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The worlds greatest bazaar

Alibaba, a trailblazing Chinese internet giant, will soon go public

IN 1999 Trudy Dai used to spend all night sending e-mails from her friend Jack Mas apartment, trying to answer queries from American customers without letting on that she was Chinese. Ms Dai was one of the first dozen employees of Alibaba, an online listings service Mr Ma, a teacher, had just started. It was already having some success connecting small Chinese manufacturers to potential customers, including the overseas ones Ms Dai was reassuring over e-mail. But the friends and students who made up the workforce were earning just 550 yuan (then $66) a month. Mr Ma, though, already had big dreams. That year he said: Americans are strong at hardware and systems, but on information and software, all of our brains are just as goodYahoos stock will fall and eBays stock will rise. And maybe after eBays stock rises, Alibabas stock will rise. Since then, Alibaba has come to dominate internet retailing in China, which will soon be the biggest e-commerce market in the world. It has moved beyond its original remit of connecting businesses to each other to ventures that let companies sell directly to the public (Tmall) and enable members of the public to sell to each other (Taobao). Between them, Taobao and Tmall processed 1.1 trillion yuan ($170 billion) in transactions last year, more goods than passed through Amazon and eBay combined (see table 1). The company that started in Mr Mas apartment now employs 24,000 workers at its headquarters in Hangzhou and elsewhere; Ms Dai is president of human resources. A few years ago Alibaba began to turn a profit; in the year to September 2012 it made $485m on revenues of $4.1 billion (see chart 2). Following a recent reorganisation it has 25 separate business units, and on May 10th it will have a new chief executive, Jonathan Lu; Mr Ma will stay on as executive chairman. The rules of the market In one respect things are as they were in 1999: Alibaba is privately owned. But this will not remain the case for long. The reorganisation into 25 business units is widely seen as preparation for an initial public offering (IPO) that would take most of them public. A deal with Yahoo, which once owned 40% of Alibaba, means that the IPO, if done soon, would

allow Alibaba to buy back its shares and end the often stormy relationship. Asked about the IPO, Mr Ma says We are ready. Analysts predict that the IPO will value the company somewhere between $55 billion and more than $120 billion. Tencent, a Chinese gaming and social-media firm now getting into e-commerce, has a market capitalisation of $62 billion, just shy of Facebooks current valuation. Mark Natkin of Marbridge, a Beijing-based technology consultancy, thinks Alibaba could easily be worth more than Tencent, given that there is so much room to grow its businesses in China. The top-end estimates would imply a remarkably high ratio of value to profits. But such a ratio might make sense to investors if they think that the company is investing in yet more growth to come. Amazon, in some ways a similar company, supports a market value of $117 billion with no profits to speak of. And Alibaba will provide an attractive platform for investors trying to profit from Chinas booming internet economy. There will be some caution. Part of Alibaba floated on the Hong Kong exchange in 2007, but the shares ended up being bought back by the company after losing much of their value. The experience with Facebooks IPO suggests a certain wariness about internet stocks is wise. But many think it will be different with Alibaba this time. This will be bigger than Facebook, predicts Bill Bishop, a Beijing-based technology expert. Mr Ma seems to agree. Though he will say only that the IPO will be very very big, asked about Facebook he cannot help but smile and say Our revenues and profits speak for themselves. (In the last quarter of 2012 Facebooks revenues were $1.6 billion.) Gordon Orr, a senior partner at McKinsey, thinks a healthy IPO valuation could be just the beginning. He says that if Alibaba can sustain its leadership in its current market and expand strongly into finance, the management of the supply chain and other services, it could become one of the worlds most valuable companies five years from now, with potentially more than $1 trillion of sales passing through its platforms each year. Those are sales through Alibaba, not by Alibaba. In America 76% of online retailing involves people buying from individual merchants, according to a new report by the McKinsey Global Institute (MGI), a think-tank. In China, in 2011, that figure was 10%. The other 90% was sold through marketplaces that simply allow buyers and sellers to find each other. Alibaba has grown so big because early on Mr Ma had two insights into what could make such marketplaces work. The first was that many Chinese are tight-fisted. So Alibaba made all the basic services it offers free to both buyers and sellers. It earns money through online advertisements and extra services it offers clients, such as website design. With 6m vendors Taobao is a

