Can China Go Green?

China's unprecedented growth in recent years has come at a terrible price. Two-thirds of its rivers and lakes are too polluted for industrial use, let alone agriculture or drinking. Just 1 in 100 of China's nearly 600 million city dwellers breathes air that would be considered safe in Europe. At a time when arable land is in short supply, poisoned floodwaters have ruined many productive fields. And last year, ahead of most forecasts, China passed the U.S. to become the world's largest source of greenhouse gases.

The immensity of these troubles has produced a result that may surprise many outside China: The nation has emerged as an incubator for clean technology, vaulting to the forefront in several categories. Among all countries, China is now the largest producer of photovoltaic solar panels, thanks to such homegrown manufacturers as Suntech Power (STP). The country is the world's second-largest market for wind turbines, gaining rapidly on the U.S. In carmaking, China's BYD Auto has leapfrogged global giants, launching the first mass-produced hybrid that plugs into an electrical outlet. "China is a very fast follower," said Alex Westlake, a director of investment group ClearWorld Now, at a recent conference in Beijing.

GOVERNMENT SUPPORT

Understanding they are in a global race, China's leaders are supporting green businesses with policies and incentives. Beijing recently hiked China's auto mileage standards to a level the U.S. is not expected to reach until 2020. Beijing also says it will boost the country's share of electricity created from renewable sources to 23% by 2020, from 16% today, on par with similar targets in Europe. The U.S. has no such national goal.

While most environmentalists applaud these developments, China watchers are voicing two very different sets of concerns. Some question whether China will really stand by its ambitious targets and are worried by signs of backsliding as the recession in China's key export markets drags down economic growth. Another group, interested mainly in America's own industrial future, fears that China's growing dominance in certain green technologies will harm budding cleantech industries in the U.S. After all, China's emergence comes just as the Obama Administration is trying to nurture these same types of ventures, hoping to generate millions of green jobs. Many of these U.S. businesses will have trouble holding their own against low-price competitors from China.

Beijing's green intentions will soon be put to the test. China is in the midst of the biggest building boom in history. A McKinsey & Co. study estimates that over 350 million people—more than the U.S. population—will migrate from the countryside into cities by 2025. Five million buildings will be added, including 50,000 skyscrapers—equal to 10 New York Cities. And as quickly as new offices and houses multiply, they are filled with energy-hungry computers, TVs, air conditioners, and the like, sharply increasing demand for electricity, which comes mainly from coal-powered plants.

Environmental groups say it is therefore critical that Beijing promote rigorous, greener standards. And to some degree, that's happening. A government mandate states that by the end of next year, each unit of economic output should use 20% less energy and 30% less water than in 2005. Portions of Beijing's $587 billion economic stimulus package are earmarked for cleantech. On top of that, in March the Finance Ministry unveiled specific incentives to spark solar demand among China's builders. Included was a subsidy of $3 per watt of solar capacity installed in 2009—enough to cover as much as 60% of estimated costs to install a rooftop solar array.

USING WASTE HEAT

Steps like these will help Himin Solar Energy Group in Dezhou, Shandong Province. Founded in 1995 by Huang Ming, an oil equipment engineer turned crusader against the use of fossil fuels, the company is the world's largest producer of rooftop piping systems that use the sun's rays to heat water.

How Delta Climbed Out of Bankruptcy

Delta Air Lines (DAL) plunged into bankruptcy in September 2005, marking the culmination of more than a decade of management missteps made largely out of hubris. The Southeastern airline allowed itself to go through many of the stages of decline outlined in Jim Collins' new book. Its sense of infallibility helped foster an undisciplined pursuit of practically every new jumbo jet that aircraft manufacturers rolled out, forcing it to fly large planes even on one-hour routes. Add to that a distinct denial of the increasingly grim realities of the airline business, exemplified by the errors made earlier this decade by then-Chief Executive Leo F. Mullin. He launched the trendy Song discount airline, which fizzled amid high costs and stiff competition from JetBlue Airways (JBLU). Worse, Mullin negotiated a 2001 labor deal that paid top pilots a record-shattering $300,000 a year. "Management always had to have the biggest and the best," recalls a former exec. "It was the Delta way."

