber to a furniture manufacturer for $100,
plus $10 in tax, and sends the $10 to the government. Then
the manufacturer sells the furniture to a retailer for $350,
plus a $35 tax, and sends $25 ($35 minus the $10 already paid)
to the government. Then the retailer sells it to the consumer
for $500, plus $50 in tax, and sends $15 ($50 minus $35) to the
government. This system soundsand iscomplex, but it has
the advantage of being largely self-enforcing: Each business in
7 How the U.S. compares with the OECD:
Sources of tax revenue
100% Federal, state, and local tax revenue as a percentage
of GDP, 2014 U.S. OECD average
Personal income taxes
Social Security
50 contributions
Taxes on goods
and services
Property taxes
Corporate income taxes
0
2016 0 4 8 12%
DATA: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
Bloomberg Businessweek November 13, 2017

the production chain must report the tax the previous busi- nations are much more generous to those with low incomes.
ness in the chain was supposed to have paid to get credit for The notion that a national consumption tax in the U.S. could
it. Because of that, and because these payments often arent take pressure off the income tax while addressing the fiscal chal-
transparent to consumers, countries are able to impose VATs lenges posed by Social Security and Medicareand maybe even
at rates far higher than would be conceivable with a sales tax. allow for a bit more spending on this or thathas been batted
Hungary has the developed worlds highest VAT, at 27 percent around by would-be reformers for years.9 Theres even a bill
which allows it to get away with a flat-rate income tax of just currently in the Senate, sponsored by Maryland Democrat Ben
15percentwhile Canada has the lowest, at 5 percent. The U.S. Cardin, that proposes a 10percent VAT coupled with rebates for
is the only OECD member without any VAT at all. the poor, much lower tax rates, and exempting couples who earn
Like any consumption tax, the VAT is inherently regressive, up to $100,000 from the income tax ($50,000 for individuals),
because poor people spend more of their income than rich and much lower corporate tax rates. Such initiatives have never
people do. There are ways to offset some of that with rebates, garnered anything close to a critical mass of political support,
and of course a progressive income tax can help make up for though. That 2005 Bush tax reform panel, for example, studied
it, too. Most of the worlds other wealthy nations also rely more both a VAT and a retail sales tax but endorsed neither.
on government spending to combat inequality. Personal income
taxes in the U.S. are actually both higher and more progressive ith all this in mind, I headed out one recent afternoon
than the OECD norm. But when you factor in government spend-
ing on health care and other safety net programs, most wealthy
W to gauge the thinking of Glenn Hubbard, dean of the
Columbia University Business School and seasoned
veteran of Washington tax politics. Hubbard was an architect of
the 2001 and 2003 Bush cuts and has warmly endorsed the new
8 How the U.S. compares with the OECD: Total tax burden
GOP tax plan. (He's also a former Bloomberg Businessweek colum-
Federal, state, and local tax burden as a percentage of GDP for nist.) Before I could even get the acronym VAT out my mouth,
OECD members though, he launched into this mini-monologue:
We dont seem as a society to be willing to bring down
Denmark 46.6% spending as much as I would like to, and the corporate and per-
France 45.5 sonal income tax cant be raised enough to cover the difference.
Belgium 44.8 If were going to have a higher level of government spending,
Finland 44.0 you have to pay for it, and the most effective way to pay for it
Austria 43.5 67
is through a tax on consumption, such as a value-added tax.
Italy 43.3 And what about the current tax reform? Oh, its still worth
Sweden 43.3 doing, he said, but the U.S. cant go on like this. You can think
Hungary 39.4 of this as the last reform effort in this system. The end of the
Norway 38.1 cut-reform-increase-repeat era is coming.
Netherlands 37.8 Ah, but when will it come, and what will it take to bring it
Iceland 37.1 on, beyond a crisis? There was a time when federal deficits
Luxembourg 37.0 of 4 percent or 5 percent of GDP seemed like an emergency,
Germany 36.9 but no longer. Politicians of both major parties have become
Greece 36.8 increasingly comfortable with the chronic budget shortfalls of
Slovenia 36.6 the post-1981 tax era, and its hard to blame them. The federal
Portugal 34.5 government has had no trouble financing its deficits (other than
Spain 33.8 self-imposed trouble involving the statutory debt ceiling), and
Estonia 33.6 theres a credible argument to be made that in a low-inflation,
Czech Republic 33.5 low-interest rate environment like todays it ought to be borrow-
New Zealand 32.8 ing even more to invest in wealth-creating public goods such as
U.K. 32.5 transportation infrastructure and basic research. Still, theres
Slovak Republic 32.3 much less of an economic argument for running up debts to pay
Poland 32.1 for retirement and health care. Hubbard told me he thinks of
Japan 32.0 the deficit in terms of insurance, or fiscal space. Without it,
Canada 31.9 in case of war or economic crisis, your capacity to intervene
Israel 31.4 is reduced. Then again, he acknowledged, its not a table-
Turkey 30.0 banging argument to say, we need fiscal space!
Latvia 29.0 So no, Im not going to bang on any tables. But someday the
Switzerland 27.9 U.S. will need that fiscal space, and theres a way to get it that
Australia 27.8 would be in keeping with our history of tax experimentation and
U.S. 26.4 likely wouldnt impose great economic pain. We probably should
South Korea 25.3 be talking about it a lot more, instead of just Cut Cut Cut. 
Ireland 23.6 Justin Fox is a columnist for Bloomberg View.
Chile 20.7
Mexico 17.4
9 Some people have also proposed using a carbon tax for this purpose, but
at the moment that seems even less politically achievable than a VAT.
*FIGURES FOR 2015, EXCEPT FOR AUSTRALIA, JAPAN, AND POLAND (2014)
DATA: ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
 A Time to Give P
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Holiday gifts that are
R
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anything but cookie-cutter

