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Tho mason for staples sch as ‘newer ol and wheat. > UK Fitch Wek Keks ft on Apa inLondon, benging together pattciens uch as Chanoolor Fish Sunak with bark exooutves and ralsg boron costs regulators > The Farnaoraugh >The Masters gat Sustainable Sos Wors tournament at he Sut Apei5-6 wi Pogusta atonal Gott tdecuss ways to make ai traylmore eco reray fndesnive arate fomissons target (hi in Georgia tarts on orl7 The big question ‘Stbetnar Tiger Woods ‘lake a comaback Ireodo Nay Buta, the resent ot el Sakador, ndbllonareimvestorm@ REMARKS » ‘The Moral Quandary Of Russian Debt The country is fast becoming a case study in distressed investing. Who's buying? Capitalism’s finest By Erik SchatzkerREMARKS. ‘loombers Businessweek ers, 2022 ‘Wall Street doesn’t usually let moral dilemmas get in the way of making money. There's almost always a bidder for whatever security is on offer, no matter how dodgy the issuer, how funky the structure, or how unpleasant the cir- cumstances. Russian President Vladimir Putin's invasion of Ukraine is no exception. Even before the missiles started raining down on Kyiv, the financial opportunists who prey on market dislocation ‘were already hunting for bargains in Russian bonds. They had plenty to choose from. Almost all of Russia’s debt, both sovereign and corporate, remains open for trading under US. economic sanctions. And, because demand has col- lapsed, the yields on all that paper are now among the high- est in the world, One government bond that matures in September 2023 was recently quoted at 48¢ on the dollar. If Russia honors its foreign debt-and so far it has-anyone who buys today stands to earn a return of at least 108% in only 18 months. Needless to say, there's no small amount of risk involved. ‘The battle for Ukraine may drag on for months, if not years. ‘The theater of war may expand to include NATO members. Putin may resort to chemical or nuclear weapons. But what ifbuying Russian debt is a risk worth taking? While the world recoiled in horror at the sight of bombed-out hospitals and civilians sprawled dead in the streets, many hedge fund man- agers asked that question and salivated at the thought of a payday so huge it could be the biggest in a generation. That's the cold calculus of investing in so-called dis- tressed debt-buying the beaten-down, unloved, some- times toxic securities that no one else is willing to touch and then holding on with unwavering conviction to crystal- lize a fat profit. Often that involves messy litigation, accusa- tions of vulture-like behavior, and contentious court rulings. Occasionally it becomes an international incident, like when Elliott Management, a hedge fund in New York known for its bare-knuckle tactics, seized a navy vessel during a 15-year battle with Argentina. In the US., distress is mostly a business of legal maneu- vering for control of bankrupt (or almost-bankrupt) com- panies. It’s different in emerging markets. There, borrowers are largely governments, and creditors have to accept the eth- ical trade-offs of, say, profiting from a humanitarian crisis or negotiating with a dictator. Yet even veterans of fraught sit- uations such as Venezuela and Sudan are drawing a red line around Putin's war. “This i just too grotesque for me;” Hans Humes, the chair- ‘man and founding partner of Greylock Capital Management, said in an interview from Caracas, where he was meeting with the Venezuelan vice president-herself a target of U.S. sanctions. “The cliché is you buy when there’s blood in the streets. Not literally.” ‘To Bill Browder, the anti-Kremlin activist and former man- ager of what was once the largest hedge fund in Russia, there is no quandary. “It’s like asking if you should buy German equities during the Holocaust,” he tweeted on March 6. For other investors—even those who can disassociate the hunger for profits from the misery of Ukraine's people-it's not a matter of choice. They've been instructed by pension plans including the New York State Common Retirement Fund and the Public School Employees’ Retirement System of Pennsylvania to divest from Russian assets as soon as possible. ‘There’s a cost to that restraint. Russia still has plenty of available cash and sources of income, even under sanctions so severe they've largely cut it out of the global financial system. And Putin may keep servicing the country’s debt, hoping perhaps to preserve access to foreign capital in the postwar future. Anyone who chooses not to invest while Russia's bonds are priced for default is consciously forgoing any potential upside. Plus, Russia has already proven some doubters wrong. Jay Newman, the architect of Elliott Management's victory in the Argentina case, predicted on Bloomberg Television that the Russian government would fail to pay interest due in mid-March and called its sovereign bonds worthless. Yet Russia made the payment on schedule. Of course, there are investors with no qualms about buying Russian debt. Two hedge fund managers, speaking to Bloomberg Businessweek on the condition they remain anonymous, say they'd placed bets on Lukoil, Russia’s No.2 oil producer. Another says he passed on Lukoil but made similar wagers on several other companies. Meantime, trad- ing in Russian corporate debt has soared to the highest level in at least two years, topping $250 million a day through id: March, ‘The rationale, they explain, was simple. Some bonds, such as those issued by Lukoil in the Netherlands, ft the distressed playbook perfectly. They're denominated in dollars, governed by British law, and backed in part by assets in Bulgaria, Italy, the US., and other “friendly” countries. If Lukoil defaults, bondholders can pursue claims in international court and, in theory, win control over operations outside the Russian Federation. Or maybe the bonds trade up when everyone else realizes they're too cheap. “We've done this kind of thing a bajillion times,” says one of the buyers. Furthermore, the argument goes, letting borrowers such as Lukoil fail to honor their obligations only undermines the West’s efforts to punish Putin. His cronies are needlessly rewarded, and Russia gets to keep the precious hard currency that would otherwise leave the country in debt payments. Whether it's right or wrong, betting on Russia is not some- thing these investors are willing to discuss publicly. There's just too much headline risk. No one wants to be the next “Vampire Squid,” the nickname Rolling Stone gave Goldman Sachs Group Inc. over its rapacious role in the global finan: cial crisis. As one hedge fund allocator, the manager of a multbillion-dollar family office, puts it, “people will be judged for years to come.” Greylock’s Humes says there's only one scenario in which he'd consider investing in Russian debt: “If someone takes out Putin, then maybe.” ©Hl FY OOM Estedy mes Ets Bloomborg Businessweek Aoi 4, 2022 Robots For the Little Guy @ Subscription services let small outfits automate and avoid high wages and labor shortages Society has long worried that the widespread adoption of robots will displace workers and elim: inate jobs. But rather than fearing the arrival of automatons, Shakerria Grier, a 27-year-old quality auditor at Georgia-based Thomson Plastics Inc., is relieved to get the help. In late 2020, Thomson began installing robots that take plastic parts, such as fenders for ATVs or covers for lawn mowers, out of hot molding machines and place them on a con: veyor belt that brings them to Grier. In the past, ‘workers had extracted the parts, with Grier making the rounds among nine machines to troubleshoot for defects. “My job is way easier,” she says. “Before the robot, I would have to go to every station and make sure the parts are good. It was alot of walki ‘The robots are coming-and not just to big out. fits like automotive or aerospace plants. They're increasingly popping up in smaller US. factories, warehouses, retail stores, farms, and even con: struction sites. The pandemic has kicked orders for robots into high gear as companies deal with a labor shortage, rising wages, and a surge in demand for their products. U.S. robot orders jumped 28% in 2021 from the previous year, to an alltime high of almost 40,000 units, accord: ing to trade group Association for Advancing Automation, and they're expected to increase again this year. i imousiness: ‘loombers Businessweek ers, 2022 At the same time, advances in vision, mobility, ‘machine learning, and dexterity have expanded dra- ‘matically the variety of tasks the machines can do. Now, a nascent trend of offering robots as a service-similar to the subscription models offered by software makers, wherein customers pay ‘monthly or annual use fees rather than purchas- ing the products~is opening opportunities to even small companies. That financial model is what led ‘Thomson to embrace automation. The company has robots on 27 of its 89 molding machines and plans to add more. It can't afford to purchase the robots, which can cost $125,000 each, says Chief Executive Officer Steve Dyer. Instead, Thomson pays for the installed machines by the hour, at a cost that’s less than hiring a human employee-if cone could be found, he says. “We ust don't have the ‘margins to generate the kind of capital necessary to go out and make these broad, sweeping invest- ments,” he says. “?'m paying $10 to $12 an hour for a robot that is replacing position that was pay- ing $15 to $18 plus fringe benefits.” Robotics providers, including Formic, Robex, and Rios, are design- ing and installing the equipment, providing maintenance, and charging customers a flat fee that competes and usually beats hourly worker wages. ‘The automation provid- ers take on the risk of the equipment operating as, advertised in exchange for the steady stream of revenue. While the subscription automation trend is only getting started, it could expand quickly if itfollows the same path software did. ‘The need to automate has never been more pronounced, because more companies are discussing moving manufacturing back to the US. to reduce the risks of supply chains stretched thin across the Pacific. The pandemic highlighted the US's dependence on foreign countries for key com. ponents, and the fourfold increase in maritime ship: costs and port delays have helped stoke the highest inflation since the 1980s. President Joe Biden in his February State of the Union speech called on businesses to bring production back to the US. ‘There simply aren't enough workers inthe coun- try to handle a surge of new manufacturing. In December there were 11.4 million unfilled jobs in the US., according to the Bureau of Labor Statistics. ‘That's up 4.7 million from two years earlier. ‘The U.S. lags manufacturing powerhouses such as South Korea, Japan, and Germany on robot den: sity, or the number of robots as a percentage of a country’s workforce. China is by far the largest ‘market for industrial robots, accounting for 44% of installed robots in 2020 and dwarfing U.S. instal- lations fourfold, according to the International Federation of Robotics. ‘aman Farid co-founded Formic Technologies Inc. in 2020 out of frustration over many com- panies’ hesitancy to adopt automation, With the robots-as-aservice model, his company is betting ican break down those barriers by taking much of the complexity and risk of deploying robots off the backs of subscriber companies. Formic is offering to set up robots and charge as little as $8 an hour, aiming first at the most tedious tasks, such as pack ing and unpacking products and feeding materi- als into existing machines. The potential market is huge, and it will only grow as the robots become ‘more sophisticated, Farid says. > Automation on the Move US. robotic oar by industry segment Automotie mAulomotive components Robot density inthe manufacturing industrymousiness Bloomberg Businesswosk ‘Api 4, 2022 “We plan to put more than a million robots in manufacturing facilities over the course of our life” he says. “I can’t tell you exactly when that’s going to happen, but the demand is there. There's no reason why America can't be the biggest manu- facturer in the world. China doesn’t have any struc tural advantage other than access to labor.” ‘Worker attitudes toward robots have shifted as ‘well. The pandemic sparked the Great Resignation, in which many workers reconsidered if they wanted to return to repetitive, tedious jobs. And younger workers, wielding smartphones from an early age, aren’ intimidated by the technology and would rather see robots do menial work. Rocio Montano, 26, didn’t give much thought to automation when she joined the Southwest Carpenters union in Los Angeles three years ago. Now she uses a small mobile robot that draws the lines on a building’s foundation to mark walls, doors, and other fixtures. The job normally takes two peo- ple armed with the age-old tools of tape measures, squares, and chalk lines. But Montano does the work alone