Economic Calendar

Thursday, September 29, 2011

Hong Kong Shuts Schools, Markets as Typhoon’s Gale-Force Winds Sweep City

By Stephanie Tong and Michelle Yun - Sep 29, 2011 5:10 PM GMT+0700
Enlarge image Hong Kong Closes Stock Market, Hoists Gale Signal on Typhoon

Victoria Harbour is seen during a Typhoon 8 Signal Warning as Typhoon Nesat passes close to Hong Kong. Photographer: Ed Jones/AFP/Getty Images

Sept. 29 (Bloomberg) -- Central Hong Kong's streets were emptied as Typhoon Nesat swept gale-force winds and rain into the city. Banks including HSBC Holdings Plc and Standard Chartered Plc closed branches, and Hong Kong Exchanges & Clearing Ltd. canceled equities and futures trading for the day. The storm felled trees and ripped bamboo scaffolding from buildings, while bus, tram and ferry services were suspended and at least 38 flights were delayed at the airport. (Source: Bloomberg)

Hong Kong shut financial markets, schools, courts and government offices, raising its highest storm signal in two years as Typhoon Nesat swept gale-force winds and rain into the city.

The typhoon, which killed at least 35 people in the Philippines, made landfall on China’s Hainan Island after passing Hong Kong, the city’s observatory said. The No. 8 storm warning was reduced to a strong wind signal with Nesat 450 kilometers (280 miles) away, it said at 5 p.m. local time.

Gusting winds and rain emptied the streets in the city’s financial district as HSBC Holdings Plc and Standard Chartered Plc shuttered branches, and Hong Kong Exchanges & Clearing Ltd. canceled equities and futures trading for the day. The storm felled trees and ripped bamboo scaffolding from buildings, while tram and ferry services were suspended, and at least 287 flights were delayed, canceled or diverted.

“It’s deadly quiet outside, like a dark, wet, ghost town,” said Gavin Parry, managing director of brokerage Parry International Trading Ltd., who walked to work today. “There are few mini buses, no public buses and taxis are trawling for passengers to pay an extra HK$100 fare.”

The typhoon, the strongest to hit China this year, reached the southern province of Hainan at 2:30 p.m. local time, the China Meteorological Administration said in an e-mailed statement today. All flights and high-speed railway services to the resort city of Sanya in Hainan were canceled, the official Xinhua News Agency said.

Banks Closed

HSBC closed at least 100 branches, Laine Santana, a Kong- based spokeswoman for the bank, said. Standard Chartered shuttered at least 75, said spokeswoman Gabriel Kwan.

Hong Kong markets were closed as Asian stocks rose, with the regional benchmark index heading for its biggest three-day gain since December 2009, on speculation German lawmakers will vote to expand a bailout fund for Europe’s debt-stricken nations. The MSCI Asia Pacific Index rose 0.5 percent as of 5:35 p.m. in Tokyo, after having lost as much as 1.3 percent.

Not everybody was off work in Hong Kong.

“Traffic was smooth as there aren’t many cars on the roads,” Frank Huang, head of trading for fixed income at Sinopac Securities Asia Ltd. in Hong Kong, said by phone. “I have to come back to work as trading is still going on in other markets.”

Hong Kong endured fewer tropical storms in the past two years, with seven in 2011, and 11 for the previous year, compared with 28 in 2009. Typhoon Roke this month crossed Japan, causing widespread flooding and power cuts. Typhoon Muifa caused almost 3 billion yuan ($469 million) of direct economic losses in China in August, according to Xinhua .

Disappointed Tourists

Retailers including Apple Inc., which opened its first store in Hong Kong last week, Gucci Group, Coach Inc., and Folli Follie closed shops near the Lan Kwai Fong entertainment area and the International Finance Centre mall in Central.

“You would see lots of bags in my hands right now if shops were open,” said Letty Li, a 30-year-old fashion designer from Shanghai who is here on a four-day trip with friends. “I’m very disappointed since we had planned to do lots of shopping.”

Hong Kong, teetering on the edge of recession after the economy suffered its first quarterly contraction since 2009, is relying on tourist spending to bolster growth. Retail sales exceeded 20 percent for a fifth straight month in July.

“We’ve only got 5 percent of the customers that we used to have,” said Stephen Chui, a manager at the Chuen Cheung Kui restaurant at Causeway Bay on Hong Kong Island. Even should customers return, it “won’t be enough to make up for the losses in the morning session.”

Flights, Port

A total of 245 flights were delayed, a spokesman for the Hong Kong Airport Authority said, declining to be identified. The airport also canceled and diverted 42 flights.

“Some flights arriving into Hong Kong have been delayed or diverted,” said Carolyn Leung, a spokeswoman for Cathay Pacific Airways Ltd. (293), the city’s biggest carrier. “Passengers are advised to check the latest flight information on Cathay Pacific’s website.”

All container delivery services at ports were suspended, the government said. The police evacuated 57 people when the anchor chain of a vessel floating at Sinopec Hong Kong oil terminal on the eastern part of Hong Kong island came loose and struck the facility. No oil leakage was reported, it said.

A total of 25 people were treated at public hospitals, and the government received 418 reports of trees collapsing. The marine department said the Hong Kong-Macau ferry terminal in Sheung Wan was reopened after the passage of the storm.

Cold Beer

Citybus Ltd. started resuming services from 3:30 p.m. local time, customer representative Christina Li said.

With most of the city closed, some bars filled up earlier than usual.

“My clients are at home with their children and family,” Matt Skeggs, a financial adviser at deVere & Partners, said at a bar in Lan Kwai Fong. “I’d never see a client after I had a beer, and I’m on my second.”

To contact the reporters on this story: Stephanie Tong in Hong Kong at; Michelle Yun in Hong Kong at

To contact the editor responsible for this story: Hwee Ann Tan at


Amazon’s Bezos Fuels Tablet Wars With $199 Kindle

By Brad Stone - Sep 28, 2011 8:45 PM GMT+0700

Jeff Bezos is channeling Steve Jobs. It’s mid-September and the wiry billionaire founder of Inc. (AMZN) is at his brand new corporate headquarters in Seattle, in a building named “Day One South” after his conviction that 17-year-old Amazon is still in its infancy.

Almost giddy with excitement, Bezos retrieves one by one the new crop of dirt-cheap Kindle e-readers --- they start at $79 --- from a hidden perch on a chair tucked into a conference room table. When he’s done showing them off, he stands up, and, for an audience of a single journalist, announces, “Now, I’ve got one more thing to show you.” He waits a half-beat to make sure the reference to Jobs’ famous line from Apple Inc. (AAPL) presentations hasn’t been missed, then gives his notorious barking laugh.

With that, Bezos pulls out the Kindle Fire, Amazon’s long- anticipated tablet computer --- and the first credible response to the Apple iPad, Bloomberg Businessweek reports in its Oct. 3 edition.

Unlike a wave of other tablets that have emerged hopefully only to flop, such as the Hewlett-Packard Co. (HPQ) TouchPad, the Motorola Mobility Holdings Inc. Xoom, and the Research in Motion Ltd. (RIM) PlayBook, the Kindle Fire has a good shot at turning the newest theater of war in high-tech into a two-tablet battle.

$199 Fire

With a 7-inch display, the Fire is about half the size of the iPad. At $199, it’s also less than half the price of the cheapest Apple model. Amazon has painted over the rough surfaces of Google Inc. (GOOG)’s Android operating system with a fresh and easy- to-use interface and tied the device closely to its own large and growing content library. Kindle Fire owners can watch the film “Rio,” scroll through magazines such as The New Yorker or Esquire, and access their music collection on Amazon’s servers.

“What we are doing is offering premium products at non- premium prices,” Bezos says. Other tablet contenders “have not been competitive on price” and “have just sold a piece of hardware. We don’t think of the Kindle Fire as a tablet. We think of it as a service.”

To demonstrate the Kindle Fire, Bezos pulls up a chair. He proudly shows off a lightning-fast Web browser that runs on Amazon’s EC2 cloud computing engine and Amazon’s version of the Android app store, with over 10,000 games, e-mail programs, shopping guides, and the like.

Bezos pauses briefly to exhibit his dexterity at a game called “Fruit Ninja,” zapping watermelons and kiwis that fly across the screen, and appears to momentarily lose himself in the effort. “I do find it strangely therapeutic, uncomfortably therapeutic,” he says.

No Camera

There are some limitations to the Kindle Fire. Unlike the iPad 2, it doesn’t have embedded cameras or a microphone, and there’s no 3G cellular connection, only Wi-Fi.

Its diminutive size, which makes it so handy for stashing in a coat pocket, also makes it unlikely to satisfy more than one antsy kid on a long car ride.

The versatile iPad 2, with its video chatting capabilities and exquisite screen resolution, is a lifestyle-defining objet d’art.

The stripped-down Fire is more of a sit-back-on-the-sofa- and-shop device. It crystallizes the difference between Apple, which tends to keep prices -- and profit margins -- high, and Amazon, which likes to start low and drive lower in an effort to knee-cap the competition. The tablet is symbolic of Amazon’s ability to adapt and reluctance to cede the future to anyone. If the Fire and its inevitable sequels are successful, they will add even more might to one of the fastest-growing retail operations the world has ever seen.

