fortune--2020-08-10--Is oil giant BP finally ready to ‘think outside the barrel’?

For months, BP had planned this year’s annual general meeting as a sleek presentation. The company’s brand-new CEO would be onstage at London’s ExCeL convention center, trumpeting his green revolution to hundreds of shareholders. But this being 2020, nothing went as planned. When the day of the meeting finally arrived in late May, there was no audience, and no applause.
Instead, Bernard Looney, head of one of the world’s biggest oil companies, sat in a bare room in BP’s deserted London headquarters, next to a board member and a company official, talking into a camera. By then, the pandemic had killed more than 38,000 people in Britain. And rather than hosting BP’s big event, the ExCeL center had been transformed into a triage hospital for coronavirus patients. Looney, on a brief outing from months of lockdown at home, looked less like the head of an iconic 111-year-old giant than the captain of a troubled spaceship beaming bad news down to Earth. “Today’s challenge is of a different scale than any experienced before,” he told the invisible investors logged on for the meeting. He called it a “brutal environment.”
Just three months earlier, Looney had begun his tenure as CEO with a bang by unveiling a drastic overhaul for BP. He committed to “net-zero” carbon emissions by 2050—a strategy that promises to radically transform the company, and which several of his competitors then rushed to match.
Yet Looney barely had time to elaborate before COVID-19 hit the global economy with seismic force. Planes and cars sat grounded for months, with lockdown orders forcing billions of people indoors, including Looney and his team. From their homes, BP executives watched global oil demand collapse in the steepest drop since the Second World War. With no place left to store millions of barrels of unsold oil, futures prices of crude briefly dropped below $0 in April for the first time in history.
Bernard Looney, CEO, BP Daniel Leal-Olivas—AFP/Getty Images
It was “brutal” indeed. BP’s first-quarter earnings showed debt of more than $6 billion and losses of $4.4 billion, compared with almost $3 billion in profits for the same period the year before. In June, the company announced 10,000 layoffs, equal to one in seven employees in its global workforce, and cast the bad news as being part of its net-zero restructuring. That same month it warned of a coming write-down in the value of its assets of up to $17.5 billion. (The actual figure turned out to be $17.4 billion.) And in early August, there was still more grim news: BP reported losses of $16.8 billion for the second quarter and slashed its dividend in half.
It didn’t take a pandemic to cause a crisis in the oil industry, however. Even before the virus began its rampage across the planet, oil companies’ stocks were lagging badly behind others on the major global indexes, as operating costs rose and crude prices remained low. And yet, oil super-majors like BP are hardly on the verge of collapse. Proof of that, if any is needed, is this year’s Global 500 list, in which five of the top 10 are oil and gas companies. BP sits at No. 8, with $283 billion in revenues and $4 billion in profits for 2019.
Yet for all their hundreds of billions of dollars in sales, a sense of unease has steadily grown inside these companies as they assess their prospects in a world increasingly committed to going green. And a combination of factors has ratcheted up the external pressure for change: a fast-worsening climate crisis; an angry and motivated younger generation; and, perhaps most critically, growing numbers of shareholders who are threatening to move their money out of oil and gas stocks unless they see serious change.
$17.4 BILLION Write-down that BP took in the second quarter, sharply adjusting the value of its assets downward because it expects oil prices to be lower than previously projected in coming decades
In last year’s climate marches, millions of youth railed against oil companies for causing global warming; scientists estimate that about one-third of greenhouse gases in the atmosphere today can be connected to the oil and gas industry. Protesters threw beetroot juice on delegates to the Oil & Money conference in London last October. And on Looney’s first day as CEO in February, Greenpeace activists barricaded BP’s London offices, forcing a temporary shutdown. Wisely, Looney opted to spend the day visiting a BP refinery in Germany.
Ducking beetroot juice and barricades is relatively simple. However, the bigger problems are no longer possible for oil companies to sidestep. To avoid a precipitous collapse in their core business in decades to come, they will need to execute the most dramatic pivot in their long history. At least, that’s the conclusion from many outside the industry. In January, shortly before Looney began as CEO, Larry Fink, founder and CEO of BlackRock, the world’s biggest asset management fund with more than $7 trillion under management, stunned investors by writing in his annual letter that “climate change has become the defining factor in companies’ long-term prospects.” That, he said, would become increasingly true as the new generation grow up to be investors and CEOs themselves. Simply put: Companies can either join the fight for climate, or slowly wither and die.
For the energy giants, that choice is painful indeed. Taken logically, it could well mean leaving in the ground, undrilled and unexplored, billions of barrels of oil and trillions of metric tons of gas. That seems to run contrary to their very DNA. “The oil industry has an existential challenge,” says Fred Krupp, president of the nonprofit Environmental Defense Fund. “Nothing will be easy about it.”
The message has not been lost inside BP. By the time Fink published his BlackRock letter, Looney had reached the same conclusion. On Feb. 12, one week after taking over, he announced his dramatic shift in the company under the clunky title, “Reimagining Energy, Reinventing BP.” The core promise to zero out carbon emissions by 2050 or sooner mirrors what climate scientists believe is needed to avert environmental catastrophe.
Among both oil analysts and environmentalists, the reaction was a mix of hope and eye-rolling. In interviews, several pointed to BP’s last major rebrand in the late 1990s and the accompanying slogan “Beyond Petroleum,” which became symbolic of the industry’s unfulfilled promises to explore clean energy. Now BP is nominally leading the charge again, and Looney insists that this time his company is all in. “The direction is set,” Looney said in February. “We are moving to net zero. There is no turning back.”
The direction is set, we are moving to net zero. There is no turning back. Bernard Looney, CEO, BP
If that is the case, Looney’s plan is a staggering shift for BP, whose driving purpose since 1909 has been to pump oil and gas out of the ground and oceans, and to refine and sell it at gas stations around the world. Now, within 30 years tops, it needs to account for all the 415 million metric tons of carbon it adds to the atmosphere every year by offsetting it with non-carbon renewables like wind turbines or solar plants; cutting methane emissions leaking out of oil facilities; capturing carbon and storing it deep underground; protecting forests, and—the hardest of all—simply not producing some of that carbon in the first place.
Looney told investors in early August that BP would cut its oil and gas production by 40% within a decade and stop exploring for fossil fuels in new countries. After more than a century in business, BP, he says, will now become an “integrated energy company.” Seeing that transformation through could prove to be an epic challenge. But BP’s new boss insists there will be no reversal. “I really think this direction is unstoppable,” Looney told Fortune in a long interview. “I really do.”
With hindsight, the rush to switch directions seems like an inevitable development, given the intense investor pressure. The impact of that has been “massive, massive. There is no question,” says Oswald Clint, senior research analyst at Sanford C. Bernstein in London. He believes oil execs have become far more concerned about the climate themselves, rather than being dragged into taking action. “Perhaps the companies have been forced to buckle,” Clint says. “But they are not buckling today. It is full embracement, a cultural change.”
That BP could be in the vanguard of this historic shift will seem unlikely to many. Early on, the company was built by capitalizing on political upheaval in what is now Iran, Iraq, Libya, and elsewhere. And more recently, BP earned notoriety for unsafe operating conditions that went unattended—with disastrous results. Americans probably best remember BP for two major accidents, both found to have been the result of slipshod practices: the explosion at a BP refinery in Texas City, Texas, in 2005, in which 15 workers died; and the Deepwater Horizon explosion in 2010 off the coast of Louisiana, which killed 11 people and wreaked mammoth damage to the Gulf of Mexico. (See box.) It was the worst oil spill in U.S. history, for which BP is still paying out billions to local communities.
10,000 Number of employees that BP said it would lay off, equal to one seventh of its workforce, after the company lost $4.4 billion in the first quarter
Looney’s ascent as CEO finally gives the company a chance for a very new role. In the weeks following his net-zero decision, BP’s competitors in Europe rushed to do the same, perhaps sensing that if they failed to do so they would be cast as climate villains. Within weeks of Looney’s speech, Royal Dutch Shell, the Italian oil major ENI, and France’s Total all announced goals for net-zero carbon emissions by 2050. The Spanish oil company Repsol and Norway’s Equinor had made similar pronouncements earlier, promising to boost investments in renewables and increase energy efficiency in oil production.
The plan Looney unveiled in August would radically change BP by increasing its investment in low-carbon energy sources 10-fold by 2030, and eventually cutting oil and gas exploration by about 75% from its peak levels. “We know this will not be easy, but we are confident that this is the right thing for all our stakeholders,” he said. The plan would steadily determine all BP’s decisions. “You will see low carbon increasing, and fossil fuels in the long term decreasing,” says Giulia Chierchia, who joined BP in April, as its new executive vice president for strategy and sustainability, to help manage the net-zero transition. “We will make choices, and those choices will be low carbon.”
For Looney, 49, the decision came after much thought. In an hour-long video interview in late June, he said he came to realize that there was no way to square the growing alarm over climate change with his company’s business of pumping out 3.8 million barrels of oil and gas a day. Something had to give. “It became increasingly apparent over the last few years that we were in many ways swimming against the tide,” Looney says, sitting in a black T-shirt in his home office, back from a three-mile run around his London neighborhood. I ask him what would happen if BP and other big oil companies do not zero out their carbon footprint. “Without action,” he says, “it is a rather bleak future for the world.”
