August 31 September 6, 2015 | bloomberg.com

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Theres no rational choice

anymore, no rational reaction

p6

I hope very much that we will be smart enough as a

nation to realize the societal and ecological time

bomb were sitting on p48

Im interested in people who are innovators,

not time serversp22

WE LIVE IN A WORLD OF SURVIVAL AND PRESERVATION, RIGHT? UBERS NOT A PROBLEM. UBER IS PUSHING ME, RIGHT? p38

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Opening Remarks Now when China sneezes, the world catches a cold 6

Bloomberg ViewGOP reforms to Obamacare miss the mark Ukraine needs cash 10

Global EconomicsAlibaba leads Chinas hunt for rural consumers 12

Modi faces the mother of all elections in turbulent Bihar state 14

Currencies from the Mongolian tugrik to the Brazilian real tumble 14

Cheap oil hasnt trickled down to consumers yet 15

Investors head for the exits as Turkeys problems grow 16

Companies/IndustriesIf Netix can make it in Japan, maybe it can make it anywhere 19

Learn the ABCs of e-cars in a Tesla store 20

As Qatar Airways goes global, its work rules become more worldly 21

Colbert wants to make CEOs celebrities, too 22

Briefs: Tech toys boost Best Buy; H&Ms $1.2 million prize for a good idea 23

Politics/PolicyDoubling down on coaland asking for a handout 24

The Koch brothers are being Trumped 25

Farmers learn to share their tractors 26

North Dakota media, an unlikely beneciary of the Iran deal 27

TechnologyHow to move from cloud to cloud 28

Britains National Health Service vs. health startups 29

Qualcomm wants to nurture Brazils smartphone habit 30

To beat cyberthieves, companies stake out their own domains 31

Innovation: A more efficient way to search images 32

Markets/FinanceLab diamonds that are bloodless and far cheaper, too 34

A UAW retiree health plan proves its naysayers wrong 35

Big league bankers defect to the minors 36

Bid/Ask: Southern Co. buys a gas distributor; $138,000 for an Ernie Banks jersey 37

FeaturesTheYellowKingHow New York taxi mogul Gene Freidman is trying to save his eet from Uber 38

Air Rage Gogo aims to nd some love (good luck!) among its captive in-ight audience 44

Change orWe Die The nations re chief calls for ghting fewer forest res 48

Etc.Fall fashion: Stop following trends. Here are 10 classic ways to update your office wardrobe 55

What I Wear to Work: A high-end real estate agent and a womenswear retailer on the uniforms they rely on 67

How Did I Get Here? A teen Kenneth Cole hawked peanuts at Mets games. Now he brings in $1.5 billion selling clothes 68

August 31 September 6, 2015

Cover story is about the market

plunge caused by China.

But the U.S. has generallyrecovered, so theres nothing to

worry about, right?

For now the U.S. is ne, butthere are fears of a more sustained

global bear market.

Theres an obvious cover solution. A painfully obvious one. One that only

the most thoughtless businessmagazine would resort to. I regret

not having studied the marketscarefully enough to gain a full

comprehension of their volatility and cyclical nature. But theres time to

right these wrongs. Give me just three days to do a thorough and intensive

study on our global economiclandscape. Its only through gaining profound knowledge on a topic that

one can visually express an ideamore powerfully, succinctly, and

originally than anything that camebefore it. In three days, we willredene how a bear market is

represented forever. The only limit is our intellect and imagination.

Very imaginative.

What if there were more bears?

How the cover gets made

CoverTrail

2

Corden, James 22CoreOS 28Cramer, Kevin 27Cruz, Ted 25

DDaiwa CapitalMarkets (8601:JP) 12Dankberg, Mark 44Daus, Matt 40De Beers (AAL:LN) 34De Blasio, Bill 40Decades Inc. 67Deere (DE) 23, 26Delclima 37Delta Air Lines (DAL) 44Desai, Bhairavi 40DiCaprio, Leonardo 34Docker 28Doorbar, Mark 29Douglas Elliman 67DuPont (DD) 24

EEBay (EBAY) 28Edmunds.com 20El Corte Ingls 32Emirates 21Erdogan, Recep Tayyip 16Etihad Airways 21ExxonMobil (XOM) 15

FFacebook (FB) 30Fallon, Jimmy 22

FarmLink 26Ferrari (FCAU) 20Fiat ChryslerAutomobiles (FCAU) 35FirstEnergy (FE) 24Fitch Ratings 16Ford Motors (F) 35Freidman, Evgeny Gene 40Fuji TelevisionNetwork (4676:JP) 19

GGavekal Dragonomics 6Gem Lab 34General Electric (GE) 6General Motors (GM) 35Gerber, Ethan 40Giuliani, Rudolph 40Global EagleEntertainment (ENT) 44Gluskin Sheff (GS:CN) 6, 15Gogo (GOGO) 44Goldman Sachs (GS) 15, 36Google (GOOG) 28, 31

HHames, Peter 29Hampton Creek 23Harbour, Tom 50Hastings, Reed 19, 22Heitkamp, Heidi 27Helzberg Diamonds 34Hennes & Mauritz (HMB:SS)23Herms (RMS:FP) 31Home Depot (HD) 6, 31Hulu 19

IIBM (IBM) 28IDC 28, 30IIa Technologies 34Index Ventures 29Inslee, Jay 50Intel (INTC) 28

JJD.com (JD) 12JetBlue (JBLU) 44Jindal, Bobby 10, 25Jive Software 28Johansson, Scarlett 22Johnson & Johnson (JNJ) 23Joly, Hubert 23Jones, Chuck 24Joyent 28JPMorgan Chase (JPM) 6, 31,

36

KKalanick, Travis 22, 40Kantar Media (WPPGY) 27Kasich, John 10Keith, Toby 22Kenneth Cole Productions 68KeyCorp (KEY) 36Kimmel, Jimmy 22Koch Industries 25Koch, Charles 25Koch, David 25Koppel, Neil 34Kroeber, Arthur 6Kumar, Nitish 14

LLampe Asset Management 6LeMay, Ron 26Leno, Jay 22Letterman, David 22Li Keqiang 6, 12Lowes (LOW) 24

MMa Kai 6Macquarie Group 44Macys (M) 24MasterCard (MA) 15McDonalds(MCD) 35

McKinsey Digital 12Medtronic (MDT) 37Mehta, Vishal 34Mercedes-Benz (DAI:GR) 20

MiaDonna 34Microsoft (MSFT) 28Mills, Calvin 34Mitsubishi Electric (6503:JP) 37Modi, Narendra 14Moodys (MCO) 15, 16Morgan Stanley (MS) 6MTV (VIAB) 19Musk, Elon 20, 22

NNBC (CMCSA) 22, 27Netam 30Netix (NFLX) 19, 22, 28Nippon TelevisionHoldings (9404:JP) 19Nissan (7201:JP) 40Nomura Securities (NMR) 19NTT Docomo (DCM) 19

OPQObama, Barack 6, 24Oerting, Troels 31Oil Price Information Service15Oppenheimer (OPY) 15Oshkosh (OSK) 37Panasonic (6752:JP) 19Parker, Fran 35Prez de la Coba, Sira 32Phillips, Tweeps 40PJM Interconnection 24Porsche (VOW:GR) 20Putin, Vladimir 6, 10Qatar Airways 21Qualcomm (QCOM) 30

RRegions Financial (RF) 36Renaissance Diamonds 34Richenhagen, Martin 26RichRelevance 32Rock Health 29Rodrguez, Ydanis 40Royal Bank of ScotlandGroup (RBS) 36Rubio, Marco 10Russell Reynolds Associates 36

STSafe Patient Systems 29Salesforce.com (CRM) 28Sanders, Bernie 26Schlumberger (SLB) 37Schneiderman, Eric 40Shazura 32Small, Michael 44SoftBank Group 19Sony (SNE) 19Soros, George 10Southern (SO) 37Southwest (LUV) 44Stanley Black & Decker (SWK)

35Staples (SPLS) 24Stewart, Jon 22Stifel (SF) 6Sycamore Partners 37Target (TGT) 31Tejada, Maria Teresa 36Tesla Motors (TSLA) 20, 22Tesoro (TSO) 15Tester, Jon 27TMF Associates 44Toronto-Dominion Bank 16Tripwire 31Trump, Donald 10, 25, 36Turner, Adair Lord 6Twelve 37

UVWUber 22, 40UniCredit 6United (UAL) 44Valero Energy (VLO) 15Van Saun, Bruce 36Verisign (VRSN) 31Verizon (VZ) 44Viacom (VIAB) 22ViaSat (VSAT) 44Vilsack, Tom 50Virgin America (VA) 44Virtu Financial 23Visa (V) 15Visteon (VC) 35Voth, Robert 36Walker, Scott 10Wal-Mart Stores (WMT) 28, 31,

34, 35Walt Disney (DIS) 19Williams, Dennis 35Wirecard (WDI:GR) 37Wise, James 29Worldpay 37

XYZXi Jinping 6Yadav, Lalu Prasad 14Yellen, Janet 6YouTube (GOOG) 22Zell, Sam 40Zuckerberg, Mark 30

CCameron International (CAM)