cluttered-up cyberspace. Many sellers think it worthwhile to pay for fancy storefronts and online advertisements to help them stand out. The second is that many Chinese are reluctant to trust strangers. So Alibaba has provided tools to build trust. One is an independent verification service through which third parties vet the claims made by sellers; the sellers pay for the process. Another is the Alipay payments system. Unlike PayPal, used by many Western internet companies, Alipay takes money up front and puts it in an escrow account. Vendors can be sure that payments made through it will be honoured. Alipaya source of much bad blood with Yahoo, which felt Mr Ma seized control of it illegitimately, something Alibaba strongly denieshas roughly half of Chinas online-payments market. The vast majority of Alipay transactions are for deals made through Alibaba, but the firm says that use elsewhere is growing fast. Alibaba also now has the advantages that come with dominating its domain. In the West, shoppers often search for items on Google, and then follow a link, possibly one in an ad, to a retailers website or to Amazon; the ads are what make Google its money. In China Taobaos scale means it can afford to block the spiders that search engines like Google, or its local equivalent, Baidu, use to find out what is on a site. It can do this because shoppers more or less have to come to it anyway. This makes adverts on Taobao more valuable; it gets a fair whack of the revenue that would otherwise go to the search engines. This is just one way that the marketplace model works better the bigger a firm gets. The more buyers come, the more sellers need to; the more sellers come, the more buyers want to. As a result, domestic and foreign rivals are having a hard time. This goes for purely online firms like DangDang (which resembles Amazon) and 360buy (in which Prince Alwaleed bin Talal of Saudi Arabia recently invested) and for high-street retailers fighting defensive battles online like Suning and Gome, two appliance giants. The founders of 7gege.com (translated as seven princesses), a womens fashion firm , tried the bricks-and-mortar route but flopped. They turned to Alibabas web portals and found eventual success. The firm now spends up to 100,000 yuan a day on banner ads with Alibaba, as well as money on search optimisation and special promotion days; last year, its online shops on Alibaba earned over 350m yuan. A torrent of customers International brands like Adidas and Samsung are still pouring money into Tmall. Some use Tmall as the exclusive channel for online purchases in China; others are experimenting with having both their own site and a Tmall storefront. Gnther Hake of

Disney says his firm has had good experiences advertising and selling on Tmall. With a new Shanghai theme park opening in two years, he expects to sell ten times more merchandise in greater China. Tmall will see a lot of that action. But Alibaba will not necessarily get things all its own way. Tencent has set up a standalone e-commerce division; it runs Paipai, a Taobao competitor, and recently bought 51buy.com, which competes with Tmall. Tencent is a potent rival, says Marbridges Mr Natkin, because other businesses such as gaming give it a lot of cash. Alibaba will probably need to invest heavily to maintain its lead. That helps explain the $8 billion in loans and other outside financing the company is pursuing. Most of the money will go to refinance older loans at better rates, says Joseph Tsai, the groups chief financial officer. But some $3 billion might be used for acquisitions.

What of the companys prospects? To some extent they are good simply because of where it is. Chinas e-commerce market has grown by 120% a year since 2003, says MGI. This year it is set to surpass Americas, with a total value of $283 billion7% of retail salesaccording to Morgan Stanley (see chart 3). The number of Chinese online shoppers has surged to 250m, more than doubling in three years. And there is a lot of room for growth. Online penetration in China was 43% in 2012, well below the 70% or higher seen in developed economies. And fewer Chinese internet users shop online than in other markets. With more non-shoppers starting to shop and the rest of Chinas population getting online, MGI predicts the market will be between $420 billion and $650 billion in 2020. Mr Ma says that the rudimentary nature of much Chinese offline retailing will allow ecommerce to grow faster and further in China than in the developed world; in rich countries, he says, e-commerce is just the dessert. In China its the main course. This may be particularly true in smaller cities where consumer spending power is outgrowing the shops available.

The changing nature of Chinas growth offers new possibilities to the company. Peter Williamson of Cambridge Universitys Judge Business School argues that a big reason Alibabas original business-to-business platform thrived is that by helping buyers and sellers overcome a lack of information and high search costs it was perfectly placed to help and profit from the first wave of Chinas integration into the global economy. Now Alibaba is well positioned for the next wave. The rise of Chinese consumers, Chinese tourists, Chinese companies going global and so on [will offer] lots of new opportunities, he says. But the company plans to do more than simply ride the waves of Chinas growth. One of its strategies will be to use the data it gets from e-commerce to expand into new areas. We have the best data mindset in the world, boasts Wang Jian, Alibabas chi ef technology officer. Zeng Ming, the companys chief strategy officer, points to finance as a way its data can give the company an edge in new markets. For three years Alibaba has been making small loans (average size $8,000) to merchants trading on its platforms, using the data it holds on them to guide its decisions. Mr Tsai says its loan book was $600m in 2012, and that by the end of this year it should top $2 billion; the non-performing-loan ratio is below 2%. The people we are focusing on are completely below the radar screen for the big banks, he points out. The company turns the loans into products that can be sold to investors. The firm is expanding into loans to individuals, and into insurance, where it has announced a joint venture with Tencent and Ping An, a Chinese insurer. The financial division is likely to be spun out soon, and run at arms length rather as Alipay is today. Regulators would probably not allow foreigners to hold a big stake in a financial firm and any Alibaba IPO would bring in lots of foreign investors. Another growth opportunity is that China is now the worlds biggest market for smartphones. Purchases on mobile phones leapt from 2 billion yuan in 2010 to 53 billion yuan last year, 4% or so of total e-commerce. A company dedicated to serving this market might be a serious competitor. Mr Ma recently ordered a large number of engineers to be shifted to the firms mobile division. Mr Wang acknowledges that mobile is a new game where we dont have the edge yetbut he reckons nobody else does either. Then there are the opportunities (and risks) of going global. Alibaba makes no secret of its global aspirations, but some of the things that make it a success at home may not transfer well. Alipay, for example, may offer few advantages in markets which are better supplied with banking and credit services. The marketplace approach that lets the company do without warehouses and other tangible assets has not proved the winning business model around the world that it has in China.