with Dusty, as the Roomba-like contraption is called, completing the job faster and more precisely. “was surprised to hear there was this new tech- nology,” says Montano, who does carpentry work around LA for Swinerton Inc., which got the robot under a services contract, “I never thought that con- struction would be using robots to get the job done.” She sees Dusty not as a threat to her job but as another tool. And more robots are coming to con- struction, There are already machines that apply plaster to walls and ones that drill holes in con- crete ceilings to hang lighting and other fixtures. Still, Montano is confident that humans will always bbe needed to oversee the machines. “Itgives me an opportunity to learn more and develop a new skill to work with this robot,” she says. “We can’t hide from technology. We have to face it.” Robots are also moving into agriculture as vision ‘and machine learning improve. Stout Industrial ‘Technology Inc. in 2020 began selling a machine that’s pulled by a tractor and weeds large fields. ‘The machine's sensors distinguish between a desir- able crop and the unwanted weeds after being fed thousands of photos to teach it the difference, and the device chops down the weeds with a hoelike blade. This is usually backbreaking work done by crews of about 25 people. “Growers have chal- lenges with labor, and people just aren't showing up for work,” says Brent Shedd, who was hired in November as CEO of Stout to boost production and sales of the machine, “Your crop is still growing whether the workers show up or not.” ‘The move to robots as a service was pioneered by makers of autonomous mobile robots, the kind that Amazon.com Inc. uses to fetch items from the shelves of cavernous warehouses and bring them to workers, who then pack them for shipping. When Covid-19 hit, companies were suddenly handling e-commerce volumes they expected to reach in five years, and they turned to robots for help, says Apurva Vadera, a partner at robot maker GreyOrange, a company that began by selling automation as a service rather than individual automatons. The mobile robots cut down on 95% ofthe walk- ing required in a traditional fulfillment center, which means 250 workers can now handle the same volume as 1,000, he says. “What we bring to the table i that ability for an enterprise to solve for ful: fillment problems with our platform, which is com- pletely flexible and configured,” Vadera says. “Itis not built for a particular business requirement.” ‘That’s a model that Rios Intelligent Machines Inc. isalso following, Rather than tailoring designs for each customer, the startup focuses on a few common, repetitive tasks in factories such as pack- ing products and manipulating food items. If Rios can't use 80% to 90% of its standard automation, system with a customer, it won't take them on, says CEO Bernard Casse. Rios cobbles together its own hardware and software with Fanuc’s robotic arms, ‘Nvidia's graphic cards, and cameras from Intel to create the systems. The startup has strategic rela- tionships with large financial institutions to acquire the equipment, he says. ‘The robots can save companies as much as 60% of labor costs while offering efficiency gains and climinating production interruptions from work- ers calling in sick or quitting. “Everyone has been super interested, because essentially from a cus- tomer standpoint, there’s zero risk associated with ity” Casse says. One of Rios’s customers is Ramar Foods, a third-generation family-owned maker of Filipino foods that had been looking at automation for more than five years as California's minimum wage crept Ramar, located in the San Francisco suburb of Pittsburg, was hesitant because of the initial cost and the need to hire someone to maintain the machines, says PJ Quesada, a vice president and member of the founding family. Another obstacle was the technology: The com- pany wanted to automate the job of picking up raw dumplings from a conveyor and putting them on a steam tray, and he was concerned that a robot would mangle the dough. “The biggest issue is that upfront investment,” Quesada says. “And we were not convinced robots could adequately do it” “Peoplejust aren'tshowing upforwork. Yourcropis still growing whetherthe workers show upornot” i 5 imausiness: ‘The machine Rios installed won over Quesada and his work crew, which ended up naming the robot My Pal. The robot is much faster and does the work of two employees, who are freed up for other, less tedious tasks, says Quesada, whose company still has 25 unfilled jobs. The cost is competitive with paying a worker and will become even more so as Jocal wages continue to rise, he says. “The repetitive ‘movements are also the ones that have the higher occurrence of injuries,” Quesada says. “Now the robot is eliminating thousands of lower-back rota- tions from multiple people every day.” Universal Robots A/S, a pioneer of so-called collaborative robots that can do their jobs safely among humans, works with 300 companies that provide gadgets that attach to the robot arm of its machines, including sanders, grinders, riveters, welders, and grippers, says CEO Kim Povisen. That explosion of innovation has made the robots much ‘more versatile. “So you take your iPhone-anybody, ifthey have the know-how, can build an app for it,” he says. “We do the same thing around our robots. It’s continuous investment to make it easier for anybody to build something on top of the robot.” sven Robex LLC, a traditional automation s} tems integrator in Perrysburg, Ohio, whose main business is leasing equipment to customers, has decided to offer robots as.a service, dubbed Robex Flexx, to expand its customer base, says President Craig Francisco. “I believe if we didn’t have some- thing like this in place, it would hurt our business eventually.” Francisco says the services model could become a quarter of Robex’s business in a few years. “With minimum wages going up and the need for employers to pay a higher wage, it’s becoming really easy to justify the Flexx program.” Even large companies are interested inthe financing ‘model because of capital-expenditure constraints for buying or leasing the equipment, he says. Francisco says there are risks for robot subscrip- tion companies. For the contract to be considered a service instead ofa lease, operators like Robex ‘must still own the equipment and allow the cus- tomer to return it after a notification period. That’s why Robex won't take on companies with little or no track record and shies away from customers only looking to experiment with automation. “We do not want somebody that just wants to kick the tires, because we put a lot of money in upfront,” Francisco says. “So we're very careful that some body has a real need for automation.” ‘Thomson's Dyer, for instance, says his justfi- cation for using robots only became greater when the pandemic supercharged already nagging diff culties of finding enough factory workers. “There ‘loombers Businessweek are simply no bodies to fill open positions,” he says. ‘So now robots are removing parts that weigh about ‘9 pounds from some of his hot injection presses, allowing one employee to oversee three of the molding machines instead of one. The robots are also faster and have increased output by about 30%. ‘And there's a payoff for the humans at his plant, too: With the efficiency gains, the company has increased starting wages for technicians to about $$22,an hour from $15, Dyer says. —Thomas Black ‘THEBOTTOMLNE Robot ores inthe US rose 26% n 2021 brereasingly workers are sooing alomation handle loss dosabie ‘apoio functors rather than educa the werkores. Is Warren ers, 2022 Buffett Drilling @ His growing stake in shale producer Occidental has investors ‘wondering whether it will be Berkshire Hathaway's next acquisition After helping Occidental Petroleum Corp. win a bidding war for Anadarko Petroleum by purchasing $10 billion of Oxy’s preferred stock in 2019 and then. ‘quietly buying up a sizable stake in regular shares during the following months, Warren Buffett’s Berkshire Hathaway Inc. suddenly disappeared from the common stock in 2020, giving no reason for the investor's about-face. >mousiness Bloomberg Businesswosk ‘Api 4, 2022 4 Now, Buffett is once again on the Occidental ‘bandwagon-and with more momentum than ever. Just as billionaire investor Carl Icahn exited his own stake in Occidental, Berkshire disclosed in a regulatory filing in March a rekindled interest that’s led to a buying spree. In just a few weeks, Berkshire stacked up an investment worth about $77 billion on top of its preferred stock holding, making it the biggest shareholder at Occidental and landing the shale producer among the con- glomerate’s top 10 equity bets. ‘That renewed enthusiasm from Buffett, who's flush with near-record levels of cash and hungry for deals, has some investors wondering if he’s consid- ering an outright bid for Occidental. It would prob: ably cost him more than $50 billion, which would rank as his biggest deal ever. Buffett has never fully ‘owned an oil company, raising questions about just how far the billionaire investor wants to wade into the volatile world of oil markets. But with Occidental ‘becoming a more attractive target as it transformed from a struggling oil producer into the S&P 500’s ‘best performing stock this year, shareholders spec- ulate it could be the “elephant sized” deal Butfet’s been scouting for years “He obviously finds value,” says Robert Miles, a Berkshire investor who's also an executive in resi- dence at the University of Nebraska at Omaha and the author of The Warren Buffett CEO: Secrets From the Berkshire Hathaway Managers. Although it's not ‘yet clear if Occidental could be a true takeover tar- Bet, “that wouldn't surprise me at all either,” Miles says. Berkshire shareholder Bill Smead, whose Smead Capital Management also owns stock in Occidental, gives Berkshire buying the oil producer a tin-4 chance. Neither Buffett nor Occidental responded to requests for comment. For Berkshire, there’s a lot to like about Occidental. It has large, capital-intensive, cash- producing assets that are protected by high bar- riers to entry-all key attributes for a Buffett business. Berkshire would also gain a veteran oil ‘manager in Occidental Chief Executive Officer Vicki Hollub, which is key because Berkshire, with just 26 employees at its Omaha headquarters, relies heavily on its subsidiaries’ managers to operate independently and know their industry well. Financially, Occidental is in good shape. The company needs an oil price of only $40 a barrel to maintain its recently hiked dividend; crude currently trades at nearly three times that level. Occidental has paid back much of the debt it took on in 2019 during its bidding war with Chevron Corp. for Anadarko, and it recently announced plans to buy back $3 billion in shares. In fact, Occidental's stock has been one of the biggest beneficiaries of the spike in oil prices, largely because it had been so battered during the pandemic. Unlike rivals, the company doesn’t have any financial hedges to protect against low oil prices, meaning it’s also able to capture the full upswing when prices soar. Shares have surged ‘more than fivefold from their 2020 low. As oil buy- ers turn away from Russia, the third-largest global producer, following its invasion of Ukraine, the importance of crude production from U.S. fields has only grown. Occidental is among the largest acreage holders and producers in the Permian Basin, the vast US. il field in West Texas and New Mexico. The area is one of the only places in the world that can quickly increase production for a global economy desperately short of crude. “If anyone needed a higher oil price environ- ment for everything to work out, it was Oxy-and they got it,” says Noah Barrett, lead energy analyst at Janus Henderson, which manages $432 billion including Occidental shares. On the environmental front, Occidental also has positive story to tell: I's the only U.S. oll company with ambitions to eliminate emissions from both its ‘own operations and those of its customers by 2050. That could be good news for Berkshire, which has already faced investor pressure on climate change initiatives given its sprawling utility business. Buffett also is familiar with CEO Hollub. In April 2019, Occidental had been blindsided by Chevron’s attempt to buy rival Anadarko and responded with a bid ofits own. But battling an oil giant five times its size was a huge task for Holub. ‘To turn the tables in her favor, she enlisted Bank of America Corp. CEO Brian Moynihan-a close associate of Buffett whose company was advising Occidental on its Anadarko bid-to call the famed investor. Buffett said he was interested, and a day later Hollub flew to Omaha. Buffett “was at the door waiting on us that morning to let us in him- self” she said in 2019. She wanted to tell him about her and the company. “But I found out he really already