Photographs by Stephen Lewis

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Prop styling by Sonia Rentsch

I
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70
Gifts for world
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72
and fashionistas

76
and nesters

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and athletes

82
and foodies

84
And yes, the thought
really does count

Bloomberg
Brass bookend/doorstop, Businessweek
$650; orphanwork.com.
Louis Vuitton Tambour November 13, 2017
Horizon connected
watch, $2,900; Edited by
louisvuitton.com Chris Rovzar

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Travel & Adventure
1. ODS-1 Classic in-ear headphones
For a frequent flier, a pair of packable in-ear headphones is essential.
Taking inspiration from the novels of Jules Verne, Paris-based Adle
wraps its ear hooks in hand-stitched Venetian leather; the brushed
aluminum buds feature a custom 10mm driver for deep, natural-
sounding lows. $360; aedle.net
2. Erno Laszlo hydra-therapy skin vitality treatment
The famous pink mask is a set of four moisture treatments for
those whose faces need cooling and plumping after an overnight
flightor just a long day on the road. $80; ernolaszlo.com
3. Delvaux Le Mutin saddle bag
An updated take on the labels classic Chasseresse silhouette, this
covetable carry-on from Delvauxs latest collection is made from soft
calfskin in rouge de pourprea magenta-meets-purple hueand
has a sporty twill-tape strap that wears lightly. $3,900; barneys.com
November 13, 2017
1
4. Travel map pin board
Start a new family tradition with a pinnable board from Conquest
Maps, a small operation out of Columbus, Ohio. Using 12 colors of
pins, mark out your worldwide or American adventures on one of
three elegant designs. From $99; conquestmaps.com
5. Shearling eye mask
One could wear this Fendi eye mask at home, but wheres the fun in
that? Made from Italian silk, its decorated with mink fur to resemble
the camouflage of butterfly wings and is guaranteed to make an
impression at 30,000 feet. $590; fendi.com
6. Stow tech and travel case
At 8-by-11 inches, this organizer from London-based leather goods
company Stow is large enough to hold an iPad, and it comes with a
plug adaptor usable in more than 150 countries. $575; ahalife.com
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Gift Guide

Style & Grooming

1. G-Timeless watch
This psychedelic 36mm timepiece displays
lunar phases on a rotating rainbow disc that
spins behind the dial. $1,460; gucci.com

2. Simon Miller bonsai bag

The Los Angeles designers bonsai take on
the bucket bag, with its acrylic handles, has
become the preferred choice of fashion folk.
Theres enough room inside for a phone, keys,
wallet, and cosmetics. $590; net-a-porter.com

3. Apoteker Tepe Holy Mountain perfume

New Orleans-based perfumer Holladay Penick
Saltz, who started Apoteker Tepe in 2014, uses
natural ingredients to evoke the fragrance of a 7
winter hearth: seven different resins, plus a rare
extract of Lapsang Souchong tea, create an
earthy warmth. $110; poketo.com

4. Mark Cross vintage duffel

This jewel of a bag, made by one of Americas
oldest luxury leather brands, is made from
Italian calfskin leather in a natural brown.
But the blue demands appreciation. $2,995; 6
markcross.com
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5. Concrete eau de parfum
Fresh off her retrospective at New Yorks
Metropolitan Museum of Art, Comme des
Garons designer Rei Kawakubo expands
5
her line of perfumes with Concrete, a
sandalwood homage to the city that comes
in a bottle made from its namesake material.
$150; doverstreetmarket.com

6. Bubble cluster ring

The new collection from Brooklyn jeweler
Caitlin Mociun features a batch of Instagram-
ready rings, including this bubble cluster of
pearl, peach moonstone, and white diamond.
$1,910; mociun.com