Looney says two groups of people had weighed heavily on his mind in thinking of BP’s future: his employees, and the investors. Both groups, it was clear, were deeply perturbed. “The sense that investors were really beginning to push, and question our purpose, started to weigh on the financial performance of our sector,” he says. “And our employees were becoming anxious about what I would describe as their personal purpose being misaligned with our corporate purpose.”
One of those anxious employees was Jo Alexander. A geoscientist with a long mane of red hair, she joined BP after graduating from Oxford University in 2003, then spent a decade working on major oil projects, including in Libya and Australia. It was a life of adventure and travel, she says. But her growing distress over the environment finally made the work feel untenable. She took a buyout from BP in 2015 and joined ShareAction, a nonprofit in London focusing on responsible investment.
Onetime BP engineer Jo Alexander, 39, quit the company because of climate concerns. Now she’s back, hoping to engage employees in “reimagining energy.” Peter Dench
At BP’s annual meeting last year, Alexander stood up to speak. She told the executives that many inside BP felt the same frustration that had driven her to leave the company. “I asked them, ‘When is BP going to give them jobs that are meaningful?’ ” she says. The execs were taken aback. After the meeting, Looney came to find her and said, “Promise me you’ll come talk to me about this,” she says. She spent months quietly gauging the views of people she knew within BP. Then late last year, she met with Looney at BP headquarters. Looney, who headed BP’s upstream division, was already rumored to be the next CEO, succeeding Bob Dudley. Alexander shared a presentation she had prepared with data about the views of BP’s employees. Then Looney told her that he was about to unveil a drastically different strategy. Alexander knew in an instant she wanted to be involved. “I said, ‘You cannot do that without me,’ ” she says. “It was the cheekiest thing I had ever said.”
Her boldness worked. Looney hired Alexander, 39, creating a job for her titled “purpose engagement manager,” with a brief to engage BP staff in the new purpose of “reimagining energy.” Looney now mentions her at every turn, including in his “net-zero” speech in February and in his interview with me. Alexander insists she is not there just to make Looney look good. “I am not naive. I do not think it is a slam dunk,” she says of BP’s net-zero plan. Still, she says, “everyone is on board with our purpose. A sense of pride has really returned.”
That optimism has not been shared equally by all BP alumni. Consider Mike Coffin, another engineer who, like Alexander, quit BP over environmental concerns. Coffin, 34, joined BP in 2008 as a geologist, right out of Cambridge University. Like Alexander, he spent a decade working on BP’s exploration projects and says the job offered him much of what he wanted: interesting work, and a solid career path that would enable him to buy a house and start a family. “Ten, 12 years ago, it was a very attractive proposition,” he says.
But Coffin grew increasingly uneasy about the environmental damage from oil production. He worried whether BP could even survive the energy transition, and that, even if it did, exploration engineers like him, hunting for big new finds, could become extinct. “I felt there was not necessarily a future in oil and gas,” he says.
3.8 million Barrels of oil and gas that BP produces each day
Early last year, Coffin finally left BP and became an oil and gas analyst for Carbon Tracker Initiative, a nonprofit organization in London that researches oil companies’ climate impact on financial markets. With the stunning fossil-fuel cuts Looney announced over the summer, Coffin says, “BP is now the industry leader in responding to climate change.” Even so, he still harbors strong doubts about whether oil companies can truly reinvent themselves as dramatically as they claim. He also questions whether Big Oil will abandon its long practice of pegging bonuses to fossil-fuel production. (BP says from now on, it will increase the environmental weighting in bonus considerations.)
As activist investors have grown more organized, so has the movement to dump energy stocks from portfolios—both from environmental concern and for reasons of financial risk. “Investors maybe do not care about climate at all,” says Andrew Grant, head of oil, gas, and mining for Carbon Tracker Initiative. “But they are getting pressure from their clients,” he says. “At this point, the financial imperative has really lined up with the environmental imperative.”
In the U.S. and Europe, dozens of pension funds and governments have begun pulling billions of dollars’ worth of stocks from fossil-fuel companies. According to the activist organization Fossil Free, institutions with a total of more than $14 trillion in assets have now committed to divestment. “Investors have gotten more and more savvy about these companies,” says Kathy Mulvey, accountability campaign director at the Union of Concerned Scientists, a research and advocacy organization in Cambridge, Mass. She adds that environmentalists fear that companies will use “corporate gymnastics,” rather than real carbon emission cuts, to reach net-zero targets. “There is quite a bit of work to be done to hold their feet to the fire,” she says.
Shareholders have also sought to drive change from within the companies. Since 2016, activists have pushed climate resolutions at the annual meetings of several big oil companies by grouping shareholders together, in order to meet the required threshold for a vote.
In 2016, Mark van Baal, a Dutch mechanical engineer turned activist, founded the shareholder group Follow This, specifically to put pressure on oil companies to commit to environmental policies via shareholder resolutions. “People said, ‘Oh, you want to change Shell? Dream on,’ ” he says. His first resolution, at Shell’s 2016 annual shareholder meeting, was blunt: “We told the company they should not explore oil and gas.” That was a tough sell, considering that the oil giant’s sole purpose was to do just that. “It’s a miracle the resolution got 2.6% support,” he says.
The group’s strategy has since grown more sophisticated and now includes directly negotiating with oil executives. Last November, van Baal hopped the Eurostar train from Amsterdam to meet Looney at BP’s London headquarters. Looney had by then been named as the next CEO. The two holed up in a closed room, where Looney revealed to van Baal that big changes were coming. “He was quite convinced he would need to make a big announcement when he took the helm, and that he would need shareholder support,” van Baal says. Van Baal agreed not to push an activist resolution at Looney’s first shareholder meeting in late May and to rather work with Looney on a joint resolution for next year’s meeting, committing BP to net-zero strategies. “If implemented properly, it would be a radical shift,” he says.
Van Baal has succeeded in getting resolutions to a vote in Shell, Total, Equinor, and BP; in the U.S., the Securities and Exchange Commission has blocked similar activist resolutions, including at the annual shareholder meetings of Exxon Mobil and Chevron, claiming that investors were trying to interfere with the companies’ management decisions. Van Baal is sanguine, confident that the oil industry must bow to reality. “I used to dream about a big oil CEO having an epiphany, a sleepless night about his children’s future,” he says. “That is not going to happen. Looney was woken up by his shareholders. He’s an oil and gas guy.”
Yet van Baal believes BP’s “oil and gas guy” is finally a CEO he can work with. And he believes that the plan Looney outlined in August could be a landmark moment for the industry. “This is the first oil major to walk the walk instead of just talking about 2050. Cutting oil production by 40%, that’s really immense,” says van Baal. “If one oil major breaks ranks and shareholders reward them for it, others will follow.”
When Looney describes his early life, it seems extraordinary that he could emerge as a game changer of any kind. He feels hugely grateful to BP. “It has given me an opportunity I never could have dreamed of, coming from where I came from,” he says. “I didn’t come from the right school or the right background.”
That is an understatement. Looney’s parents left school at age 11 and raised their five children on a dairy farm with 14 cows in rural County Kerry, Ireland. Money was tight. He says he and his brothers learned at a young age how to work for extra cash. When I ask Looney about the green toy tractor sitting on his bookshelf at home in London, he says it is a nod to his childhood. “We never had good machinery, and we always wanted good stuff,” he says. “We made money buying old tractors and selling them. Anything to make a few pounds.”
His strongest memory was of being different from his peers. “Boys were good at hurling [a traditional Irish sport somewhat similar to lacrosse] and rugby, and to be honest with you, I was pretty useless,” he says. “I was not good with my hands, on a farm where everything is about your hands.”
Looney was the first in his family to go to college. He joined BP as a drilling engineer immediately after graduating from University College, Dublin, and spent years working on projects in Britain’s North Sea, Alaska, Norway, and the U.S. He was eventually handpicked by former CEO Lord John Browne as a “turtle”—an executive assistant (named for the Ninja Turtles) on a likely track to the top. In preparation, Browne sent him for a year to Stanford Graduate School of Business.
Even now, Looney says his childhood has indelibly marked him. He believes it left him with a heightened need to include people who feel different or disrespected. One of the few interviews since his appointment to CEO was with transsexual activist and filmmaker Jake Graf, telling him that if any BP employees do not support LGBTQ+ rights, “they don’t belong in our company.” Amid the explosive Black Lives Matter protests, he wrote to BP’s worldwide staff on June 1, urging them to “call out” racism in their lives as well as inside BP. Wrenching video meetings with staff followed, with “people in tears, people crying,” he says.
415 Metric tons of carbon that BP adds to the atmosphere each year
As CEO, Looney has made mental health BP’s main charitable cause, with the company donating heavily to Mind, a British mental-health organization. He sees it as a critical issue within corporations and thinks it has been “turbocharged” by the pandemic. But it is clear that the issue is also personal. “I have had my own relationship challenges. I have had counseling and all of those things,” he says, without offering details. “I believe it affects each and every one of us.” Under lockdown, Looney offered BP employees access to Headspace, a meditation app, which he says he now uses every night. “It’s next to my bed,” he says. “I put on waves rolling in. It is calming.”