Its most promising overseas markets will be low-trust, underbanked emerging economiesthe markets in Africa, Latin America and Asia where other Chinese pioneers leaving the home market, such as Huawei, a telecoms giant, cut their teeth. Being a platform for retail, rather than a retailer itself, may be a winning proposition in those countries too; but it is not a sure thing. And outside China there are serious competitors in the form of Amazon and a resurgent eBay. Among the advantages those competitors might have is that the goods they offer are highly likely to be kosher. This has not always been the case with Alibaba. China has a history of making and consuming counterfeit goods, and vendors on Taobao have not been a notable exception. Up until the end of last year, Taobao was on the American governments list of notorious markets. Its removal reflects the effort the firm has put into cracking down on fakes by working with multinationals and lobbies like the Motion Picture Association of America. But managers of Western brands sold through Tmall grumble that fakes are still too readily available on Taobao. Judging by the $12 Manolo Blahniks found in a quick browse they have a point. McKinseys Mr Orr tells of a Chinese shoe manufacturer selling through a number of stores on Taobao and Tmall competing with several thousand dodgy operators peddling unauthorised or counterfeit goods, many sourced from within the companys own supply chain. Taobao has not yet changed the culture of counterfeiting in China, he concludes. If it is to become a global giant, it must do more to clean things up. As well as an old problem to overcome, there is also a new one: the sharing of power at the top. Mr Ma is not leaving the firm; he is staying on as executive chairman. But his stepping aside as chief executive clearly changes things. Microsoft, to take the obvious example, was already a global giant and successful public firm when Bill Gates made a similar move. Few people outside China know Alibaba well, and what they know centres on its dynamic founder. The change has been long planned inside the company, though. In a little discussed move three years ago Alibaba reorganised its top brass into a partnership structure. Mr Tsai says this was explicitly designed to ensure continuity at the top and a smooth transition from boss to boss. Pressed on whether such a cabal could continue to run things once the firm goes public, he immediately points to Goldman Sachs, an investment bank, as an example of a publicly traded company with a close-knit partnership structure. Edward Tse of Booz & Company, a consultancy, observes that such partnerships (his firm is one too) cannot rely on rules and top-down control to make quick decisions. Shared values are much more important.

Change China, change the world Alibaba seems to take its culture seriously. Assessment on key values, which include integrity and teamwork, make up half of performance reviews, and Mr Ma spends a third of his time teaching such valueswhich, as one of Chinas few revered entrepreneurs, he promotes far beyond the bounds of the company. He claims Alibaba is about improving peoples livesgoing beyond Googles Dont be evil to Do good. When corruption was uncovered in the Alibaba.com business a few years ago, Mr Ma showed the divisions high-flying boss, and a lot of other people, the door. Thus Alibaba may continue to grow. Even if it does not its legacy of creating trust, encouraging a shift to consumption, and increasing the overall productivity of the retail sector will persist, to the benefit of the country as a whole. Any company that surpasses it will do so by building on those gains, not reversing them. That is why Harvards William Kirby, an expert on Chinese business, calls Alibaba a transformative firm a private company that has done more for Chinas national economy than most state-owned enterprises.

Americas combat veterans

The waiting wounded

The government is failing to keep faith with ex-soldiers

IN WAR, it is said, there are no unwounded soldiers. Bombs that shatter bones also batter brains. Even on the periphery, war afflicts men with aching joints, ringing ears and psychological damage. Imagine, then, the human damage wrought by over a decade of battle. America does not have to. Its wounded warriors are now seeking help in record numbers. Nearly half of its 1.6m soldiers who have served in Iraq and Afghanistan have asked for disability benefits from the government. (Just 21% filed similar claims after the first Gulf war, according to estimates.) With ageing veterans of earlier conflicts also seeking more help, Americas disabled-servicemen population has increased by almost 45% since 2000. Some of them may be reacting to a bad economy, perhaps growing shrewder in their pursuit of benefits. But disability claims are also up because of positive developments. Advances in battlefield medicine mean more wounded are surviving their wounds.

Mental-health problems once dismissed are now treated seriously. And the Department of Veterans Affairs (VA) has expanded access to benefits for older servicemen who were exposed to Agent Orange in Vietnam or are suffering from Gulf-war syndrome, while easing the requirements for claiming post-traumatic stress disorder (PTSD). Having created, by virtue of war, and recognised, by virtue of policy, more wounded veterans, Americas government might have anticipated the challenges they pose. But the system responsible for helping these men and women as they find their ways back into civilian life has been overwhelmed. Ironically, it is Eric Shinseki who oversees this broken bureaucracy. Before becoming Barack Obamas secretary of veterans affairs, the former general earned the ire of George W. Bushs cabinet by testifying that several hundred thousand soldiers might be needed in Iraq. Mr Shinseki was right, but now he heads an agency that is both understaffed and illequipped. The VA is crumpling under a growing pile of disability claims. In some cases literally: last year the departments inspector-general said the mounds of paperwork at one regional office threatened the buildings structure. Bureaucrats are completing more claims than everover 1m a year in the past three yearsand almost three times as many in 2012 as in 2001. But they cannot keep pace with the growing caseload (see chart). Nearly 1m veterans are now waiting. On average it takes the VA about nine months to complete a claim. In some big cities the average delay is over 600 days. Those who appeal against a refusal usually wait two years for a resolution. Mr Obama entered the White House with a promise to fix the system, but waiting-times have increased considerably on his watch. Even the navy SEAL who shot Osama bin Laden says he is waiting for his claim to be processed. Efforts to improve training and streamline processing have shown little in the way of results. The VA now says it hopes that by 2015 it will be able to process all claims within 125 days. Yet veterans of Iraq and Afghanistan have grown accustomed to rosy projections that come to naught. A grim result of this bottleneck is that in the past fiscal year over $400m in retroactive benefits was paid to family members of veterans who died waiting. One such veteran was Scott Eiswert, a National Guardsman who returned from Iraq in 2005. Tortured by nightmares of roadside bombs and fallen comrades, Eiswert took to drink. When the doctors at the VA at last found time to see him they diagnosed him with PTSD. But the VA rejected his disability claims, on the ground that his condition could not be tied to specific incidents from his service. In 2008, after learning that his unit was going back to Iraq, he took his own life.