knew everything. I guess he’s an avid reader, must be a speed reader, and must also have a photographic memory.” Buffett invested $10 billion in the form of war- rants and preferred shares that pay 8% annual dividends, turning to a familiar playbook that he used with Goldman Sachs Group Inc. and General Electric Co. during the financial crisis. The invest- ‘ment allowed Occidental to raise its offer, ease the debt burden associated with the deal, and persuade Chevron to walk away. Buffett's timing was “criti cal” to help seal the deal, Hollub later said. Bernie gest Commenstoskhalings* opt Sako Arca Anwican xpress [izes Socata ins Ketone [ee Moods [les Vrzon [Jes Ie Us Bancorp [|r Seren fies 3 i 3 Fmousiness: Occidental completed the $53 billion deal in August 2019, but by then the company’s stock had fallen so much that the purchase price was higher than its market value. Worse was to come. Activist investor Icahn entered the fray, calling for Hollub and the board to be removed. A few months later the price of ol crashed because of Covid-19, causing the stock to drop to its lowest level in two decades before recovering. Hollub has struggled to shake the view that she paid far too much for Anadarko. stil, the only female leader of a big USS. oil company has man- aged to hold on, and some investors are less wor- ried management will do another big, risky deal with Buffett in the background. “There are tight ‘guardrails on the management and path they can take,” says Barrett of Janus Henderson. “It gives people confidence they're not going to do some thing stupid.” Even if Buffett doesn’ try to buy the entire company, he’s already sitting on warrants that could bump his stake, currently about 15%, past 23%. ‘The big question mark over Buffett's future involvement with Occidental is how well the com- pany’sriskladen operations in the volatile oil mar- ket fit with his preference for strong, stable returns over the long term. And while Berkshire has waded into oil before, including an existing stake {in Chevron and former holdings in Exxon Mobil, PetroChina, and ConocoPhillips, its rack record in the industry hasn't been the best. “We have not distinguished ourselves, at all, in the oil and gas field,” Buffet said at Berkshire’s 2015 annual meet- ing, “although we've made a little money.” Buffett certainly has the money for a deal of Occidental’s size, with almost $13 billion in cash on hand ifhis purchase of insurer Alleghany Corp. goes through. And for years he’s talked about how he needs a big deal to move the needle at his $788 bi lion company. He’s also able to stomach some cyclt- cality in the businesses he owns thanks in part to the breadth of Berkshire's holdings—from insurers to retailers such as Dairy Queen tothe large behemoths of the railroad and energy businesses. Still, diving headfirst into oil would mean being subject to the whims of macroeconomic forces well beyond any one company’s control. “When you buy into an oil-a huge oil production com- pany,” Buffett said about his Occidental investment at the 2020 shareholders meeting, “how it works out is going to depend on the price of oil toa great extent.” —Katherine Chiglinsky and Kevin Crowley THE BOTTOMLINE When Occidental Petroleum needed a finanoalhobing hangin 20° turned to Warren Sui Now te Invest uring or aculsitons, may cass paths with Oxy aga. Emo 3 Jack Hartung Rising costs were a challenge for many businesses even before the recent price spike in energy. Hartung, chief financial officer for Chipotle Mexican Grill Inc., told us about how the restaurant chain has managed cost pressures. —Carol Massar (9 Harngjoine Cspotin202 ate years stMeDonskss @One hie askssmatshin nancial o low Chipalelogrow without compromicngtsomphassenresponsiyrlcedtood@ The can tsnolong-rmdebtandacasheusionotalost$blon Chip has trastionaly kept menu prices stable. Tot us bout that we've raised prices, we've ot seen any resistance. We've always tried not to.g0 to the menu board toraise prices whenever we've had a challenge from cost standpoint. Welll do other things to try to find efficiencies somewhere along the line—smaller stores, less rent—but certainly not with the way we invest in our food. You own yourestaurans, How does not franchising affect your pricing foxy? Hew have you adustodt tho igher pay txpense bisinestes face today? We raised prices in the second quarter last year just to cover the cost of raising wages. We raised wages up to $15. it was an average increase of 15%; we raised prices just to cover the dollar cost of that. Our margins actually went down, but our profitability stayed the same. When you have franchisees that have borrowed to invest in their business, they can't necessarily afford to let inflation eat away at their ability to pay the debt for very long. At Chipotle, we can be patient and watch and see how things play out. How ds th math warken that? The labor line is about 25% of our costs, 25% of sales. So when you apply a 15% times a 25%, 4% covers it from a dollar standpoint. St et ns an unsuly i te to manage costs? These are extraordinary times. In my career, Ive never seen inflation this severe. It's hitting everything, So we've had to raise prices at a faster clip than we have in the past. But because we've held, How dé customers respond? Our customers said, “We really applaud what you're doing. We're fine with a 4% price increase.” On a chicken burrito, that’s 30¢. But the fact that we increased wages made them like Chipotle even more, back over the years, we have more pricing power. So when (Ete er cary andingthCe ee Se SA~ E C H N O L O G Y Netflix’s Indian Drama The streaming company remains frustrated about its performance in a critical international marketTECHNOLOGY ‘loombers Businessweek ers, 2022 ‘Two-and-a-half years after it launched in India, Netflix Inc. had its first big hit. Based on a sprawling novel by Indian-American author Vikram Chandra, 2018's Sacred Games was a Hindi language TV show exploring Mumba's criminal underworld and one police officer’s efforts to save the city. The drama stood out in a country best known for romantic ‘musicals, which was the point. The New York Times named Sacred Games one of the best foreign-made shows of the last decade, and Netflix described it at the time as its most-watched locally produced show in the country. ‘The success seemed to indicate that the compa- ny’s plan for India was coming together. Netfix’s formula for international expansion, which has worked everywhere from Canada to Japan, starts by targeting wealthy, young consumers in large cit- ies who'll pay to watch Stranger Things or Narcos. ‘Then, to reach progressively larger audiences, the company hires a local team to commission projects from the country’s biggest producers, offering them creative freedom they wouldn't get elsewhere. Certain things about India were working in Netflix’s favor. The country has a robust local film industry, a growing middie class, and rapidly expanding access to the internet. Several months before Sacred Games was released, Chief Executive Officer Reed Hastings told a group of Indian busi ness leaders that Netflix would sign up 100 million, customers in the country. Almost four years later, it has only 5.5 million subscribers in India, according to research firm Media Partners Asia. Netflix describes the second season of Sacred Games as a success, but hasn't announced a third season. Many of ts other shows have been canceled after just one season. In a call with investors in January, Hastings expressed frus- tration with the lack of progress in India, alarming employees who aren't used to their boss being so forthcoming about Netflix’ filings. ‘The stakes are higher than ever. Slowing sub- scriber growth has investors worried, and the com- pany’s share price has fallen almost 40% so far this Year, wiping out more than $100 billion in value. To keep growing, Netflix will have to find customers in Asia the Middle East, and Africa. There’s no bigger prize than India, the second-most populous coun- try in the world. The only nation with more people, China, has blocked every major streaming service. Netflix’s struggles are even more notable when contrasted with rivals Walt Disney Co. and Amazon.com Inc., whose Indian services draw mil- lions more viewers. “Netflix underestimated the immense complexity and challenges India brings,” says Vivek Couto, head of Media Partners Asia. Netflix’s problems started when executives began debating how much to charge when launch- ing in the country in January 2016. at the time, the ical Netflix rates globally were $8 to $10 amonth, aimed at young consumers who might be looking for a cheaper and more convenient alternative to ay TV. In India, pay TV costs far less than it does in most ofthe worl, typically $2 to $3 a month. But Netflix decided it would prefer at first to have fewer, ‘more lucrative subscribers, so it charged 499 rupees ‘a month, which was about $750 at the time. ‘The company later reconsidered, deciding it could reach the subscriber numbers it hoped for only by dropping the price. Executives conceived a plan that would allow customers to watch its entire library for less than half its standard fee, but only Netflix’s Room to Grow in India sm Netti subscribers 02 2021 [SPepuation, 2020, a 8 A OG [= yy oo 8 ‘on mobile devices. In December, Netflix cut its price again, bringing it more in line with the competition. Lower prices have brought in more custom cers, but holding on to them has been a challenge. ‘Netflix’s mobile-only subscribers have been much ‘more likely to cancel ater only a few months than those who were paying for the initial, pricier plans. India also has laws that require many customers to approve the payment every month, increasing the number who don't renew. “India has been a real ‘exercise in iteratively learning how to do payments well,” says Chief Operating Officer Greg Peters. Programming for India’s diversity-the country is home to dozens of different ethnic groups who speak more than 20 languages~is also hard. Netilix has signed deals with some of the country's big- gest production companies, including Red Chilies Entertainment and Dharma Productions. But, South ca South Korea & us -mTecHNOLOGY according to Couto, most people still sign up for its international programming. “The customers in India don’t turn on Netflix to watch Indian content,” he says, Netflix executives say its struggles are par- tially aresult of working with Indian producers more used to making movies than high-end episodic TV. It hhas made several hit movies, though its head of orig inal movies left the company last year. Local producers, meanwhile, blame Netflix for hiring executives without strong ties to the coun- try's filmmaking community, then being unclear about what it wants and insisting on micromanaging projects, according to conversations with people familiar with Netfix’s Indian operations. “Netflix isn’t some U.S. company people want to hate,” says one producer, who asked not to be named for fear of alienating a potential business partner. “People at Netflix in India severed the relationships.” ‘These problems were most apparent with the ill: fated TV show Baahubali: Before the Beginning, a pre quel to one of the most successful film franchises in Indian history. Netflix spent more than $10 million developing and producing the first season, making itan expensive project by local standards. But the executives who commissioned it have since left the company, and when Netflix hired Monika Shergill to oversee Indian content in 2019, she didn't lke what she saw. As production dragged on, the lead actor quit the show, and Netflix brought ina different cre: ative team to come up with a new vision. Despite reports that the show has been canceled, Netflix says its still working on the project. ‘There's still ime to recover. It took years for Netflix to find a footing in important markets such Bloomberg Businesswosk as Brazil and Japan. And while the Disney+ Hotstar service has 45 million subscribers and Amazon’s Prime Video has about 15 million, Netflix argues the comparisons aren't straightforward, Hotstar broad- casts cricket, the country’s most popular sport. Both services are also cheaper, with Amazon's com- ing bundled with its home delivery service, Prime, and Hotstar customers paying just $1 a month. ‘The average Netflix customer pays more than $4, according to Media Partners Asia. There are also signs of change. A surge of cus- tomers joined after Netflix cut costs in December, and Couto forecasts that the company will end 2022 with almost 8 million subscribers. After striking out on many series, i's also had some successes, including most recently The Fame Game, a show starring Indian actress Madhuri Dixit. “India has a rich, rich history of storytelling with amazing actors and writers,” says Bela Bajaria, Netflx’s global head of TV. “We are making significant investments in local, authentic stories in