37Capital Economics 15, 16Capital One (COF) 40CBS (CBS) 22, 36CF Industries Holdings (CF) 35Chandler, Marc 6Chanel 31Chesky, Brian 22Chipotle Mexican Grill (CMG)

23

Cifu, Douglas 23Cisneros, Gustavo 32Citigroup (C) 36, 40Citizens Financial Group (CFG)

36Citizens Mark 67Colbert, Stephen 22Comcast (CMCSA) 44Conrad, David 31Consolidated Edison (ED) 24

ABABC (DIS) 22Aboaf, Eric 36Agco (AGCO) 26AgFunder 30AGL Resources (GAS) 37Air Canada (AC:CN) 44Airbnb 22Alaska Air (ALK) 44Alcoa (AA) 24Alibaba Group (BABA) 12, 30Alrosa (ALRS:RM) 34Amazon.com (AMZN) 28American Airlines (AAL) 44Amon, Cristiano 30Apple (AAPL) 23AT&T (T) 28Audi (NSU:GR) 20Balderton Capital 29Banco Bradesco (BBD) 30Bank of America (BAC) 36Barclays (BCS) 31Belk (BLKIA) 37Belski, Brian 6Best Buy (BBY) 23Big Health 29Bloomberg, Michael 40BMO (BMO) 6BMW (BMW:GR) 20Boeing (BA) 23, 44BP (BP) 15Brennan, Megan 26Bronfman, Edgar Jr. 32Brown Brothers Harriman 6Brown, Jerry 50Brown, Ophelia 29Burberry(BRBY:LN) 20

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The U.S. is healthy enough to withstand Black Monday, but it and the rest of the world must learn to watch out for Chinas well-being

The Contagion Out of China By Peter Coy

U.S. markets partially rebounded thatday and the following ones as investorsrealized that the U.S. economy isnt onthe precipice of a recession. But thatdoesnt take away from the importance ofwhat was quickly dubbed Black Monday.China, which makes the worlds steel,electronics, and bobblehead dolls, hasnow demonstrated it can make a prettyserious market crisis, too.

China accounted for almost 40 percent of global growth last year. Its appetite for raw materials has undergirded economies from Australia to Brazil to South Africa, and its production capabilities have lowered prices of industrial machines and consumer goods everywhere money changes hands.

But its also kind of a mess.

When the Dow Jones industrial averagefell almost 1,100 points soon after theopening bell on Aug. 24, the world sud-denly seemed like a very small place. A tidal wave of stock selling that began in Shanghai had rolled all the way into lower Manhattan as Chinas problem became, undeniably, Americas. Wall Street pan-icked. General Electric, JPMorgan Chase, and Home Depot lost a fifth of their value in minutes. For the first half-hour, the Chicago Board Options Exchange couldnt even cal-culate its Volatility Index, also known as the fear gauge. Markets from Asia to Europe preceded the U.S. downward. Theres no rational choice anymore, no rational reac-tion, Michael Woischneck, a senior equi-ties manager for Lampe Asset Management in Dsseldorf, Germany, told Bloomberg.

6

The turmoil has parallels with the 1997 Asian meltdown, including expectations of a Fed rate hike

Fueled by real estate and shadowbanking, Chinas debt quadrupled from2007 to 2014, according to a McKinseyanalysis. Its economic growth is slowing,pollution is awful, and a hawkish foreignpolicy is alienating neighbors. Investorswere willing to ignore all that because oftheir faith in the technocratic excellence ofChinas economic managers, but that faithhas been destroyed by this years bunglingof the stock and foreign exchange markets.The main aims of Chinas leader Xi Jinpingare political and geostrategic, while his eco-nomic goals are contradictory, ArthurKroeber, founding partner and head ofresearch at Gavekal Dragonomics, a Beijingresearch firm, wrote to clients on Aug. 25.

The way this meltdown occurredfirst slowly and locally, then rapidly andgloballysays a lot about the nature of theworld economy and markets today. Manyinvestors dont trust stock valuations,which they think have been inflated byeasy money from the central banks. Thetripling of U.S. stock prices since their 2009bottom had a lot of them ready to sell atthe first sign of trouble. We believe thatthis has been the most doubted, second-guessed, and frankly hated stock marketrally in history, Brian Belski, chief invest-ment strategist at BMO Capital Markets,wrote to clients the day of the tumble.When trouble emerged in the form ofChina, trend-following trading strategieskicked in, amplifying the plunge. Potentialbargain hunters stood aside. Prudencedictates waiting for a technical sign that themomentum has exhausted itself, advisedMarc Chandler, head of currency strategyat Brown Brothers Harriman.

In a genuinely globalized economy,excesses and imbalances in one corner ofthe world inevitably affect other countries.(The last example: the U.S. subprime mort-gage bubble.) China is home to some of thebiggest excesses, with vast overinvestmentin everything from chemicals to apart-ments. In many ways, President Xi andPremier Li Keqiang were doing the rightthingtrying to push the economy awayfrom its addiction to exports, manufactur-ing, and construction and toward produc-ing goods and services for consumers athome. They also vowed to give the freemarket a decisive role in setting pricesand interest rates. But they couldnt rec-oncile that with the Communist impulseto control the commanding heights of theeconomy and tamp down the natural vol-atility of capitalism.

The governments first mistake wasto encourage ordinary Chinese to investin the casino-like Chinese stock market,thus pinning its prestige on the marketsrise. The Shanghai Composite index rose152 percent this year through June 12.

When the speculative frenzy finally cooled, Premier Li and Vice Premier Ma Kai led the effort to stop prices from falling, banning sales by major shareholders, stopping initial public offerings, and using govern-ment funds to buy stocks. It worked fora while, but eventually the markets suc-cumbed to investors fearfulness.

The government didnt do any betterin managing the value of its currency, theyuan. In a bid for global financial leader-ship, Xi has said he wants the redbackto be a reserve currency on par with thedollar, euro, yen, and pound. A market-set exchange rate is a necessary step inthat direction. But when China devaluedthe yuan on Aug. 11 and said it would relymore on supply and demand to determineits rate, traders fairly or not suspectedthat Xi and his team actually wanted acheaper yuan to boost Chinese exportswhich had fallen 8.3 percent in July from ayear earlier. Traders pushed the currencydown so much, China was forced to reversecourse and buy up yuan by cracking openits hoard of foreign currencies.

Global investors reacted to Chinasclumsiness first with amusement, thenwith fear. New Yorks Black Monday cameon the heels of an 8 percent same-day dropin Shanghai, which occurred when Chineseinvestors sold after authorities didnt do asmuch as theyd hoped they would to propup the market. This is a real disaster, andit seems nothing can stop it, said ChenGang, Shanghai-based chief investmentofficer at Heqitongyi Asset Management.A day later the government did come tothe rescue, cutting the one-year lendingrate by a quarter of a percentage point andfreeing up bank funds by lowering the frac-tion of deposits that banks are required tohold in reserves. Chinese issues kept fallingthrough Aug. 26, though, bringing theirweekly decline to 23 percent.

The whole drawn-out episode may haveweakened Xi, who has been on course tobecome Chinas strongest leader since Mao.On Aug. 20, state media carried an articlesaying the leaderships push for reformssuch as fighting corruption and shrinkingstate-owned enterpriseshad come upagainst unimaginably fierce resistance.

The overdue decline in the fairly small,underdeveloped Chinese stock marketcaused such a ruckus because it awokelarger fears. It crystallized somethingthe market ought to have been aware of,which is that there is a very, very majorslowdown occurring in China, says AdairLord Turner, chairman of the Institutefor New Economic Thinking and pastchairman of the U.K. Financial ServicesAuthority. Every single major globalrecession in the last 50 years has started

in the United States, Ruchir Sharma, head of emerging markets for Morgan Stanley Investment Management, said on Bloomberg Television in July. The next global recession will be made in China.

Perhaps so. Still, the hair-on-fire reac-tion of Aug. 24 was a bit much. Markets behaved as they usually do, which is to underreact to new developments for a long timeand then abruptly overreact. It feels like a severe episode of market hypochondria, Erik Nielsen, chief econ-omist for UniCredit in London, wrote to clients. Every bit of news is seen as disaster-in-progress.

How much we should worry about China has a lot to do with the definition of we. Most at risk are countries such as Turkey and South Africa that have heavy debt denominated in foreign currencies like the dollar, persistent inflation, and economies prone to trade deficits. When investors lose confidence in emerging markets, countries like these are always the first to suffer. Although less connected to China, Europe is at some risk, because its economy is barely growing, making it vulnerable to even a smallish shock. Asian nations such as South Korea and Singapore that sell a lot to China have obvious expo-sure, but theyve amassed huge foreign reserves that protect them against specu-lation. They can cut interest rates to stim-ulate growth and counteract the drag from China without concern that investors will trash their currencies.

With its huge domestic market, America is always more insulated than other nationsfrom the ups and downs of global trade.Exports to China amount to only 1 percent of its gross domestic product. And crude oil at about $40 a barrelthanks in part to weakening Chinese demandwill lower the price of gasoline, giving U.S. consumers more money to pay down debt and even-tually increase spending on other things.