About 20% of Iraq and Afghanistan veterans are thought to suffer from PTSD, though many do not report their problems. Instead they try to dose themselves. A VA study found that veterans suffering from PTSD or depression were about four times more likely to have drug or drink problems. Too many end up in the same desperate place as Eiswert. The VA reported that, on average, 22 veterans committed suicide each day in 2010. Last year more active-duty soldiers took their own lives than were killed in combat. In 2010 the VA eased its requirements for PTSD claims so that, as Mr Obama put it, soldiers in war zones dont have to take notes to keep for a claims application. (Eiswerts family did receive benefits in the end.) But the preponderance of invisible ailments like PTSD makes todays disability claims more complicated and harder to sort through. Those who were injured in earlier wars typically received compensation for at most a handful of problems; todays veterans often report ten or more issues each. Many afflicted veterans feel isolated. Theres just not a lot of people who understand what PTSD is like, says Derek Coy, a former marine who waited 13 m onths for his claim to be approved. Volunteer groups have stepped in, organising disaster-relief missions, bike rides and protests against the VA. The camaraderie, at least, can be therapeutic. Veterans already tormented by demons and tangled in red tape face further anxieties on the home front. Those recently returned from wars abroad have an unemployment rate 1.7 points higher than the national one. Encouraged by the first lady, Michelle Obama, some firms, including Walmart, IBM and GE, have created programmes to hire more veterans. But veterans advocates talk of an inability to translate war-related skills into civilian job qualifications. A soldier who drove a bulldozer in Iraq must get a certificate before doing the same job back home. Washingtons budget-cutting is unlikely to help. Flag-waving politicians are loth to slash the VAs funding. But overall cuts in spending will disproportionately hurt veterans, who made up 28.3% of the federal governments new hires in 2011. The numbers had been increasing, thanks in part to an administration effort to take on ex-soldiers. Naturally, many of them joined the Pentagon, which has suffered the largest cuts of any department. As America draws down its remaining troops in Afghanistan, the challenges facing veterans may become larger still. A bureaucratic wall separates Americas ex-soldiers from the benefits they have earned, and it is growing higher as more veterans confront it. Many of those still serving in Afghanistan will come home seeking compassion, only to find new battles in store.

Small island, big finger

Cypruss rejection of a bail-out plan raises new doubts about the future of the euro
CALL it the cussedness of an island nation. Beneath the cheeriness of Aphrodites sun kissed island lies the intransigence of the Balkans and the Middle East. On the eve of its accession to the European Union in 2004, the Greek-Cypriot republic rejected a UN plan to reunite with the Turkish-Cypriot north, where the plan was supported. Within the club the Greek-Cypriot government has used and abused EU institutions to wage its feud with Turkey and to lend support to Russia. This weeks 36-0 vote in the Cypriot parliament to reject a euro-zone bail-out, in protest at a large proposed tax on bank deposits, may be the most momentous act of bloodymindedness yet, raising new questions about the stability, and even the survival, of the euro. Outside parliament, a demonstrators poster summed up the mood: Fuck Europe. Such defiance from the island will be admired by some, yet it does not alter Cypruss predicament. It is bust, and cannot afford to salvage its oversized and insolvent banks (see article). Cyprus is also trying to play the euro zone against Russia, amid rumours that it might be prepared to offer Russia concessions in offshore gasfields or a naval base. But who really holds the gunthe firing squad, or the prisoner? The question was raised in Greece last year, and leaders decided to keep it in the euro, even at the cost of overt and covert debt-forgiveness. Cyprus is even smaller, accounting for just 0.2% of eurozone GDP. Yet Eurocrats insist it too is of systemic importance. A bank run in Cyprus could start one in other countries with dodgy banks. And the prospect of Cypruss exit from the euro would raise doubts about the future of other weak members of the currency. For now, the Eurocrats say it is up to Cyprus to come up with an alternative plan. Perhaps they think Cyprus will have to come to its senses if it is ever to reopen its banks. And if it remains obstinate, some would see advantage in making an example of the Cypriots. To euro-zone hawks, the spread of moral hazard is the most dangerous form of contagion. In many ways, the mess in Cyprus comes down to the political symbolism of round numbers. Germany said the euro zone would lend no more than 10 billion ($13 billion) to recapitalise Cypruss banks and refinance its debt. The IMF insisted the islands debt should be kept below 100% of GDP by 2020. And Nicos Anastasiades, the new