Largest Bookstore

Amazon’s 1990s slogan -- “Earth’s largest bookstore” -- stood for an ambition that now seems cute. Amazon boasted of its unlimited selection of books, even though in most cases it was simply having them shipped directly from distributors.

Today, Amazon sells millions of goods and services, from toys and high-definition televisions to server space for other Internet companies and digital reading devices for book lovers. Borders Group Inc. found it impossible to match Amazon’s selection and went out of business earlier this year.

Best Buy Co. has watched Amazon undercut it and commoditize whole product categories, and is now trying to shrink the square footage of its superstores. Wal-Mart Stores Inc. (WMT) has struggled to match the ease and reliability of Amazon’s shipping network, and posted nine straight quarters of declining same-store sales. Websites that have matched Amazon in selection, price, and customer service -- Zappos, -- Bezos has quickly acquired.

`Hyper Competitor'

“Amazon is not a fight-on-their-knees kind of company,” says Rob Glaser, the Seattle-based entrepreneur behind RealNetworks and now also a venture -capitalist at Accel Partners. “Jeff’s a hyper competitor.”

As its rivals steadily asphyxiate, Amazon is ringing up 50 percent growth in quarterly revenues, and may reach $50 billion in sales this year.

Wal-Mart needed almost twice the time --- 33 years --- to cross that threshold.

“Amazon is such a smart learning organization,” says Nancy F. Koehn, a professor of business administration at Harvard Business School. “It’s like a biological organism that through natural selection and adaptation just keeps learning and growing.”

Amazon is also facing a new kind of challenge that competitors like Wal-Mart are intimately familiar with --- cultural backlash, or at least the early signs of it. The company has been criticized for waging an expensive state-by- state battle to avoid collecting sales taxes, and more recently for skimping on air conditioning in its East Coast distribution centers during a brutally hot summer.

Growing Dominance

If the Kindle Fire is half as good as it looked in Bezos’ conference room, it will fan the fears about Amazon’s growing dominance. The tablet funnels users into Amazon’s meticulously constructed world of content, commerce, and cloud computing. Just like owners of Kindle e-reading devices tend to start buying all their books from Amazon, Kindle Fire owners are likely to hand over an increasing chunk of their entertainment budget to Jeff Bezos.

Tablets represent an opportunity for Bezos not only to sell a new kind of device but also to entice people to buy more stuff.

Even with only 28.7 million iPads sold, e-commerce sites say they see an increasing amount of traffic coming from tablets. Forrester Research reported that online purchases made on tablets now account for 20 percent of all mobile e-commerce sales, and that almost 60 percent of tablet owners have used them to shop.

`Huge Tailwind'

Bezos says tablets “are a huge tailwind for our business.”

Amazon once saw spikes in traffic during the workday lunch hours. Now traffic is more evenly distributed as people pick up their tablets anytime of the week, buying the books and albums they see on television and making impulsive decisions about replacing their dishwashers.

The Kindle Fire (internal code name: Otter) is designed to ensure that even more of those purchases go to Amazon. The company has built a tablet-optimized shopping application, with simplified and streamlined pages with none of the clutter of the main website. The app is pre-installed and sits at the bottom of the Fire’s main screen (users can get rid of it if they want).

The device also comes with the enticement of a 30-day free trial of Amazon Prime, the company’s $79-a-year two-day delivery program that tends to convert members into Amazon addicts who triple or even quadruple the amount they spend on the site. Since March, Amazon has also administered its own app store for Android devices, culling Google’s more comprehensive selection and removing everything that’s offensive and unreliable.

Twitter, Facebook

Kindle Fire owners will have access to apps from Pandora Media Inc., Twitter, Facebook, and Netflix Inc. (NFLX) Although other competitors like Barnes & Noble Inc. (BKS) can submit their apps, it will be much easier for Kindle Fire owners to find Amazon’s own content. That’s one reason Amazon is in the best position to turn the tablet battle into a two combatant war.

The other is price. Analysts speculating on the new device pegged the Kindle Fire at $250 to $300. (Companies like Samsung and RIM have entered the tablet race with similar devices at those prices and above.)

Bezos is able to go lower because he can make his profits on media content and with additional subscriptions to Amazon Prime, which then will drive additional purchases of toys, toasters, diapers, etc. He’s also exploiting his company’s popular cloud computing initiative, called Amazon Web Services.

`Extremely Low Margins'

Amazon saves money on the Kindle Fire by packing it with only eight gigabytes of memory (the costliest version of the iPad has 64 gigs), but owners of the device get to store as many books, songs, movies, and personal documents on Amazon’s cloud servers as they like for free.

Bezos won’t say whether he thinks he’ll lose money on the device itself, only that he’s at ease flirting with red ink.

“Certainly this is a for-profit business,” he says. “Let’s put it this way. We are and always have been very comfortable at operating at extremely low margins.”

Though the decision to design and build its own hardware is a high-stakes bet, it’s equally true that Bezos had no choice but to enter the tablet business.

About 40 percent of Amazon’s revenue comes from media --- books, music, and movies --- and those formats are rapidly going digital.

Amazon was late to understand the speed of that transition; Apple, which introduced the iPod in 2001 and iTunes two years later, wasn’t. The iPad has only strengthened Apple’s hold over digital media.

Kindle App

Although there’s a Kindle app for the iPad, Apple takes a 30 percent slice of all e-books Amazon sells on it and has restricted Amazon and other app makers from directing iPad users to their websites in order to avoid giving Apple its cut. Doing business on the iPad threatens Amazon’s already thin profit margins.

Bezos says he doesn’t think defensively.

“Everything we do is driven by seeing opportunity rather than being worried about defending,” he says. Given Apple’s inroads into the media business, that’s hard to believe. Bezos is magnanimous toward Jobs.

“On a personal level we have a tremendous amount of respect for Apple and Steve. I think that’s returned,” he says. “Our cultures start in the same place. Both companies like to invent, both companies like to pioneer, both companies start with the customer and work backwards. There’s a like-mindedness.” Pause. “Are two companies like Amazon and Apple occasionally going to step on each other’s toes? Yes.”

E-Book Store

Amazon has recovered more quickly than other tech companies in the race to catch up with Apple in digital media. Amazon introduced an online TV and movie store in 2006, the Kindle e- book store in 2007, and the MP3 digital music store in 2008.

Earlier this year, Amazon also aimed its sights on Netflix with an Instant Video streaming service that’s free for members of Amazon Prime, and it’s now spending hundreds of millions to increase its catalog with TV shows and movies from studios like News Corp. (NWSA)’s Fox and NBC Universal.

The music and video stores haven’t been huge hits. That may change on the Kindle Fire. On a tablet those apps will give users the impression that most songs, TV shows, and movies are just a click away.

“We are leaning into this,” Bezos says. “It’s not a small initiative for us.”

Amazon is also among the companies in the final round of bidding for the online video site Hulu, according to people with knowledge of that process who were not allowed to speak on the record.

IPod Lessons

Apple’s success with the iPod taught the entire tech industry another valuable lesson. There were other digital music players on the market back in the 1990s, but Apple’s device, which seamlessly blended hardware, software, and eventually an online service in iTunes, made the experience simple and unintimidating for non-techies.

There is a sense, as one easily holds the Kindle Fire in one hand (try doing that with an iPad), that Bezos is working from the same set of principles as Jobs: Content matters. Simplicity is key. How do companies allow users to easily buy songs, movies, and other digital goodies? They persuade customers to entrust them with their credit cards--as both Amazon and Apple have done. How do they ensure that the device is easy to use? They design and build it themselves.

Making Own Hardware

“What should Amazon be doing in 20 years?”

That was the first question Bezos asked Jateen Parekh, a Silicon Valley systems engineer who had worked for the digital video recorder pioneer Replay-TV, an early TiVo rival, and Philips Research, a division of the Dutch consumer electronics maker.

It was August 2004, and Bezos and his new senior vice- president in charge of worldwide digital media, Steven Kessel, were exploring what seemed like a radical idea for an online retailer: making their own hardware.

“The question impressed me,” recalls Parekh, who is now the founder and chief technology officer of digital radio startup Jelli. “The fact that the CEO was thinking that far out was huge.”

Parekh joined Amazon that September, becoming the first employee of Lab126, a secret Silicon Valley skunkworks. At first, Parekh didn’t have an office to report to: He and the few industrial designers and engineers hired soon after, including Gregg Zehr, a former vice-president of hardware engineering at Palm Computing, set up shop in an empty room in the offices of A9, Amazon’s Palo Alto, California-based search subsidiary.

Build an E-Reader

Parekh recalls spending his first few weeks investigating the possibility of building Internet-connected set-top boxes and even an MP3 player.

Bezos loved reading far more than listening to music, and Amazon had deep expertise in the book market, so the next decision was a natural one. Amazon’s new hardware geeks would build an e-reader. Parekh and Zehr, who became president of the new division, researched existing e-readers of the time, such as the Sony Librie, which required AAA batteries, sold poorly, and never made it out of Japan. They concluded the market was wide open.