It helps that the U.S. economy was on a slow but steady growth path to begin with, adding more than 200,000 jobs amonth on average. New-home sales rosebetter than 5 percent in July, the most this year. Equipment orders in July exceeded expectations. Auto sales have rebounded to their highest level since before the financial crisis. Consumer and corporate balance sheets are in excellent condition.

The scenario that gets veteran inves-tors nervous is a repeat of the Asian Contagion of 1997 and 98. Then as now,

7

the Federal Reserve was poised to raiseinterest rates, oil prices were falling, and investors were losing confidence in certain emerging markets that had gone on a debt-fueled investment binge. Deflation loomed, and money was flowing out of emerging markets at an alarming pace. Fed Chairman Alan Greenspan worried about how long the U.S. could remain an oasis of prosperity.

The U.S. played a role in causing the Asian Contagion, because investors with-drew money from emerging markets and put it in the U.S. to take advantage of antic-ipated interest rate increases. Likewise today, the Fed is preparing to raise short-term interest rates off the floor of near-zero, where theyve been napping since the end of 2008. Higher rates in the U.S.

around the world. ther drive up bor-ble countries such ney is leaving. Its that has investors ng over declines ure currencies like tnamese dong and

azakhstani tenge.h e d i f f e re n c e een now and then t a lot of develop-ions and global

ve braced them-the risks of a cur-

aking a full-scale y. Morgan Stanley

economists Manoj Pradhan and Patryk Drozdzik in London told clients on Aug. 24: In a nutshell, no one can or should rule out a crisis, but we believe that the risk has fallen from a few years ago.

The U.S. has even less reason to worry about contagion from Asia, since it wasnt harmed by the original episode, says David Rosenberg, chief economist and strategist at Gluskin Sheff, a Toronto-based wealth manager. Over the period of the last crisis, he says, the Fed cut rates instead of raising them, stock prices rose, unemployment fell, and economic growth averaged more than 4 percent a year.

Still, the August selloff is bound to getthe attention of Fed Chair Janet Yellen and her colleagues when the Federal Open Market Committee meets on Sept. 16 and 17 to decide whether to raise rates. Because of the latest turmoil, markets are betting the Fed will wait until at least December. Thats probably right: The Fed has cited international developments as a factor to watch in each meeting since January, says Lindsey Piegza, chief economist of Stifel Nicolaus, a Chicago-based investment firm. For the Fed, the biggest concern is that in a turbulent world, the dollar will become even more of a haven, driving up the exchange rate and making U.S. goods and services less competitive in global markets. Although the dollar has sagged recently against the euro and yen, it rose 13 percent this year through July, according to the Feds index of a broad set of trading partners currencies adjusted for inflation.

Financial markets depend on good infor-mation. When its lacking, investors flail. They assume the best when theyre bullish and the worst when fear gets the best of them. That helps explain the eruptionover China, a nation that remains opaquedespite having the worlds second-biggesteconomy. Fachard to pin d7 percent in thequarterssuspcisely the ratefor 2015. Somsiders put grocloser to 5 pbased on dataelectricity cotion and railThe official uployment raeven less plauDespite all the cChinas gone thasnt left arange of 4 percto 4.3 percens i n c e l a t e2002.

Financial markets dont mesh well withcommand-and-control economies, either. Traders react instantly to new informa-tion, constantly updating prices on the latest intel. Viewed up close, the process of adjustment can look choppy to Chinas leaders. They try to keep a lid on volatil-ity the opposite wayby fixing prices and ratesbut all they manage to do is bottle it for a time. The first marker of a fragile state is a concentrated decision-making system, wrote Nassim Nicholas Taleb and Gregory Treverton in the January-February issue of Foreign Affairs.

China still has a lot of strengths, including plenty more room to cut inter-est rates if needed and a war chest of about $3.6 trillion in foreign exchange. (Although its spending dollars fast to support the yuan.) What it lacks for the first time in awhile are trusting investors. Some are angry enough to have taken matters into their own hands. On Aug. 22 a group of investors seized the head of the Fanya Metal Exchange, threw him into a car, and drove him to a Shanghai police station, alleging that Fanya had stopped making payments on its heavily adver-tised financial products.

These are strange times. Barack Obama s entire presidency with short-st rates of essentially zero e transition back to normal, ppens, might be wrenching and abroad. For the U.S., the

mare scenario is less financial political; no one wants a China e leaders try to cover up eco-ic woes by stirring patriotic r with confrontations in, say,

outh China Sea or East China One Putin is enough, thanks.) mbarrassed leadership could en harder to deal with than astful one. Bashing China is pular American sport, espe-

y on the campaign trail, buter the made-in-China melt-antiquated response. Whenezes, the world just mightld.

DATA: COMPILED BY BLOOMBERG

5,000

4,000

Shanghai Stock Exchange Composite Index

3,000

2,000

8/26/14

Sept. 4, 2014 State-controlled media encourage the Chinese to buy stocks

June 12, 2015 The index peaks, having gained 152 percent in the past year

July 5, 2015 Sales of new shares are suspended as prices fall; a market stabilization fund is started

Aug. 11, 2015 The yuan is officially devalued by 1.9 percent

Aug. 26, 2015U.S. stocks reboundafter losing 11 percentin a week

March 15, 2015 Premier Li Keqiang promises to sustain economic growth, fueling the rally

8/26/15

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Since mid-August, Russian-backed rebels in eastern Ukraine havemoved heavy weapons to the front, ending the relative peace thatprevailed since the Minsk accords earlier this year. The goal forthe moment seems to be to impoverish and destabilize Ukraineso it will ultimately have to submit to Russian influence. Withwinter approaching, the Kremlin will soon have more ways toapply pressure; rebel shelling is likely to be just the start.

The European Union recognized that Russia and the rebelsit supports never embraced the cease-fire agreement, and overthe summer it renewed its sanctions against Russia. But Ukraineneeds greater economic support to survive the onslaught. Itseconomy shrank more than 14 percent in the second quarter;its currency, the hryvnia, has collapsed, together with invest-ment and consumption; and inflation has soared to 55 percent.

One idea is for Europes central banks to jointly put togethera currency swap facility that Ukraines central bank could useto defend the hryvnia if need be. A verbal commitment to sucha strategy alone might help stabilize the currency and make iteasier for the government to lift capital controls.

Its also in the EUs interest to find hard cash for Ukraine andtechnical support to plug the holes in its financesholes thatget bigger the more Russian-backed rebels attack. Most press-ing is Ukraines need to cover the $3 billion it owes Russia. Thegovernment is also looking to borrow $1 billion to pay for naturalgas for the winter, to undercut the Kremlins ability to use gassupplies as a weapon. The European Bank for Reconstructionand Development is considering a loan of $300 million. Otherlenders are needed to step in.

Earlier this year, the financier George Soros said Europe shouldproduce a new $50 billion package for Ukraine. His figure wasarbitrary, but his reasoning was on the money: A clear financialcommitment to Ukraine would give the EU greater leverage tohasten reform, reassure Ukrainians that there is reason to endurethe pain it involves, and convince Vladimir Putin that his strategycostly to Russia as well as Ukrainecant succeed.

HowNot toReplaceObamacare

TheHelpThatUkraineNeedsNow

GOP candidates have alternatives,but none are improvements

Economic woes increase as Russiaand the rebels are on the move

Trying to repeal Obamacare has long been a popular, if futile,Republican pastime. Now replacing Obamacare is catching on,at least among Republican presidential candidates. This wouldcount as progress, except that none of their proposals meetsthe definition of replacement.

The point of health-care reform is, or should be, relativelystraightforward: providing the best possible health insuranceto the largest possible number of people at the lowest possiblecost. How do the various proposals fare under these criteria?

Wisconsin Governor Scott Walker says 6 million more peoplewould have private health insurance under his plan than underObamacare. How many would lose government-sponsored cov-erage, however, is left for voters to guess. Florida Senator MarcoRubios outline doesnt mention the effect on insurance levelsat all. Its unclear how any plan that rolls back the expansion ofMedicaid, as both proposals do, could insure as many peopleas Obamacare does through other means.

It also seems likely that the quality of that insurance,measured by the services covered and the share of costs borneby beneficiaries, would be lower, considering Rubio and Walkerwould lift Obamacares provisions for essential benefits. Univer-sal health insurance isnt achieved by giving more people accessto insurance plans that dont cover their basic medical needs atan out-of-pocket cost they can afford to pay. There are certainlyways to streamline and improve insurance market regulations.Operating without rules is no solution. Nor is leaving coveragerequirements to the states and hoping for the best.

As for the other candidates, Louisiana Governor BobbyJindal has a plan that includes replacing the tax exclusion foremployer-sponsored plans with a standard tax deduction, butthats unlikely to maintain Obamacare levels of coverage. OhioGovernor John Kasich says everyone should have health insurance,and he supports the expansion of Medicaid, but he dislikes man-dates. Donald Trump says only that he would replace Obamacare with something terrific, and it would involve hospitals.

Finally, theres the question of cost. The Congressional Budget

Office has repeatedly said that repealing Obamacare would addto the deficit, because the laws tax increases and cuts in Medi-care raise or save more money than its new benefits cost. Soto qualify as an improvement, any alternative needs to reducethe deficit more than Obamacare does (about $137 billion over10 years) while covering the same number of people.