India.” Covid was a time for streaming services to gain new footholds, because people were seeking entertainment they could enjoy without leaving the house. But it also held back Netflix in India by delaying productions when it was hungry for new, locally relevant content that would attract view- ers. With restrictions being eased, that’s changing. ‘The shows Netfix had planned to make in 2021 are now set to be made in 2022. Every production is a chance to find the next hit. —Lucas Shaw THE BOTTOMLINE Netfixnas een chatenged in india by uestons ovr pice, publi oly. 2nd the feu of producing Gnpinalcontnt hat resonates wn iocalausencee, Is This the End of The Space Station? ‘Api 4, 2022 epvat © A symbol of international cooperation in space is under threat As joke videos go, it wasn’t very funny. Set to ‘a bouncy Russian pop tune, the 57-second clip posted to Telegram showed International Space Station cosmonauts hugging an American astro- naut goodbye, climbing into the Russian segment of the ISS, undocking, and flying away, as Russian ‘ground controllers gave a standing ovation. ‘What lent the ostensibly lighthearted clip a darker feel was the identity of the organization that made it-Roscosmos, Russia’s equivalent of NASA~and what the video implied would happen next. With the Russian portion of the station detached, the ISS would have no thrusters to main- tain its orbit. The whole thing would be doomed to plunge to Earth. With a wink and a smile, Russia ‘was suggesting it might kill the orbital outpost. ‘The possibilty that Moscow could sabotage the 18S as a way to retaliate for sanctions imposed since its invasion of Ukraine is real. “Ithink thisis the big- gest threat to the international partnership in its i i ‘ iTECHNOLOGY SUE C on Uuma elim con Pi tarele Lm aoa an irerelU Cc) ear nn oe eee Suc Russia is ed hed in 1998, is a collab Tea a responsible for, it couldn't function. history,” says Ron Garan, a former NASA astronaut, who spent five months aboard the station in 201 ‘What's at risk is the largest and most complex international project ever, a $100 billion testament to human ingenuity and cross border cooperation. ‘The 490-ton assemblage, which required more than 40 space launches to build, sprawis over an area big ‘ger than a football field. I's been inhabited contin- ‘uously for 21 years, a record in manned spaceflight, and at any given time more than 100 scientific exper: iments are under way. At the end of December, the biden administration announced it was extending funding for the ISS from 2024 to 2030. The ISS's original purpose was to serve as an employment plan for Russian scientists after the collapse of the Soviet Union. Because the same technology that puts things in orbit can also be used to lob nuke, the U.S. was keen to ensure that ndly Iran, Libya, North Korea, or some other unfi power didn't scoop up all that talent and technol ogy. The space station was a way to give them some. thing to do. “We signed all the paperwork to admit, them into the partnership right in the middle of basically civil war in Russia,” says Garan, referring, to the constitutional crisis of 1993, during which Russian President Boris Yeltsin ordered troops ‘loombers Businessweek ees Pea aad parts that ‘gee Seren to shell the building that housed the leg ‘The idea that the ISS was an expression of an unbreakable partnership influenced its design. The U.S. would provide the electricity to run the sta tion, generated by four sets of solar panels. The Russians would supply propulsion, both to boost it higher when the orbit decays and to shift its loca: tion to avoid space debris. “The station is not built to exist without the Russian module,” says Todd Harrison, a senior fellow at the Center for Strategic & International Studies, a think tank in Washington. When the U.S. terminated the space shuttle program in 2011, it had to rent rides for its astro nauts aboard Russian Soyuz rockets. That depen dence, which lasted until May 2020, left Americans with lite leverage when Russia annexed Crimea in 2014 and backed armed separatist movements that seized parts of Ukraine's Donetsk and Luhansk regions. When the Obama administration intro duced a slate of sanctions in response, including. ‘on Russia's high-tech exports, Dmitry Rogozin, who was then deputy prime minister, fired off a pointed barb on Twitter: “After analyzing the sane: tions against our space industry, I suggest the U.S. delivers its astronauts to the ISS with a trampoline.” Rogozin, now general director of Roscosmos, > ers, 2002 coe “Thatsenta clearsignal toallother countriesand companies thatyoucan't relyonthe Russians”m= TecHNOLOGY had a similar response to the sanctions put in place after the latest invasion of Ukraine. To get to the ISS, he said, the Americans could “fly on their brooms.” When former NASA astronaut Scott Kelly criticized him on Twitter, Rogozin tweeted back: “Get off, you moron! Otherwise, the death of the ‘15S will be on your conscience.” ‘The ISS isn’t the only space project roiled by the fallout from the invasion of Ukraine. Russia has pulled its workforce from the European Space Agency launch complex in French Guiana, and the ESA has suspended the joint ExoMars robot, probe. To retaliate against the U.K. for its sanc- jons, Russia canceled the coming launch of 36 sat- ellites for OneWeb, a satellite internet company based in London and partly owned by the British government. In response, OneWeb canceled its entire order book. “That sent a clear signal to all other countries and companies that you can't rely on the Russians,” Harrison says. “Honestly, I think they have completely killed their international Jaunch business.” If Russia does decide to tip over the playing board and go home, it won't be as simple as the ‘Telegram clip suggested. “That video is propa- ganda,” says Ann Kapusta, a former American ISS ‘ground controller who's now executive director of the Space Frontier Foundation. “There are so many interconnections, so much wiring going back and forth, that you would have to do a bunch of space- walks to actually disconnect the module.” Russia's simplest route to withdrawing from the 18S would be to just pull its crew off and refuse to provide propulsion anymore. In that case, the space station would gradually descend into a lower orbit, eventually disintegrating into a fireball. Itwould take 9 to 12 months for that to happen, Kapusta says If the countries reached a more amicable divorce agreement, Russia could take a payout and continue to support the ISS on an interim basis while the U.S. builds and installs replacements for Russian equipment, That kind of gradual exit might set the stage for one of the other ISS partners-the ESA, Canada, or Japan-to play an increased role, or for new spacefaring nations to join in. But would Russia really want to leave? The ISS stands out as an untarnished monument to its engi neering prowess. “The space station is one of the main points of pride of Russia when it comes to space,” Harrison says. “I mean, they don't have a lot else to point to.” For now, Rogozin is maintaining a tough stance. On March 27 he indicated that if Western pow- ers didn't lift some of their sanctions, Roscosmos might soon announce a withdrawal from the ISS. Bloomberg Businessweok “March 31 is the last day when we are waiting for a response from NASA, the European Space Agency, the Canadian Space Agency regarding the fact that they must withdraw sanctions,” Rogozin said, according to Russian state news agency TASS. So far, Russia has been keeping to the previ- ously agreed-upon schedule of astronaut launches and returns. On March 18 a Soyuz rocket took off as scheduled and ferried three Russian cosmo- nauts to the ISS, There are now five Russians, four ‘Americans, and a German on board. On March 30 one of the Americans-Mark Vande Hei-climbed into a Soyuz capsule with two Russians and descended to Kazakhstan. Whether he’s the last to do so will depend on what, if any- thing, Russia decides after Rogozin’s deadline. Some think a Russian pullout would be good riddance. “From a responsible perspective, we shouldn’t want to work with somebody who is acting this way on Earth,” Kapusta says. —Jeff Wise ‘THE BOTTOMLINE witout Ruslan suport the ISS cat survive nits caren form. and the head of Russias space programm has sad Fitdeom the project some sanctions aren ad soon ‘Api 4, 2022 Signed, Sealed, On the afternoon of March 8, a Telegram user with the screen name “Liam Neeson” posted the word “UPDATE? in a channel with about 1,200 subscrib- ers, Once the person behind the account had every- one’s attention, they posted a series of uncashed checks for sale, including a $67 payment for an electric company, $129 for DMV fees, and a $10 donation intended for South Carolina Republican Senator Tim Scott. Online forums like this have helped fuel a wave of postal crime, both by providing a market for stolen goods and a place for criminals to egg one another on. Mail theft complaints increased by 161% from March 2020 to February 2021, according to the inspector general for the U.S. Postal Service (USPS). For the past two years David Maimon, a.43:year- old sociology professor at Georgia State University, and his students have been combing through @ Online markets for checks stolen from mailboxes lead toa spike in theft from the Postal Service > Stolen items posted on TelegramTECHNOLOGY thousands of social media channels, group chats, and dark web sites. Their efforts include compiling mages of the checks for sale to look for patterns. Their data, which previously have not been shared publicly, show a threefold increase in the online market for stolen checks in just the last six ‘months. In January, Maimon documented more than 1,200 stolen checks from Texas in the chan- nels he monitors, plus about 750 each from Florida and New York. Social media posts show purported thieves stuff ing so many stolen letters in a getaway car that stacks of mail fall out of the back seat and sorting through mail strewn across an apartment floor as they appear to seek valuable material inside. “They post photos of themselves with piles of money,” Maimon says. “They don't hide. They're brazen.” The scheme generally starts with an event that has preoccupied postal customers for decades: someone gaining illicit access to actual envelopes. First, thieves steal a physical mailbox key-also known as an arrow key-often by robbing a mail carrier. In March, the USPS told the Department of Justice that more than 165 armed robberies against ‘loombers Businessweek carriers had occurred since October. If that pace keeps up through December, it would represent a 400% increase from 2019, according to an internal ‘memo reviewed by Bloomberg Businessweek. People who spend up to $7,000 to buy the stolen keys loot mailboxes, then use nail polish remover tostrip away the intended payee’s name so a check can be cashed fraudulently, Maimon says. Personal checks sell for anywhere from $120 to $175 each, and those drawn on business accounts cost about $250. A spokesperson for the Postal Inspection Service, the law enforcement arm of the USPS, said in a statement that the agency “takes seriously its role to safeguard America and will continue to aggressively pursue perpetrators that use the US. Mail system to further their illegal activity.” stil, the service opened cases in less than 1% of all mail theft complaints received, according to the USPS inspector general. (The spokesperson says that not all complaints translate to confirmed cases of mail theft, noting that some missing mail eventually ‘urns up after a complaints filed.) Federal prosecu- tions of mail crimes have hit a 20-year low, accord: {ng to data compiled by Syracuse University. Uniformed postal police officers were able to patrol mailboxes and protect letter carriers on the street until late 2020, when they were told not to do so as part of a broader labor ‘Maimon says law enforcement should analyze the kinds of data he collects to predict where crimi- nals will strike next, Banks, he says, should be more vigilant in alerting customers and changing account ‘numbers when they receive reports of stolen checks. ‘The Telegram chatrooms also seem to violate its pol icy of not using the service to “send spam or scam ‘users.” In an email, a spokesperson for Telegram said the company is working to expand its rules and ‘moderation efforts to better combat misuse. ‘The burden of the thefts falls on people like Bernard Winkel, a 77-year-old retiree from Chevy Chase, Md. Thieves recently stole a check he'd ‘mailed to pay a credit card bill, along with checks from three of his neighbors. They then used his bank account mumber and signature to try, unsuccessfully, to cash a forged check fora much larger amount. ‘The ordeal left Winkel nearly overdrawn on his account. He had to file a police report and visit his bank, a process that undermined his trust in the ‘corner mailbox he had used for years. “I