“It was the one thing that wasn’t being done well by anyone else out there,” Parekh says.

First though, Amazon’s engineers needed a better name for the original “A2Z Development Corp.” Parekh and his colleagues hated it, and thought it ill-suited to luring the best and brightest engineers from places like Apple and Palm.

Lab126 Project

They eventually settled on the more mysterious “Lab126.” The 1 stands for a, the 26 for z, a geeky naming convention inside Amazon where groups like the personalization team are referred to by the abbreviation P13N. (If you’re confused by that, count the letters in the word “personalization.”)

Other people who worked for Lab126 in those early years recall it as a loosely managed startup. The group piggybacked on A9’s infrastructure for most the next year. When the search division moved to the former offices of a Palo Alto law firm, Lab126 moved with them and took up residence in the old law library.

Lab126 was eventually given almost unlimited resources. It also had to contend with the unfettered imagination of Bezos. Amazon’s founder wanted his new -e-reading device to be drop-dead simple to use and argued that configuring devices to Wi-Fi networks was too complicated for non-tech-savvy users.

No PC Connection

He also didn’t want to force customers to connect the device to a PC, so the only alternative was to build cellular access right into the device, the equivalent of embedding a wireless phone in the hardware. Nothing like that had been tried before. Bezos insisted that customers should never have to know the wireless connection was there or even pay for access.

“I thought it was insane, I really did,” Parekh recalls.

The effort to develop the first Kindle ended up taking more than three years. Almost everything went wrong. The black and white displays from E Ink, an offshoot of the Massachusetts Institute of Technology Media Lab that makes screens resembling the printed page and require very little power, would look good for one month and then degrade alarmingly.

Qualcomm Inc. (QCOM), which was set to provide the wireless chips, was sued by a competitor, Broadcom Corp. (BRCM), and for months was enjoined by a judge from selling its wares in the U.S.

The Lab126 team repeatedly urged Bezos to make their project easier by considering a Wi-fi-only connection for the Kindle. He rejected the idea, constantly suggesting new ones for complicated features, like the notion that customers’ annotations of books should be backed up on Amazon’s servers.

Code-Name `Fiona'

That original Kindle, code-named “Fiona” after a character in Neal Stephenson’s futuristic novel “The Diamond Age,” was finally ready to go in the fall of 2007.

Still, Amazon almost blew it. Modeling demand after the first-year sales of the original iPod, Amazon underestimated what a hit the Kindle would turn out to be. The first batch sold out in just a few hours. Amazon then discovered that one of its Taiwanese suppliers had discontinued a key part and spent months getting a replacement.

“You look at the history of the Kindle, they developed some real skills around the creation of that product. They’ve cut their teeth so to speak,” says Brian Blair, a New York-based analyst at Wedge Partners.

Making four successive versions of the Kindle e-reader also led Amazon down the path toward the Kindle Fire. For years the engineers at Lab126 tried to create a workable and reader- friendly color Kindle, according to three former employees.

New Color Displays

New color display technologies like Qualcomm’s Mirasol and another MIT IT-offshoot called Pixel Qi proved unreliable and difficult to produce in large quantities. In January 2010, the iPad demonstrated the broad appeal of a new kind of color LCD tablet with better image quality, wider viewing angles, and, near to Amazon’s heart, Apple’s own selection of e-books. People close to Lab126 say that work on tablets, including the Kindle Fire, started soon after.

Amazon’s devices division now employs around 800 hardware and software engineers in Cupertino, California, who fill up all but one floor of an entire eight-floor office building and part of a second building in the same office park, less than a mile from Apple’s corporate headquarters.

In the unit’s industrial design lab, according to a person who has visited that top-secret floor but was not authorized to speak on the record, naked e-ink displays hang from the walls with images from books imprinted on their screens.

E-Ink Screens

They’re used to demonstrate to potential new hires how an e-ink screen can hold an image indefinitely without being connected to a power supply.

There’s also another office of Kindle employees at Amazon’s new corporate campus in the South Lake Union district of Seattle, in a building nostalgically named “Fiona.” The group is cordoned off from other Amazon employees, whose company badges do not grant them access.

Bezos won’t say what kind of devices he’s cooking up next. People with knowledge of the division’s plans say that the Kindle Fire is only the first of a line of Amazon tablets, not an isolated product, and that the group has always considered the possibility of building Amazon cell phones and Internet- connected TVs.

“We are a company with a lot of ideas,” Bezos says, when asked directly about his plans. And then, of course, he laughs uproariously.

Kindle Fire Impact

For those already competing with Amazon, the Kindle Fire won’t be good news.

Kevin Ryan, the co-owner of Green Apple Books, a 44-year- old bookstore in San Francisco, says that Amazon has lowered the prices in the book business beyond his ability to match them. Amazon has also locked up several big authors to publishing contracts, and though it says it will produce their books in print as well as digital formats, that has competing retailers nervous.

“They’re bullies. They really are. I think they really want to be a monopoly,” Ryan says from the 8,000-square-foot store that features tribal masks over the bookshelves, and which has watched sales drop for much of the last decade.

Of the growing group of authors like George R.R. Martin whose books have sold over a million digital copies through Amazon, he says, “You have to assume that people joining the million book Kindle club is taking business away from you.”

ShopRunner Program

In the past year major chains like Toys “R” Us Inc., Sports Authority, and RadioShack Corp (RSH).have teamed up to combat Amazon’s might, forming a free shipping program called ShopRunner that, like Amazon Prime, also offers free two-day shipping for $79 a year. It’s not clear yet how ShopRunner is doing; the group won’t release subscriber numbers.

Fiona Dias, ShopRunner’s chief strategy -officer, says that by locking in a new wave of customers with the Kindle Fire, Amazon will make their jobs even harder.

“It’s a phenomenal concentration of power,” she says. “If we were scared of Amazon in the Web world, we should be absolutely terrified of them in the tablet world.”

It’s not just competitors that are assessing Amazon’s dominance. Over the past year, lawmakers, the media, and even some customers have begun weighing Amazon’s growing sales and size against the impact for communities, commerce, and the local job market.

Amazon has brought some of this scrutiny on itself. It touts its hiring of workers for its growing network of shipping centers, yet those jobs aren’t exactly plumb: They start at around $11 an hour (with health benefits), and conditions can be tough.

Few Perks

The recent newspaper account in the Allentown, Pennsylvania Morning Call said that temperatures over the summer in a local Amazon facility reached 120 degrees Fahrenheit (49 degrees Celsius), and that workers who were slowed by the heat felt penalized by their bosses. (Amazon has promised to put in air conditioners.)

The report is consistent with a company that gives employees few perks aside from 10 percent off $1,000 in annual purchases. Unlike Google and Apple, Amazon doesn’t subsidize meals or provide free sodas. Even the pet dogs of Amazon employees get a better deal: There’s a bucket of free milk bones at the front desk of every company building in Seattle.

The multi-state battle over state sales tax has created perhaps the most controversy around Amazon. Legislators in more than a dozen states, pressed by such politically connected competitors as Wal-Mart, have been pushing Amazon to collect the sales tax that their customers technically already owe on online purchases, to better repair widening budget deficits and pay firemen and school teachers.

California Compromise

Bezos has fought that effort, saying that only federal legislation can overrule a U.S. Supreme Court ruling from 1992 that retailers with no physical presence in a state should not have to pay sales tax there. Critics have charged he’s just stringing out his price advantage as long as possible.

On Sept. 7, Amazon finally compromised in California, agreeing to start collecting sales tax in the state by November 2012. Bezos says that by then the federal government will uniformly set nationwide standards for the collection of online sales tax.

“You have to do what you think is correct,” he says. “Obviously we care about perception but we also value substance and the right place to fix this is in federal legislation.”

Losing the tax advantage may not be such a bad thing. If and when Amazon starts collecting sales tax, it will be free to set up distribution centers right outside major cities, which would enable even faster deliveries than it offers now.

Same-Day Deliveries

As part of Amazon’s deal with California, for example, the company has pledged to spend $500 million on new warehouses and hire 10,000 full-time workers and 25,000 seasonal employees.

Customers in California may soon end up getting same-day deliveries of products and even produce. Amazon’s experimental “Fresh” grocery program is now active in Seattle, where the company already collects sales tax.

Nancy Koehn of Harvard Business School says Amazon may be getting big enough for people to finally start considering the ramifications -- for towns, shopping centers, and jobs --- of a world dominated by online buying. She recently discussed Amazon on Wisconsin Public Radio --- not the most neutral forum --- but was surprised when almost all of the phone calls from listeners were critical of the company.

“Americans get very nervous about centralized power that - affects their communities,” she says. “We get a little bit nervous about bigness, yet we want the convenience and the - pricing and the material plenty that bigness allows.”

11 New Buildings

Amazon’s new Seattle campus testifies to that growing size. The company has leased 11 brand new buildings in the burgeoning South Lake Union neighborhood from real estate developer and Microsoft Corp. (MSFT) co-founder Paul Allen. It’s classic Amazon: unostentatious, and no -company signs on any of the buildings. The entire campus is due to be completed by 2013 and will host several thousand employees, but the company is growing so fast, it’s already looking for even more space.