Theres nothing precious about Obamacare. Its a massive and complicated piece of legislation whose shortcomings are significant, and it requires more work. If a candidate can devise a better way to provide the same level of coverage to the same number of Americans at equal or lower cost, in a package that is likely to pass Congress and survive court challenges, great. Something that accomplishes less wouldnt be progress.

To read Matthew Winkler on Texas and Sam Tanenhaus on Jesse Jacksons Democrats, go to Bloombergview.com

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August 31 September 6, 2015

Alibaba, the e-commerce giant, is turning to the immense interior in search of fresh prots

In this process, we are nurturing the culture and habit of shopping onlineTuguan village in remote Yunnanprovince feels about as far from the tur-bulence of modern China as you can get. A one-lane, bumpy dirt road runs through it, past whitewashed farm-houses, most with a painting of flowers and bamboo on the outside wall and tra-ditional sweeping rooftop eaves. Tuguanis home to some 170 families of the Bai ethnic minority, who grow table grapes and tamarinds. During steamy after-noons, most residents loll in the shade or nap in their house to escape the heat.

But on a hot day in June, one spot in Tuguan is bustling. At the local conve-nience store, a dozen sun-tanned villag-ers are clustered around a new Lenovo computer and wall-mounted flatscreen Skyworth monitor, checking out thelatest online deals on mobile phones,toothpaste, pesticide dispensers, and more, all for sale on Alibaba Groups

of 49.7 percent from the previousyear. But in the global market rout onAug. 24, Alibabas stock fell 3.5 percent in New York, for the first time dropping below its initial public offering price of $68. The companys slowing growth and Chinas decelerating economy havemade investors anxious.

Even with the economic slow-down and stock market collapse,e-commerce sales grew 37.7 percent in the first seven months of 2015. Inhopes of keeping up the momentum

of online selling, Alibaba and its rivals are startingto look beyond the marketof young, well-educated urbanites and head forthe countryside, where about half of all Chinese hail from. The developedcities cant keep delivering

Chinas Hunt for GrowthIn the Countryside

new rural e-commerce platform.Zhang Yibin , a lanky, chain-smoking

grape farmer with two gold teeth, hasbought a fan, a pesticide dispenser,and a 13,600 yuan ($2,122) Zongshenthree-wheel motorcycle online in theless than two months since Alibabaopened a Taobao rural service centerin town. (Taobao is Alibabas consumere-commerce business.) Online, theprice is cheaper, the choice is better,and it is far more convenient, Zhangsays, noting he didnt have to make thehalf-day trip to the dealer toget his three-wheeler, whichhe uses to move irrigationpipes and haul fertilizer. Hesays he wants to sell his grapesonline to everyone in China.

Chinas e-commerce markethad revenue of 2.79 trillion yuan in 2014, an increase

Diligence is the left hand of making money;

Rural Taobao is the right hand of saving money

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Turkeys become one hot mess 16

The fractious state election that Indias Modi must win 14

The yuan falls, and others come tumbling after 14

When oil and gas dont work together 15

double-digit growth rates foreverit is just the law of Mother Nature,says John Choi, head of Greater ChinaInternet research at Daiwa CapitalMarkets in Hong Kong.

Last October, Alibaba announcedplans to invest 10 billion yuan in logis-tics, hardware, and training to push itse-commerce model into 100,000 vil-lages in the next three to five years. Itsopening warehouses and working withdelivery companies and local officials.

At the heart of Alibabas strategy isthe Taobao rural service center, wherevillagers can become comfortablebuying goods and paying mobile phoneand utility bills online, and pick upitems they bought on Taobao. Alibabaprovides computers and monitors,ensures timely delivery of purchases,and trains villagers to serve as its rep-resentatives in the centers, which areoften in convenience stores. Alibabahas wanted to expand in rural regionsfor a long time, says Yu Xianghai,senior director of rural e-commerceinitiatives at Alibaba. In this process,we are nurturing the culture and habitof shopping online.

The plan is to start by selling popularitems such as washing machines, tele-visions, and apparel while graduallydeveloping a digital platform for farmersto sell vegetables and fruits to the cities.We thought, Would it be possible tofirst sell to them, and so solve the issueof talent and infrastructure? Then whenthe timing is ripe and the infrastructureis built, we can try to solve the other endof the problem, Yu says.

About three-quarters of Chinese infirst-tier cities such as Beijing, Shanghai,Guangzhou, and Chongqing are alreadyonline, but in rural areas its 19 percent,according to a survey by McKinseyDigital, which helps companies shapetheir digital strategies. Even so, ruralChinese have an affinity for e-commerce.Close to two-thirds of rural Chinese whodo use the Internet say they have pur-chased items online; that compares with72 percent of users in the cities. Its not just coastal, first-tier cities where things are happening, as one might expect, says Hong Kong-based Alan Lau, Asia Pacific head at McKinsey Digital.

Until now, shopping in rural China has been characterized by limited choice, inflated prices, and shoddy

quality, says Jiang Hongyu, director of rural development at Alibaba rival JD.com. With historically lower incomes, dispersed populations, and poor logistics, the hinterlands havent attracted many brick-and-mortar stores.

More Internet-savvy migrant workers are returning home. We are finding that rural consumers have really high demand for quality products today,Jiang says. JD.com plans to openmore than 500 rural service centersby yearend.

The companies rural forays fit in with government policy. Beijing wants to boost household consumption as a share of gross domestic product fromslightly more than one-third today; inthe U.S., its about 70 percent. Chinas

The distribution center

The orders

The packing

The Taobao center in

Binchuan County moves goods

to smaller villages

13

Currency DominoesAsian, Latin American, and African nations feel the pain of China, the giant consumer of resources, as their money loses value. Bruce Einhorn

Violence

Modi Fights for Victory In a Lawless State

Bihar is a must-win state for the Indian prime minister

Whoever builds a bridge, I will vote for him for the next 20 to 25 years

A bullet tore through policeman Anil Kumars chest during a gunfight last year. He might have lived, but the make-shift bridge from the island where he worked in Indias poverty-stricken state of Bihar was closed. By the time his bleeding body had been ferried across the Ganges from Raghopur Island and

government will support migrantworkers, college graduates, and armyveterans who wish to return to theirrural hometowns to start new busi-nesses and encourage e-commerce inrural areas the Xinhua News Agencyreported on June 10 after a meeting onrural entrepreneurship that PremierLi Keqiang presided over.

Our farmers have already started tobecome rich and want to buy products,says Xu Dongzhu, director of the agricul-ture department for the county whereTuguan is located. Xu has appointedthree of his staff to help Alibaba.Later, farm produce will be sold onthe Alibaba platform, and that willhelp increase the income of farmers,bringing more prosperity to all of us,he says. Dexter Roberts and Lulu ChenThe bottom line Alibaba is spending 10 billion yuan building a network of e-commerce centers in rural China.

taken to a hospital in Patna, the statecapital, it was too late. Maybe anhour would have saved his life, saysSub Inspector Randhir Kumar Bhatt,Kumars replacement, and one of just adozen officers on the island.

The murder is emblematic of Bihar,where more than 100 million peoplelive on an average of less than $2 a day.The lawlessness, poverty, and decrepitinfrastructure that cost Kumar hislife now also threaten to derail PrimeMinister Narendra Modis plans toreform India.

Starting as early as October, Modisparty will face the first in a series ofstate elections. There are six that heneeds to win by 2017 if hes goingto deliver on his promise to trans-form Indias economy.

Bihar will be the first ofthose states to hold elections.Winning there is seen as crucial toModis momentum. If Modis Hindu-nationalist Bharatiya Janata Partywins there and in at least five otherstates, the BJP will have a majority inthe upper house of parliament andfinally be able to pass legislation.

When Modi swept into office lastyear, investors poured money intoIndia in the hope he would unleash thepotential of the worlds second-most-populous nation. Voters gave Modi control of the lower house, but the ousted Congress party and its allies, who vehemently oppose Modi, kept control of the upper house, where members are selected by state assem-blies. Since then, Modis proposals to make land easier to acquire for com-mercial projects and to standardize tax rates have been stonewalled by the upper chamber; measures to over-haul labor laws still sit on the shelf, noteven introduced. Indias chief election

commissioner calls the coming contest in Bihar the mother of all elections.

Landlocked Bihar is on a vast plain bordering Nepal to the north and bisected by the Ganges, Indias holiestriver. The state is home to about1 in 12 Indians. Despite recent eco-nomic growth, Bihar still has Indiaslowest literacy rate61.8 percent as of the 2011 censusand the coun-trys highest proportion of severelymalnourished children.

The percentage of direct foreign investment in India that goes to the state is so small it looks like a round-ing error. The central bank records

$75 billion of foreign direct invest-ment flowing through its

Mumbai regional office from 2000 to May 2015.

The banks office in Patnarecords $59 million.

Bihar has the second-highest number of murders in India. The four gunmen who shot Officer Kumar were

angry about a business dispute. They also killed their business rival, who was standing beside the policeman.