Looney does not sound much like the typical head of a giant corporation, and he seems to recoil from being depicted as one. “Bernard,” as he is called on BP’s official website, has a new Instagram account whose few dozen posts include Pride rainbows and rain forests amid the regular corporate photos, where he is typically dressed in blue jeans, and rarely in a tie, not even at the shareholder meeting in May.
The new CEO has urged workers to reach out, and some have taken him up on the offer, using the coronavirus lockdown as a chance to catch time with him online. On one video call, gas-station attendants in Britain spoke to Looney about their difficulties in working low-paying jobs through the pandemic as essential frontline workers; Looney afterward raised their wages. In Toledo, Jose Rodriguez, operations coordinator for the BP-Husky oil refinery, pinged Looney on a whim, using the company’s internal social network Yammer, and invited him to join one of their staff meetings. Rodriguez was stunned to hear back. Looney quickly set a date and chatted by video to the refinery workers for 20 minutes. “It made us feel like he actually cared about us,” Rodriguez says with amazement, adding that Looney was unlike the four former BP CEOs during his 29 years at the company. “One plant manager’s mom had just died,” Rodriguez says. “Bernard said, ‘Don’t forget about your dad. He might be hiding his feelings.’ ” Rodriguez and Looney have since kept in touch.
It is tempting to dismiss this all as part of BP’s image-making, at a moment when the company is promising a drastic shift in direction. But by all accounts it appears to reflect Looney’s actual management style and personality.
$15.2 BILLION BP’s total capital investment in 2019, less than 3% of which was spent on renewables
Even so, the CEO will have trouble winning over doubters on the outside with long memories. The company’s “Beyond Petroleum” rebrand, launched in 1997, was a $200 million PR campaign designed by Ogilvy Public Relations Worldwide. The company, the world was told, would “think outside the barrel.” For emphasis, then-CEO Browne changed the company’s name from British Petroleum to BP.
To some, Looney’s “Reimagining Energy” does not sound all that different. “We’ve heard this before from BP with ‘Beyond Petroleum,’ ” says Mulvey, from the Union of Concerned Scientists. “People were pretty hopeful at that time. It felt like it was a breakthrough.” Environmentalists fear being let down again, she says.
Browne says his efforts represented serious progress at the time, signaling the company’s real worries about carbon emissions, in a break from other oil majors. “The industry felt very threatened by it, telling us we were leaving the church,” he says. “We had no intention of greenwashing.”
The campaign coincided with BP’s $8 billion investment in solar panels in the U.S., an expenditure that cost it dearly when China began mass-producing panels at a fraction of the price; BP later took a 50% share in Lightsource, a solar company in Britain, with which it builds and operates solar plants, without manufacturing the panels. Browne says oil companies were well aware, as far back as the 1990s, that their carbon emissions were wreaking severe damage on the world’s climate. Yet there was still little sense of urgency. “We were nowhere near the position we are in today,” Browne says. “We had plenty of time.”
Looney has no such luxury. To reach net-zero in 30 years, he must race to change BP, starting now. What is more, far more than in the 1990s, investors will reject any hint of hypocrisy, Browne says. “You cannot just say you are offsetting,” he says, referring to the practice of balancing carbon emissions with, for example, planting trees or protecting existing forests. “You have to do something real.”
Investors and activists are finally hearing Looney’s plan for “something real.” (And, he says, it doesn’t depend on carbon offsets.) Chierchia, BP’s new head of strategy, says that the pandemic has made the need for change feel more immediate. “If anything, it’s showed us the exposure we have to an environment that is very volatile,” she says. “It reinforced our need to diversify.” She says she quit her previous position at McKinsey & Co. earlier this year, after Looney convinced her BP was fully committed to cutting emissions and would not make compromises. “I thought, ‘Wow these guys are actually serious about it,’ ” she says. “I thought if we could be successful, others would follow.”
Krupp, head of the Environmental Defense Fund in New York, has met several times with Looney to discuss BP’s net-zero plans, including by video during the pandemic. He says BP will need to deploy myriad solutions, starting this year, in order to meet its 2050 target. Krupp has advised Looney to rapidly shift from fossil fuels to low-carbon energy production; reduce pollutants like methane around oil facilities; and neutralize whatever carbon emissions remain, including by protecting existing tropical forests. All of those, he says, should be done on a massive scale. “They have to shift away from investing in more oil and gas,” he says. “We have challenged Bernard to find the milestones in that shift.”
One crucial question towers over all: Just how much oil and gas will the energy giants be willing not to drill? BP says it will use its oil and gas production to fund investment in low-carbon energy. Right now it has 19.3 billion barrels in reserves on its books.
$14.83 trillion Value of assets under management at institutions that have divested From the fossil-fuel industry, according to the divestment-focused nonprofit Fossil Free
But in a net-zero strategy, millions of barrels will likely need to remain in the ground forever, becoming so-called stranded assets, in finance-speak. Environmentalists fear that BP might be tempted to increase drilling as world prices rise—just as oil companies and OPEC’s oil-rich countries have done for decades. BP invested less than 3% on renewables last year out of its $15.2 billion capital expenditure, according to the company. The industry overall is currently projected to devote about 9% of its spending on clean energy over the next five years, says Matthew Fitzsimmons, vice president of energy service research at the market intelligence firm Rystad Energy. Those figures are hardly reassuring to environmentalists. “The industry has been kicking the can down the road for the past 20 years,” says Sophie Marjanac, a lawyer for ClientEarth, a London NGO. “Hopefully, the game is up now.”
Changing that dynamic while still finding a way to deliver the profits that shareholders demand is the ultimate challenge for Looney and his Big Oil peers. One thing seems almost certain: BP and others are likely to continue their oil and gas production for many years. “It is simply not possible to transform a company of 110 years old by shutting off the taps,” Looney said when unveiling his plans in August. And even if they invest heavily in solar power, electric vehicles, and wind turbines, oil demand is projected to continue rising for at least a decade, as wealth rises in emerging countries, according to the International Energy Agency in Paris.
When I ask Looney if BP might inevitably become less profitable as the company moves away from fossil-fuel production, he says that on the contrary, he believes BP will gain hugely from the energy transition. Governments are rolling out gargantuan investments to facilitate the energy shift, including the European Union’s trillion-dollar pandemic recovery plan. With thousands of engineers and a global supply chain, the oil majors could position themselves to be part of that rollout. “Trillions of dollars will be spent rewiring and replumbing the world’s energy system,” Looney says. “That presents an enormous opportunity for a company of our skills.”
Besides just identifying a financial opportunity, Looney is also increasingly sounding like a true climate believer. “There’s a tendency to take position. I am not into positions,” he says. “I want us to do what I think is right for the world.” The trick will be making what’s right for BP, and right for all of us, one and the same.
Fire boat response crews battle the blazing remnants of the offshore oil rig Deepwater Horizon, off Louisiana, April 21, 2010. U.S. Coast Guard/Reuters
10 years after: How the Deepwater Horizon debacle changed BP
A decade ago, the explosion at a BP well caused the biggest oil spill in U.S. history. The company is still paying the price.
On April 20, 2010, the Deepwater Horizon rig was drilling into an ultra-deep oil prospect off the coast of Louisiana named Macondo, after the setting for Gabriel García Márquez’s epic novel One Hundred Years of Solitude. And then it turned into an epic disaster.
Gas ripped through the well and blew up 1.5 miles undersea in the Gulf of Mexico, killing 11 platform workers. It sent up a plume of fire visible from space and wreaked mammoth damage on the Gulf’s fishing stocks and wetlands. About 3.2 million barrels of oil poured into the Gulf over 87 days, and another 810,000 barrels were soaked up by BP, in the biggest oil spill in U.S. history.
Ten years on, the Trump administration has rolled back several key oversight regulations that were introduced after Deepwater Horizon, including independent inspections and safety requirements such as backup systems to prevent blowouts.
The incident cast a shadow for years over BP’s trustworthiness, which it is only now beginning to shake off. “It was a desperately difficult experience,” says current CEO Looney, back then a senior BP executive who helped oversee the cleanup effort. In court, BP was found to have cut corners on safety, and President Barack Obama accused the company of “recklessness.”
BP is still paying the remainder of the $69 billion or so in settlements and grants to local communities and states along the Gulf, including about $2.4 billion paid last year. The company predicts it will pay about $1 billion a year for the next 13 years.
Despite the disaster, BP still invests heavily in deepwater drilling in the Gulf of Mexico, and aims to pump about 400,000 barrels a day from its waters by the mid-2020s—about the same amount it produced in 2009, before the explosion. But Looney says Deepwater Horizon forever changed the company. He says safety conditions are now the primary consideration in BP’s operations, and that the company has learned not to get too attached to one particular project—a charge that critics leveled against BP after the 2010 accident.
“We will never forget, and we must never forget,” he says. “We walked away with a lot of humility, which I personally believe is good for all seasons.” For BP and for the Gulf Coast, it was a very costly lesson.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “Is BP finally ready to ‘think outside the barrel’?”