In Day One South, Bezos would clearly rather discuss the Kindle Fire than real estate, sales taxes, or air conditioning. Former employees of Lab126 say the chief executive officer spends an -unusual amount of his time delving into the gritty details of his fledgling hardware business, and can happily talk for hours about the location of this or that button on a device.

“I spent a huge amount of time working on Kindle Fire,” he says.

He’s right to sweat the details, especially now that his competition has gone from slow-moving big-box -retailers to tech giants like Apple, which has even deeper deep pockets and is as comfortable with long-term investments as Amazon.

“These industries are so big, there are going to be multiple winners,” Bezos says. He’s been saying that for 10 years, during which time he’s helped consign Circuit City, Borders, and others to oblivion. “When I look at something like the Kindle Fire, what I want is to be one of the winners.”

To contact the reporter on this story: Brad Stone in San Francisco at

To contact the editor responsible for this story: Bradford Wieners in New York at


Rare Earths Fall as Toyota Uses Alternatives

By Sonja Elmquist - Sep 29, 2011 6:15 PM GMT+0700
Enlarge image Rare Earths Fall as Toyota Develops Alternatives

Shannon Song, Neo Material Technologies Inc.'s vice president of Magnequench Tianjin Co., holds up a vial of NdFeB powder at the Magnequench factory in Tianjin, China. Photographer: Doug Kanter/Bloomberg

Rare-earth prices are set to extend their decline from records this year as buyers including Toyota Motor Corp. (7203) and General Electric Co. (GE) scale back using the materials in their cars and windmills.

Prices for cerium and lanthanum, the most abundant rare- earth elements, will drop by 50 percent in 12 months, Christopher Ecclestone, an analyst at Hallgarten & Co. in New York, has forecast. Neodymium and praseodymium, metals used in permanent rare-earth magnets, may fall as much as 15 percent, he said.

Makers of electric cars, wind turbines and oil-refining catalysts have sought to reduce use of the metals after China, which supplies more than 90 percent of the market, said in July 2010 that it would cut exports and clamp down on the industry. That boosted prices, encouraging mining companies to develop new prospects and buyers to find alternatives.

“If you think you can keep raising the prices for those materials and still keep your customers, you’re crazy,” Jack Lifton, co-founder of Technology Metals Research, said in a telephone interview. “The principal customer for rare-earth metals is a global automotive industry using rare-earth permanent magnets. That industry will engineer this stuff out.”

Declines in August and September pared a five-month, fourfold surge that brought the average price for eight of the most widely used rare-earth oxides to a record 396,850 yuan ($62,068) a metric ton in July, data from consultant Shanghai Steelhome Information show. The average price declined 13 percent from its July peak as of Sept. 27.

Share Performance

The Bloomberg Rare Earth Mineral Resources Index dropped 41 percent in the last three months, led by a 60-percent decline in Montreal-based Quest Rare Minerals Ltd. (QRM) Great Western Minerals Group Ltd., which explores in North America, climbed 4.6 percent in the period and is the only gainer on the 17-member benchmark.

Rare earths have been pushed lower because of selling by speculators, Michael Gambardella, a New York-based analyst at JPMorgan Chase & Co., said in a report last week. Tsunami- related disruptions in Japan and dumping of unpermitted material in China have undercut prices, while industrial substitution has driven “demand destruction,” said Sam Berridge, a Sydney-based analyst at Royal Bank of Scotland Group Plc.

“A greater focus on recycling and substitution, particularly by Japanese consumers, has resulted in tightness of demand easing somewhat for the lighter rare earths,” Berridge said by phone.

‘Huge Savings’

Rising prices for the so-called light metals, such as neodymium and lanthanum, have prompted automakers including Toyota, Asia’s biggest automaker, to look at reducing the use of relatively powerful and expensive rare-earth magnets in their vehicles. Some Toyota vehicles will be built with an induction motor, which doesn’t use rare-earth magnets, said John Hanson, a Toyota spokesman in Torrance, California.

“Moving from a fixed-magnet motor to an induction motor is a huge savings with regard to rare-earth metals,” Hanson said by phone.

“The Japanese are leading the push to replace, reduce and recycle their rare-earths consumption,” said Dudley Kingsnorth, chief executive officer of Perth-based advisory Industrial Minerals Co. of Australia. “Users are recycling rare earths wherever they can, using them more efficiently, particularly in the magnet industry where they are producing powerful magnets with smaller volumes.”

GM’s Plans

General Motors Co. (GM), the largest U.S. automaker, plans to sell a Chevrolet Malibu Eco next year that uses an induction motor, and otherwise cut down on magnets that use a lot of rare earths.

“The magnets are like God’s gift to electric motors,” Pete Savagian, GM’s chief engineer for electric motors, said in a telephone interview. “But we don’t always need that level of magnet. Even at prices we saw three and four years ago, there’s a more economic alternative, albeit at slightly less efficient outcome.”

The largest portion of demand for rare earths, one third, comes from generating electricity, according to Bloomberg Industries.

In August, GE announced the development of wind-turbine generators that will reduce dependence on the rare-earth materials prevalent in so-called permanent-magnet machines. Some current offshore wind turbines may contain as much as half a ton of the metals, according to Bloomberg Industries analysis.

Gasoline Refining

“Everybody is going back to the drawing board and trying to redesign their generators to minimize the usage of permanent magnets,” said Steve Duclos, chief scientist and manager of material sustainability for GE Global Research. “In all of our businesses we’re looking to reduce our usage.”

W.R. Grace & Co. began selling this year an oil-refining catalyst with reduced lanthanum, a rare earth that has increased in price more than fourfold in the past year. Lanthanum improves the amount of gasoline refiners can extract from crude oil and is also used in hybrid-car batteries.

Half of the company’s customers had switched to the new formula, which offers the same performance and gives them “double-digit type percent decreases in their cost,” Grace Chief Financial Officer Hudson La Force III said on a conference call this month.

The development doesn’t worry Mark Smith, CEO of Molycorp Inc. (MCP), owner of the largest rare-earth deposit outside China.

New Mines

Fluid-cracking catalysts have “always been one of the largest single markets for any of the individual rare earths,” Smith said in an interview at Bloomberg headquarters in New York. “We don’t see that deteriorating in any significant form.”

While rare-earth prices have fallen, demand will outpace supplies even with new mines in California and Australia expected to come online in 2014, Smith said.

“Like any market, you’re going to see up and down in the course of a month or two,” Smith said. “But the overall trend remains short supply, heavy demand.”

The ability to substitute many rare-earth applications will be limited, said Constantine Karayannopoulos, CEO of Neo Material Technologies Inc. (NEM), a Toronto-based producer of rare- earth magnets.

“All kinds of folks are trying to use alternative technologies,” he said by phone. “Longer-term, don’t expect these technologies to be in place this quarter or the next.”

GE’s Duclos says he has little doubt companies will find substitutes, sooner or later.

“It will depend on the element, it will depend on the usage, but getting 10-20 percent efficiencies out of the usage of an element is not that terribly difficult,” Duclos said. “What I don’t subscribe to is this idea that there’s nothing we can do.”

To contact the reporter on this story: Sonja Elmquist in New York at

To contact the editor responsible for this story: Simon Casey at


Stocks in Europe Advance After Data on U.S. Jobs, Growth Exceed Forecasts

By Adam Haigh - Sep 29, 2011 7:36 PM GMT+0700

European stocks rose, erasing earlier losses, as U.S. reports showed claims for unemployment benefits fell more than forecast last week and the economy grew faster than estimated in the second quarter.

The Stoxx Europe 600 Index climbed 0.5 percent to 228.42 at 1:35 p.m. in London, having earlier dropped as much as 0.7 percent. The measure is heading for its worst quarter since 2008, having fallen 16 percent amid concern global economic growth is slowing and policy makers are struggling to contain the European debt crisis. The gauge has dropped 3.8 percent this month following a 10 percent slump in August.

Germany’s lower house of parliament approved the expansion of the European bailout fund, the European Financial Stability Facility, today in Berlin. Lawmakers in the Bundestag voted 523 in favor of the legislation, while 85 voted against; three abstained. The legislation is set to be debated and set to a non-binding vote in the upper house, or Bundesrat, tomorrow.

Even so, global investors anticipate Europe’s debt crisis leading to an economic slump, a financial meltdown and social unrest in the next year, with 72 percent predicting a country abandoning the euro as a currency within five years, a Bloomberg survey found.

About three-quarters of those questioned this week said the euro-area economy will fall into recession during the next 12 months and 53 percent said turmoil will worsen in a banking sector laden with government bonds, according to the quarterly Global Poll of 1,031 investors, analysts and traders who are Bloomberg subscribers. Forty percent see the 17-nation currency bloc losing at least one member in the next year.