president of Cyprus, was adamant that any tax levied on big depositors should be kept below 10%. Put crudely, the euro zone and the IMF ensured the bail-out should be accompanied by a bail-in of depositors; but Cyprus chose to inflict much of the pain on grandmothers savings so as to limit the losses of Russian oligarchs. As so often, short-term politics has trumped rational crisis-management. The deal in Cyprus should have been a dry run for the banking union that the euro zone seeks to create. Instead it has raised questions about whether Europeans genuinely intend to break the link between weak banks and weak sovereigns. Take deposit guarantees. In the early days of the financial crisis the EU raised deposit insurance to 100,000 to prevent bank runs. Now it risks provoking them by seeming to breach that guarantee. National deposit insurance is plainly limited by the solvency of the state. A common deposit-guarantee system in the euro zone makes sense, however much the Germans and Eurocrats may claim it is irrelevant. Then look at the promise of a common means of winding down troubled banks. Uniform bank-resolution rules were supposed to be adopted in each EU country, and later on a unified system was due to be created for the euro zone. The Cyprus deal makes a mockery of the proposed hierarchy of creditors to absorb bank losses: senior bondholders (few in the case of Cyprus) have been spared but small depositors penalised. With a proper banking union, other options become possible. One is the orderly winddown of Cypruss two big crippled banks. This would impose heavier losses on large deposits (up to 50%), but protect small savers and shrink the banking sector. Another option would be the direct recapitalisation of banks by the euro zone. And with a less rickety banking system, it would be easier to get tough with rule breakers. Draghis dilemmas Amid the muddling of European leaders, Mario Draghi, boss of the ECB, has stood out as the prime guarantor of the euro. His conditional promise to buy the bonds of vulnerable sovereigns did much to restore calm last year, though it has never been tested. The ECB, moreover, is being charged with overseeing a new single euro-zone bank supervisor. Its jealously guarded independence is supposed to lend credibility to the system. Yet the more the ECB involves itself in managing the crisis, the more it sullies itself with politics. And having been intimately involved in the botched plan for Cypruss banks, and insisted on the protection of senior bondholders, it is reasonable to question whether the ECB is up to the task of bank supervision.

There is another question: now that voters in Italy and MPs in Cyprus have openly rejected the strictures of the euro zone, might the ECBs magic spell be broken? After all, its bond-buying policy depends crucially on troubled countries submitting to a euro-zone reform programme. The ECB may reach a decisive moment sooner. Cyprus banks survive only on the ECBs emergency liquidity. If there is no deal in Cyprus, the ECB will have to decide whether to follow through on its ultimatum to cut off the money within days. This would cause a messy collapse and almost certainly push Cyprus out of the euro. Mr Draghi has bravely stepped in to defend the weakest members of the euro zone. But would he dare to shoot one of his own?

Euroscepticism in Germany
Silent no more

A new political party is the first to call openly for scrapping the euro
AS FOUNDER of a new Eurosceptic party, Bernd Lucke, an economics professor, is among the most controversial figures in Germany. The website of his Alternative for Germany party went online this month. Its first gathering is in April, and it has until the summer to collect up to 2,000 signatures in each of Germanys 16 states in order to get on the ballot for the federal election in September. Supported by an impressive list of fellow professors, Mr Lucke has three main goals. The most urgent is an orderly dissolution of the euro, with a return to national currencies or to new, smaller and more homogenous currency blocks. He wants a decentralised European Union with less bureaucracy and more emphasis on the single market. He favours more direct democracy, with Swiss-style plebiscites. In its own mind, the Alternative is classically liberal in philosophy and otherwise proEuropean. Mr Lucke argues that the euro, far from being the peace project that was intended, nowadays causes strife among Europeans. Cyprus is a case in point. Starting when the no-bail-out clause in the EU treaties was first ignored in 2010, successive euro rescues have in his view broken rules and undermined the single currency beyond repair. Anywhere else such a voice might count as just another in the political spectrum. Not so in Germany, where any form of Euroscepticism remains taboo. The German media, ever vigilant against creeping populism or right-wing extremism, are now applying a magnifying glass to the partys supporter lists. That is grotesque, snaps Hans-Olaf

Henkel, a former head of Germanys main industry association, who supports the Alternative. We are not fishing on the left or right, insists Frauke Petry, a member of the partys board. Membership applications are being screened to ferret out potential extremists, even though this slows down the partys growth. Around 4,000 people have become members since March 7th. They are coming from across the political spectrum, says Mrs Petry. Even if the Alternative qualifies in time, hardly anybody expects it to reach the 5% needed to enter the Bundestag. But the election looks increasingly likely to be a tight race between the centre-right coalition of Chancellor Angela Merkel and the centre-left opposition. Since the Alternative appeals most directly to disillusioned voters on the centre-right, its mere appearance on ballots could prove to be incredibly dangerous for Mrs Merkel, says Mr Henkel. He points to a state election in Lower Saxony in January, where Mr Lucke ran as a candidate for another mildly Eurosceptic party, the Free Voters, which got barely over 1%. In a race that hinged on a few hundred votes, this mattered. It would be undemocratic to obstruct a new party because of such tactical considerations, says Michael Wohlgemuth, the director of Open Europe Berlin, a Eurosceptic think tank. A large minority of Germansone in four, according to one recent pollare unsupportive of the euro. So far, Mrs Merkel has presented rescue efforts as alternative-less. Sooner or later, something called an Alternative for Germany was bound to come along.