To win an election in this dangerous, dysfunctional state, Modi and the BJP have to overcome a mindset molded by the caste system. Caste is the reality of Indian society, and Bihar is no differ-ent from any other state, Nitish Kumar, the states current leader, tweeted in August. Once a BJP ally but now an opponent, Kumar (no relation to the murdered policeman) leads the Janata Dal (United) party, the dominant faction in the states ruling coalition. Janata Dal counts lower-caste voters as its power base and is aligned in this elec-tion with another group, the Rashtriya Janata Dal (RJD), which is supported by a mix of the states lowest castes. The two parties have fought bitterly in the

Bihar

Taiwanesedollar-3%Exports to China,

which account for

16.3 percent of gross

domestic product,

plunged 17 percent in

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dong-5%Exports are showingsigns of weakness,

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After China devalued the

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Change against the U.S. dollar from 12/31/14 to 8/26/2015

14

Global Economics

past but are setting aside theirdifferences to defeat the BJP.

Bihar became infamous forwhat critics called the jungleraj, or rule of the jungle, under power broker Lalu Prasad Yadav, head of the RJD party. He ran the state for seven years before handing power to his wife in 1997 as chief minister. He left office after cor-ruption charges for which he was later convicted. Yadav, who was released from jail on bail after his conviction, hasmaintained his innocence. He didnt reply to requests for comment.

During the campaign, BJP officials in Bihar say they will focus on economic development and sidestep their rivals caste-based politics. A July opinionpoll showed Modis coalition trail-ing by 11 points for the state vote. The prime minister is trying to engineera late surge: In August he announceda plan to spend $19 billion on Bihari development projects, including roads,schools, and power plants.

Modis hopes may be lifted by voters such as Nishibi Rai, a Raghopur farmer who says hes tired of politi-cians broken promisesincluding the failure to build a permanent bridge to the mainland. Whoever builds abridge, I will vote for him for the next20 to 25 years, he says, standing bare-chested by his cow. Rai, who is from a low caste, says hes voted for Yadavs party all his life.

Navin Kumar Arya, a Janata Dal offi-cial, says his party has already madelife better in Bihar: Work will beginvery soon on an $800 million bridge and road that would include a connec-tion between Raghopur and Patna. The Asian Development Bank, though, hasnt yet approved funding.

The BJP cant just walk in here,

says Udai Narayan Rai, a Yadavally. Sipping tea on the porchof his two-story white bun-galow, one of the largest onRaghopur, Rai says hes frus-trated along with everyone else

that conditions arent better, but headds that residents should be gratefulto Yadav for road improvements andother accomplishments. As a group ofmen, women, and children pull weedsin the sun in farm fields in front ofthe house, Rai says people know theirplace and will vote as they always have,based on caste. Tom Lasseter andKartikay MehrotraThe bottom line Prime Minister Modi ispledging $19 billion in investment to win votesin the state of Bihar.

Energy

Wheres That CheapOil Windfall?

Lower petroleum prices have yetto provide the expected boost

The reners dont have to give itaway at the pump all at once

During a July 24 earnings call, Visa ChiefFinancial Officer Vasant Prabhu said gas-oline prices have had a significant neg-ative impact on business. MasterCardsays cheaper gas took 2 percentage points off the growth in the value of its overall second-quarter transactions.

When the price of crude oil started dropping a year ago, credit card com-panies were thought to be among the winners. Consumers and businesses would soon be buying ever-cheaper

gasoline made with ever-cheaper crude. The effect would be like a tax cut. TheDepartment of Energy calculated inApril that the average U.S. household would save about $700 on gasoline this year compared with 2014. Visa and MasterCard figured consumers would eventually spend that extra cash.

But so far the savings from cheaper gasoline havent shown up in other consumer spending. So Visa and MasterCard, which collect a tiny per-centage of every transaction made with their cards, are stuck with consum-ers who are using their plastic to buy cheaper gas but not spending the extra money elsewhere. It doesnt add up toprofits for the companies.

In an Aug. 19 research note, Goldman Sachs acknowledged it had overesti-mated how quickly cheap oil and higherwages would increase personal con-sumption, which has grown 2.3 percentover the past year instead of the4 percent the bank predicted in March. Initially, Americans put into savings what they didnt spend at the pump.The share of income that householdssave is back to 4.8 percent, right whereit was in June 2014 before climbing to5.4 percent earlier this year. Goldman says the problem now is that incomes havent been rising as fast as expected. Lower oil prices havent led to a signif-icant increase in consumption in any of the major economies, says Andrew Kenningham, senior international econ-omist at Capital Economics.

The rule of thumb has been that asustained 50 percent drop in the priceof crude lifts U.S. economic growth byabout 1 percentage point. In April a trio of research economists at the Federal Reserve Bank of Dallas surmised that principle should probably be halved to about half of a percentage point.

Caste is the reality of Indian society, and Bihar is no different from any other state.

Chief Minister Nitish Kumar

Brazilianreal

-26%The real has takena hit from politicalinstability, withcorruption allegationsthreatening PresidentDilma Rousseff. Brazilis a major exporter ofiron ore to China, sothat countrys woesaggravate Brazilseconomic problems.

Nigeriannaira

-8%Africas biggest oilproducer, Nigeria inFebruary imposedtrading curbs that keptthe value of the nairafrom plummeting evenas crude prices plunged.The central bank vowsto ght speculatorsbetting the overvaluedcurrency will fall.

Angolankwanza

-18%Angola is AfricasNo.2 oil producer anddepends on crude salesabroad for dollars.Foreign exchangereserves are down21 percent in the past12 months.

SouthAfrican rand

-12%One-tenth of SouthAfricas exports goto China, the biggestbuyer of the countryscommodities. Anunemployment rate of25 percent may go higheras mining companiesplan job cuts. On Aug. 21the rand was at itslowest level on record.

Turkmenianmanat

-19%This Central Asianproducer of oil and gasstarted the year with a19 percent devaluationof its currency. Chinahad agreed to doubleimports of natural gasfrom Turkmenistan by2020, but as Chinaseconomy slows, demand

is faltering.

Colombianpeso

-27%With crude trading atabout $40 a barrel, thepeso is at a recordlow. Ination hastopped 4 percent forsix months, but thecentral bank hasnot raised rates,fearing an economicslowdown.

Global Economics

15

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Consumer loan and mortgage payments as a share of after-tax income are at their lowest since at least 1980. The levels may have spurred recent housing con-struction and mortgage applications.Matthew PhilipsThe bottom line U.S. oil reneries have proted from processing cheap oil and passing only some of the savings to consumers.

Cheaper Oil Was Supposed to Spur Consumer Spending, But

0 3.5%

The change in prices of gasoline sinceAugust hasnt matched crudes drop.

The forecast for 2015 householdspending growth has dipped sincethe beginning of the year.

Gasoline

Oil-30% 3.0%

-60%8/22/14 8/22/148/24/15 8/24/15

2.5%

FORECAST BASED ON A SURVEY OF ECONOMISTS BY BLOOMBERG; DATA: COMPILED BY BLOOMBERG

Now that the U.S. is producing about two-thirds of the oil it consumes, low prices for crude are more of a drag than in the pastparticularly as the industry adjusts to the global collapseof petroleum prices. It has played outlike a double-edged sword, says David Rosenberg, chief economist at Gluskin Sheff. A decline in energy-related invest-ment such as drilling equipment sub-tracted about half of a percentage point from U.S. growth during the first half of 2015, according to a Goldman research note from July. From December through June, energy companies cut about 70,000 jobs. Moodys Analytics chief economist Mark Zandi thinks the indus-try may lose another 70,000 workers before things bottom out in February or March. This is going to be more painful than I thought, he says.

Its not that cheap gasoline isnt a pos-itive. Demand for it has risen 4.4 percentyear to date. A gallon of regular gaso-line has averaged $2.50 so far this year, a dollar cheaper than a year ago. In terms of total miles driven, this summer driving season is finally seeing monthly totals surpass the prerecession peak in 2007. Refiners are going all-out to keepup. Through July the roughly 140 refin-eries in the U.S. were using 96 percent oftheir total combined capacity.

Not all Americans, however, have been enjoying lower gas prices. A handful of refinery outages through the year disrupted the flow of gasoline and actually raised prices in parts of thecountry. In February an explo-sion at an ExxonMobil refineryoutside Los Angeles injured fourpeople and led to a $566,000 finefor safety and health violations. It also pinched the West Coasts supplyof gasoline and contributed to several price spikes in California. In mid-July,

Instead ofbuying things,

people arecutting debt

Turkey

Erdogan Is Fighting Wars on Three Fronts

Can he win against the Kurds, Islamic State, and the economy?

The country has entered uncharted waters

For a few years, Recep Tayyip Erdogan appeared unassailable. As prime min-ister and now as president, he kept Turkey out of the turmoil afflicting its neighbors and reigned over what seemed to be an unstoppable economy.

That era is over. Turkeys military has struck at targets in Syria and Iraqat a new enemy, Islamic State, and an old foe, Kurdish militants, as the regions violence has seeped over the border into Turkeys southeast. At the same time, the economy has finally suc-cumbed to politics and global forces. And inconclusive elections in June have given investors, who were already exiting emerging markets, more reasons to avoid Turkey.