Europe’s Woes

Europe’s woes have reignited as Greece attempts to stave off default and spars with its European Union partners over whether it deserves the next tranche of aid next month. Euro- area lawmakers are also taking their time implementing a July overhaul of their rescue fund to give it more crisis-fighting tools, while investors question the ability of banks to withstand further market unrest as signs also mount that the economy is losing momentum.

Italian and Spanish financial market regulators extended bans on short selling of financial shares that were introduced last month in a bid to stem market volatility. The Spanish ban will remain “until the market conditions allow it” to be lifted, the country’s financial regulator said late yesterday. Italy’s restriction, and another enacted by France in August, will both last until Nov. 11.

To contact the reporter on this story: Adam Haigh in London at

To contact the editor responsible for this story: Andrew Rummer at


Solyndra’s $733 Million Plant Had Whistling Robots, Spa Showers

By Alison Vekshin and Mark Chediak - Sep 28, 2011 11:27 PM GMT+0700

The glass-and-metal building that Solyndra LLC began erecting alongside Interstate 880 in Fremont, California, in September 2009 was something the Silicon Valley area hadn’t seen in years: a new factory.

It wasn’t just any factory. When it was completed at an estimated cost of $733 million, including proceeds from a $535 million U.S. loan guarantee, it covered 300,000 square feet, the equivalent of five football fields. It had robots that whistled Disney tunes, spa-like showers with liquid-crystal displays of the water temperature, and glass-walled conference rooms.

“The new building is like the Taj Mahal,” John Pierce, 54, a San Jose resident who worked as a facilities manager at Solyndra, said in an interview.

The building, designed to make far more solar panels than Solyndra got orders for, is now shuttered, and U.S. taxpayers may be stuck with it. Solyndra filed for bankruptcy protection on Sept. 6, leaving in its wake investigations by Congress and the Federal Bureau of Investigation and a Republican-fueled political embarrassment for the Obama administration, which issued the loan guarantee. About 1,100 workers lost their jobs.

Amid the still-unfolding postmortems, the factory stands as emblematic of money misspent and the Field of Dreams ethos that seemed to drive the venture, said Ramesh Misra, a solar-industry analyst in Los Angeles for Brigantine Advisors.

Cylindrical Modules

“When you don’t have the demand, you can’t go into something with the attitude, ‘Build it and they will come,’” Misra said. “You have to make sure the customers are already there when you build it.”

He is skeptical of the company’s statement, in a press release on the groundbreaking for the plant, that it had a backlog of $2 billion in orders for its cylindrical solar modules for commercial rooftops, which it touted as cheaper to install and more efficient than competing flat panels. “Backlog” is a term sometimes used loosely in the industry and may not represent firm orders at all, he said.

David Miller, a Solyndra spokesman, didn’t respond to a phone call and e-mail seeking comment.

Solyndra was the dream of founder Chris Gronet, who received a Ph.D. in semiconductor processing at Stanford University and had spent 11 years as an executive at Applied Materials Inc. (AMAT) He adopted as the company’s motto, “What we do here will someday change the world.” Gronet didn’t return a phone call seeking comment.

Prices Plunge

U.S. Energy Secretary Steven Chu and then-California Governor Arnold Schwarzenegger attended the 2009 groundbreaking for the plant. At the event, Chu said the U.S. solar-energy industry was losing out to countries like China and the loan guarantee, the first awarded by the department under President Barack Obama’s 2009 economic stimulus plan, would ensure the company’s orders would be filled by U.S. workers.

Even as Chu, Gronet and Schwarzenegger were thrusting their shovels into the dirt, market forces were working against Solyndra. The price of polysilicon, the main ingredient in competing traditional solar panels, had plunged. By the time the plant opened last January, the price would be down about 40 percent from when Solyndra got the loan guarantee. Chinese companies were ramping up production of their ever-cheaper competing flat panels.

Solyndra executives rushed construction in a race to fill orders, putting some work on a 24-hour, seven-day schedule. The factory was up and ready for equipment installation in 10 months. The project employed more than 3,000 union construction workers, according to a Solyndra background sheet.

‘First Class’

“They were anticipating large production,” Juancho Suntay, 51, a former Solyndra equipment maintenance technician, said in an interview. “That’s why they wanted to have a state- of-the-art factory.”

The plant features 19 loading docks, four electric car charging stations in the parking lot and landscaping of wild grass and a rock garden. An automated rail system moved parts through the assembly process.

Robots that resembled “a big freezer with wheels” maneuvered around the factory transporting panels from one machine to another, said George Garma, 49, a former Solyndra equipment maintenance technician from Fremont. The Disney tunes alerted workers to the robots’ presence.

“It was first class,” David Chan, 51, who was an information-technology contractor for Solyndra, said in an interview. “I’ve been in the business for 25 years and have seen some elaborate buildings. I’ve never seen a facility like it.”

Costly Real Estate

The plant caught the attention of competitors. “Everybody I know in the solar industry would remark on it and say ‘Boy, that’s a really, really big factory,’” said Barry Cinnamon, chief executive officer at Westinghouse Solar Inc., a Campbell, California-based solar-panel company that manufactures in China.

“That’s a lot of money that went into that factory,” Cinnamon said in an interview. “It’s one of those neck-snapping things every time you drove down the highway.”

Commercial real-estate agents in the region wondered why a new factory was being built in the Silicon Valley region, the epicenter of some of the priciest real estate in the country, where most new construction consists of office space.

“There hasn’t been a factory or warehouse building built in Silicon Valley in well over 10 years,” Jeff Fredericks, managing partner at Colliers International in San Jose, said in an e-mail.

The asking rate for industrial properties in Silicon Valley is the fourth-most expensive in the U.S., according to Jack DePuy, Bay Area research manager at CB Richard Ellis in Foster City, California.

Machinery Breakdowns

About 11.4 percent, or 950,801 square feet, of industrial space was vacant in Fremont in September 2009, according to data from Colliers.

“There was available space that we talked about with them,” Bob Wasserman, Fremont’s mayor, said in an interview. “It was their decision that they needed a new building. Was that a good decision? It didn’t turn out to be.”

John Olenchalk, senior vice president at Kidder Mathews, a commercial real-estate firm in Redwood City, said Solyndra executives considered existing space, including a former Sun Microsystems Inc. facility in nearby Newark that had 218,000 square feet of production space. The company wanted more space and to be near its existing operations, he said.

Solyndra used the new plant for the first phase of panel production. An older facility nearby finished and assembled the panels, former employees said. Problems developed at the old plant, when machinery wouldn’t work properly and needed constant repair, workers said.

“Everybody was talking about it,” said Edward Santos, 44, a former warehouse worker in Solyndra’s logistics department.

Advantage Lost

“A significant percentage of the product we built went into a dumpster because it was defective,” said Craig Ewing, 55, a former maintenance technician. “It seemed like the company accepted that,” he said.

Even if the old plant hadn’t had problems, by the time the company opened the new facility it was clear that Solyndra had lost whatever cost advantage it might have had, said Michael Butler, chairman and CEO of Cascadia Capital LLC, a Seattle- based investment-banking firm that advises renewable-energy companies.

“I’m sure there was a lot of panic at that point, because I’m sure that everyone saw the writing on the wall,” Butler said.

Workers noticed inventory piling up. “The drivers would tell us that the warehouses are getting full,” Santos said. “Sometimes, they’d stay there one or two days before the material was unloaded.”

About two weeks before the company closed, Solyndra CEO Brian Harrison gave an upbeat speech at the new factory, said Romie Sumera, 58, a former equipment-maintenance technician.

Solyndra was getting leads on new orders from companies including Wal-Mart Stores Inc., Harrison told them.

To contact the reporters on this story: Alison Vekshin in San Francisco at; Mark Chediak in San Francisco at

To contact the editors responsible for this story: Mark Tannenbaum at; Susan Warren at


Stocks, U.S. Futures Climb on GDP, Jobless Claims; Euro, Greek Bonds Gain

By Stephen Kirkland - Sep 29, 2011 7:43 PM GMT+0700
Enlarge image Euro, U.S. Stock Futures Gain Before German Vote

The euro strengthened against most of its major peers. Photographer: Chris Ratcliffe/Bloomberg

Sept. 29 (Bloomberg) -- David Blanchflower, a professor at Dartmouth College and Bloomberg Television contributing editor, talks about German lawmakers' approval of expanding the euro-area rescue fund's firepower. Blanchflower, speaking with Deirdre Bolton, Erik Schatzker and Dominic Chu on Bloomberg Television's "InsideTrack," also discusses the results of a quarterly Bloomberg Global Poll of investors, analysts and traders. (Source: Bloomberg)

Sept. 29 (Bloomberg) -- German lawmakers approved an expansion of the euro-area rescue fund’s firepower, freeing the way for European officials to focus on what next steps may be needed to stem the debt crisis. Global investors in a Bloomberg survey found investors anticipate the crisis to lead to an economic slump. Deirdre Bolton, Erik Schatzker, Michael McKee and Dominic Chu report on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Sept. 29 (Bloomberg) -- Brian Barish, the Denver-based president of Cambiar Investors LLC, talks about global financial markets, Europe's sovereign debt crisis, and his investment strategy. Barish speaks with John Dawson on Bloomberg Television's "First Up." (Source: Bloomberg)

Sept. 29 (Bloomberg) -- Paul Donovan, deputy head of global economics at UBS AG, discusses the European sovereign debt crisis and the outlook for Germany's vote today on the European Financial Stability Facility. Donovan speaks with Linzie Janis on Bloomberg Television's "First Look." (Source: Bloomberg)

U.S. stock-index futures rose and European shares rebounded after a report showed the American economy grew faster than earlier estimated and jobless claims declined. The euro strengthened and Greek bonds rallied as German lawmakers backed expansion of a European bailout fund.