fortune--2020-08-10--Why innovation is the secret weapon of the world’s biggest companies

Closing schools is ‘ socially intolerable , ’ says Boris Johnson .
Teachers and parents are far less assured

In the 30 years since we launched the Fortune Global 500, our annual ranking of the world’s largest companies by revenue, two very clear themes have emerged.
Illustration by Nicolas Rapp
The first—which Fortune’s incomparable director of infographics, Nicolas Rapp, has captured artfully on the cover of this issue—is the sheer gravity-defying rise of China as a leader of global business. There were precisely zero Global 500 companies based in mainland China in 1990 when we began our survey. Today there are more giant for-profit enterprises there than anywhere else on earth.
The second—and equally dramatic—narrative is the steep rise of global trade in general, which has been just as inexorable, it seems, as China’s ascent. In the first running of the Global 500, world trade represented less than 39% of global GDP, according to the World Bank; in 2018 (the latest year available), such trade accounted for more than 59% of our planet’s economic output.
It should go without saying (but, unfortunately, too often goes unsaid) that cross-border trade is precisely what made America the first economic superpower—long before it made China one. American companies exported $2.5 trillion worth of goods and services in 2019, up from $487 billion three decades earlier—a greater than fivefold increase in nominal dollars. Even adjusting for inflation, the growth rate is 152%. (For those who believe imports have increased at a substantially faster rate over the past three decades, prepare to be shocked: In inflation-adjusted terms, imports have grown 160%, barely more than exports.)
Market-based economies, naturally, need markets. And in order to thrive, businesses in those market-based economies need to either expand existing markets or find new ones. America’s free-spending, high-living, 328-million-strong population makes for a pretty robust cohort of consumers—but outside its borders are nearly 7.5 billion more who might be turned into possible customers one day. Starbucks, which makes its Global 500 debut this year (at No. 478) figured this out early, and now gets 30% of its $26.5 billion in revenue outside the U.S. (see chart). With a compound annual growth rate of over 22% since 1999, Starbucks’ international sales are growing about a third faster than domestic sales. Nike (No. 322), the pride of Beaverton, Ore., now gets 59% of its sales outside America; Archer Daniels Midland (No. 168), purveyor of the American breadbasket, gets 57%.
Which brings us back to the Global 500. The ability to export—to open up and thrive in a new market—is a key attribute of the world’s most successful firms. That ability, moreover, is often self-reinforcing. “The opportunity to export more incentivizes companies to innovate more on their products and to sell better products in the market,” says Fabian Trottner, an assistant professor of economics at the University of California, San Diego, who has written about the connection between exporting and innovation. Launching into a new market also helps a firm tap foreign knowledge, from process efficiencies to product design. “You open up a new market for ideas,” says Trottner, who has studied these effects on 6,000 German manufacturing firms. “You get to dip into an entire new world of knowledge and innovation activity that has been closed to you before.”
Indeed, you’ll see that same narrative thread winding through the great mass of feature stories in this year’s Global 500 edition. Please read on and let us know what you think.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “Great ideas are global.”


fortune--2020-08-10--Will India’s Jio be the next tech giant?