The armed conflict has exposed Turkeys mixed motives. The U.S. hailed Turkeys decision in July to begin air strikes against Islamic State. Yet that assault was almost immediately over-shadowed by Turkeys parallel opera-tions against Kurdish militants in Iraq, whom the U.S. counts as allies against Islamic State. Turkey sees the Kurds growing role in the region as stoking statehood ambitions among its own Kurdish population.

The fighting comes at a delicate moment in Turkish politics. After his party failed to form a coalition govern-ment with any of its rivals, Erdoganannounced fresh elections for Nov. 1. Opinion polls suggest another hung par-liament is likely. The country is being run by a caretaker government.

Turkey has entered uncharted

even as oil was 50 percent cheaper than it was a year earlier, the average price of a gallon of regular gasoline across California was about $3.90, only a dime cheaper than it was in July 2014.

Refining outages have also raised prices in the Midwest, where the regions largest refinery, owned by BP, cut back sharply because of leaks in its biggest crude processing unit foundin July. BPs refinery in Whiting, Ind.,about 20 miles southeast of Chicago,accounts for 11 percent of all the fuel produced in the Midwest. The episode led to high prices at gas stations fromsouthern Illinois up through Iowa andMinnesota. On Aug. 25, BP said the refinery is up and running.

Refiners without problems have been able to take advantage of high demandfor gasoline. Despite the recent stockmarket selloff, a handful of big refining companies in the U.S. has enjoyed strong profits this year. Shares of Valero Energy and Tesoro, two of the biggestrefining companies in the U.S., areup 19 percent and 23 percent, respec-tively, year to date. The refiners have the upper hand, says Fadel Gheit, an energy analyst at Oppenheimer. They dont have to give it away at the pump all at once. They can drag [gasoline prices] down at a much slower pace.

When the kinks in the refinery network are worked out, even more gasoline may be produced, trigger-ing a rapid and uniform price drop. I think we may see $2 a gallon across a

wide swath of the country by late 2015, says Denton Cinquegrana, chief oil analyst at Oil Price Information Service.

Until then, the best place to find the cheap oil dividend may be in housing. Inexpensive gas has helped millions of Americans pay down debt.

16

Global Economics

waters, both economicallyand politically, wroteWolf-Fabian Hungerland,an economist in Hamburgat Berenberg Bank, in ane-mail. The global liquid-ity situation is changing,making foreign capital scarcer, anddomestic politics are edging towardparalysis and instability.

Minister of Finance Mehmet Simsek,a member of the AK Party, warned ontelevision that the instability is deterringinvestment and putting Erdogans andTurkeys accomplishments over the pastdozen years at risk.

National elections in June saw the pro-Kurdish party, the HDP, win an historic13 percent of the vote. Those gains helped deprive the AKP, which Erdogan co-founded, of an outright majority for the first time since 2002. The hope was that a new election would lead to a stronger presidency. A survey by Metropoll Arastirma says that the AKP would fail to regain its parliamentary majority if the election were held now.

The investment-grade ratings Turkey has received from Moodys and Fitch

Ratings for more than two years are at risk. Moodys has givenTurkey a negative outlook. Losingan investment-grade rating would worsen the selloff in Turkish stocksand bonds, which already totals arecord $5 billion this year. Turkeys

10-year bond, yielding a high 5.1 percent,is trading like junk. The yield on two-year government bonds has risen morethan 3 percentage points from the start of 2015, the most among 20 emerging markets tracked by Bloomberg. That means investors are demanding a hefty rate to compensate for the risk theyre taking by buying the bonds. Fitch and Moodys declined to comment.

Im pretty sure Turkey will be down-graded if things dont change, and itshard to see where that change is goingto come from, says Markus Kiraly, head of the emerging-markets foreign exchange trading desk at Toronto-Dominion Bank in London. What the country needs is a stable, demo-cratic government and an indepen-dent central bank. Governor ErdemBasci has been under pressure from theErdogan administration to lower rates.

The lira, down 21 percent this year,is the third-worst performer among24 major emerging markets. Turkey is more reliant on foreign capital than many countries because of the size of its current-account deficit, which sees more money going outto service debtthan coming in. Althoughthe deficit is expected to shrink to4.9 percent of gross domestic product this year, it still compares poorlywith the emerging-markets average of1.5 percent.

Turkeys finances will remain under stress. The size of the current-account deficit and the amount of debt that needs to be rolled over is so large that it creates risks and vulnerabilities, says Neil Shearing, chief emerging markets economist of Capital Economics.History suggest this ends in a verymessy way. Jack Fairweather,Constantine Courcoulas, and Isobel FinkelThe bottom line An outbreak of ghting, dollar-denominated debt, and a weak lira put Turkeys investment-grade rating at risk.

Edited by Christopher PowerBloomberg.com

What the country needs is a stable, democratic government and an independent central bank.

Marcus Kiraly, Toronto-Dominion Bank

Protesting Turkeysoperations againstKurdish militants

on Aug. 19 inIstanbul

17

Global Economics

The streaming service is betting it can prosper in a land where free TV still reigns

In Japan theres a culture of not paying for content. Thats only just starting to change

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The successful expansion by Netflix into Australia, Canada, Europe, and Latin America over the last five years has increased investor confidence in thestreaming services plan to build the firstworldwide, online television network. Its steady growthusers topped 65 million globally in Junehas fueled a $22.4 billion increase in Netflixs market value since the end of 2014.

For all its success, Netflix has been a Western phenomenon. About 65 percent of its subscribers are in the U.S., while an additional 19 percent will hail from Brazil, Canada, and the U.K. by yearend, estimates Nomura

Securities. By the end of 2016, Chief Executive Officer Reed Hastings wants to reach the rest of the globe, a sprint through more than 150 countries across Africa, Asia, Eastern Europe, and the Middle East. That push begins with Netflixs Sept. 2 entry into Japan, home to more broadband households than any of its current markets outside the U.S.

Yet Japan has vexed other Western media companies, including U.S. rival Hulu, who want the countrys aging consumers to pay for TV content. And the subscription video-on-demand market there is about a tenth the size

of the streaming market in the U.S. Thats likely one reason Netflix execu-tives, including Hastings, have lowered expectations. We expect a slow and steady growth in the Japanese market relative to other markets, Hastings says. The Japanese are slow to warm and trust the brand.

A smooth rollout in Japan would help calm investors lingering concerns about Netflixs expansion plans. The degree of difficulty there is higher than in the West; and while every country has its quirks, Japan will be instructive for the companys entry into bigger markets such as China and India, says Vivek

August 31 September 6, 2015

Briefs: Best Buybuoyed; corn as high asan elephants eye 23

Qatar Airways cutsdown on the sternparenting 21

Drivers ed, with Teslacher 20

Coming up on Colbert:Scarlett JohanssonandElon Musk? 22

19

Autos

For Tesla, Stores Are Classrooms, Too

Aiming for tenfold growth by 2020, it wants them to educate buyers

The rst questions we get are always about charging

Elon Musk, the visionary chief exec-utive officer of Tesla Motors, has proved to be an adroit salesman, cap-turing the publics imagination for agreener future with his stylishandpriceyelectric vehicles. Thats madehim a fixture on magazine covers anda coveted guest on TV shows (page 22), helping him to raise billions from inves-tors eager to finance his vision. Now he

Overseas Is the New BlackNetix quarterly revenue

$1.8b

$0.9b

$0

4Q 11 2Q 15

Internationalstreaming

The companyplans to expandinto Italy, Japan,

Portugal, andSpain by yearend

U.S. streaming

U.S. DVD rentals

Couto, executive director of MediaPartners Asia, a media and telecommu-nications consulting firm. Japan is amarket more challenging than anywheretheyve been, Couto says.

Despite Japans reputation foradvanced technology, its TV marketis retrograde. Most people watch oneof seven free broadcast networks anduse digital video recorders to tape theirfavorite dramas, according to Couto.Fewer than 30 percent of Japanesehouseholds even subscribe to pay TV,and subscription video on demand gen-erated sales of just $450 million last year,Media Partners Asia estimates. Thatcompares with about 85 percent and$4 billion, respectively, in the U.S.

Its not going to be like Australia,where Netflix has streamrolled its wayin and became the dominant provider,says Seung Bak, CEO of U.S.-basedvideo provider DramaFever, which buyscontent from Japan and other inter-national markets. In Japan theres aculture of not paying for content. Thatsonly just starting to change.

Japan has also turned inward at a timewhen Hollywood studios have increasedtheir reliance on foreign markets suchas China for growth. Foreign films shareof the Japanese box office dropped to42 percent in 2014 from 73 percent in2002, according to the Motion PictureProducers Association of Japan. By con-trast, China has become the most impor-tant foreign market for U.S. films andhas overtaken Japan as the worldssecond-largest film market.

That ups the risks for Netflix, as itsglobal strategy has relied on viewers inmost countries having similar tastes. Its most popular shows in the U.S., such as Orange Is the New Black, are also its top shows overseas.

To entice viewers, Netflix will offer local originals at its Japan launch, a

first for it in any global market.While local shows eventu-ally make up 10 percent to20 percent of offerings in mostNetflix territories, that will riseto 40 percent in Japan, says Greg Peters, head of Netflixs opera-tions in Japan.