Standard & Poor’s 500 Index futures jumped 1.4 percent at 8:40 a.m. in New York. The Stoxx Europe 600 Index rallied 0.9 percent. The euro appreciated 0.6 percent to $1.3625. The Greek two-year yield tumbled 157 basis points to 68.20 percent. Oil rose 1.5 percent to $82.40 a barrel, while copper slid 1.8 percent.

The U.S. economy grew at a 1.3 percent pace in the second quarter, and applications for jobless benefits dropped by 37,000 in the week ended Sept. 24 to 391,000, the fewest since April, according to government data. German Chancellor Angela Merkel gained support from lawmakers to expand the European Financial Stability Facility’s firepower, as the lower house of parliament passed the measure with 523 votes in favor and 85 against.

“Crucially, Merkel won the vote without relying on the opposition,” Geoffrey Yu, a currency strategist at UBS AG in London, wrote in a note to clients. “Fears had initially been voiced that dissent within the party would be high.”

Concern Greece will default is dragging global equities and commodities toward their biggest quarterly losses since 2008. About three-quarters of investors surveyed by Bloomberg say the euro-area economy will fall into recession in the next year and more than half predict China’s growth will slow to less than 5 percent a year by 2016.


The gain in S&P 500 futures indicated the U.S. equities gauge will climb for the fourth time in five days. Advanced Micro Devices Inc. (AMD) fell 10 percent in pre-market trading after the second-largest maker of processors for personal computers cut its forecasts for third-quarter sales and profits.

Three shares advanced for every two that declined in the Stoxx 600. BNP Paribas (BNP) SA and Commerzbank AG led a rally in banks, climbing more than 4 percent. Hennes & Mauritz AB advanced 5.1 percent as Europe’s second-largest clothing retailer reported earnings that beat analysts’ estimates. Rio Tinto Group led mining companies lower.

The 17-nation European currency rose 0.7 percent against the yen, while the Dollar Index, which tracks the U.S. currency against those of six trading partners, slid 0.5 percent. The greenback weakened 0.6 percent against the Australian dollar and New Zealand’s currency.

Greece, Italy

The yield on the Greek 10-year bond fell for the third day, declining 23 basis points. That drove the difference in yield with benchmark German bunds down by 18 basis points to 2,085 basis points. The yield on Italy’s 10-year bond was little changed at 5.64 percent after the government sold 7.9 billion euros ($10.8 billion) of debt. The Portuguese 10-year yield dropped 36 basis points, falling for a second day, with similar- maturity Irish yields retreating for the fourth straight day.

The Markit iTraxx Crossover Index of 50 mostly junk-rated European companies climbed six basis points to 807, snapping four days of declines, JPMorgan Chase & Co. prices show.

The yield on the 10-year U.S. Treasury note was little changed at 1.98 percent before the government auctions $29 billion of seven-year notes, the last of three sales this week.

The MSCI Emerging Market Index rose 0.2 percent, trimming this quarter’s slump to 22 percent, the worst performance since 2008. Turkey’s ISE National 100 Index rose 1.1 percent, led by banks, on speculation the country’s debt may be upgraded. South Korea’s Kospi Index jumped 2.7 percent and benchmarks in Russia, Poland and Hungary climbed at least 0.9 percent.

The Shanghai Composite Index dropped 1.1 percent to a 14- month low on concern growth will slow, and the cost of insuring Chinese government debt rose 9.5 basis points to 182.5, the highest since March 2009, according to CMA.

To contact the reporters on this story: Stephen Kirkland in London at; Shiyin Chen in Singapore at

To contact the editor responsible for this story: Stuart Wallace at


Bernanke: U.S. Unemployment a ‘National Crisis’

By Joshua Zumbrun and Vivien Lou Chen - Sep 29, 2011 11:00 AM GMT+0700
Enlarge image U.S. Federal Reserve Chairman Ben S. Bernanke

U.S. Federal Reserve chairman Ben S. Bernanke. Photographer: David Maxwell/Bloomberg

Federal Reserve Chairman Ben S. Bernanke said the U.S. is facing a crisis with a jobless rate at or above 9 percent since April 2009, and that fiscal discipline would help spur the economic recovery.

“This unemployment situation we have, the jobs situation, is really a national crisis,” Bernanke said in response to questions after a speech yesterday in Cleveland. “We’ve had close to 10 percent unemployment now for a number of years and, of the people who are unemployed, about 45 percent have been unemployed for six months or more. This is unheard of.”

The chairman is contending with the most opposition on the Federal Open Market Committee in almost 19 years, with three policy makers opposing the central bank’s decision last week to push down longer-term interest rates. Fed regional bank presidents Thomas Hoenig of Kansas City and Richard Fisher of Dallas spoke out against the plan this week, while Eric Rosengren of Boston backed it and Dennis Lockhart of Atlanta said the move will probably have a “modest” effect.

The speech was Bernanke’s first since the Fed announced on Sept. 21 that it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and strengthen the flagging economy. U.S. growth has stalled even as the Fed purchased $2.3 trillion in assets in two rounds of quantitative easing and held interest rates near zero since December 2008.

“Monetary policy is not a panacea,” Bernanke said. “There are certainly some areas where other policy makers could contribute,” and “strong housing policies to help the housing markets recover would certainly be useful.”

Stocks Decline

The Standard & Poor’s 500 Index of stocks fell 2.1 percent yesterday to 1,151.06 in New York trading, while yields on 10- year Treasury notes rose 1 basis point, or 0.01 percentage point, to 1.97 percent.

The U.S. should learn from the success of many emerging market economies and support strong economic growth through “disciplined fiscal policies,” Bernanke said in his speech yesterday. He didn’t address the outlook for the U.S. economy or monetary policy in his remarks on “Lessons from Emerging Market Economies on the Sources of Sustained Growth.”

The experience of emerging markets shows “the need to encourage private capital formation while undertaking necessary public investments,” Bernanke said. He also cited open trade, investment in education, technological advances and a regulatory framework that “encourages entrepreneurship and innovation while maintaining financial stability.”

Set of Guidelines

Bernanke’s speech reviewed the recommendations of John Williamson, an economist and senior fellow at the Peterson Institute for International Economics, a set of guidelines known as the Washington Consensus.

During the U.S. recession from December 2007 to June 2009, the BRIC nations of Brazil, Russia, India and China became the engines of the global economy, with Chinese gross domestic product expanding 7.9 percent even as the U.S. was still contracting.

While emerging countries produced about 85 percent of global economic growth since then, China, India and Brazil are slowing after they lifted interest rates to curb inflation following at least $870 billion of fiscal stimulus during the financial crisis.

“Over time, as the emerging market countries become wealthier and technologically more sophisticated, they will gradually lose the advantages of starting from behind,” Bernanke said.

Both emerging markets and advanced economies will have to “do their part” to reduce global imbalances, Bernanke said.

To contact the reporter on this story: Joshua Zumbrun in Washington at Mark Niquette in Columbus, Ohio, at

To contact the editor responsible for this story: Chris Wellisz at


German Parliament Backs Euro Rescue Fund

By Tony Czuczka and Brian Parkin - Sep 29, 2011 5:17 PM GMT+0700
Enlarge image Germany Backs Euro Rescue Fund to Set Stage for Next Steps

Germany's chancellor Angela Merkel center, prepares to cast her ballot in a vote to expanded the powers of the European Financial Stability Facility (EFSF), in the lower-house of the German Parliament in Berlin, Germany, on Thursday, Sept. 29, 2011. Photographer: Michele Tantussi/Bloomberg

German lawmakers approved an expansion of the euro-area rescue fund’s firepower, freeing the way for European officials to focus on what next steps may be needed to stem the debt crisis.

The lower house of parliament passed the measure with 523 votes in favor and 85 against, granting the fund powers to buy bonds in secondary markets, enable bank recapitalizations and offer precautionary credit lines. It raises Germany’s guarantees to 211 billion euros ($287 billion) from 123 billion euros. The main opposition Social Democrats and Greens said before today’s session in Berlin that they’d vote with Chancellor Angela Merkel’s government, assuring passage.

The bill’s passage by Europe’s biggest economy allows euro- area officials to weigh further measures to bolster Greece and stem investor concern that helped end the biggest three-day rally in 16 months for European stocks. Options include seeking further writedowns on Greek sovereign bonds, adding yet more firepower to the rescue fund and a plan to protect banks.

Beefing up the fund bolsters defenses against the crisis, setting the stage for German policy makers to focus on Greece’s second bailout, said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. That “may morph into a debate about an orderly Greek default later this year, with a haircut on Greek debt, an immediate recapitalization of Greek banks, European guarantees for restructured Greek debt and conditional fiscal support” for Greece, he said.