Mammoth technology companies tend to blossom slowly. Google grew quietly out of a garage, Facebook from a dorm room, Amazon in a car rolling across the country. The investments in such upstarts amount to grubstakes, relatively paltry sums from risk-seeking investors who know it could all come to naught.
Yet when two of these giants (Facebook and Google) plunk down billions of dollars to back an emerging competitor to the third (Amazon), a new tech colossus can be crowned nearly instantaneously. That company, Jio Platforms, is a four-year-old mobile phone company controlled by India’s richest man, Mukesh Ambani. It has attracted so much capital so quickly that while the rest of the world is focused on a global pandemic, Jio suddenly has staked its claim to becoming the first global tech giant to get its start in India.
The scramble began when Facebook inked a $5.7 billion deal with Jio in April for a 9.9% stake in the company. That ignited a cascade of investors grabbing a slice of Jio, which is controlled by Ambani’s family business, the petrochemical conglomerate Reliance Industries. In May, U.S. private equity heavyweights Silver Lake, Vista Equity Partners, General Atlantic, and KKR together plowed nearly $5 billion into Jio. In June, Jio collected more than $4 billion from other U.S. tech investors and sovereign wealth funds in Saudi Arabia and the United Arab Emirates. And in July, after selling slices of Jio to U.S. chipmakers Intel and Qualcomm, Jio sealed a $4.5 billion deal with Google for 7.7% of the company. For good measure, Reliance, which funded Jio from its own balance sheet, raised nearly $7 billion more in a rights offering.
All in the Family: Mukesh Ambani (front right), India’s richest man, with (from left) his wife, Nita, daughter, Isha, and sons, Anant and Akash, having just voted in Mumbai in national elections in April 2019. Mukesh took over Reliance Industries from his father and credits twins Isha and Akash with the idea for Jio Platforms. Dhiraj Singh—Bloomberg via Getty Images
By mid-July, Jio had amassed more than $20 billion, leaving Reliance and Jio net debt-free and positioning the mobile offshoot for an eventual IPO. What’s more, by spinning up Jio as a high-growth offshoot of an old-line energy company, Ambani has solidified his place as one of the world’s top business titans. Already Asia’s richest man—his 27-story Mumbai mansion has a 168-car garage; nine elevators; and a room with artificial snow, a handy feature in the tropical heat—Ambani now is one of the five richest people on the planet. If his ambitions for Jio succeed, it will join the ranks of global e-commerce “superapps” of the magnitude of China’s Alibaba and Tencent.
To do that, Jio and its many new non-Indian partners will wage an all-out battle with two American behemoths that have invested heavily in Indian retail: Walmart and Amazon. The prize is nothing short of a market that, by all rights, should be among the top tier in international commerce—but which until now has frustrated many of those who have tried to capitalize on it. “India is no longer a regional player,” says Mathew Oommen, the Indian-born president of Jio Platforms and a former U.S. telecom executive. That is why, he says, investors rushed in. Despite its youth, Jio is now in a position to pick and choose among its eager suitors. Oommen says Jio’s top criterion has been partners who appear to have India’s interests at heart. “You would be surprised, the number of investors we have turned down,” he says.
Jio’s extraordinary season of fundraising might never have happened had it not been for a persistent complaint by Ambani’s teenage twins that will sound familiar to any parent: The Internet was too slow to adequately run the sites other kids were consuming every day. Ambani had inherited Reliance from his father, and he expanded the Mumbai-based oil-refining and petrochemical outfit into supermarkets, gas stations, and thousands of convenience stores. Reliance has shopped for assets abroad as well, more recently buying the British toy retailer Hamleys. Already immensely rich by the 2000s, Ambani, now 63, lacked one crucial segment in his portfolio: telecommunications. That was all too clear to his daughter, Isha, and son Akash as they struggled (albeit in the lap of luxury) with India’s creaky 2G networks. “Growing up, they expressed to many people, and to their dad, their frustration not being able to use mobile data,” says Oommen, the Jio president. “Isha had a large influence on her dad, persuading him that this was a big opportunity.”
Few realized just how big. Won over (or worn down) by his children, Ambani purchased a failing phone company in 2010, giving him licenses over some of India’s wireless spectrum. At the time, hundreds of millions of Indians had never used a mobile phone, let alone logged on to the Internet. Ambani plowed about $35 billion into laying fiber lines and erecting about 200,000 towers for a modern 4G network in every corner of the vast country. The new company’s catchy name, Jio, looks a bit like “oil” spelled backward. It was a fitting inside joke. Fossil fuels had made Ambani rich. Now, he concluded, he could future-proof his wealth by pegging it to data.
Ambani has solidified his place as one of the world’s top business titans. Already Asia’s richest man—his 27-story Mumbai mansion, seen here on right, has a 168-car garage; nine elevators; and a room with artificial snow, a handy feature in the tropical heat—Ambani now is one of the five richest people on the planet. Danish Siddiqui—Reuters
Jio’s trajectory has been jaw-dropping. When it launched in September 2016, only about 28 million Indians owned smartphones, out of a population of more than 1.3 billion. Within 18 months Jio had signed 100 million people to its network, and by the end of July had nearly 400 million subscribers. The newcomer’s trick was cheap data. Before Jio, mobile data cost $4.50 per gigabyte, painful in a country with per capita annual income at the time of $5,760. Jio offered a gigabyte for just 15¢ and made voice calls free. This unleashed a price war that entrenched operators like Vodafone and Bharti Airtel were destined to lose.
Two years after offering free calls and inexpensive data, Jio unveiled a $20 Android handset called the Jio Phone, loading it up with Google-owned apps like YouTube, included free with mobile plans. With that one product, Indians began to consume as much data as all of the Americas combined. It was a boon not only for Indians but for global tech giants too. Facebook’s WhatsApp now operates in all 23 official Indian languages and has 400 million users, making India WhatsApp’s biggest market. And in a country with widespread illiteracy, Google’s YouTube acts as the default search engine for many. To other emerging countries with high-priced Internet, India now offers a prime example of the accelerator effect cheap data can have on businesses, education, and rural development. “Broadband connections have skyrocketed,” says Nikhil Pahwa, founder and editor of the Indian tech analysis site MediaNama. Ambani, he says, is “someone who dreams big.”
Ambani’s dreams are far bigger even than telecommunications. Jio has rapidly displaced its cell phone competition, but it still has little presence in huge swaths of the Internet, including mobile payments and e-commerce. Says Oommen: “What we’re seeing is only a small piece of the larger, bigger opportunity.”
To grab those opportunities, Jio needed global partners, which created a virtuous investment circle. The investors got a stake in a fast-growing company that generated cash on its core business. Reliance was able to wipe clean its balance sheet ahead of its stated timetable. And Jio gains the globe’s savviest tech players as allies. “Ambani made a huge bet on Jio,” says Egon Durban, co-CEO of technology investment firm Silver Lake, who led the firm’s Jio investment. Jio, he says, “is the world’s greatest private tech company hidden in plain sight.”
Driving away from the sprawling megalopolis of Mumbai, across the bridge spanning the Arabian Sea, you reach the quieter exurb of Navi Mumbai and eventually arrive at the leafy, cordoned-off, 550-acre campus that is headquarters to Reliance Industries. Set around the complex of office buildings, both old and new, are neat footpaths connecting tennis courts, soccer fields, and a cricket pitch, as well as basketball, volleyball, and badminton courts and a full-service gym. At the center of this idyll sits Jio, whose building has blue-tinted glass walls shielding the interior from the blistering sun, with soothing shadows across its sleek offices.
Nearby sits the Jio Experience center, a building spotlighted in soft pinks and purples that represents the company’s vision for its future. It imagines Jio not as a mobile phone carrier but a “digital lifestyle company,” as a staff member puts it, a business embedded in Indians’ daily habits. The whizbang toys on display include Jio TVs streaming, among other offerings, Bollywood hits and cricket matches—addictive Indian pastimes—via voice commands into a set-top box. “Our story has been about digital services as a platform from the beginning,” says Oommen, who was chief technology officer of U.S. mobile operator Sprint before returning home to join Reliance in 2011. “It has never been an afterthought.”
At the leafy, cordoned-off, 550-acre campus that is headquarters to Reliance Industries, the reflection of the “Jio” sign reads “oil” spelled backwards. The name was a fitting inside joke. Fossil fuels had made Ambani rich. Now he could future-proof his wealth by pegging it to data. Vivek Singh for Fortune
Perhaps not. But by earlier this year, Jio was still not offering its gargantuan number of mobile users an array of other paying services. And it trailed badly behind competitors in the “digital lifestyle” offerings it had envisioned. Amazon began spending billions in India in 2012. And even as Jio was giving away its handsets, Walmart muscled into India in 2018, buying control of the homegrown online-shopping company Flipkart for $16 billion.
To continue growing while beefing up its offerings, Jio began to look outward, which had the added benefit of cleaning up its balance sheet. The outsiders were eager for a way into the Indian market with a partner who knew how to operate there. Facebook’s investment in Jio was India’s single biggest foreign tech investment ever and Facebook’s biggest investment since buying WhatsApp in 2014 for $14 billion. One big draw was Jio’s ability to maneuver through India’s labyrinth of government regulations—something that has entangled Amazon. In January, one day before Bezos flew to New Delhi to invest $1 billion more into Amazon India, the government announced the company was under investigation, along with Walmart-controlled Flipkart, for antitrust violations. Jio, adept at working the halls of power in New Delhi, has faced few such problems. “They’ve shown evidence they can execute well on initiatives that solve for both scale and complexity, which is hard to do well in any country,” says Ajit Mohan, Facebook’s top executive in India.
Ambani and Zuckerberg cast their partnership almost as a patriotic act, saying it would be crucial to protecting the millions of small mom-and-shop shops, called “kirana stores,” that for decades have been the backbone of Indian commerce, and whose future has looked increasingly precarious as online shopping takes off. In a YouTube address from his mansion, Ambani said he and Zuckerberg shared the goal of “serving all Indians,” saying that WhatsApp had built an “intimate relationship with Indians,” and whose partnership aligned with Prime Minister Narendra Modi’s digital strategy for the country.
Under the deal, Jio’s e-commerce site, JioMart, which launched in June, will be linked to WhatsApp, which will include an online payment option for the first time. The idea is that the payments will be for orders from 40 million or so kirana stores, which would deliver a far wider range of goods by combining their catalogs and delivery. Amazon and Walmart constitute a mortal threat to these family-owned shops, putting Jio in the role of a nationalist savior. “The big traditional e-commerce players are eradicating them,” Oommen says. He sees the quintessential JioMart-WhatsApp customer as his mother, 84, who lives in India’s southern state of Kerala. “My mom is not the most proficient with online things,” he says. “But she knows the guy down the street who delivers most of her items.”
Facebook will also be able to use its Jio deal as a prototype for its global market. In the same way, Google first rolled out its online payment system in India, before expanding the app into the U.S. and elsewhere. Google says it is now working on a low-cost Android operating system for Jio phones, which positions it yet again to test prototypes in India for use elsewhere in the world. In statements after his April deal, Zuckerberg made it clear Facebook has similar designs.
Ambani made a huge bet on Jio. Now it is the world’s greatest private tech company hidden in plain sight. Egon Durban, co-CEO, Silver Lake
It is Jio’s prospect for huge revenue growth that has ignited the frenzied dealmaking, as investors, almost all American, raced to buy slivers of the company while they could. “Companies are coming to the realization that India is a unique market,” says Diego Piacentini, a former Amazon executive who oversaw the company’s multibillion-dollar move into India. Piacentini now is an adviser to KKR, though he wasn’t involved with the private equity firm’s Jio investment. For investors, he says, “the approach is, ‘better be sorry I made the wrong investment, than I missed a huge opportunity.’ ”
In fact, the potential to launch its e-commerce business with Facebook was, for Jio, a game changer. “Reliance may be able to disrupt India’s e-commerce space the way it did within the telecom sector,” Pranav Bhavsar, India consumer analyst for ASA Capital, told an Indian journalist. Western investors, he says, are “buying into the promise of changing India’s retail landscape.”
While Jio has proved adept at building a subscriber base, its success in offering new services is not entirely assured. Under the pandemic, Jio began testing its fiber services in 50,000 homes, for example. But on several fronts, the company is racing to catch up with the Western competition. Walmart and Amazon already each have many millions of customers in India. And Google, Jio’s newest investor, launched its online payment system in India in September 2017. “Google Pay has a significant head start over Facebook in terms of online payments,” MediaNama’s Pahwa says. “I doubt they will be able to compete.”
There are other issues, too, which could lead Zuckerberg to question his $5.7 billion investment at times. Not the least of those issues is the sheer complexity of operating in a country with multiple languages and religions, whose government regulations still heavily favor local businesses. When I ask Piacentini, the former Amazon executive, what challenges Western tech investors face in the country, he replies, “How many hours do you have?” He cites as one example trade regulations among India’s 28 states, which make online commerce convoluted. “In India you make investments for the long term. That means 30 years, not five years,” he says. “You need a lot of capital and great people. Execution is incredibly hard.”
Local Connection: Jio Platforms president Mathew Oommen was a senior executive with Kansas-based mobile carrier Sprint Communications. He returned to his native India to help Reliance, an oil refiner, jump into telecommunications. Vivek Singh for Fortune
For all that, there could be huge prospects ahead, which Reliance is already eyeing. Just as the WhatsApp payments system is likely to expand quickly to Facebook’s markets in the rest of the world, so too might Jio ultimately use its home country as a place to build a platform of services that it could then replicate in other countries. That would catapult Jio, and by extension, Reliance, into the ranks of global companies. Jio president Oommen says he believes even parts of the U.S. and Europe might be potential markets for Jio. “We will not rule out going global at the right time,” he says. Market watchers expect a Jio IPO in the not so distant future, although Oommen says the company has “not officially deliberated a timeline” for going public. But he says, “It is a possibility.”
In classic Jio style, those plans could unfold quickly and on a huge scale—potentially making Jio the world’s next big tech giant, and India’s first. In July, Ambani told shareholders Jio is set to roll out its own 5G technology next year in India, and also expand into big data, machine learning, blockchain, and health care platforms. All of them, he says, would be readily exportable to markets across the world. “Each of these solutions, once proven in India, has the potential to be a global solution,” Ambani said. His U.S. investors will be along for the ride.
Photo-Illustration by Fortune, original photos, Bezos: Andrej Sokolow—picture alliance via Getty Images; NAdella: Simon Dawson—Bloomberg via Getty Images; zuckerberg: Chesnot—Getty Images; mcmillon: Qilai Shen—Bloomberg via Getty Images; pichai: Geert Vanden Wijngaert—Bloomberg via Getty Images
Vying for the Indian market
Western players have now lined up either with or against Jio Platforms. The three big tech and software companies are partners; America’s two biggest retailers are foes.
Facebook
CEO Mark Zuckerberg led the Western parade of investments in Jio Platforms with a $5.7 billion stake in April. Facebook’s WhatsApp is huge in India and has a higher-income clientele than Jio’s users.
Google
Sundar Pichai, CEO of Google and its parent company, Alphabet, appeared by video at the Reliance annual meeting in July to unveil a $4.5 billion investment in Jio. Google has focused intently on India for its untapped market and sees Jio as a way to navigate treacherous governmental waters.
Microsoft
Jio has partnered with the software giant through the project that is CEO Satya Nadella’s crowning achievement, Microsoft’s cloud-computing Azure business. The two companies have formed a joint venture to sell cloud services in India.
Amazon
Jeff Bezos, the boss of Amazon, has invested billions to make India a winning market for the Seattle-based e-commerce giant. JioMart and its tie-up with WhatsApp constitute a threat to Amazon.
Walmart
CEO Doug McMillon bet big on India, buying a controlling stake in e-commerce champion Flipkart. Walmart has been stymied by regulations that favor local retailers.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “Can Jio be the next tech giant?”