definitely ‘won't be putting any more mail in there,” he says. “My wife said not to trust it. Now I know why.” Jack Gillam THEBOTTOM LINE Mall thetthasnreased apy as crminls fr rol market oe stolen materia onine and law erlocemont {alstoreep un ers, 2022 ‘¥ Number of checks Texas 1202 New York 773 Fords 751 ono =O, Ponneyvaria 497 Marylané 432 Cattoria 296 New Jersey 987 Louisana 240 ‘zona 331 Georgia ‘Miscou 8 Tennessee 34 Ditet of Columbia 3 Wisconsin 2 Massachusetts 97 Mehigan 88 Connecticut 28 ‘Nabena 28 South Carcing 29 Coverage 2 Masssiopl 20 New Hanpehre 10 Menesota 16 Okltboma 14 un Washington 13 Kentucky 12 rkersas 1 iow 10 (Oregon 8 Neth Dalata Nevada 7 SoutnDakata 6 Montana 4 New Mexico 3 Hawai 3 dato 2 iKensas 2 Westvigna 2 ‘Naska 1 wyoming °moOoZzrZz—-—T Estody Pat Regnier Bloomborg Businessweek ‘Api 4, 2022 A pot purchase at a legal dispensary may show up as an ATM withdrawal (wink, wink) ‘The McDonald's in Great Barrington, Mass., had hired extra employees to keep up with the flow of hungry customers from a marijuana shop nearby. ‘What its managers didnt realize, on a Saturday after- noon in December, was that the payment process: ing technology at the dispensary was misidentifying a purchase of pearflavored THC chews as a with- drawal from an ATM-at the burger joint’s address. ‘The dispensary, Theory Wellness, didn’t know about the wrong address either. But why did the purchase show up as a cash withdrawal? Theory's payment machine, which looked to a customer a lot like a card reader at a coffee shop, was in fact running a so-called cashless ATM. Instead of spit- ting out $20 bills, the machines work with software that programs them to send signals down debit rails, where they eventually run through a sponsor bank before triggering a sweep of funds from a customer’s account to the store's. Still, the bank saw the sale of edibles asa cash withdrawal and reimbursed its cus- tomer the $2.75 they paid to use a debit card, just as itwould have for an out-of network ATM. ‘The transaction that day-one of eight documented at multiple dispensaries by Bloomberg "News-was just an ordinary sale of marijuana, which is legal in Massachusetts. Yet it was made possible by an unusual technology that enables dispensaries to get around the fact that banks and credit card companies don’t want to handle such transactions because of federal laws criminalizing marijuana sales, Industry participants estimate that more than ‘one-quarter ofthe $28 billion in US. dispensary sales forecast this year by market research firm BDSA may bbe disguised by cashless ATMs. Those sales could generate more than $500 million in fees for payment Processors, based on average purchase sizes. Brandon Pollock, chief executive officer of ‘Theory Wellness, says that the company was ‘unaware of the address mix-up and that its former ‘payment processor- it has since switched—attributed ittoa mistake that was rectified. “We, like the major- ity of dispensaries, have relied on vendors to provide ‘these solutions over the years, with the understand {ng that these services are in full compliance with all applicable laws and regulations,” Pollock says. Yet even when an address is correct, the nature of a purchase using one of these machines is dis- guised. “The problem with the cashless ATM model is that you're masking a marijuana transaction,” says Andrew Kline, a lawyer in the Denver office of Perkins Coie specializing in cannabis law. “You're saying this is ust a normal ATM transaction, when in fact it’s not. You're basically lying,” Visa Inc. said in a Dec. 2 memo to clients that it ‘was “aware of a scheme” involving cashless ATMs and that such transactions are prohibited on its network. A spokesperson for the card company declined to elaborate but said in a statement that “transactions in the U.S. involving the purchase or trade of marijuana are not permitted on the Visa network, until such time as federal law allows.” ‘Mastercard Inc. says that it’s reminded banks to ‘ensuite merchants code transactions properly and that it continues to monitor the situation and seek guidance from regulators. Scott Talbott, senior vice president for government affairs at the Electronic Transactions Association, a payments industry trade group, calls the use of cashless ATMs a “transactional gymnas: tics” that’s resulted from the conflict between fed- eral and state law. Three-quarters of U.S. states have legalized marijuana sales. ‘The stores would rather take plastic than cash. ‘Customers spend as much as 20% more, and the dis ppensaries avoid theft risks. Pollock says his industry needs federal legislation that would allow cannabis ‘businesses the same access to banks that other com- ‘panies have. Such a bill has passed the House several times, only to be blocked in the Senate. Pot fintech companies have stepped into the breach, Cashiless ATMs, also known as point of bank: ing technologies, are a subset of a larger industry called point-of sale. POS companies with wellknown investors, such as Flowhub, backed by Jay’Z, and Dutchie, backed by Snoop Dogg and Howard Schultz-and recently valued at $3.75 billion-sellFINANCE software for accounting, inventory, and compliance with state cannabis laws. They can end up promot- ing cashless ATMs by integrating them with software to manage dispensaries ‘Try to figure out which technology a POS company is working with, and you often run into layers of resellers and sub-resellers. Industry insiders say the cashless ATM business is domi nated by Paybotic and Transact First, both based in Florida, and by Michael Shvartsman, who founded Transact First and now runs investment fund Rocket One Capital. Paybotic and Shvartsman declined to comment for this story, and Transact First couldn’t be reached. A spokesperson for Dutchie, whose LeafLogix software is used by Theory Wellness, says the choice of payment technology is up to dispensaries and that cannabis transactions through cashless ATMs are “solely between the dispensary and the cashless ATM provider.” The company declined to comment con the mistaken address. Theory’s payment proces- sor at the time was Paybotic, according to a person familiar with the arrangement. ‘The cashless ATM technology, even ifit doesn’t involve transposed addresses, raises legal con- cerns. For dispensaries, it increases the risk that ‘loombers Businessweek someone could use their books for tax or account ing fraud. Banks that process such transactions can run afoul of federal prohibitions and laws that require them to know their customers. If authorities and courts decide cashless ATMs are being used in what another Perkins Coie law. yer, Sam Boro, calls “transaction laundering,” money laundering that hides a merchant's identity, that could be a problem for the companies that sell the technology. “Everyone knows it’s an obvious workaround,” says Peter Su, a senior vice pre at Green Check Verified, which sells compliance soft ware to state-chartered banks and credit unions that provide banking services to cannabis companies. “It’s.a loophole, and it’s going to get closed down.” ‘That December purchase of pear flavored chews with 52 milligrams of marijuana’s psychoactive ingredient THC at the barn shaped Theory Wellness store had an awkward prelude. A cashier said banks are ashamed of the dispensary’s business, so they hhad to charge inthis unusual way. The sale would be rounded up to the nearest $5 or $10. The customer ‘would get change to true up to the actual cost ofthe goods plus tax, and also be charged a $2.75 fee. ‘That rounding up is the hallmark of a cashless ATM. It makes an $18 sale look like a $20 cash ® ers, 2022sm FINANCE “4 withdrawal. The customer std a debit card-issued by Chase Bank and bearing a Visa logo—into a sand- wich size hunk of plastic. That’ where the software that’s often sold to dispensaries along withthe hard- ware kicks in. Some compare it to a hack into the banking system that miscodes cannabis transac- tions as ATM withdrawals. Since the sales are illegal in the federal government’ eyes, others in the indus try say, no correct code can be entered. As the miscoded signal bolted out of Theory’s card-reading machine, it likely would have sped along electronic rails owned by a major card com- pany before landing at a sponsor bank batched with other transactions. While batching is a normal prac- tice, it can be used for deception, as parties that aggregate transactions can misrepresent the con- tents of the portfolios they present to banks. ‘When the purchase settled, it appeared in the customer’s account as a “Non-Chase ATM with- drawal” and was coded to the McDonald's address, rather than Theory Wellness's. The same address was displayed next to the $2.75 fee. Of the eight transactions documented by Bloomberg, four by cone customer resulted in fees being reimbursed by Chase. Another customer was reimbursed by Bank of America Corp. Spokespeople for both banks declined to comment. “I didn’t realize that was happening,” Amy Sanford, a manager at the McDonald's franchise for eight years, says of the use ofits address, Another employee says she'd gotten calls from people com: plaining they had a charge from the address, which they'd never visited. Wrong addresses appeared on four of the transactions, all made after Visa’s memo. In addition to the one at Theory Wellness, two oth: ers were in Great Barrington. Calyx Berkshire Dispensary showed up at the address of Baba Louie's Sourdough Pizza. The Rebelle dispensary appeared at the location of the Great Barrington Bagel Co. ‘The fourth, from Sunnyside Cannabis Dispensary in Chicago, showed up at the address of a pizzeria called Nude Dude Food. Like Pollock at Theory, Rebelle CEO Charlotte Hanna says the company’s payment processor attributed the address mixup to an error that's been fixed. Cresco Labs Inc., which owns Sunnyside, says the same, adding that an audit of other locations across the U.S. showed 4% were programmed with incorrect addresses. Cresco says all have been cor rected and that it wouldn’t knowingly use a platform that isnt transparent. Calyx declined to comment. Accidental or not, incorrect addresses can help block an audit of prohibited locations and disguise large money flows, something banks typically watch for to alert them to suspicious activity. Some in the industry say wrong addresses aren't just om mistakes. “The address is being used to trick esto the transaction,” says Nathaniel Gurien, (0 of New Yoricbased Tan, wich advices cam nabis industry clients on payment processing and sells a product that competes with cashless ATMS. “Thisis part of the overall program. You're not going to see Bob's Cannabis Store.” —Tiffany Kary, with Jonathan Roeder, Deena Shanker, and Jenny Surane THE BOTTOMLINE The clash botwoon federal and state Cannabis awshas created a fntech workaround tht brings at east $7 taten # mbigoniios nde to the fecal eystom Private Equity’s FOther’ Expenses @ Investors including public pensions pay for a variety of funds! business costs, which are often lumped into one big pile The stewards of billions of dollars in retiree savings are struggling to account for fees charged by one of the wealthiest industries on Wall Street. Investors who put money into a private equity fund expect to pay a management fee as well as a share of their profits to the firm running the fund, But on top of those costs are agreements to cover expenses ranging from dealmaker travel to din- ners to news subscriptions. A Bloomberg analysis of data collected from more than two dozen U.S. public pension plans shows that most of those investors aren’t tracking details of so-called partnership expenses across their private equity portfolios. Some say the task is too difficult because fund managers are reporting i i \FINANCE ‘loombers Businessweek ers, 2022 the costs in vastly different ways or fail to break out expenditures at all. For a large public pension system, these expenses can amount to tens of millions of dollars a year. It’s an issue set to come into greater focus as regulators scrutinize the private equity industry's high fees and lack of transparency. In February, the Securities and Exchange Commission proposed a rule that would require the firms to better disclose certain costs and categorize their fund expenses. Private equity lobbyists are preparing to influence the crafting of any rule. They argue that investors in their funds are sophisticated and that firms already face disclosure requirements. The Institutional Limited Partners Association (ILPA), which represents investors including pension plans, is pushing for more transparency. (Investors in private equity funds are known in industry jargon as limited partners, or LPs.) Public pension officials take the stance that pri- vate equity fees are worth the returns the firms can deliver. But without itemized disclosure of expenses, itcan be hard to tell ifirms are abiding by their con- tracts, says Jennifer Choi, a managing