Recession Risk

Faced with German voter dismay at bailouts, coalition members wary of granting more aid threatened to rebel against the government line. The risk of defeat receded as international concern grew that default by Greece would harm the euro region’s core countries and tip the global economy back into recession.

“The German parliament is voting for too little, too late,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said by phone before the ballot. “Merkel can’t possibly believe this is the final point in a rescue package that will calm global markets and lead us out of the crisis.”

Additional measures now in play include further leveraging the rescue fund, known as the European Financial Stability Facility; bringing forward the start of its permanent successor by a year or more; reopening the second Greek rescue agreed in July to increase the financial industry’s contribution; and a safety net for Europe’s banks if default becomes inevitable.

Merkel, head of Europe’s largest economy and the biggest country contributor to bailouts for Greece, Ireland and Portugal, spent weeks cajoling dissenters in her coalition to back the July 21 accord by euro-area leaders to expand the fund.

Coalition Dissenters

Provisions inserted into the bill to satisfy Germany’s constitutional court and potential rebels will allow lawmakers to vote on all new aid requests from the 440 billion-euro fund. Leaders of the Free Democratic Party, Merkel’s junior coalition ally that has flirted with an anti-bailout stance, said the bill would pass on the strength of the coalition’s majority.

Merkel’s coalition has 330 seats in the 620-member lower house. With a simple majority of 311 required to pass the bill, she can afford 19 dissenters before depending on opposition votes to win approval. The full breakdown of the vote will be announced later today.

Expanding the fund requires approval in all 17 euro countries. Nine have authorized the changes, including France, Italy, Spain and Finland, where parliament voted yesterday. Estonia also votes today and Austria holds its ballot tomorrow, when Germany’s upper house of parliament will debate the fund.

Obama’s Call

Nearly two years into the debt crisis centered on Greece, the U.S. is urging European governments to go further and show more urgency. Europeans haven’t responded “as effectively as they needed to,” President Barack Obama said during a roundtable discussion at the White House yesterday.

Europeans “are aware of our responsibility,” German Finance Minister Wolfgang Schaeuble said on Deutschlandfunk radio today. “We have to take as many precautions as we can. We must ensure that Europe doesn’t become the starting point of a new, big financial and economic crisis in the world.”

If the rescue fund must be enhanced further, it will be done in the “most efficient way,” Schaeuble said on Sept. 27. He said that he had also asked all 17 euro states to come up with “backstop plans” to shield banks if the crisis worsens. The plans are to be outlined at the next euro-area finance ministers’ meeting on Oct. 3, when they are due to decide whether to release the next aid payment for Greece.

Greece’s lack of competitiveness means “insolvency on its own won’t solve the root problem,” Frank Schaeffler, an FDP lawmaker who said he planned to vote against the bill, said in an interview yesterday. He called for Greece to leave the euro region because rescue packages “won’t work.”

“I don’t believe the domino effect we hear about will happen,” he said. “Investors will learn the bitter lesson that their losses can’t be socialized by the taxpayer.”

To contact the reporters on this story: Tony Czuczka in Berlin at; Brian Parkin at

To contact the editor responsible for this story: James Hertling at


Europe Financial Meltdown Converging With Slump Seen by Investors in Poll

By Simon Kennedy - Sep 29, 2011 6:37 PM GMT+0700
Enlarge image Europe Meltdown, Global Slump Seen Next year

A sign is seen through a shop grill on a closed-down retail store in Barcelona, Spain. More than a third of participants say deteriorating European debt will derail the world economy over the next year. Photographer: Mikel Laburu/Bloomberg

Sept. 29 (Bloomberg) -- Global investors anticipate Europe’s debt crisis leading to an economic slump, a financial meltdown and social unrest in the next year with 72 percent predicting a country abandoning the euro as a shared currency within five years, a Bloomberg survey found. About three-quarters of those questioned this week said the euro-area economy will fall into recession during the next 12 months and 53 percent said turmoil will worsen in a banking sector laden with government bonds, according to the quarterly Global Poll of 1,031 investors, analysts and traders who are Bloomberg subscribers. Dominic Chu reports on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Sept. 29 (Bloomberg) -- David Blanchflower, a professor at Dartmouth College and Bloomberg Television contributing editor, talks about German lawmakers' approval of expanding the euro-area rescue fund's firepower. Blanchflower, speaking with Deirdre Bolton, Erik Schatzker and Dominic Chu on Bloomberg Television's "InsideTrack," also discusses the results of a quarterly Bloomberg Global Poll of investors, analysts and traders. (Source: Bloomberg)

Global investors anticipate Europe’s debt crisis leading to an economic slump, a financial meltdown and social unrest in the next year with 72 percent predicting a country abandoning the euro as a shared currency within five years, a Bloomberg survey found.

About three-quarters of those questioned this week said the euro-area economy will fall into recession during the next 12 months and 53 percent said turmoil will worsen in a banking sector laden with government bonds, according to the quarterly Global Poll of 1,031 investors, analysts and traders who are Bloomberg subscribers. Forty percent see the 17-nation currency bloc losing at least one member in the next year.

More than a third of participants say deteriorating European debt will derail the world economy over the next year, with the pessimism highlighting the pressure European policy makers face as they try again to fix their 18-month sovereign crisis. Stocks last week tumbled into their first bear market in two years and foreign leaders, including President Barack Obama, are urging European leaders to intensify their rescue efforts.

“It’s a bad crisis,” said Jean-Yves Chereau, a poll respondent and chief investment officer at Halkin Investments LLP in London. “Since the resurgence of troubles in Greece, you suddenly have a crisis of confidence and trust and that’s impacting markets and could hurt economies. Politicians need to move ahead pretty quickly.”

Cut Investment

Europe’s woes have reignited as Greece attempts to stave off default and spars with its European Union partners over whether it deserves the next tranche of aid next month. Euro- area lawmakers are also taking their time implementing a July overhaul of their rescue fund to give it more crisis-fighting tools, while investors question the ability of banks to withstand further market unrest as signs also mount that the economy is losing momentum.

Investors signaled the stresses are prompting them to shift money out of the euro area. Fewer than one-fifth of those polled said the EU’s market offers the best investment opportunity over the next year, about half the number that cited the U.S. Fifty- three percent identified the EU as offering investors the worst opportunities during the next year.

Fifty-six percent said they will reduce their exposure to the euro in the next six months and even one in three inside the region plan to. Half of all investors said they expect the Euro Stoxx 50 index to fall.

Economy Deteriorating

Economists at Pacific Investment Management Co., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc all said in the past week that the euro-area is entering recession. The European Commission reported today that confidence in the economic outlook this month dropped more than economists forecast to its lowest level since December 2009.

Eighty-eight percent of those surveyed by Bloomberg said the region’s economy is deteriorating. Almost half of Asian respondents said they expected Europe’s pain to spark a worldwide economic meltdown within the next year, compared with 34 percent in the U.S. and Europe.

“If the euro crisis continues to fester or become more dangerous, the cumulative effect of declining economic confidence and harsh austerity measures will tip the peripherals into certain recession,” said Akber Naqvi, a poll respondent and executive director at Al Masah Capital Ltd. in Dubai. “The ensuing chaos and banking crisis will almost certainly tip the whole region into a recession.”

German Vote

German lawmakers today approved an expansion of the euro- area rescue fund’s firepower, freeing the way for European officials to focus on what next steps may be needed to stem the debt crisis. Policy makers are studying how and whether to boost the fund through leverage.

“Some of the challenges that we’ve had over the last several months actually have to do with the fact that, in Europe, we haven’t seen them deal with their banking system and their financial system as effectively as they needed to,” Obama said yesterday.

As Greece struggles to impose the austerity needed to tap more international aid next month, 93 percent said the country will eventually default, up 8 percentage points from May. Fifty- six percent said Portugal faces the same fate, down 3 points. Sentiment toward Ireland also improved as 58 percent said bankruptcy would be avoided, four months after the majority bet otherwise.

Spain, Italy

Sixty-four percent said Spain will keep paying its bills and a similar number of respondents said the same of Italy. More than 90 percent said the U.K. and France won’t go insolvent.

Almost every respondent described Greece’s creditworthiness as poor, with more than half saying the same of Italy and Spain. By contrast, 38 percent said Germany’s was excellent and 45 percent said it was good. Fifty-three percent described their faith in Japan as “just fair” or “poor” and 59 percent gave the same rating to France.

Banks have also been hit. Eighty percent said the reputation of Paris-based Societe Generale (GLE) SA worsened over the last six months and 71 percent said the same of compatriot BNP Paribas (BNP) SA. Both vowed this month to trim their balance sheets after concerns about their sovereign-debt holdings made U.S. money-market funds reluctant to lend to them, crimping liquidity options.

UBS Reputation

UBS AG (UBSN)’s Sept. 15 announcement that unauthorized trading had cost it $2.3 billion left Switzerland’s biggest bank with a poorer reputation than six months ago, according to 90 percent of those surveyed. A majority said the incident was probably a single event rather than proof of a dangerous lack of regulation.