One of the first local originals is Terrace House, a reality show produced by Fuji Television Network that bears some similarity to MTVs The Real World. It will be central to Netflixs pitchto Japanese viewers, as will Daredevil, from Walt Disneys Marvel Studios. While U.S. shows are often relegated to second-tier cable networks in Japan, Netflix sees an opportunity to bring them into the mainstream by promotingthem more aggressively than is usually done. American TV shows are not as popular in Japan, says Ted Sarandos, Netflixs chief content officer. Im not convinced thats because Japanese have radically different tastes than the rest of the world.

Netflix figures the potential for an on-demand revolution exists, since much of Japan has access to broadband Internet at home, and people routinelywatch videos over their mobile phones.The two largest subscription video pro-viders in Japan have ties to mobile phone carriers SoftBank Group and NTT Docomo, which offer them aspart of larger phone packages. Netflixon Aug. 24 announced its own partner-ship with SoftBank, which will promote the service in its stores and kiosks, on its website, and in other retail outlets. SoftBank customers will be able to pay for Netflix on their phone bill, and the Netflix app will arrive prein-stalled on new smartphones in October. Consumer electronics giants Panasonic and Sony have agreed to include a Netflix button on TV remotes.

The deals reflect a conscious effort by Netflix to strike a conciliatory tone with local players that can influence consumers. Hulu struggled to earn that trust when it entered Japan in 2011. The Japanese viewed Hulu as gaijin, or for-eigner, according to Media Partners Couto. Plus, it charged about $15 a month; Netflix will cost less than the $8.99 most of its U.S. subscribers pay. Hulu didnt gain traction until its prices were lowered and its local unit was sold to Nippon Television Holdings in 2014.

The real challenge is to generate excitement in a place that isnt clamor-ing for Netflix, says Cameron Johnson,

a company executive working on the Japanese site. While most Japanese websites are dense with small photos and many entry points, Netflix opted to stick with the spare

look it uses in other countries. Johnson says hell start tweaking the service within minutes of its debut, respond-ing to complaints and praise. Netflixs entry into Latin America in 2011 was slow to take off, but the company credits its eventual turnaround to more than 100 different changes it made to the service based on viewer behavior and feedback.

That nimbleness is one reasoninvestors support the expansioninto unfamiliar territory. Anthony DiClemente, an analyst with NomuraSecurities in New York, estimates Netflixmay approach 5 million subscribers in Japan by 2020, just behind its bigger markets in Germany, Brazil, and the U.K.

Hastings wont give hard numbers, but hes optimistic about Netflixs prospects. It may be one of our best markets in the long term because when the Japanese society embraces a brand, it is a very deep connection, very long-term, he said on a recent earnings call. So were willing to make that investment knowing that its not the quick route to success that might be in other countries. Lucas Shaw, with Pavel AlpeyevThe bottom line Betting that streaming is a global phenomenon, Netix will expand to more than 150 countries by the end of 2016.

Its not going to be like Australia, where Netix has steamrolled its way in and became the dominant provider.

Seung Bak, DramaFever CEO

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ORBIS

faces his biggest sales job yet: findingbuyers for a lot more cars.

Musk has vowed to sell 500,000 elec-tric vehicles a year by 2020an aggres-sive tally for a company that in Augustlowered its 2015 sales goal from 55,000vehicles to 50,000. As the carmaker triesto move beyond early adopters, educat-ing ordinary drivers about electric carswill be key. Tesla isnt yet big enough tojustify the cost of a national ad campaignto do the job. So its counting on its 200stores worldwide to demystify the tech-nology for customers.

Mostly in high-end malls, Tesla loca-tions are much like the experiencestores once favored by consumer elec-tronics makers; the idea is less tosell a product on the spot than to letshoppers spend time with the brand.Theres no hard sell. Product spe-cialists greet and educate visitors.And while plenty of shoppers visit thestores, ultimately many configure andpurchase their car online.

In coming weeks, stores will installinteractive displays and graphicsfocused on four major themes: safety,autopilot features, Teslas chargingnetwork, and the motors that powerthe axles. People who buy an elec-tric vehicle go through a very differ-ent process than someone buying a carwith an internal combustion engine,says Ricardo Reyes, a Tesla spokes-man. No one goes into a car dealer-ship and says, How does a gas stationwork? But the first questions we getare always about charging. Visitorswith range anxiety can plug in a desti-nation and speed (faster driving usesmore battery power) to locate chargingstations on the route.

Tesla is going mainstream at a timewhen entrenched luxury brands suchas Audi, BMW, and Mercedes-Benzare also pouring billions into theirstores and models. With vehicles thatstart north of $70,000, Tesla is a nichebrand for well-heeled drivers; its luxerivals sell entry-level vehicles that even millennials can afford to lease.

The Model X SUV, which beginsery in September, could help Tesattract a wider range of customers.So could a mass-market car called theModel 3, due in late 2017, because ofits lower price. But investors remainjittery. Teslas shares have fallen about10 percent in the past 12 months, inpart because of slower-than-expectedgrowth in China and the lowered 2015sales target.

Teslas direct sales strategy is unorth-odox. For decades most U.S. states forbade automakers from selling cars directly to consumers, forcing them to use networks of independent dealers. Tesla has fought battles in several states to avoid franchised dealers, though attractive markets including Arizona, Michigan, and Texas still wont let it go direct. So its opened galleries in mallsin Dallas and Houston, where customerscan learn about the cars but employees cant discuss prices or offer test drives.

Alan Baum, who runs a market-research firm in West Bloomfield, Mich., says eventually Tesla may have to open traditional dealerships. Trying to sell 500,000 vehicles a year without the help of local operators, he says, is a whole other order of magnitude. Jessica Caldwell, a senior analyst at car researcher Edmunds.com, says half of the people who buy a new car are trading one in, typically requiring new car outlets to also have used-car lots. But Teslas stores are in pedestrian promenades and malls, so at some pointTeslas retail locations are going to need more space, she says. And as Tesla moves to a more mainstream vehicle, theyll have more service needs.

For now, Tesla wants to become a life-style brand. Like BMW, Ferrari, andPorsche, it has a fashion line, including a $300 tote bag, $100 driving gloves, and a $40 iPhone sleeve. Like the fashion industry, Tesla plans twice-yearly make-overs of its stores to generate buzz. In July it named former Burberry executive Ganesh Srivats chief of North American sales. Says Kate Benson, a recruiter

Airlines

MakingQatars SkiesFriendlier for Employees

The emirates carrier seeks to allaycomplaints of female cabin crew

Its stopped telling 35-year-olds, No, you cant have a family; wait

Its 10 a.m. in Doha, and more than 200 Qatar Airways cabin crew are gathered in an airport hotel ballroom. Taking the mic, a female flight attendant fires off a query about a policy barring cabin crew from using mobile phones in public while in uniform, garnering murmurs of approval. Another asks why those livingin company-owned housing must be intheir rooms from 4 a.m. to 7 a.m. She gets a round of applause.

Fielding questions is RossenDimitrov, the senior vice presidentwho oversees the carriers 9,500 cabincrew, 80 percent of whom are women. While pledging to review the curfew and other concerns, he notes the carrier is already being responsive, as evidenced by recently loosening its restrictions on marriage and pregnancy. As the airline matures, the workforce matures, he says later. (Qatar Airways permitted access to the meeting on condition that comments not be cited directly.) You cant turn to someone who is 35 years old and say, No, you cant have a family; wait. We want to retain people.

Qatar Airways rapid expansion

Come on Down

A New Yorkstore

Tesla retaillocationsopened

at Martens & Heads, who focuses onfashion, retail, and luxe goods: Thereare a lot of opportunities to learn fromluxury retail, which is all about build-ing relationships with customers andkeeping them loyal. DanaHullThe bottom line To meet its annual salestarget of 500,000 vehicles by 2020, Tesla isboosting its stores ability to educate buyers.

70

35

0

08 15

DATA: TESLA MOTORS

Tesla stores opened sofar this year, including 40

in North America

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Companies/Industries

Television

OnColbertsCouch,CEOsGet aSeat, Too

The new Late Show host will chatup execs from beyond Hollywood

A show with this format can have a humanizing effect for executives

With a couple of weeks to go before the debut of his late-night talk show, Stephen Colbert has revealed a part of his strategy to beat Jimmy Fallon: corporate suits. The comedian, whos taking over from David Letterman, will use his perch at CBS to inter-view a more diverse range of guests than appears on the average late-night gabfest. For his first week hes booked two of the most intriguing business-men in the U.S., Tesla Motors Chief

from a regional carrier into a long-haul powerhouse has brought the con-servative values of its home state into conflict with Western views on womensrights. With thousands more flight atten-dants from places as far-flung as Peru and Pakistan set to be hired by 2018, the carrier has scheduled about two dozenmeetings this year to explain shift-ing policies and to better understand workers needs. It has already scrapped rules that allowed the airline to fire cabin crew who married within their first five years of employment or got pregnant. Under guidelines imple-mented in December, flight attendantscan get married anytime after notifying the company, and pregnant crew will beoffered temporary ground jobs.