director at ILPA. “Having an understanding of what it costs to generate those returns is important,” she says. ‘The pension officials who oversee retirement savings of state employees such as teachers and fire- fighters also have a duty to account for the charges, says Emil Siriwardane, an associate professor in the finance unit of Harvard Business School. “Ifyou are ‘going to spend public money, you should be able to figure out where it went,” he says. Bloomberg sent Freedom of Information Act requests to 27 U.S. public pension plans seeking details on how much they paid in partnership expenses, as well as a breakdown of those costs. Only nine said they kept track of the total costs to their private equity portfolios, and two of the plans said they monitored the expenses across cat- egories. Four refused the request altogether. Even for those pensions that have managed to track costs, the data can be nebulous. The ‘Washington State Investment Board (WSIB) began tracking partnership costs more closely in 2020 to make sure private equity managers complied with the terms set out in their contracts on a more detailed level. The pension manager sought to cat- egorize the charges by areas such as legal, travel, and bank fees. But about $70 million-or 45% of the money that went to reimburse private equity ‘managers for fund expenses-was labeled “other,” according to unaudited 2020 data. ‘That's in part because some private equity ‘managers provided only lump-sum partnership costs. “Where practical, within our resource levels, we have continued to use those more detailed categories,” says Chris Phillips, a spokes ‘man for the pension manager. “The reason why there has been less standard. ized disclosure is that LPs want information bro- ken down in different ways,” says Jason Mulvihill, chief operating officer and general counsel of the American Investment Council, which is the private equity industry's lobbying group. To the extent there is an SEC rule, “we want to make sure that it is tailored appropriately and doesn’t overburden firms.” ILPA has tried to standardize disclosures by creating a form for managers~actually a spread- sheet template-to send their clients each quarter that would define costs across various categories such as travel, audit, and legal. Partnership expenses are lower than other private equity management fees, so they've received less attention. Stil, they add up for pension sys- tems. The Washington State Investment Board paid {$158 million in partnership expenses for multiple funds in its 2021 fiscal year on a $41.5 billion private equity portfolio, or about 0.38% of the total value. ‘This compared with $374 million in management fees, or 0.9%. Phillips says some of the partnership ‘expenses go to reduce the management fee, though it’s difficult to determine how much. According to its annual report, the WSIB got strong performance from its private equity portfolio in the 12 months ‘ended June 2021, seeing a 58% increase in its value. ‘Those charges can also cumulatively translate {nto significant dollars for the managers that oversee ‘mega buyout funds. For example, the Los Angeles County Employees Retirement Association paid Blackstone only $212,680 in expenses for one buy- ‘out fund during fiscal 2021. But the firm collected ‘$22 million in total partnership fees across its fund’s $18.8 billion pool, according to an analysis of FOIA data, Matt Anderson, a Blackstone spokesperson, says the fund has delivered annual returns of 21%, net ofall fees and expenses. Public pension plans have been increasing their ‘exposure to the industry in search of higher returns. ‘Some question whether tracking partnership costs ata more detailed level is worth the expense. Larger ‘ones say they can hold managers accountable by exerting influence through advisory boards. Although expenses may be small relative to performance in a strong year, SEC Chair Gary Gensler has expressed concern over private equi ty’s high costs compared with the rest of the asset ‘management industry, which has seen its fees shrink in percentage terms. The lack of detailed accounting hurts investors because they don't > ‘Private oa partnership oos pat bye Washington stato pension manager For2020 eategried (BUnspecitieg| By foal yearsm FINANCE Bloomberg Businesswosk ‘Api 4, 2022 have the ability to tell why costs might be high or low, says Chris Flynn, a manager at CEM Benchmarking, which provides cost benchmark. ing to large pension plans. “When you just get a Jumped number for partnership costs, how are you supposed to exercise your duty that the funds are being spent well2” he asks. —Sabrina Willmer THE BOTTOM LINE Partnership expenses are smal compared wih pate eqult/s management fos BUT they aad up to alatot Faro rack ronoy for tho publi pnsionagoncios that pay thom, Whos Going to Regulate Crypto? @ A major exchange is pushing to give more power to the US. commodities watchdog It was a classic Washington networking party. Sam Bankman‘Fried, the co-founder and chief executive officer of FTX, one of the world’s larg est crypto trading platforms, held court on a February evening in a private room at the Park Hyatt hotel on the edge of Georgetown. Drinks flowed from an open bar, and hors d'oeuvres were served to the clutch of congressional aides, finan- cial lobbyists, and former regulators. The goal of Bankman-Fried, a 30-year-old billionaire, was to showcase his new lobbying operation—and to persuade influential Washingtonians that crypto needs more regulation. It may seem strange that a crypto magnate is seeking federal oversight. But as lawmakers and bureaucrats grapple with how to police a fast- ‘growing and risky $2 trillion market, new rules seem inevitable. In March, President Joe Biden signed an executive order calling on federal agencies to work out policies on crypto. Bankman-Fried, whose com- pany last year bought the naming rights to the Miami Heat’s basketball arena, is pushing his own ideas of ‘what regulation ought to ook lke, as wellas who his ‘main watchdog should be. He's arguing for a bigger role for the U.S. Commodity Futures Trading Commission. The rel atively small agency monitors futures contracts in basic goods such as crude oil, corn, and pork, as well as financial derivatives such as interest-rate swaps. It also oversees U.S. futures and options contracts on the popular cryptocurrencies Bitcoin and Ether. A U.S. affiliate of the Bahamas-based FTX offers such crypto derivatives, so part o business is already under the CFTC’s purview. Bankman-Fried wants Congress to expand the CFTC’s authority to cover trading in the coins them- selves. Currently, the CFTC only claims jurisdiction over cash token markets in cases of suspected fraud or manipulation that could affect the performance of crypto derivatives. In February testimony to the Senate, he said this lack of clarity is bad for inves- tors and the industry. Other trading platforms are also starting to see the merits of being overseen pri: marily by the CFTC, say industry leaders who asked not to be named talking about private discussions. All this is happening as another regulator, the US. Securities and Exchange Commission, is flex- ing ts muscles in crypto, and some industry watch- ers say it’s no coincidence: Expanding the CFTC’s role could put some digital assets beyond the SEC's reach. “The exchanges are coming to a conclusion that the last thing they want isto be regulated by the SEG,’ says Patrick McCarty, who teaches a class on crypto at Georgetown University’s law school. ‘The SEC is run by the Biden administration's most prominent crypto expert, Gary Gensler. Although he hhasa fascination with crypto's underlying blockchain technology-he taught a course on it-he hasn't been an industry booster. Instead, he’s scared a number of exchanges by warning them that they're violating the law by selling coins that are, in his view, unreg- istered securities. And he reminds them they could face steep finesif they don’t register with the agency, according to people briefed on the discussions. ‘The ambiguous regulatory regime underscores how complicated itis for the government to get a handle on crypto. The situation, says Representative Josh Gottheimer, a New Jersey Democrat, “is totally chaotic and confusing.” He's working on a billto reg: ulate stablecoins, tokens that typically are pegged to traditional currencies like the dollar. Spokespeople atthe SEC and CFTC deciined to comment. The Biden executive order asks for cooperation among some two dozen agencies and govern- ‘ment offices, including the U.S. Department of State, the U.S. Environmental Protection Agency, and the Office of Science and Technology Policy. “The exchanges arecomingto aconclusion thatthelast thing they wantistobe regulatedby theSEC”FINANCE The regulator of major banks, the Office of the Comptroller of the Currency, has argued that stablecoins that aren’t properly backed by reserves could produce something akin to a bank run, and thus should be subject to reviews by its examiners. ‘The Consumer Financial Protection Bureau is eyeing crypto lending. Both stablecoins and crypto lending are also on the SEC’s radar. Importantly, the exec- tive order doesn't “clearly delineate regulatory responsibility between the SEC and the CFTC,” says Representative Don Beyer, a Virginia Democrat. ‘The big, largely unsettled question in crypto regulation is which digital assets count as securi- ties. Some, lke Bitcoin, seem to fall clearly into the commodities bucket. But a growing number seem similar to stocks, bonds, or funds. Their value may depend on how money is invested or on the suc- cess ofa technology project, much asa stock’s value depends on how well a company performs. That ‘may put them in SEC territory. Stablecoins could also potentially be considered securities. So might digital artworks, or nonfungible tokens, if owners sell fractions of them to investors. Ultimately, courts or Congress may have to draw the lines. FTX says that in promoting more power for the CFTC, it’s not trying to box out Gensler, who ran the CFTC in the Obama administration. Brett Harrison, president of the U.S. arm, FTX US, says it just wants the CFTC to have clearer authority over the coins that are considered commodities. But FTX appears to be placing its thumb on the CFTCsside of the scale. Bankman Fried has become a frequent visitor to Capitol Hill-holding meetings with lawmakers, testifying in favor of the CFTC, and circulating proposed legislation that would expand that agency's crypto authority. CFTC Chairman Rostin Behnam recently told the Senate Agriculture Committee that his agency is “a few steps ahead and ready to run” with heightened oversight. Vet the SECs the much larger agency and has more experience protecting retail investors. It has about 4,500 fulltime workers; the CFTC has about 700. The SEC's $1.9 billion budget dwarfs the CFTC’s $300 million. Sheila Warren, CEO of the Crypto Council for Innovation, a trade group, saysit willbe challenging for Congress and watchdogs to set a framework for an industry that “defies the boundaries” of existing rules. “My hope,” she says, “is that we wind up with a regulatory regime that makes sense, as opposed to one that’s just the result of some sort of turf war.” —Robert Schmidt and Allyson Versprille ‘THE BOTTOMLINE.Reguating the crypt Indust sit gong to bo easy forthe goverment anda players ar alady ching in ‘nha thay think ach ageey's le shou be fee Reginald Browne Browne, a principal at the trading firm GTS, is a market maker who's played akey role in developing the $7 trillion exchange-traded fund industry. ETFs need exchange-registered traders like Browne to ensure there's liquidity for their shares so investors get the prices they expect. —Scarlet Fu well around nickel, because the asset class is thinly traded. There's not enough supply, and you can get cornered in the marketplace. ‘Tere ave Been alot of atemts to Ibuncha US ETF thatimests recy InBitcan, but eguators have buted thom. What do youmake of them? To trade an actual Bitcoin, it's pretty expensive, and no one understands the implicit costs that you're paying. The ETF community does a good job of democratizing those costs quickly. We're looking forward to trading a spot Bitcoin ETF because ‘we're going to flatten the costs, open it to a wide range of investors, and then bring more liquidity. Som advocating for a Bitcoin ETF. ‘Do you thik we've reached peak ETE” fori there more market share fo take? Do you see those mutual, funds over there? We're coming for you, baby. | think there's a lot of opportunity to convert mutual funds into the ETF format and give investors lower pricing and more choices around when they enter and exit It really comes down to retirement investment platforms and allowing ETFs into their ecosystem. But | think that there's a lot of opportunity for growth. | see it. Every asset manager who has a mutual fund complex wants to convert into ETFs. Youoar