7. Saturated-color sweaters
If you must buy a sweater, stay on trend with
a bold color, whether in Acnes coral pink,
Theorys conservative navy, or Raf Simonss
honeycomb marvel in marigold from his
205W39NYC collection for Calvin Klein. From
top: Acne Studios, $650, and Theory, $285;
barneys.com. CK, $775; calvinklein.us

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Home & OfFH
1. Baggen connected speakers
Stockholm-based Urbanears multiroom
speakers are a powerful addition to the
category. Users can stream from built-in
Spotify Connect, AirPlay, or Chromecast;
connect via Bluetooth; or use the classic
auxiliary cord. They come in colors such as
goldfish orange, indigo, and dirty pink.
$499; urbanears.com
2. Tom Dixon cog pen collection
For these sleek writing instruments, British
designer Tom Dixon set aside his typical
metallic finishes, choosing a high-impact blue.
$135; tomdixon.net
5 every direction for optimal visibility. Rather
4
November 13, 2017
3. Transparent box of dominoes
A domino set this handsome, with jumbo,
tournament-size two-tone tiles and spinners,
deserves to be displayedand frequently
played. $180; comingsoonnewyork.com
4. Octopod clock
The latest collaboration between Swiss avant
garde watchmakers MB&F and clockmaking
artisans LEpe 1839, the Octopod is inspired
by the submarine hulls in the James Cameron
film The Abyss. (Some may see a resemblance
to Toy Story villain Babyface.) Its jointed
legs can be unlocked and set in a range of
positions, while the globular head rotates in
than a traditional minute hand, the gears and
springs inside the clever floating mechanism
tell the time. $36,000; mbandf.com
5. Gitterwerk vase by Josef Hoffmann
Got architecture buffs on your shopping list?
They likely love Hoffmann, the legend of the
Wiener Werkstatte design collective, who
created this latticework enameled steel vase in
1905. $380; shop.neuegalerie.org
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 Gift Guide Bloomberg Pursuits
Sport & 1. Vaporfly 4% running shoes
These are the sneakers Nike
designed to break the two-hour
Exercise marathon barrier. They feature
a carbon-infused nylon plate
with a 10mm offset to minimize
Achilles tendon strain and a 31mm
stack height that adds impact
protection for long distances.
$250; nike.com
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2. Hero6 Black camera
The newest iteration of the
beloved minicamera has its most
advanced stabilization technology
yet, as well as 4K video at 1080p.
But most exciting are its new
QuikStoriesslick, automatically
generated videos edited from
footage sent to your phone.
$499; shop.gopro.com
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November 13, 2017
3. EL 42 binoculars
Known more for its hand-cut
crystal glasses, Swarovski
also makes the most high-end
binoculars on the market. These
birdwatching favorites have an
ergonomic wraparound grip and
4.9mm exit pupils to produce
bright images in low light.
$2,832; swarovskioptik.com