Qatar isnt alone among Gulf carri-ers struggling to maintain smooth rela-tions with crew. Etihad Airways of Abu Dhabi has been criticized for excluding a trouser option for women when intro-ducing its latest uniforms, though the carrier says thats because its flight atten-dants didnt want them. Dubai-based Emirates has drawn complaints from cabin crew about working conditions and in February began similar meetings to hear their concerns.

Qatar, though, has borne the brunt of the criticism. In a report released in June, the International Labor Organization said the Qatari govern-ment had allowed its flag carrier to institutionalize discrimination. The United Nations agency acknowledged that things are improving. But it said it was waiting to see whether the relaxed rules on marriage and pregnancy are fully implemented and questioned ongoing restrictions, such as a ban on female attendants being dropped off at work by men theyre not related to.

The latter provision reflects a cultural norm in Qatar, the company said in an e-mailed response to the ILO report. Qatar Airways should be given credit for the steps it has already taken and for accepting that there are still aspects on which it may need to work, it said.

Dimitrov in March added fuel to the controversy when he sent an e-mail to staffers that included a blurred-out photo of a drunk female flight atten-dant, whose behavior he said left him ashamed and disturbed. Yet he says the changes have been driven mostly by the need to retain crew members as the carrier expands. It will add at least 6,000 flight attendants in the next two years to crew 320 new jets.

He insists that the carrier is always transparent about the cultural norms crew members must adhere to. Qatar is a conservative place, Dimitrov says, and anyone coming to work for the airline or any other company must accept and adjust to that. Sometimes its hard for people whove never been to this part of the world to understand, he says. Im not saying bad or good, but beliefs are different, and we need to accustom our-selves to the way things are. Deena Kamel Yousef and Mohammed Aly SergieThe bottom line Qatar Airways, set to add 6,000 ight attendants within two years, is easing rules on how they must behave.

United Airlines 1968

Allows singleattendants to wed;starts hiring marriedwomen three yearslater

American Airlines1991

Lets older attendantsweigh more, tweakingits ban on bulges,rolls, or paunches

Pan Am 1971

Stops ring pregnantattendants, butrequires mandatoryunpaid leave

Qatar Airways 2015

The carrier isreviewing the 4 a.m.curfew for attendantsin company housing

A Turbulent History of Flight Attendant Rules

Marriage Pregnancy Weight Bed Check

Executive Officer Elon Musk and Uber Technologies CEO Travis Kalanick.

Viewers should expect more CEOs in the futurealong with astro-nauts, diplomats, and policy-mindedintellectuals, according to Colberts booker, Emily Lazar. She says a blend of comedy and intelligent conversation can set Colbert apart from his peers, who lean more on celebrity interviews and sketches that get recirculated online. There are many CEOs who are celebrities in their own right, she says. Im not interested in a conventional CEO. Im interested in people who are innovators, not time servers.

Lazar compared booking Muskto many, this generations Thomas Edisonto the appearance of Airbnb CEO Brian Chesky on Colberts previous show for Viacoms Comedy Central. Her team isnt keen on the hotel or auto industry, but conversations about the sharing economy and the future of energy resonate with viewers. One dream guest? Netflix CEO Reed Hastings, who has reshaped television.

CBS hopes Colbert can deliver some-thing Letterman seldom did in his later years: young viewers. While Letterman drew a nightly audience that dwarfed that of The Colbert Report, Colbert is popular among younger people, the group advertisers care about most. He and Jon Stewart drew more viewers age 18-49 than Jay Leno, the most-watched late-night host, on some nights.

An appearance on late-night TV gives executives the opportunity to connect with viewers in a more personal way.Kalanick runs a company valued atabout $50 billion and has been battling established taxi and limo businesses in countries around the globe. A show that is structured in this way can help give an executive Everyman appeal, says Brian OShaughnessy, co-founder of the strategic communications firm the Pramana Collective. There is growing class tension in this day and age, and given the economic disparity that occurs between the average CEO

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and the average worker, frankly, partic-ipation in a show with this format canhave a humanizing effect.Over the years, Colbert interviewed

scientists, authors, and political activ-ists. On the broadcast networks,Letterman and NBCs Leno were morefocused on celebrities and top 10 lists.Although Letterman asked tougherquestions, any list of his top momentsfeatures more interviews with the likesof Drew Barrymore and Madonna thancaptains of industry.The new generation of hosts, such

as ABCs Jimmy Kimmel, have wonloyal followings with playful banterand YouTube-friendly sketches, suchas Fallons Lip Sync Battle on NBCsThe Tonight Show. James Corden hasaped the strategy with CBSs new TheLate Late Show and its popular sketchCarpool Karaoke. Theyve learnedhow to create entertaining little bits,and theyve learned how to play withthe guest, but I dont think theyvelearned how to have great conver-sations with guests, says JeffreyJones, director of the GeorgeFoster Peabody Awards atthe University of Georgia andauthor of books about politi-cal satire.Colberts initial guest list

suggests he wants to wind theclock back to the days of JackPaar and Merv Griffin, whodput politicians and musicians side byside on the same couch, Jones says.In a recent meeting with televisioncritics, Colbert stressed that he isntgoing to radically change the formulahe used during The Colbert Report.While he will drop the right-wing blow-hard shtick, hes still hosting a light-hearted talk show. Musk will appearthe same night as Scarlett Johansson,and Kalanick will appear with countrymusics Toby Keith.Im very interested in my guests,

and Im looking forward to being ableto be sincerely interested in what theyhave to say without regard to having totranslate it through an idiots mouth,Colbert told TV critics in August. Soif that leads to some serious conversa-tions, Id be very happy.Lucas ShawThe bottom line Stephen Colberts guestson The Late Show will include more thanentertainers pushing their latest lm or album.

Briefs

A Rare Big-Box Bounce

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Edited by James E. Ellis Bloomberg.com

Best Buys business is booming thanksto the Apple Watch, flatscreen TVs, and fitnesstracking devices. CEO Hubert Joly says thesheer volume of new tech toys has sent consum-ers to its stores for advice. Its profit in the recentquarter rose 12 percent, to $164 million, while salesat stores open more than a year rose 3.8 percent.6 The U.S. Department of Agriculture saidU.S. farm incomes will fall 36 percent in 2015 totheir lowest level in almost a decade, as surging milk, pork, corn,and soybean production hurts commodity prices. The forecast isweighing on suppliers such as Deere. Johnson & Johnson

sold its no-calorie sweetenerSplenda to Heartland Food Prod-ucts for an undisclosed sum.Patents for sucralose, the main ingredient, expired years ago, but the deal gives Heartland a

recognizable brand. Food companies increasingly use the ingredient to replace aspartame, which has been hit by health concerns. e Boeing is finally getting its day in court against a class-action lawsuit that claims its 401(k) plan left employees with excessive fees and presented unwise investment options, including Boeing shares. The suit, on behalf of 190,000 workersand retirees, was filed in 2006 but is just reaching trial. Jerome Schlichter, the lawyer bringing the case, has managed eight settlements from 17 similar actions. Boeing has said the plans practices were in line with industry standards. Hennes & Mauritz, the worlds No.2 apparel retailer, offered a $1.2 million prize fora breakthrough in clothes recycling. Garmentswith several different materials often end upin landfills, and current recycling methodsproduce relatively low-quality fibers.

CEO Wisdom

Our rm is made forthis kind of market.

Douglas Cifu, CEO ofVirtu Financial, ahigh-frequency tradingcompany, on stocksrecent volatility

The FDA saidmayonnaise isntmayonnaise withouteggs. The ruling wasprompted by Just Mayo,a vegan spread fromHampton Creek.

The number of workers Chipotle said it will hire on Sept. 9, in a recruiting blitz its calling National Career Day. 4k

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Companies/Industries

August 31 September 6, 2015

Clifty Creek plant in Indiana. Customers also would underwrite the purchase of whats generated by FirstEnergys Davis-Besse nuclear plant on Lake Erie.

FirstEnergy concedes that the 15-year power purchase agreement would cost customers in its first three years but argues that over the next dozen it would save them $2 billion. Thats based on an assumption that natural gas prices will rise steeply. The Office of the Ohio Consumers Counsel, a state agency, has done its own projections and estimates that rather than enjoy savings, custom-ers would pay $3 billion over a decade and a half. What theyre talking about is a $3 billion consumer subsidy for unprofitable plants, says Dick Munson, the Environmental Defense Funds Midwest clean-energy expert.

The Public Utilities Commission of Ohio will begin hearings on FirstEnergys proposal on Aug. 31. The companys chief executive officer, Chuck Jones, has presented his case in the Cleveland Plain Dealer. Ohio is losing its energy independence, he wrote in an Aug. 2 op-ed. New envi-ronmental rules recently forced the closure of several of FirstEnergy Corp.s Lake Erie power plants.

Indeed, in April, the company com-pleted the shuttering of coal-fired plants in Ashtabula, Eastlake, and Cleveland, the oldest of which began generating electricity in 1911. FirstEnergy chose to pull the plug on the plants rather than meet U.S. Environmental Protection Agency pollution standards for mercury and other toxic metals. Shutdowns arent unique to Ohio. N