A three-cornered fight

MICHAEL DELL has a battle on his hands. Last month Mr Dell and Silver Lake, a private-equity firm, presented a plan to take the personal-computer company that bears his name private. Just before the expiry on March 22nd of a go-shop period in which other potential bidders could express interest in the company, two suitors appear to have done just that. One is a group headed by Blackstone, another buy-out firm. The other is Carl Icahn, an activist investor. Mr Icahn, who has a stake in the company, had complained that Mr Dells plan would leave shareholders other than the founder shortchanged. Other shareholders had also voiced their disgruntlement. The proposal by Mr Dell and Silver Lake valued the company at $24.4 billion, offering $13.65 a share. Mr Dell would roll over his stake, worth $3.7 billion at that price, and add another $750m of equity; Silver Lake would pitch in $1.4 billion; Microsoft, of which Dell

is an important customer, would contribute $2 billion in debt; banks would lend $14 billion. Neither Blackstone nor Mr Icahn has yet had to make a formal bid, but Mr Icahn is said to be offering $15 a share and Blackstone no more than that. Earlier this month Mr Icahn wrote a letter to Dells board outlining a plan that valued the companys shares at $22.81 apiece and proposed a special dividend that would amount to $16 billion. His latest proposal is reported, like the one in his letter, to suggest that shareholders be given the option of keeping their shares. Whoever gains control of Dell will have the same problems to deal with. Although it makes a profit ($2.3 billion in the nine months to January), a company that was once the worlds leading maker of personal computers is now ranked third in a market that, though still big, may be entering long-term decline. On March 18th IDC, a research firm, estimated that global PC sales in the first quarter of this year would be more than 10% lower than in the same period of 2012 and that attractive designs and keen pricing would be needed to bring about a return to growth in the second half of the year. Dell has so far missed out on the industrys shift towards tablets and smartphones. Its current bosses, led by the founder, have been moving the company towards software and services. The weeks ahead, however, are likely to be dominated by discussions of finance, not strategy.

Private-equity firms
Zombies at the gates

The funds that will not die

CHOOSE well, and investing in private equity is a lucrative business. Investors can double their money by tying it up in funds that run for a decade, sometimes more. For their trouble, the buy-out firms keep a 20% wedge of the profits, plus fees on the side. Thrilled by the results, all sides then sign up for another ten years. If all goes well, that is. In the unprofitable shadows of the industry, zombies roam. Partly as a result of the downturn, many buy-out firms are likely to return less money than was originally entrusted to them. This is bad news for investors. It is graver still for the buyout firms, which have no profits to look forward to and little chance of raising fresh capital for future funds. These firms are the undead: partly sentient (with little prospect of new business, many have fired the bulk of their staff); hard to kill off; and ubiquitous. The incentive for zombies to keep going is simple: though there are no profits to split, and no long-term future to look forward to, there are still juicy fees to be had. Buy-out firms typically take 1-2% of the value of assets from their investors. They can

supplement this by charging the companies they own a consulting fee. This may not be enough to finance a private-jet lifestyle, but it will pay the school fees. Rather than paying out money with no prospect of a return, investors would far rather see the underlying portfolio companies sold, even at a loss, and the fund wound up. Sadly for them, this is a decision for the buy-out firms alone. Private equity is an industry with extraordinary barriers to exit, quips Andrew Sealey of Campbell Lutyens, an advisory firm. Zombies exist partly because of the peculiar way in which private equity is structured. Those who put up the money agree to stay in the background as limited partners, mainly for tax reasons. Unlike investors in hedge funds, they cannot redeem their cash whenever they want to but have to wait until the lifetime of the fund expires, short of finding a willing third party to buy them out. If they want their money sooner, their only leverage with the buy-out firm is to threaten not to invest in future vehicles. Zombies, knowing there is no future for them anyway, are impervious to this threat. Most investors resign themselves to waiting it out. A 2011 survey by Coller Capital, a private-equity investor, found that half the industrys backers have at least one zombie-run fund in their portfolio. Preqin, a research firm, says 1,156 private-equity managers raised a fund between 2001 and 2006 but have not done so since (funds typically deploy money only in their first five years, leaving the next five to sell the companies they bought). Industry estimates put assets being managed by zombies at around $100 billion. Many think this will balloon in future, as funds that raised money during the peak of the credit bubble slowly become the living dead. One way out of the imbroglio is for investors to reset the economics of a fund. They do this by forgetting about the initial value of firms in the funds portfolio and granting management a small share (often 5%) of any profits achieved on the current, lower valuation of these companies. This remotivates the buy-out team, but many investors fret that it also rewards the original failure. Another solution is for an outsider to inject fresh money. Vision Capital, based in London, specialises in buying entire portfolios of companies previously owned by private-equity firms, thereby taking over the assets of a zombie fund. This gives an exit option for longsuffering investors, but still requires the co-operation of the buy-out firm. You have to work with both sides to make a deal happen. It takes time, says Julian Mash, its boss. Cipio, a firm in Germany, does much the same thing with smaller, venture-capital investments. Many buy-out bosses still prefer to sit on their ageing assets, disregarding the ire of their investors. Some claim they are merely waiting for the right time to sell the companies, to

recoup as much money as they can for their backers before shutting up shop. If so, a buoyant market will force their hand soon. A few may even get back into profit, and live to raise another fund. For many investors in zombie firms, however, the horror will continue.