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4. Top loader bag
This waxed canvas duffel from Tracksmith
looks simple, but the Boston-based
independent running brand has reinforced
the edges with leather corners and added
a separate compartment for your shoes.
$168; tracksmith.com
5. Cannondale CAAD12 105 bicycle
Aluminum bikes dont get the love that
carbon fiber ones do, which is a shame. With
an ultralight frame weighing just 2.5 pounds,
this 11-speed bike is perfect for everyday
city riding. $1,599; sidsbikes.com
6. Scorpion bike stand
For racers, a portable, lightweight bike stand
comes in handy for cleaning, maintenance, and
race-day storage. Make sure the bike has a
hollow spindle crankthats where it attaches.
$60; feedbacksports.com
7. Vyper 2.0 fitness roller
Turbocharge recovery times with this three-
November 13, 2017
speed vibrating foam roller. Tested by top
athletes, its made by Hyperice, a company
partly owned by NBA All-Star Blake Griffin,
Olympic gold medalist Lindsey Vonn, and
former NFL MVP Adrian Peterson, among
others. $200; hyperice.com/vyper2
8. The Elder Statesmen x NBA scarves
The much-hyped Los Angeles-based fashion
brand collaborates with the NBA on cashmere
(yes, cashmere) scarves for fans of all 30
teamseven the Knicks. $725; barneys.com
 Gift Guide
Food & Drinks
1. Salter Fine Cutlery knives
Artisan Gregg Salter makes every one of
these blades in his shop on the Big Island
of Hawaii, pairing traditional Japanese
blacksmithing techniques with beautifully
curved handles made of native Koa wood.
Theyre the preferred knives of the chefs
at the Grill, which opened in May at the
former Four Seasons inside New Yorks
Seagram Building. $1,035 for two-piece set;
salterfinecutlery.com.
2. Last Drop 1971 blended Scotch whisky
Any drinker would appreciate receiving one
of the mere 1,352 bottles ever made of this
whisky blend. Its the latest from Last Drop,
a London-based outfit that buys up, blends,
and distributes casks of aged liquors from
shuttered distilleries. In his 2017 Whisky
Bible, Jim Murray gave the release a 97-point
score and named it Scotch Blend of the Year.
$3,999; lastdropdistillers.com
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3. Glenmorangie Pride 1974
Even fewer drinkers will get to enjoy the
Glenmorangie Pride 1974a scant 503 bottles
of the $9,050 single malt exist. The spirit
inside the crystal decanter (by Philippe Starck
protg Laurence Brabant) has notes of salted-
caramel toffee, chocolate truffles, rum raisin
ice cream, and aged balsamic vinegar. $9,050;
email privateclient@moethennessy.com
4. Wim frozen yogurt maker
Froyo fanatics, take note: A Google alum has
invented a one-touch, single-serve, Keurig-like
device thats perfect for home chefs or those
who dont cook at all. (Milk not included.) $299;
wimyogurt.com
5. Toast toaster
In December the Museum of Modern Art
design store will begin carrying this stainless-
steel beauty. Designed in 1968 by Italian
architect Gae Aulenti, it remains the cheekiest
way to burn your bread. $198; pre-order from
store.moma.org
November 13, 2017
6. Dimes peppermill
Feel like more fun in the kitchen? This
multicolored pepper grinder, by Sabrina
de Sousa, co-founder of Manhattans healthy
snack haven Dimes, adds just the right amount
of spice to the table. $120; dimesnyc.com
7. Canon wine tilt
Your guests wont be able to miss that special
bottle in this 3D-printed porcelain wine tilt,
available in a numbered edition from Brad
Ascalon, a New York-based designer whos
also created furniture for French powerhouse
Ligne Roset. $410; othr.com
8. 2009 La Romane Domaine du Comte
Liger-Belair
This spicy grand cru red Burgundy, from a
plot directly behind the legendary Romane-
Conti vineyard, boasts rich cherry and
rose-petal flavors with an overlay of smoky
minerality. This stylish, sensual vintage has
ultrasmooth tannins and the houses hallmark
silky texture. $3,600; nywines.com
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6.

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a work of art
How to give The most potent gifts are things you would
miss yourselfto choose something that
is, in a way, a loss to you. That is the real
gift of giving. It goes for a work of art, too.
If you know the person really well, a unique
object can have incredible resonance. My
sports memorabilia advice is just to give the gifts you want to
Personalized stuff is really big. If you know receive, so you dont end up being the kind
someone is a big supporter of a particular of person who gives socks and underwear at
team or, in my case, a race car, getting Christmas. Philip Hewat-Jaboor, chairman
them that specific thing is good. But if you of the Masterpiece London art fair
can get it personalized somehow, thats
even more special. If they like [my racing
team] Penske, for example, and they like a
particular car, reach out over social media
and ask for something specific to be signed.
Sometimes in racing and motorsports,
colleagues will send a die-cast of your
vehiclelike a 1/60th scale version of your
race car, just miniaturized but identical and
very detailedand those mean a lot to me.
Josef Newgarden, 2017 Verizon IndyCar
champion and driver with Team Penske,
Nashville

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a piece of clothing something for the home

Oh, that is hard. But you cant go wrong if
Its not about brands. You have to believe
it comes from the heart. What I always tell
in your object. It could be a story, a link with
anyone I give a gift to is, Listen, if you need to
your own family. It could be new, it could be
return this, go ahead. Swap it for something
old, it could be expensive. Its more about
you like more. I may not have gotten it right
the experience. I gave the best gift to my
that time. And that is why we sell a lot of gift
son. It was a small wooden box that my
cards at this time of year. Its less pressure.
great-grandfather had given to my father, so
My dad used to say about money as a gift: Its
when my son was 16, I gave it to him. Its the
always the right color, and it fits everybody.
link with family, with story, with savoir faire.
Sid Mashburn, owner of his namesake
Sophie Demaret, director of spa and
upscale mens boutique, Atlanta
boutiques at Htel Crillon, Paris
a good bottle
If its a birthday for someone whos not too
old, I find a wine from the year of their birth.
If the person is quite mature, I recommend
portsyou can find a very, very aged one
and its still affordable, compared to an
older bottle of Bordeaux. Some people drink
bourbons or Scotch, so I try to get a rare one
or a year that is special to them. But if you
want to make Anthony Bourdain smile, just
find a bottle of Pappy. Eric Ripert, chef of
seafood restaurant Le Bernardin, New York
ILLUSTRATION BY CYNTHIA KITTLER