pitches for alt of ETFidoas. ‘wont work? There are a lot of wacky ideas where people want to bring nontraded assets into an ETF format. Like, can! ut my hedge fund inside an ETF structure? I stop those at the door. Or you can get into hairy parts of the market where liquidity is thin, We see an example with the London Metal Exchange not performing Even atthe rie of camibalsng their owns? One hundred percent. think. the ETF industry will get to $25 trillion or $30 trillion in my lifetime. And | have another 40 years to go. (© Etc tor cary and engin For mar formation on Bicombarg Now vices, 010 Parcipatoin te Moda Traning Program vt ww boomborgcam/newolesOo-ZOzZo0om SES sted eit Lindblad Bloomberg Businessweek AMarshall Plan for Energy @ A deal to boost U.S. exports of LNG to Europe has a lot of challenges to overcome Russia's invasion of Ukraine has thrust liquefied natural gas into the international spotlight. LNG is natural gas that’s been chilled toa liquid so itcan be loaded onto huge tankers and shipped to countries that use it for heating and power gen: eration. While demand for the fuel has soared in Asia, Europe has been slow to embrace it as an alternative to cheaper, piped natural gas from Russia, which supplies 40% of its needs. That changed when a war broke out on Europe's eastern flank, sending already volatile «gas prices surging. Ina deal unveiled on March 25, the U.S. has committed to working with inter- national partners to boost supplies of LNG to European countries to about 1.8 trillion cubic feet (50 cubic meters) annually by 2030. US. shipments to Europe totaled almost 913 bil- lion cubic feet last year, according to research ¥ Ventre Global INGeCaicaieu Pass export terminal Intouoina ‘Api 4, 2022 ‘company Rystad Energy. The trans-Atlantic allies are “coming together to reduce Europe's depen: dence on Russian energy,” President Joe Biden said at a press conference in Brussels to announce the pact. Six years after the first cargo of American shale gas sailed out of Cheniere Energy Inc’s Louisiana terminal, the U.S. is vying with Qatar and Australia for the title of world’s top LNG exporter. (It's con stantly shifting ranking, but the U.S. is currently in the lead.) Nevertheless, U.S. exports alone won't be ‘enough to wean Europe off Russian gas completely, at least in the short term. Even operating at full tl, the seven LNG export terminals stateside would meet only about a third of Europe’s daily gas demand, The facilities cost billions of dollars and take years to build, and a lack of financing has created a bottleneck: Roughly a dozen proposed terminals authorized by U.S. regulators over the past several years haven't been built because developers are stil trying to line up funds. And Europe doesn’t have enough import facilities to absorb a significant increase in U.S. tanker trafic Nevertheless, political support for U.S. LNG has never been higher, creating tailwinds for compa: nies trying to develop export projects. “Europe’s divorce with Russia, its longtime energy supply partner, leaves an absolutely massive growth ‘opportunity for U.S. LNG exporters,” says Sean Morgan, an LNG industry analyst at Evercore ISI, who calls ita “once-in-a-generation” shift. Here's a more detailed look at the challenges US. LNG companies must overcome to supply more gas to Europe. i : i :Dangerous Dependence MRR SERIES meetin = one me a fan Oermack | eo wt | zt vn a tunenboua | I rw ve 5 | | “Europe's 1D) Mana cannons | divorcewith Russia...leaves ‘@ CONSTRUCTION COSTS AND FINANCING Inmid-March the Energy Department approved | anabsolutely terminal, under construction in Louisiana, | from its terminal in Louisiana and another in | growth will cost about $5.8 billion-and it’s one of the | Corpus Christi, Texas-a sign that the Biden | opportunity LNG-producing unit at an existing facility takes | the president’s campaign pledge to combat cli- | exporters” about two and a half years to complete, accord- ing to Goldman Sachs. Europe's gas crunch is expected to renew inter- est in some of the U.S. export projects under devel ‘opment that have struggled to attract financing in recent years, hamstrung by relatively low gas prices and competition from Qatar and Australia, In one sign of the industry's newfound confidence, three days after the U.S-EU deal was announced, ‘Tellurian Inc. greenlighted construction of a Louisiana export complex, even though it hasn't Jined up financing for the $12 billion development. (@ FEDERAL PERMITS Before developers can break ground, they're required to submit detailed proposals to the Federal Energy Regulatory Commission—an inde- pendent agency that oversees gas transportation and the Department of Energy. Some projects also need state permits. All of that paperwork can con- sume years. ‘mate change, for the sake of European allies. @ CONTRACTS If European countries are serious about getting off Russian gas, they'll have to sign more long-term contracts for LNG from the U.S., says Samantha Dart, head of natural gas research at Goldman Sachs. That’s because financing for new termi- nals typically hinges on 15- or 20-year supply deals that developers sign with utility companies and other buyers. ‘The European energy crisis has improved the long-term contracting environment for projects with federal permits. Some of the early winners include Cheniere, which plans to expand its Texas terminal, and Venture Global, which is seeking to add three more export facilities in Louisiana. On the import side, Germany is planning to build two terminals while Italy, Poland, and other nations are eyeing development of new terminals or expanding existing facilities. >ECONOMICS Bloomberg Businesswosk ‘Api 4, 2022 © OPPOSITION TO EXPORTS, ‘An increase in the number of U.S. LNG export terminals-along with the high prices European cus- tomers are willing to pay-will divert supplies from the domestic market, potentially raising costs for US. businesses and households that have enjoyed ‘years of comparatively low prices. Industrial Energy Consumers of America, alob- bying group, already blames LNG exports for help- ing to push up energy bills. U.S. natural gas prices have risen about 45% in the year to date and more than doubled over the past i2 months. @ PRODUCTION AND PIPELINE CAPACITY Even as the war in Ukraine has marshaled support for boosting LNG exports, its not clear how much American gas producers are willing to ramp up out: ut. Although production has rebounded from a pandemic induced crash in 2029, i's grown only modestly in the past year as investors pressure companies to keep a lid on spending and return cash to shareholders. ‘There’s limited pipeline capacity to transport «gas from shale basins to export terminals, with pro posals for new conduits facing opposition from reg- ulators and environmental groups in recent years. Democratic Senator Joe Manchin of West Virginia has argued that the Defense Production Act, which gives the president emergency authority to seize control of domestic industries, should be used to rush completion of a stalled pipeline that con- nets the state-straddiing Marcellus Shale deposit to export terminals in the Gulf of Mexico. @ ENVIRONMENTAL CHALLENGES LNG has faced increasing pushback in Europe as well as in the US. amid concern about climate change. ‘Although gas burns more cleanly than coal when it leaks into the atmosphere, i's composed mostly of methane, which is more than 80 times more power- ful than carbon dioxide as a global warming agent. Hydraulic fracturing, a method for breaking rock and releasing hydrocarbons, also has been criticized for its impact on the environment. Under pressure from the French government and green groups, uti ity Engie SA scrapped plans in 2020 to buy LNG from US. exporter NextDecade Corp., which is trying to build an export terminal in Texas. Backers of natural gas argue that the fossil fuel should have a role to play in the energy transi- tion, especially if suppliers can deliver on pledges to track and stop leaks of methane from wells and pipelines, in February, the European Commission, proposed to label investments in some gas projects as sustainable under the bloc’s taxonomy system. ‘© WINDOW OF OPPORTUNITY Support from Brussels and Washington may not be sufficient to overcome uncertainty over whether demand for natural gas will hold firm overtime, Europe has set ambitious goals for wind and solar energy, which ifrealized will cut into the market for LNG. Thats the biggest long-term risk faced by investors in LNG projects, according to Emily MeClain, an analyst at Rystad Energy. “We are moving in the direction of energy transition,” she says. “How soon we get there is the question.” —Paul Takahashi and Sergio Chapa, with Naureen S. Malik and Gerson Freitas Jr. THE BOTTOM LNE Europes conmtnent to buy mee American LNG may hep unock tnaeing for some US. prot nfimbo but expanding export capacty wl consume years ard mary bllons Mexico's Remittance Windfall @ Record transfers from abroad lft communities that got little in the way of government stimulus Pizza and beer vendors were doing brisk business at an annual fair in Tehuitzingo, a municipality of 12,700 people in central Mexico, in February. Groups of kids jumped in a bouncy castle while teenagers braved a swinging carnival ride shaped like a dragon. Local vaqueros bowed their heads to pray for protection as they prepared for a bull- riding contest with a grand prize of $1,000, most of itdonated by migrants living in Nevada, “From Las ‘Vegas, we got pure green,” the carnival's announcer yelled across the fairgrounds. The festival generated a degree of jubilation not seen in these parts since before Covid-19 arrived two years ago. Last year’s party was canceled. This year’s felt lke a rebirth, funded in large part by a surge in remittances, to about $33 million in 2021, mainly from native sons and daughters working in the U.S. ‘Transfers from Mexicans living abroad jumped 27% nationwide in 2021, toa record $51.6 billion. The ‘money has been a lifeline because President Andrés ‘Manuel Lopez Obrador's government doled out ret tively little pandemic aid during the worst economic contraction in almost a century. Growth is still ane- mic; the median forecast of economists surveyed by Bloomberg is for an expansion of 2% in 2022, less than half of last year’s post-recession bump. tesco ronitances om‘na US si (a12016 a42021mt EcoNoMICS ‘loombers Businessweek ers, 2022 ‘The U.S. economy fared much better, thanks to trillions of dollars in Covid stimulus. A Mexican worker in the U.S. earned five times the average ‘wage in Mexico in 2021, according to the Center for Latin American Monetary Studies (Cemila), with ‘migrants’ total wages jumping 10%, to $282.8 billion. In Tehuitzingo, about a two-hour drive south of the state capital of Puebla, the money that came in last year averaged out to $2,600 per person— ‘more than what a Mexican earning the minimum ‘wage would make in a year. “Of every 1,000 peo ple here, you'll only find one who doesn’t receive remittances,” says Carlos Pérez Lopez, who works in Tehuitzingo’s government office. Three-quarters of residents live in poverty. ‘The remittances helped make up for lost jobs or unexpected medical costs. They also funded longer-term investments. New homes are going up, others are being expanded, and farmers have ‘money to buy more animals and seeds. The cash also has attracted new businesses: Banco Azteca SA recently opened a branch in the area, and a four- story shopping center is in the works. “There’s finally some money going around,” says Alfredo Rosas Flores, who worked ata deli in the U.S. for a decade before becoming municipal president. Because prospects are few, many of those born here go abroad. The region's main economic engines are farming and ranching-and they're sputtering. Tehuitzingo gets significant rainfall only three months a year, and climate change has ‘made that small amount less dependable. Much of the countryside was bone dry during a recent visit. ‘The main town is still rebuilding from the effects of a devastating 2017 earthquake. “Many of these youngsters we try to shape leave by the time they're out of high school,” says Luis Hoyos Hernandez, a teacher and historian in Tehuitzingo. ‘The exodus began in earnest in the 1980s, with residents drawn north of the border by the hope of better-paying jobs in construction, gardening, and restaurants. Connecticut, New Jersey, and New York. became popular destinations along with Maryland and Nevada, with new arrivals geting support from those who'd been there longer. Remittance flows to ‘Tehuitzingo have doubled since 2013. ‘A good portion of the money over the past two years came from US. stimulus handouts. Most aid ‘was reserved for citizens or authorized residents, but children born in the U.S. were eligible even if their parents didn’t have documentation. “I know guys with four or five kids who got more than $10,000 deposited to their