fortune--2020-08-10--These 18 big companies made more than $250,000 in profit per employee last year

The world’s 500 biggest companies employ some 69.9 million people and together earned a total of $2.06 trillion last year. That translates to roughly $29,500 for each worker. But the 18 companies in the graphic above, concentrated in a handful of industries, proved vastly more efficient than average at making profits per employee. Fannie Mae and Freddie Mac, the U.S. government-sponsored mortgage lenders, earned a combined $21.4 billion with a total of just 14,300 workers. Meanwhile, Saudi Aramco, the profit leader in the Global 500 with $88 billion, has 79,000 employees. Bigger isn’t always more profitable, though. Gold jewelry retailer Rajesh Exports of India produced $170 million in profits with the smallest workforce in the 500: a mere 409 employees.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “Making the most of their workforce.”


fortune--2020-08-10--Why the China-U.S. rivalry is at a crucial turning point—and what it means for business

Rarely do relations between great powers degenerate as quickly as they did when the U.S. and China skirmished in late July. When the U.S. ordered China to close its consulate in Houston within 72 hours, it looked like punishment for alleged theft of COVID-19 research and other valuable information by Chinese hackers; the Justice Department had announced charges that same day. Or perhaps it was a further response to Beijing’s crackdown on Hong Kong, for which the U.S. had already revoked the city’s special status in trade relations.
But the State Department said the real reason was what it asserted were years of “massive illegal spying and influence operations.” So why close the consulate at that moment? Virtually all analysts say the timing reflects the presidential election, as President Trump and former Vice President Joe Biden vie to appear the tougher man on China. Certainly this was not routine diplomacy theater. It was unprecedented. In the 41 years of formal relations between the two countries, the U.S. had never ordered the closure of a Chinese diplomatic facility.
Both sides replaced boilerplate umbrage with vituperation. The U.S. “will not tolerate the PRC’s violations of our sovereignty and intimidation of our people,” declared a State Department spokeswoman. A Chinese foreign ministry spokesperson shot back that the shutdown was “an outrageous and unjustified move which will sabotage relations between the two countries.” A day later, Secretary of State Mike Pompeo said the U.S.-China relationship should be based on a principle of “distrust and verify” and dismissed “the old paradigm of blind engagement with China.” The day after that, China ordered the U.S. to close its consulate in Chengdu, a major business hub in southwest China, another unprecedented move.
And to think that just last December, when the U.S. and China signed a phase 1 deal to start unwinding the trade war, President Trump said the U.S.-China relationship “might be the best it’s been in a long, long time.”
The consulate confrontation marks a particularly clear and dramatic advance in a trend the whole world will feel: the intensifying competition between the world’s two largest economies. It adds heavily to a broader uncertainty, a combination of highly consequential unknowns that together will redirect our future. They’re distilled in two big questions, both of which arose in the late-July collapse of relations: Where will the U.S.-China rivalry take us? Which country will emerge from the COVID-19 pandemic with the least long-term economic and social damage? Both questions, moreover, are intertwined with a third: Which of two starkly different presidential candidates will America choose? Together, their answers will mark a turning point in the world’s progress.
New data, presented in Fortune’s 2020 Global 500 ranking of the world’s biggest corporations, reveals a landmark change in the U.S.-China rivalry. For the first time, there are more Global 500 companies based in mainland China, including Hong Kong, than in the U.S.—124 vs. 121. If you include Taiwan, the total for Greater China is 133.
The reversal of leadership reflects long-running trends. The number of U.S. companies in the ranking has been declining every year since 2002, when it was 197. The number of Chinese companies has been increasing every year since 2003, when mainland China placed 11 on the list.
Of the three questions in the triple turning point, the future of the U.S.-China relationship arguably holds the greatest world-historical significance. Harvard China expert Graham Allison frames the relationship as “an inherent, deep, structural rivalry,” a rising power threatening a solidly dominant power. The U.S.-China rivalry is dangerous, Allison tells Fortune, in large part because it’s deeply emotional, particularly for those Americans who feel that the nation’s rightful and only place is to be “No. 1” in the world order. Allison has famously called it “Thucydides’s trap” after the ancient Greek historian’s recounting of how Sparta’s response to the threat of Athens’s rise led to a 30-year war.
While the U.S. and China are a long way from that, the current situation is bad and deteriorating fast. “Every topic that matters is getting worse,” says Ian Bremmer, founder and president of the Eurasia Group consulting firm. “Huawei, Hong Kong, the South China Sea, Taiwan, the U.S. withdrawal from the WHO over China, you name it.”
Most experts agree that over the past year the relationship has fallen into a self-reinforcing downward spiral. “I’m sitting in Washington, and it feels as if we’re in the center of this hurricane and there’s only one direction we’re heading in,” says Scott Kennedy, an expert on Chinese business and economics at the Center for Strategic and International Studies. As Beijing aggressively pushes territorial claims on the Indian border, over Taiwanese airspace, and in the South China Sea—actions intended as messages to the U.S., diplomats say—the U.S. has pressured allies to ban telecom equipment from Huawei (No. 49 on the Global 500) and has even pondered banning U.S. travel by members of the Chinese Communist Party and their families, an estimated 270 million people, including the CEOs of nearly every important Chinese company.
The shift in the Global 500 is significant because this rivalry is founded on economic might. Analysts can quibble over which country’s economy is biggest. The U.S. remains well ahead when the comparison is based on currency exchange rates, with 2019 U.S. GDP of $21.4 trillion vs. China’s $14.3 trillion. But based on purchasing power parity, a measure that adjusts for the countries’ differing price levels, China is slightly ahead of the U.S.—$21.4 trillion vs. $20.5 trillion as of 2018, the most recent year for which the World Bank has data. The gap is probably wider now and continuing to widen. That’s the measure that counts, says Allison, because it shows “who can build the most drones” or fund the most research.
It also makes China the world’s largest market for increasing numbers of products and services. It “will be the first market where new products are launched,” says Kennedy, “so Chinese consumers will have a greater say in the direction of industries. The American market may not be large enough to be where products are scaled up.”
For that and other reasons, U.S. companies will be highly unlikely to leave China. A billion prospering consumers cannot be forsaken by any business that hopes to remain globally competitive. In addition, few companies will want to remove China from their supply chains entirely. While trade tensions and the pandemic have shown many companies worldwide that they were too reliant on Chinese suppliers, Chinese companies often have manufacturing expertise that can’t be found elsewhere. Besides, foreign companies that ditch China—in favor of India and Vietnam, for example—may find that China becomes less welcoming when those companies want to sell to the Chinese market.
China’s economic strengths are sobering, but to understand this rivalry fully, GDP alone is too gross a measure. The critical field of conflict is technology, the foundation of economic growth and national security. Since the founding of the People’s Republic, Chinese leaders, including the President, have declared a national policy to “catch up and surpass” the developed world’s technology. For China’s leaders, “technological progress is not only a means to economic and military prowess,” writes Harvard’s Julian Baird Gewirtz, “but also an ideological end in itself—offering final proof of China’s restoration as a great power after decades of struggle.”
And tech is where the two countries are most noticeably decoupling. Huawei is the world’s No. 1 maker of 5G networking equipment and, as of this year’s second quarter, the No. 1 maker of phones. But its products are virtually outlawed in the U.S., and its CFO has been under house arrest in Canada for 18 months on U.S. charges of bank fraud, wire fraud, and theft of trade secrets, charges she and the company vigorously deny. For its part, China has effectively banned some of America’s most ubiquitous tech giants, including Google and Facebook. “We’ve gone from a more integrated world to a Splinternet,” says Bremmer. “Tech is by far the crux of the competition right now, the most important piece and the most dangerous.”
The technology war is being fought on many fronts—A.I., 5G, voice recognition, facial recognition, fintech, and others. A.I. is the most important because it turbocharges all the rest. A recent article coauthored by Allison and an anonymous U.S. tech industry leader argues that China is far more advanced in A.I. than the U.S. national security community realizes—noting the advantages China gains by having a population four times the size of the U.S. “In A.I., brainpower matters more than computing power,” they write, and China graduates 1.3 million STEM students annually vs. America’s 300,000, and 185,000 computer scientists vs. America’s 65,000. Even in the U.S., of every 10 computer science Ph.D.s graduating, three are American and two are Chinese; most Chinese postdocs will eventually return home.
But if China seems like an economic and technological steamroller about to squash the U.S., it isn’t. A closer look shows that despite China’s strengths, this rivalry’s future remains highly uncertain.
Start with those 124 mainland Chinese companies in the Global 500. Though they outnumber U.S. companies, they’re smaller, accounting for only 25% of total Global 500 revenue vs. America’s 30%. A large majority of the Chinese companies—68%—are state-owned enterprises; they didn’t get big by winning in the rough-and-tumble competition of open markets. While the list includes Chinese tech behemoths that compete internationally—Alibaba Group, Huawei, Lenovo—it also includes many purely domestic businesses; several are coal miners or electric utilities.
The nature of these companies makes a big difference to their power in the strategic rivalry. The key question is this: How have they grown so large? “Was it by innovation, smart managerial practices, and good corporate governance,” asks Kennedy, “or have they gotten there through the power of the Chinese mercantilism and largesse from Chinese state-owned banks?”
Even China’s eventual accession to the title of World’s Largest Economy may not be as inevitable, or at least not as imminent, as many people believe. If both countries were to continue to grow their GDP (calculated at market exchange rates) at their 2019 nominal rates, China wouldn’t pull even with the U.S. until about 2050, writes Ruchir Sharma, Morgan Stanley Investment Management’s chief global strategist, in a recent Foreign Affairs article. If China’s growth slowed by just one percentage point, it wouldn’t catch up until 2090, meaning “few Americans alive today are likely to be around to see the United States fall to second place.”
The most probable future is what some analysts are calling Cold War II. It won’t be like the first cold war; the USSR was a much weaker economy than the U.S. and scarcely traded outside Eastern Europe. But it’s a conflict, already underway, in which the adversaries field every weapon but bombs and bullets while also interacting civilly on some issues of mutually beneficial trade. “In commodities such as liquefied natural gas and agriculture,” says Bremmer, “the U.S. and China will be doing business with each other.” Just as they did last year, when the U.S. exported $13.8 billion of agricultural products and $3.1 billion of oil and gas to China.
A new look at the top
For the first 29 years that Fortune compiled our Global 500 ranking of the world’s biggest companies, the U.S. never failed to finish No. 1. Well, the winning streak is finally over. This year’s list features 124 companies based in mainland China, including Hong Kong. Add in Taiwan, and there are 133 in Greater China. The U.S. falls to No. 2, with 121.
Infographic by Nicolas Rapp
The next front in the standoff may be the phase 1 trade deal. “Can it hold until the election?” Bremmer asks. “Trump will be blaming China an awful lot. It may be tempting to break the deal,” even though consumers, the finance industry, the agriculture industry, and others would suffer.
Which raises another of the great questions, the identity of the next President. Policy analysts agree that under a President Biden, the tone of the U.S.-China relationship would change. If he were able to lower the temperature, both sides could gain room to negotiate. He would also be more likely than Trump to enlist European and Asian allies, say Eurasia Group analysts, to present a united front in negotiations with China. At the same time, the U.S. policy stance would likely remain confrontational. Politically, says Bremmer, “the only policy issue on which there’s broad bipartisan agreement is that there should be a tougher line on China.”
At this triple turning point, we’re left without answers—only with the certainty of a less stable world. Relations between the two great powers are fraying, leading who knows where. But the scenarios aren’t all bad. Maybe China and the U.S., rationally pursuing self-interest, will manage their relationship as corporate-style competition. Multiple effective vaccines—from the U.S., China, and elsewhere—could vanquish COVID-19 in less than a year. In that scenario, economies would revive, people could hug each other again, and global anxiety would unclench at least a bit.
In an unstable world, even the extreme scenarios—good and bad—seem plausible. Planning is harder; bets are riskier. In all of our lives, there’s less room for error.
A version of this article appears in the August/September 2020 issue of Fortune with the headline “And then there were two.”


fortune--2020-08-10--Hong Kong police arrest pro-democracy media tycoon Jimmy Lai and raid newspaper offices