Drugs that cause most harm

Scoring drugs

A new study suggests alcohol is more harmful than heroin or crack

MOST people would agree that some drugs are worse than others: heroin is probably considered to be more dangerous than marijuana, for instance. Because governments formulate criminal and social policies based upon classifications of harm, a new study published by the Lancet on November 1st makes interesting reading. Researchers led by Professor David Nutt, a former chief drugs adviser to the British government, asked drug-harm experts to rank 20 drugs (legal and illegal) on 16 measures of harm to the user and to wider society, such as damage to health, drug dependency, economic costs and crime. Alcohol is the most harmful drug in Britain, scoring 72 out of a possible 100, far more damaging than heroin (55) or crack cocaine (54). It is the most harmful to others by a wide margin, and is ranked fourth behind heroin, crack, and methamphetamine (crystal meth) for harm to the individual. The authors point out that the model's weightings, though based on judgment, were analysed and found to be stable as large changes would be needed to change the overall rankings.

"Drug harms in the UK: a multi-criteria decision analysis", by David Nutt, Leslie King and Lawrence Phillips, on behalf of the Independent Scientific Committee on Drugs. The Lancet

Illicit pleasures in Ethiopia

Addled in Addis

An increasingly comfortable urban middle class is learning to enjoy itself

THE brightly lit bars lining alleys off Bole Road in Addis Ababa, Ethiopias capital, come to life around midnight. Folk melodies mix with electronic beats. Customers wiggle posteriors and rotate shoulders in fast dance-bursts derived from traditional music. Some disappear with hand-holding waitresses through a narrow door to a kissing room, only to return a quarter of an hour later more exuberant than ever. And its only Monday. Illicit joys are proliferating in Ethiopia, even if its prim statist government sees pleasure as an enemy of development. Nightclubs are hazy with marijuana smoke. Qat, the leaf of a mildly narcotic plant, is ubiquitous; drivers talk of taking a short qat when stopping their cars to stock up. Two years ago non-medical massage parlours were confined to hotels frequented by foreign businessmen. Now Addis may have about 200 such establishments. Gratification costs the equivalent of three packs of Western-brand cigarettes. At the same time, school truancy is rising despite official efforts to boost education. Many schools in the capital lock their gates at 8.30 in the morning, shortly after lessons begin, in the hope of preventing pupils from leaving before classes are over. Instead they guarantee that latecomers spend the whole day indulging their youthful desires. And in an effort to enforce discipline, posher schools have banned pupils from carrying money. Yet teachers frequently catch them with 1,000 birr ($54)more than the average monthly salarygiven to them by their parents as pocket money. The government, which acquired a reputation for austerity during a long civil war in the remote countryside, is not entirely joyless. It has privatised two big breweries, Dashen and St George, turning them into potent purveyors of good times. It has also sanctioned a building boom, including the erection of the Edna Mall, a glass-walled bazaar of consumer goods. Yet it is unclear whether official tolerance for pleasures ancient and modern signals a move towards liberalisation; or whether spliffs and massages are meant merely to dull demands for popular participation in government.

Vape em if you got em

A challenge to Big Tobacco

BETTING against an industry with addicts for customers carries obvious risks. But these are uncertain times for Big Tobacco. Electronic cigarettes, once dismissed as a novelty, now pose a serious threat. E-cigarettes work by turning nicotine-infused liquid into vapour, which is then inhaled. A user is therefore said to be vaping, not smoking. More important, he or she is not inhaling all the noxious substances found in ordinary smokes. In 2012 sales of e-cigarettes in America were between $300m and $500m, say analysts. That is paltry compared with the $80 billion-plus market for conventional cigarettes in the country. But e-cigarette sales doubled last year, and are expected to double again in 2013. Bonnie Herzog of Wells Fargo, a bank, believes sales of e-cigarettes could overtake sales of the normal sort within a decade. That may depend on how governments react. E-cigarettes are probably not good for you. One study showed that vaping decreased lung capacity. Yet a switch from smoking to vaping could improve public health, some say. E-cigarettes may help smokers quit more efficiently than nicotine patches or gum. This notion has not been thoroughly tested, however, so governments are wary. America has warned e-cigarette manufacturers not to make health claims. New tobacco guidelines in Europe would either tightly limit the nicotine content of e-cigarettes or force them to undergo clinical trials, as pharmaceutical products do. Elsewhere a patchwork of regulation exists, including outright bans in some countries. None of this has stopped companies from pitching to consumers. In America and Britain advertisements for e-cigarettes have appeared on televisionforbidden territory for standard cigarettes. Craig Weiss, the head of NJOY, Americas top-selling brand of ecigarettes, vows to make traditional ones obsolete. His ads crow: Cigarettes, youve met your match. Americas tobacco giants do not think he is blowing smoke. Last year Lorillard (the maker of brands such as Newport and Kent) bought Blu, an e-cigarette maker, for $135m. NJOY is rumoured to be facing a takeover, perhaps by Altria (the maker of Marlboro). Foreign cigarette makers, such as British American Tobacco and Japan Tobacco International, also have stakes in the industry, while other firms are working on their own vaporous offerings. E-cigarette executives dream of relegating traditional cigarettes to the ashtray of history. But as they struggle with taxes, patents and red tape, they may come to envy Big

Tobaccos deep pockets. More deals are likely, thrashed out no doubt in vapour-filled rooms.