Seventy-four percent of poll participants said Bank of America Corp. (BAC)’s credibility has diminished after it posted a record $8.8 billion quarterly loss and shook up management. About half said the standing of Goldman Sachs Group Inc. (GS) had lessened.

There was little change in the reputations of Barclays Plc, Deutsche Bank AG, Wells Fargo & Co., JPMorgan Chase, Morgan Stanley, Royal Bank of Scotland, Citigroup Inc. and HSBC Holdings Plc, the poll found.

The debt crisis is raising questions about whether the 12- year old currency bloc can maintain its current form. While 4 in 10 respondents said they expected a nation to leave within a year, a further 32 percent said a member would leave in two to five years. Fifty-one percent said the euro zone would collapse at some point although only 8 percent expected that to occur in the next year.

Fiscal Union

Still, 51 percent of investors said the euro zone’s likely future would feature a move toward adopting a common fiscal policy.

Policy makers were criticized for their performance and more than half of those polled said they anticipated civil instability including riots in the next 12 months. Only 11 percent said European authorities had handled their economic challenges the best, compared with 67 percent who cited U.S. officials.

Asked how they viewed certain leaders from an investment perspective, 59 percent said they viewed German Chancellor Angela Merkel pessimistically -- a reversal from the 55 percent who said they were optimistic about her policies in May. Seventy-one percent criticized French President Nicolas Sarkozy.


Outside the euro-area, U.K. Prime Minister David Cameron split respondents, with 44 percent saying they were optimistic about the impact of his policies on the investment climate and 42 percent responding negatively. Sixty-three percent viewed him favorably. Australian Prime Minister Julia Gillard was regarded favorably by 36 percent of those surveyed.

Just over a month before Jean-Claude Trichet retires as president of the European Central Bank, poll participants were divided over whether they viewed him favorably or unfavorably, while 45 percent said the ECB’s policies had made little difference to the crisis. About a quarter said the central bank had played a constructive role in addressing the crisis; the same proportion said the bank’s actions had exacerbated the turmoil.

Trichet will be replaced on Nov. 1 by Bank of Italy Governor Mario Draghi, viewed favorably by 36 percent, about the same amount who said they didn’t know enough to give an assessment. International Monetary Fund Managing Director Christine Lagarde was praised by 58 percent of respondents. Seventy-three percent had an unfavorable view of News Corp. Chief Executive Officer Rupert Murdoch.

The quarterly Bloomberg Global Poll was conducted Sept. 26 by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 3.1 percentage points.

To contact the reporter on this story: Simon Kennedy in London at

To contact the editor responsible for this story: Andrew Davis at


China’s Delays on Regional Jet Weaken Bid to Break Boeing, Airbus Duopoly

By Jasmine Wang - Sep 29, 2011 6:13 AM GMT+0700
Enlarge image China’s Delays on Regional Jet Weaken Threat to Boeing

Attendees look at a model of the Commercial Aircraft Corp. of China (Comac) ARJ21 airplane at the Singapore Airshow, in Singapore. Photographer: Charles Pertwee/Bloomberg

A Commercial Aircraft Corp. of China (Comac) ARJ21 regional passenger airplane flies during the Airshow China 2010 in Zhuhai, China. Photographer: Nelson Ching/Bloomberg

China’s bid to break Airbus SAS and Boeing Co. (BA)’s stranglehold on the global aircraft market is being hindered by a four-year delay in delivering the nation’s first passenger jet.

The 90-seat ARJ21 won’t enter service this year as it is still going through safety tests needed to win certification from China’s aviation regulator, Tian Min, chief financial officer of state-controlled Commercial Aircraft Corp. of China Ltd., said last week. The plane was due to begin commercial flights service as early as 2007.

The ARJ21’s failure to win regulatory approval almost four years after the first aircraft was assembled may hamper Comac sales as customers can’t be sure when they will get planes, said Ken Zhang, a Beijing-based analyst with Founder Securities Co. The delay may also disrupt development of the larger 168-seat C919, which will compete with revamped Boeing and Airbus aircraft in a domestic market that may more than triple by 2030.

“It’s only logical for customers to slow orders when they don’t know when delays will be resolved,” Zhang said. “The problems just show that challenging experienced players is always easier said than done, especially in aerospace.”

Comac has 206 orders for the ARJ21, predominately from state-controlled companies in China. Of that tally, only 35 have been won since 2008, when the aircraft made its maiden flight. The plane, which competes with Bombardier Inc. (BBD/B) and Embraer SA (EMBR3) aircraft, has General Electric Co. (GE) engines and a maximum range of 2,225 kilometers (1,382 miles) for the standard model, according to Shanghai-based Comac’s website.

Unknown Schedule

Chengdu Airlines Co., which is part-owned by Comac, is due to be the first operator of the regional jet. The carrier doesn’t know when it will begin to receive planes, said a spokeswoman, who declined to give her name. Deliveries are unlikely to start before the second half of next year, said David Wei, an analyst with Shanghai Securities Co.

“The delays for the ARJ21 highlight the difficulties in getting certification,” he said. “The C919 delivery schedule may also be too tight.”

Comac isn’t alone in suffering delays in developing new planes. Boeing this week delivered its first 787 to All Nippon Airways Co. three years late. Airbus postponed the handover of its A380 superjumbo by almost two years. Singapore Airlines Ltd. (SIA) received the first in 2007.

Comac expects the C919 to make its first flight in 2014 and to enter commercial service two years later. The planemaker has won as many as 100 orders for the aircraft and it will announce “substantial” new deals this year, Chen Jin, its general manager for sales and marketing, said last week.

Regulatory Delays

Approval for the ARJ21 may be taking longer than expected because it is the first time that Comac has built a jet plane and the first time that the Civil Aviation Administration of China, or CAAC, has had to certify one, said Wei and Feng Fuzhang, a Beijing-based China Securities Co. analyst.

A high-speed train accident in July, which killed 40 people, and a Chinese-made propeller-aircraft crash in May in Indonesia that killed 25 people may also have made the regulator more cautious, said Founder’s Zhang.

“The recent train crash is a setback for China’s hi-tech manufacturing,” he said. “The CAAC may be even stricter with the new plane now.” Two phone calls to the aviation regulator yesterday went unanswered.

The process of winning approval for ARJ21 from the Chinese regulator and the Federal Aviation Administration in the U.S. are running “smoothly,” said Comac’s Tian. “It’s normal for there to be some technical issues, but so far there haven’t been any disruptive problems,” he said. He declined to elaborate.

C919 Certification

The experience Comac and the regulator gain from certifying the ARJ21 may mean that they can more quickly process the C919, said China Securities’ Feng. Comac may also now be more focused on the C919 than the ARJ21 as it’s a more important product for the company, he said

The ARJ21 has so far undertaken tests in cross winds, high temperatures and high humidity, said Comac’s Tian. He declined to say how many other stages the plane needs to complete. At least four planes have been used for tests, according to Comac’s website. Stall tests began late last year, according to People’s Daily.

The delays for the ARJ21 may disrupt Comac’s plans to win overseas approval for the C919 as the FAA is refusing to work on assessing the larger plane until the first one wins certification, aerospace magazine Aviation Week & Space Technology reported earlier this month, without saying where it got the information from. If the C919 advances much further without the regulator’s involvement, the FAA may decide it can never become involved, the report said.

FAA Approval

The FAA is working with the Chinese regulator on the ARJ21, said Les Dorr, a spokesman for the Washington-based regulator. He declined to comment on the C919 saying that the agency doesn’t discuss certification efforts in detail.

Overseas suppliers for Chinese aircraft are also helping in the regulatory process. For instance, Honeywell International Inc., which will make parts for the ARJ21 and the C919 through local ventures, has worked with partners on approval processes, said Mark Howes, its Asia-Pacific aerospace president.

“There’s always great interest from the perspective of our partners to learn more about certification with the FAA,” he said.

Boeing, Airbus

Boeing and Airbus are working on new versions of their single-aisle aircraft that will compete against the C919. Toulouse, France-based Airbus will introduce the A320neo in 2015, while Boeing plans to begin deliveries of the 737 MAX two years later. Both planes will feature new engines that will help cut fuel usage.

Boeing expects China to take delivery of 5,000 new planes, worth $600 billion, through 2030. The nation’s airline fleet will total 5,930 planes that year, with about 70 percent of the planes being single-aisle models, according to its forecast.

“I think the market is big enough for everybody to play,” said Ihssane Mounir, Boeing’s senior vice president for sales & marketing in Greater China and Korea. “People want to move around, people want to get together, so there will be plenty of business for everybody.”

Comac’s ability to grab a significant share of the domestic and overseas market may depend upon whether it can stick to its delivery plans and how quickly it can get its aircraft into service.

“The ARJ21 will eventually get the certification,” said China Securities’ Feng. “But, it’s clearly true that Comac was far too optimistic in setting schedule.”

To contact the reporter on this story: Jasmine Wang in Hong Kong at

To contact the editor responsible for this story: Neil Denslow at