Hong Kong police arrested media tycoon Jimmy Lai and raided the offices of his flagship newspaper, the most high-profile case yet against democracy activists in the city under a national security law that has fueled U.S.-China tensions.
Lai was shown handcuffed as he was taken away by officers from his home on Monday morning, according to a live feed broadcast by his media network Next Digital Ltd. When a reporter asked Lai for his views on the arrest, he answered: “What views do I have? They want to arrest me.”
Police said that seven people ages 39 to 72 had been arrested on suspicion of “breaches” of the security legislation, with offenses including collusion with a foreign country or external elements to endanger national security. An investigation is underway, it said. While the force didn’t name any of the people arrested, Lai is 72 years old.
Lai’s arrest was reported by Apple Daily, the flagship newspaper under Next Digital. Others taken in included Lai’s two sons and other top members of Next Digital, Oriental Daily reported, citing unidentified people.
Apple Daily reported mid-morning that nearly 200 officers were entering their offices. The Hong Kong police said on Facebook that they had obtained a court-issued search warrant to enter a building in the Tseung Kwan O neighborhood — where Next Digital’s offices are located — to investigate crimes endangering national security. They did not mention Apple Daily in the post.
“Because this is a media company, we are aware that there may be journalistic material involved,” Li Kwai-wah, senior superintendent of the police force’s national security department said at briefing outside the office building. “So my officers and I conducted a preliminary investigation to find out which premises we may not search — for example, the assignment and reporting desks. If there is a possibility that there would be news materials there, we will not conduct a search.”
Lai was shown being walked around the Apple Daily office in the Next Digital live feed, and said police had showed him the warrant.
Shares in Next Digital fell as much as 16.7% to the lowest level on record Monday morning following reports of the arrests.
China has called the sweeping security legislation, which bars subversion, secession, terrorism and collusion with foreign forces, a “sword of Damocles” hanging over the heads of its most outspoken critics. It has prompted fears among activists and foreign governments that it will be used to silence basic freedoms in the city.
“With the passage of the national security law, Beijing has launched a full-blown rectification of Hong Kong,” said Carl Minzner, a law professor at Fordham Law School and author of “End of an Era: How China’s Authoritarian Revival is Undermining Its Rise.” “The ultimate goal is the ‘mainland-ization‘ of Hong Kong — welding it more tightly to China and neutering all political and social elements that Party authorities view as problematic.”
The U.S. has led foreign governments in expressing concern over the security law, saying Hong Kong could no longer be considered sufficiently autonomous from the mainland. It has revoked some special trading privileges, which help underpin the city’s reputation as an international business hub, and sanctioned Hong Kong Chief Executive Carrie Lam and other officials.
‘Gravely Concerned’
The Trump administration also reacted strongly after Hong Kong barred a dozen pro-democracy lawmakers from campaigning for office and then delayed by one year legislative elections scheduled for September. The Standing Committee of the National People’s Congress, China’s top legislative body, is meeting in Beijing and is expected to discuss issues arising from postponement of Hong Kong’s election this week.
It wasn’t clear whether four sitting lawmakers who were disqualified from campaigning for the election would be allowed to remain for the legislature’s extended term. The South China Morning Post reported Monday, citing sources, that they would be allowed to stay after Lam told the central government that they should extend the terms of all legislators.
In a joint statement over the weekend by the countries making up the so-called Five Eyes intelligence-sharing alliance, U.S. Secretary of State Michael Pompeo and the foreign ministers of the U.K., Canada, Australia and New Zealand said they were “gravely concerned” by the disqualifications and election postponement.
“These moves have undermined the democratic process that has been fundamental to Hong Kong’s stability and prosperity,” the statement said. “We express deep concern at Beijing’s imposition of the new National Security Law, which is eroding the Hong Kong people’s fundamental rights and liberties.”
‘What Can I Do?’
“We are a beacon for the idea of freedom and democracy,” Lai previously told Bloomberg Businessweek.
In an interview with the Canadian Broadcasting Corporation last week, Lai criticized the rushed implementation of the national security law and called it a “blunder” for the Chinese Communist Party, which he said was already struggling with China’s slowing economy.
“I’m followed, just this morning my driver told me that, you know, look at that young kid on the left side, he’s there every day, trying to see what time I leave home,” Lai said. “I can’t be scared. If I’m scared, what can I do? I cannot say anything, I cannot do anything. The most skillful thing that the CCP can do is to induce fear in you, to subdue you.”
Asked if his comments were a violation of the security law and risked him being arrested and brought to the mainland, Lai answered: “Yes.” But he said he wasn’t scared. “What can I do? Just keep quiet?”
Lai’s media group and Apple Daily backed the protests for meaningful elections that rocked the city last year, but it’s been years since he was seen as playing a central role in Hong Kong’s democracy movement.
He was arrested in February on suspicion of participating in an unlawful assembly in 2019 and intimidating a reporter two years before that, and granted police bail. In June, he was summoned to a Hong Kong court for helping incite a June 4 vigil marking the anniversary of the Tiananmen Square massacre.
Joshua Wong, one of the city’s most prominent activists, tweeted that he strongly condemned Lai’s arrest.
Hong Kong made its first arrests under the law — of a handful of protesters — the day after it was handed down. Lam has defended the national security law and called it the “most important” development in relations between Hong Kong and Beijing since the city’s handover to Chinese rule in 1997.


fortune--2020-08-10--Bill Gates critiques U.S. COVID testing: ‘The most worthless results of any country in the world’

Microsoft Corp. founder and billionaire philanthropist Bill Gates said it’s “mind-blowing” that the U.S. government hasn’t improved COVID-19 testing that he described as slow and lacking fair access.
“You’re paying billions of dollars in this very inequitable way to get the most worthless test results of any country in the world,” Gates said on CNN’s “Fareed Zakaria GPS” on Sunday. “No other country has this testing insanity.”
“A variety of early missteps by the U.S. and then the political atmosphere meant that we didn’t get our testing going,” he said.
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Gates cited long lines at commercial labs and delays in obtaining test results, meaning that “you pay as much for the late result as the timely result.” Meanwhile, “very wealthy people have access to these quick-turnaround tests,” he said.
“It’s mind-blowing that you can’t get the government to improve the testing because they just want to say how great it is,” Gates said.
Public officials have regularly cited delays in testing results in the U.S. as an impediment to quick contact tracking and isolation of people infected with the virus.
President Donald Trump has defended the U.S. record on testing as “the best ever, the best in the world,” telling Fox News last week that half of the country’s testing is “short-term.”
Gates reiterated that he expects the U.S. to largely get through the pandemic by the end of next year as therapeutics and a vaccine become available.
In a Bloomberg interview last week Gates said he’s funded vaccine development efforts by AstraZeneca Plc, Johnson & Johnson and Novavax Inc.
The Bill & Melinda Gates Foundation has pledged more than $350 million toward COVID-19 research. Much of that has gone toward funding research and manufacturing capacity that will help a vaccine be distributed globally.


fortune--2020-08-10--Masks, small classes, and outdoor lessons: How 5 countries in Europe are reopening schools

When does the extra $ 400 unemployment benefit start ?
Everything to know about Trump ’ s executive order

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Decisions about whether to reopen schools during the coronavirus pandemic are naturally fraught, given the many potentially conflicting needs that are involved: the health of pupils and teachers; the need for education and socialization; and economic and mental-health imperatives for parents to be able to work without simultaneously caring for their kids.
In some countries, such as the U.S., the calculus is complicated by the fact that COVID-19 transmission remains widespread in communities. In Europe, where infection rates are now far lower—though not yet entirely under control—the flattened curve has allowed schools to reopen more freely over the past few months.
Here’s how that’s gone in five European countries–and you will notice the same themes recurring everywhere, to varying degrees.
Germany
Some German schools partially reopened in the spring, but it is only now, after the summer break, that schools are fully reopening across the country.
Under Germany’s federal system, each state has its own timing for the summer break, and the northeastern state of Mecklenburg-Western Pomerania—which has had Germany’s lowest infection rates—last week became the first to fully reopen its schools. Berlin, Brandenburg, Schleswig-Holstein, and North Rhine-Westphalia are following suit this week.
Mecklenburg-Western Pomerania’s early experience was not particularly heartening. By the end of that first week back, two schools had to be closed due to infections—a teacher in one school, a pupil in the other.
There’s a big debate around whether kids should have to wear masks at school. In Schleswig-Holstein, doing so is not compulsory. In Berlin and Brandenburg it is, though only in corridors, canteens, and stairwells. In North Rhine-Westphalia, masks will be compulsory in the classroom, too—but only until the end of August. Germany’s federal education minister, Anja Karliczek, would simply prefer everyone to wear masks in school buildings.
Sweden
Schools never closed in Sweden, nor did they substantially change their rules. This created an opportunity to collect data on how COVID-19 might spread in schools under such circumstances—but such data was never collected.
Anders Tegnell, Sweden’s top virologist, maintains that the decision to keep Swedish schools and day-care centers open did not have much bearing on infection rates. He has also warned that opening schools only to close them again, due to resurgences in infections, would be “disastrous” for trust in public authorities.
U.K.
Scottish schools are set to reopen Tuesday, with the authorities noting that just 0.8% of Scottish cases have involved people under the age of 15. Schools are encouraged to ventilate rooms as much as possible, and to quarantine returned library books for three days. Social distancing is not required for kids in primary schools, but older children might be discouraged from physical contact.
Many Welsh schools reopened at the end of June, making classes smaller and staggering them so only a third (at most) of pupils are present at any one time. All schools are supposed to open fully in early or mid-September. However, Welsh First Minister Mark Drakeford has warned that local flare-ups could lead to school closures.
As for England and Northern Ireland, Prime Minister Boris Johnson wants schools fully open in September. In June, his government began a phased reopening of schools but had to change its mind due to staff shortages and the spatial implications of trying to organize smaller classes.
A study published last week in The Lancet predicted that the reopening of schools in September would have to be accompanied by widespread coronavirus testing, quarantine, and contact-tracing measures—otherwise a second wave would probably appear, peaking in December.
Italy
Italy was unusual in keeping all schools closed after its initial lockdown ended, though it was of course hit very badly by the pandemic early on. Now, it plans to reopen schools on Sept. 14.
Classes will need to be smaller to allow for social distancing—50,000 temporary teaching staff are supposedly going to be brought onboard to make this possible, with federal funding, and some school districts are literally sawing desks apart so children won’t need to be too close to one another.
Students and teachers will have to wear masks (and the latter will need to wear face shields, too). There will also be a big push to hold lessons outdoors where possible, or take classes to theaters and museums.
France
France started reopening schools in May, on a voluntary basis. Dozens of potentially school-linked infections quickly appeared, leading to many urgent school closures, but the government said the length of incubation made it likely that the infections took place before the schools opened their doors.
Following weeks of gradual reopening, the return to French schools began in earnest in late June, after President Emmanuel Macron said it was “obligatory.” There were no social distancing rules for kindergarten children, a one-meter rule for primary schools, and a mask mandate for older children in cases where social distancing was not possible.
However, this compulsory schooling lasted only a couple of weeks, as France’s two-month school summer holidays kicked in at the start of July. That means September will be the time to assess how things are going.


fortune--2020-08-10--When does the extra $400 unemployment benefit start? Everything to know about Trump’s executive orde

When does the extra $400 unemployment benefit start? Everything to know about Trump’s executive order

Bill Gates critiques U.S. COVID testing : ‘ The most worthless results of any country in the world ’