cards,” says Francisco Martinez, the 46-year-old owner of a bakery in Newburgh, NX, that also arranges wire transfers. He ‘came back to town for the fair, paying for thousands of amusement-ride tickets and helping install the sound system blasting ranchera music. Coneval, a federal research office, estimates that nationwide an additional 2.5 million Mexicans ‘would've slipped into poverty in 2020 were it not for remittances along with government programs targeting vulnerable groups such as the elderly. “Remittances often reach populations that have the ‘minimum means of subsistence,” says Guillermina Rodriguez, an analyst at Citigroup Inc:s Mexican unit. “They allowed people in these communities to keep up their normal evel of consumption.” ‘The number of Mexican workers-both autho- tized and unauthorized~employed in the US. totaled 7 million in December, topping pre pandemic levels, according to data from Cemla. Migrants living in the U.S. ended up staying for lon: ger instead of moving back home, and an uptick in border apprehensions since last year suggests immi- station has recently increased. The larger presence, along with a tight job market that’s bid up wages in ‘many occupations, is expected to lead to another record year of remittances. Monterrey-based Banco ‘Base SA is anticipating an increase of 13%. David, a 35-year-old native of Tehuitzingo who ‘works asa cook at an Italian restaurant in New York state and asa cleaner ata hospital, intends to return ‘one day. For now he sends money home twice a ‘month to pay for farmhands to tend his family’s pea ‘ut crop and for internet service so his three teen: age kids can take online classes. He's also paying for a shrine to be built outside the family home to Jude the Apostle, the patron saint of desperate causes. “We didn’t have any- thing, They used to say we didn’t even have a place to die,” says David, who asked to be identified by a pseudonym because he's undocumented. “Thank God I came here.” —Mayaa Averbuch THEBOTTOM LINE. Remittances fram Mexicans ving abr [ued 27% le ear, to S518 ballon and are posed toinrease {hi year, bolstered by aot ob market n he US, “4 The farin TenstingoOZO-AclCOO pt, 2022 Eatedby {tha Koons, Rocca ent, and Rick chine Prognosis The Promise Of Paxlovid If Pfizer's Covid-19 treatment is to help end the pandemic, more nations need rapid access When Pfizer Inc. revealed the efficacy of its Covid pill last November, the excitement was palpable. Scientists hailed Paxlovid as a break- through. World leaders raced to lock up sup- plies. But just three months into the rollout, optimism about the drug's ability to help bring a swift end to the pandemic is waning, as fears ‘mount that unequal distribution will exacerbate the challenge of getting the virus under control It's too soon to say whether this will end up being as inequitable as the botched vaccine deployment. Mass quantities of the therapy may take more than a year to become available because of production and regulatory hur- dles, according to drug experts. After wealthy rations snapped up a large share of initial sup: plies of Paxlovid, which slashed the risk of hospitalization and death from Covid-19 by 89% in clinical trials, many low- and middle-income countries are facing a potentially long wait for generic versions, “We've already had those discussions with vaccines,” says Borna Nyacke-Anoke, a doctor and researcher in Kenya with the Drugs for Neglected Diseases Initiative, a nonprofit. “it’s quite unfortunate that we need to have them again.” With thousands of Covid deaths a day, time is the one thing the world doesn't have. Whenever the virus starts to subside, new variants or subvariants pop up, causing fresh spikes in cases. Knowing the critical role Pfizer's drug could play in quashing the virus, health organizations, researchers, andm SOLUTIONS: ‘loomibrs Businessweck ‘4, 2022 companies are working to accelerate Paxlovid production beyond what is currently forecast and bring down the high cost of manufacturing, ‘We need to see what's possible and if we can go faster,” says Janet Ginnard, strategy director at Unitaid, the health agency that's helping to coordinate Covid drug deployment. Unitaid is working with partners exploring how to increase manufacturing yields and helping coun- tries boost testing to get the therapy to more people, she says, Pfizer in December increased its 2022 production target to 120 million courses from 80 milion, after the drug won US. regulatory clearance. I's since been approved by authorities in the European Union, the UX. and elsewhere. ‘The company is approaching more than 100 countries, including low-income nations, to discuss direct supplies. African officials also announced an initial deal with Pfizer in March, and the company is selling as many as 4 million courses as part of an agreement with relief organization Unicef, though health advocates say that's hardly enough, with variants continuing to pose a threat. The first generic versions of Paxlovid are expected in December at the earliest, says Charles Gore, executive director of the United Nations-backed Medicines Patent Pool. The Geneva-based organization signed agreements with three dozen drugmakers in March so they could sup- ply generic versions of Paxlovid to some 95 countries that are home to almost half of the world's population, The effort to expand supplies is moving as “quickly as humanly possible,” Gore says. “There are a whole bunch of things that have to be done, all of which take time.” Before making the drug, generic producers need to acquire 38 different ingredients and reagents in large quantities, sourced from suppliers around the globe, according to Airfinity Ltd, a London-based analytics firm. That could lead to bottlenecks. Manufacturers also face a risk of losing money on their investments amid uncertainties about demand for Paxlovid, says Andrew Hill, a senior fellow at the University of Liverpool in England. Because people are less likely to be hospitalized with the omicron variant, it could become harder for governments to justify purchas- ing Pfizer's treatment, he says. Stil if amore concerning Variant emerges and data show Pfizer's treatment con- tinues to work, “it would be a godsend to have drugs like this," he says. The therapy consists of two pills. One, nirmatrelvir, is ‘anew drug designed to block the action of a key enzyme the virus uses to make copies of itself, which is how it infects a person. The other, the HIV medication ritonavir, helps slow the breakdown of the first drug, enabling it to remain active for longer and at higher concentrations, Public information on nirmatrelvir is relatively limited, so producers had to wait for licenses and Pfizer's original product to become available, a spokesperson for the patent pool says. Merck & Co's Covid pill molnupiravir wil ikely become widely available sooner than Paxlovid. The company signed initial agreements with Indian generic drug com- panies almost a year ago, then reached an accord to expand global availability in October. Also, producers have more familiarity with the therapy. However appear to be as effective as Paxlovid in studies, and it carries risks for some patients. One key to unlocking the production challenge could ‘come from the Medicines for All Institute at Virginia ‘Commonwealth University. The group, which is working with Pfizer, aims to cut the costs of the initial materials needed to make the drug by 50%, says Frank Gupton, its founder. His team, which identified a way to slash the cost of Merck's therapy by replacing one starting compo- nent, is investigating a similar solution for Paxlovid. Pfizer and generic drugmakers would benefit from the break- through. "The problem is the supply chain, so we're look- ing at new and different chemistry” to find less expensive and more readily available materials, Gupton says. ‘African health officials are acutely aware of what's at stake, with the scramble for Covid drugs. More than two decades before the pandemic, the high price of HIV drugs sparked an outcry as millions in Africa and other regions who couldn't afford the treatments died. global disease became a lower- and middle-income country disease, or an African disease, because we did not have the capacity to be able to have adequate treat- ment,” says Nyaoke-Anoke, the Kenyan researcher. “The same thing could happen with Covid.” —James Paton ‘THE BOTTOM LINE Pasdvid coud play a ruc ein combating Cows. For tat to happen production must ramp up manufacturing costs need to fal sr clstrbuton nas to quick expand beyond wealthy catersmsowuTions ‘loombers Businessweek ri 4,2022 Hooked Onindia US. generic drugmakers depend on ‘more than 100 factories in India for crucial ingredients, ‘Amid the first Covid-19 lockdowns in 2020 and worries that critical drugs could run low, a 20-year-old non- profit, litle known outside the drug industry, took it upon itself to meticulously map the supply chain of medications Americans take. It was an ambitious undertaking that not even the Food and Drug Administration had tried before. US. Pharmacopeia has long played a critical role in the drug industry, which relies on its chemical samples to help ensure quality. The results ofits huge data-mining probe were startling: Indian factories, the data showed, provide a vast amount of ingredients that go into the generic drugs Americans take, USP Chief Executive Officer Ron Piervincenzi says that before his organization sought to map the supply chain during the lockdowns, he was surprised by the paucity of data. ‘We were just frustrated—not just frustrated, truly annoyed," he says. Active ingredient production, USP found, is far more concentrated in India than was previously understood given the FDA's limited data, which had made China look like a more dominant player in the pharmaceutical supply chain than it really is. Active ingredients are what make a drug effective against a particular disease or condition. Its well known that Indian factories have struggled with quality issues over the years. What's more, there's nothing stopping the Indian government from cutting oft supplies of certain drugs to protect its domestic stockpile. That's exactly what India did early in the pandemic, when it tem- Porarily banned the export of certain antibiotics and acet- aminophen, the active ingredient in Tylenol, to ensure it had enough to meet domestic needs. Add to that India's, close ties to Russia at a time of fraught relations between the Kremlin and the West. India has expressed interest in obtaining more oil from Russia, and Prime Minister Narendra Modi has so far avoided criticism of President Vladimir Putin's invasion of Ukraine. “Imnot saying Indiais averse to the US,” says Stephen ‘Schondelmeyer, co-lead of the Resilient Drug Supply Project at the University of Minnesota's Center for Infectious Disease Research & Policy. Yet, "they're somewhat Russia- friendly. They have a lot of trade with Russia.” ‘The Biden administration recently warned about the preponderance of drug supplies that come from China and India, and members of Congress have introduced legislation to protect the pharmaceutical supply chain from what they perceive as China's dominance of the industry. Those positions will need to be reassessed after USP's determination that India has the lion’s share of the ‘world's active ingredient manufacturing plants for generic drugs, which account for 90% of the drugs Americans, take, USP found that brand-name drugmakers are more likely to turn to Europe for their active ingredients. Many issues can lead to shortages but without good data on where drugs come from, large buyers, particu- larly hospitals, can't anticipate them as well as they like, USP’ findings could change that. For a price, they can help those in charge of keeping medical centers well-stocked anticipate drug shortages and give policymakers a tool for identifying the cause of a shortage. Federal incentives could encourage the creation of new production lines in the US,, and investment in factories in Canada and Mexico would help diversify ‘supplies so that if a given company were knocked out, another making the ‘same drug elsewhere could step in Rising transportation costs are also straining the drug supply chain, adding an incentive to bring pro duction closer to home. in ‘an October survey of its members, the Association for Accessible Medicines, lobbying group, found that air cargo costs had increased an average of 227% since before the pandemic, says Jonathan Kimball, AAM'Ss vice president for trade. Ocean cargo costs were up 193%. Kimball said costs have prob- ably worsened with rising oil and gas prices triggered by Russia's invasion of Ukraine. ‘The industry has a lot of work to do. Of the 100 drugs, Americans use most, 83 have no production source in the US. for their active ingredients, says Tony Sardella, Drug Dominance Number of factories makin more ‘han 10 active ingredients forthe US mavtet