Suntech's bankruptcy
Beyond Profit

BP, an oil giant formerly known as British Petroleum, ran an ill-fated marketing campaign some years ago proclaiming itself Beyond Petroleum. The idea was to trumpet its big investments in renewable energy, especially its brief position as one of the wor lds biggest manufacturers of solar panels. That effort came to be seen as greenwash as punters realised that the companys dabbling in greenery did not take away its zeal to produceand alas, it turned out, recklessly spillgargantuan quantities of the mucky black goop that has always been the main source of its profits. Not long after that, Suntech, a Chinese solar-panel manufacturer, skyrocketed to the top of the world solar industry. So stratospheric was the rise in the firms valuation after it went public in 2005 that Shi Zhengrong, its founder, was briefly Chinas richest man. At the peak of his wealth and his company's prospects, he grandly even declared his ambition for Suntech to become as big as BP. As a clean-energy company, Suntech at least had the chance to fulfil BPs misleading promise of going beyond petroleum. Alas, Suntech has instead ended up beyond profit. The companys solar-panel operations in Wuxi, China, were declared bankrupt on March 20th. That came just days after it defaulted on some of its bond obligations. Suntech has been shutting down various facilities worldwide and Mr Shi, who once was a green hero among the fat cats who gather at the World Economic Forums annual Davos gabfest, has been ignominiously booted out of his job as company chairman. What happened? Partly, Suntech is a victim of circumstances. The global solar industry boom of recent years has turned, inevitably and painfully, into bust. Subsidies lavished by Chinese officials encouraged over-production by local manufacturers, helping to produce a glut on world markets even as their cut-price tactics wiped out rich-world rivals and prompted reprisals in the form of anti-dumping duties and other threatened retaliation. Just as pernicious were the stop-go policies in rich countries that variously subsidised solar-energy production and consumption, and then stopped doing so. So dire is the industry-wide crisis that, on one estimate, over 30 solar firms have gone bust globally of

late. Clearly, any company, never mind the worlds largest, would find it hard to survive in such an environment. However, Suntech and Mr Shi also have plenty to answer for in this sorry tale. There are accusations of mismanagement, as well as worrying suggestions of financial impropriety. China Daily, an official government publication, suggested that the company got in trouble in part because a business partner faked $680m in collateral for a loan Suntech had guaranteed. Mr Shi and Suntech have denied any wrongdoing. What is undeniable is the fact that Suntech over-expanded, including into expensive manufacturing facilities in America, at precisely the moment it should have reined in its ambition. Some hope that it will use its bankruptcy filing to reorganise and emerge in slimmer shape. However, the boards recent ouster of Mr Shi from the top job, and the ongoing bitter wrangling among all involved, hardly inspires confidence that the company will see better days any time soon. What next? If past experience is a guide, Chinas leaders may not allow the worlds largest solar bankruptcy to tarnish their ambitions of becoming a clean-tech powerhouse. Nor will they likely let its financial troubles lead to unrest resulting from massive sackings of workers. Unconfirmed rumours are swirling that the local government in Wuxi is already organising some sort of bail-out. One thing is for sure: even if a rescue package is organised, foreign investors are going to lose a packet.

Social entrepreneurs in India

Water for all

NEARLY three-fourths of all diseases caused in India are due to water contaminants. Despite that, one in eight Indians still lacks access to clean drinking water. The poor now realise that paying for clean water can save much more in health-care costs later. It was this market that Sarvajal, a social enterprise in India, wanted to cater to. Founded in 2008, Sarvajalwhich in Sanskrit means water for allnow sells clean drinking water to more than 70,000 people in rural India. In bigger villages, it employs local people to man filtration plants and sell water. In small villages it installs solarpowered water dispensing machines (pictured) that use prepaid (or pay-as-you-go) smart cards that can be topped up just like a mobile phone. The machines send data to a central server via SMS, which helps Sarvajal ensure regular supply of clean water. Sarvajal started with some help from the Piramal Foundation, a charity. And it is not alone: Water Health International was launched with an investment from the Acumen

Fund and the Naandi Foundations not-for-profit company was backed by a charity with the same name. What sets Sarvajal apart is that it has stayed away from government subsidies while still keeping the price of water low. It sells 10 litres of water for four pence (or six cents), just as much or lower than its competitors. Subsidies are not a long-term solution, says Anand Shah, Savajals founder, who grew up in America and moved to India to become a social entrepreneur. It took a healthy bit of tinkering to lower the price of installation and maintenance for its water supply infrastructure. It costs on average $2,500 to install a filtration plant, which is about half the expense of similar projects. Sarvajal claims to recover those costs within three years. Setting up its project was not easy. Savajal needed to deal with things that few businesses in rich countries have to worry about: lack of proper roads in villages, irregularity of power supply, unreliability of water sources and devising a system of money transfer. Having reached a respectable size, Mr Shah is hopeful that scaling up his business further will be less challenging. Apart from villages, Sarvajals other obvious market is the urban poor. Nearly 100m people live in very densely populated slums in Indias cities. They are more willing to pay a higher price for water than villagers who have a much smaller disposable income. But Mr Shah says that water barons, sellers of bottled-water, have been trying to block Sarvajals entry into cities. After many months of efforts, this time not without help from the government, Sarvajal will soon be launching its first filtration plant in Delhi.