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Update: Treasury Secretary Steven Mnuchin said on Tuesday states should send out enhanced unemployment checks within the next week or two.
More than 30 million Americans were receiving the weekly $600 enhanced unemployment benefits before it expired the week ending July 25.
On Saturday President Donald Trump signed a memorandum that would grant $400 enhanced weekly unemployment benefits to those out-of-work Americans if their state picked up $100 of the tab.
That order by Trump announcement came after Democratic and Republican leaders were unsuccessful Friday in their negotiations for a broad stimulus bill, which would have included an extension or replacement for the $600 weekly enhanced unemployment benefit.
The memorandum raises a lot of questions for jobless Americans. Here are some of the most pressing.
How much will the enhanced unemployment benefits pay out per week?
The memorandum signed by Trump authorizes governors to use federal funds to make a $300 payment to eligible claimants for the week ending August 1. This would go to jobless Americans on state unemployment rolls, or who are eligible for Pandemic Emergency Unemployment Compensation or Pandemic Unemployment Assistance through the CARES Act—which includes jobless part-time workers and 1099 contractors.
Originally it appeared that states must pony up $100 per week for the federal match for the $300 weekly payment to be sent. However, on Monday, Republican Gov. Mike DeWine said Ohio, the country’s seventh-largest state, would accept the federal government’s $300 per week enhanced unemployment benefits but would not throw in an additional $100 to jobless Ohioans. According to the Columbus Dispatch, Ohio can do this by counting $100 from its current unemployment payments. That means jobless Ohioans will get an enhanced payment of $300, not $400.
On Sunday, the U.S. Department of Labor let states know they could use this workaround, of counting existing payments toward the $100, and still get the $300 weekly federal funds. Given the financial constraints and budget shortfalls states are facing, it’s likely many will follow Ohio’s lead and not pony up the additional $100.
How long will the enhanced unemployment payout for?
The $44 billion allocated by Trump for the enhanced unemployment benefit is estimated to fund the weekly benefit for five weeks, or through August 29, according to a report by the nonpartisan Committee for a Responsible Federal Budget.
Who gets the enhanced unemployment benefit?
Unlike the $600 enhanced unemployment benefit, this new benefit will go only to Americans who are currently receiving $100 or more per week in state unemployment benefits. The enhanced benefit gets paid on top of state benefits.
Do I get nothing if my state doesn’t opt in?
Jobless Americans in states that either do not throw in an additional $100 in funding—or count $100 of current benefits toward it like in Ohio—will not receive the $300 in enhanced unemployment benefits.
Where does the federal money come from?
President Donald Trump’s memorandum would pull $44 billion in federal funds from the Federal Emergency Management Agency (FEMA) to pay for the federal portion of the $400 weekly benefit.
Is Trump’s enhanced unemployment benefit memorandum legal?
Trump is allocating the enhanced pandemic unemployment benefit by tapping FEMA dollars. However, as my Fortune colleague Jeff Roberts reported Monday, current law prevents Americans already on state unemployment benefits from receiving unemployment benefits in this manner. And more than 16 million of the 30 million Americans who were receiving the $600 enhanced unemployment benefit before it expired in July were also on their state unemployment rolls.
That points to looming legal challenges.
Could Congress still reach a deal on a stimulus package?
President Trump’s memorandum came after unfruitful negotiations between Democratic and Republican leaders on Friday for a broad stimulus bill, which would have included a second round of stimulus checks and enhanced unemployment benefits to help Americans cope with the pandemic.
At first it looked like Trump signing the memorandum would pour cold water on negotiations. However, on Monday, Treasury Secretary Steven Mnuchin appeared on CNBC and told viewers that the White House is still open to a stimulus bill that includes stimulus checks, another round of forgivable PPP loans, and money for schools and hospitals.
“We’re prepared to put more money on the table,” Mnuchin said Monday on CNBC. “Again, if we can get a fair deal we’re willing to do it this week.”


fortune--2020-08-10--People are paying hundreds for Fyre Festival merch

The sad, sordid tale of the Fyre Festival—an ill-fated music festival that scammed hundreds and saw its promoter go to prison—has taken a strange final twist: Collectors are bidding hundreds of dollars to own a piece of merchandise from the festival.
You can see some of the items below. These are just a few of the 126 pieces of merchandise up for sale by a Texas auction house that is selling off the swag on behalf of the U.S. Marshals:
Other items for sale include a wrist band that reads “A Conspiracy to Change the Entertainment Industry” and pairs of bright yellow sweat pants “with the hand sewn label ‘F’.”
As of Monday afternoon, most items had attracted dozens of bids with a single Fyre Festival hat attracting a $505 offering. The auction is slated to end on Thursday though the site says the timelines may be extended if there is a flurry of last minute bids.
The U.S. Marshals are responsible for liquidating items of all sorts—including Bitcoin—seized from various federal law enforcement agencies.
According to the Marshals’ website, the merchandise up for auction was seized from Fyre Festival founder Billy McFarland. The agency alleges McFarland had intended to sell the items at the festival but ended up keeping them in order to commit other unspecified criminal acts.
The festival in question was slated to take place in the Bahamas in 2017 and feature a series of A-list music acts like Blink-182, all while offering attendees luxury food and villas. The event, however, became a full-blown debacle—chronicled in two separate documentaries—as the bands pulled out and the festival-goers huddled in conditions resembling a refugee camp.
According to the U.S. Marshals, proceeds from the auction will go to victims of the Fyre Festival, who include investors and vendors who McFarland reportedly bilked out of $26 million.
McFarland is currently in federal prison with a slated release date in 2023.
More must-read finance coverage from Fortune:


fortune--2020-08-10--Uber, Lyft must convert drivers into employees, judge rules

Uber and Lyft were ordered to convert their California drivers from independent contractors to employees with benefits, an early loss in a court battle the gig economy can’t afford to lose.
The judge’s ruling Monday won’t be the last word, as the ride-hailing companies are expected to appeal the far-reaching preliminary injunction that could make them halt their services as they figure out how to adjust their business model to comply with it.
The case brought by California officials to enforce a state labor law that took effect this year is the most serious legal threat yet to the gig economy — and comes as many companies that rely on contractors for on-demand services are already reeling from the pandemic. The news erased some of Lyft’s stock gains Monday, and Uber shares were little changed.
San Francisco Superior Court Judge Ethan Schulman agreed to pause the injunction for 10 days so the companies can appeal his decision.
Schulman agreed with California Attorney General Xavier Becerra that Uber and Lyft are violating Assembly Bill 5, which says workers can generally only be considered contractors if they perform duties outside the usual course of a company’s business. If the companies are forced to reclassify their California drivers as employees, they would be on the hook for overtime, health care and other costly benefits.
Lyft’s lawyer argued at an Aug. 6 hearing that the injunction sought by Becerra would wreak havoc on the companies’ services and cause “massive harm” to drivers and riders.
The city of San Francisco, where both ride-hailing companies are based, joined Becerra’s suit and argued drivers have suffered for years as Uber and Lyft had have grown into giants by violating state labor law.


fortune--2020-08-10--Why teaming up with Amazon makes sense for top U.S. mall owner Simon

In a pragmatic acknowledgement that the fundamentals of its mall operating business are undergoing a permanent shift, Simon Property Group is reportedly negotiating with Amazon to offer up vacant department stores as fulfillment centers.
The Wall Street Journal on Sunday reported that Simon, the top U.S. mall developer and owner of many of the country’s best malls, is looking into the prospect of turning some of those stores into Amazon distribution hubs, which would aid the Internet retail giant’s shipping speed and shorten the so-called last mile in e-commerce delivery.
Amazon has about 100 fulfillment centers in the U.S. but is looking to speed up delivery with facilities closer to customers in an effort to better counter rivals like Walmart and Target, which can use 4,400 and 1,800 stores respectively to assist their e-commerce.
The companies declined to comment. But the stock market liked the prospect for Simon, sending its shares up 7% on Monday morning.
E-commerce companies have typically located fulfillment centers far from large areas to enjoy lower rent, labor, and operating costs. But with the flood of mall-based retail bankruptcies this year— J.C. Penney, Neiman Marcus, J.Crew, Ann Taylor parent Ascena Retail—on top of Sears in 2018, and big tenants like Macy’s and Nordstrom also closing stores, mall operators like Simon have little choice but to rethink their business model.
Adding to the pain, many tenants did not pay their rent during the spring’s COVID-19-related lockdowns: Gap Inc., which generates 3.5% of Simon’s rental income and is being sued by its landlord, was one such retailer.
The old model would see a department store “anchor” a mall and attract shoppers to the property in a way that would benefit all tenants, and be rewarded with very cheap rent. That drawing power has waned in the past two years. And according to estimates published by the WSJ, Amazon pays about $10 per square foot at its distribution centers, suggesting Simon would get more than what a department store can offer.
Another source of strain for Simon and its rivals: Rents across the mall are falling. According to real estate research firm Costar, mall rents will fall about 4.3% this year, after rising more than 10% in the preceding four years.
Simon, just like other mall operators, has been trying to reinvent its tenancy mix for years, adding more restaurants, movie theaters, and other entertainment options to become less reliant on department stores and apparel stores. (That effort has been slow going. This spring, Costar found that 14 of the 20 largest mall tenants across the industry remain either apparel retailers or department store chains.)
Of course, amid the COVID-19 outbreak, turning to theaters or eateries is not going to save malls. Enter Amazon, even if that means Simon would be handing over prime real estate. (Simon sold off its weaker malls years ago, leaving it with a relatively strong portfolio that includes top centers like Roosevelt Field, Long Island.)
While exploratory for now, Simon’s tie-up with Amazon would likely irk many of its tenants, bringing the proverbial fox into the henhouse, not to mention the fact that an Amazon fulfillment center would not increase shopper visits to malls that desperately need them. And that could hurt Simon’s malls longer term.
“While it pays the rent, this is a white flag moment. Tenants surrounding the locations are going to want huge rent reductions or walk away,” Stacey Widlitz, president of SW Retail Advisors, tells Fortune. Typically, lease clauses allow a mall tenant to break a lease if the store is no longer within a certain distance of anchor stores.
Simon will report its most recent quarterly results on Monday afternoon and is expected to post its smallest quarterly profit in nearly six years, hurt by the extended store closures in April as well as tenants withholding rent. Simon is reportedly in talks to buy Penney out of bankruptcy with another mall developer, Brookfield Property Partners.