That strategy helped the Atlanta-based carrier rack up billions in losses, pushing it into bankruptcy. And management was so slow to accept its humbling fate that one bankruptcy judge told executives: "I have not heard anything that I will say remotely impressed me that you have the money, the talent, or the thought that you could successfully reorganize in this case." Admits President Ed H. Bastian: "There were periods when Delta could have been just 24 hours from disappearing. If the pilots had walked out, I'm not sure we could have pulled through."

Less than four years after it was left on life support, Delta is now the picture of health. Thanks to a management overhaul, a rigorous shift towards more profitable international routes, aggressive cost-cutting, and a shrewdly timed merger with Northwest Airlines, Delta is now viewed by many analysts as the country's top-performing major carrier. It boasts the strongest balance sheet, the best route structure, and the best prospects for future profitability. "They transformed the company amazingly well," says longtime critic Roger E. King, an analyst for CreditSights, a New York-based institutional research firm.

It was a hard-won battle to reverse the downward spiral. In 2004, with cash running low and most assets hocked, Delta struggled for many weeks to find the debtor-in-possession financing to keep operating. It also came within 24 hours of failing to avert a pilots' strike. The carrier had to fight hedge fund managers pushing for a sale or breakup, then a hostile bid from US Airways (LCC).

GETTING ON COURSE

What put Delta on the path to recovery and renewal was a willingness on the part of management and employees alike to make sacrifices. Gerald Grinstein, a director who had stepped in as CEO in early 2004, convinced the pilots to swallow deep pay cuts while reducing his own salary by 25%. (For good measure, he later donated his bonus to a scholarship fund for the children of employees.) Together with Bastian, he convinced a key group of creditors—suppliers including Boeing (BA), Pratt & Whitney (UTX), and Coca-Cola (KO)—that they'd lose big under a merger with US Airways, which flew mostly Airbus planes using General Electric (GE) engines. And Bastian persuaded creditors to accept Delta's plan over US Airways' takeover bid, which was more dependent on outside financing. "They took the bird in hand," he recalls.

But simply warding off failure wasn't enough.

Cisco's Big Push into New Markets

Pulled up close to a conference table at Cisco Systems (CSCO) headquarters in San Jose, CEO John T. Chambers talks about what feels to him like a tipping point in the company's history. In recent weeks, Cisco has cut deals with customers looking to use its technology in more expansive ways than ever before—Major League Baseball teams that want fully wired stadiums, the city of Miami as it develops a smart power grid. "It's been like that for the last 120 days," Chambers says. "We're in the right place at the right time."

Chambers is betting big that Cisco can capitalize on such opportunities. While many companies retrench, the tech giant has strong profits and $33 billion in cash in its coffers. More important, in Chambers' eyes, is Cisco's position as the dominant provider of the networking gear that runs the Internet. Just as the tech world revolved around IBM (IBM)'s mainframe computers in the 1970s and Microsoft (MSFT)-powered personal computers in the 1980s and '90s, Chambers believes Cisco has an opportunity now to make its digital networks the platform on which new innovations are built. "There's an inflection point happening," he says. "Cisco and the network are at the center of it."

Investors certainly hope so. Cisco's stock, now $18 a share, is at the same level it hit in 1998. Although Chambers has assured shareholders that Cisco can increase revenues 12% to 17% annually, that looks increasingly difficult now that the company has grown to $39.5 billion in revenues.

To hit that growth target, Chambers is hastening efforts to move beyond the core business of selling switches and routers. This year Cisco hiked the number of new markets it is targeting to 30, so it can offer everything from digital billboards to stereos and video surveillance systems. Chambers also is using the company's cash to buy his way into other markets, as he did in March with the purchase of the Flip video recorder maker Pure Digital. Chambers tells BusinessWeek that Cisco likely will hit a total of 50 fresh markets within a year. "We're moving into new [areas] with a speed nobody has ever attempted," he says.

Such frantic expansion comes with risks, and not just the danger of losing focus. The biggest concern is that Cisco will alienate key partners that as a group deliver more than 80% of the company's sales. IBM, Dell (DELL), and Hewlett-Packard (HPQ), for example, sell billions in Cisco gear each year as they help companies build tech systems. But Cisco's move this spring to sell its own servers makes it more of a rival to those three, which sell similar products. "They definitely risk relationships [with IBM, HP, and Dell]," says Greg Simpson, chief technology officer for General Electric (GE). HP and Cisco already have begun to spar publicly.

BIG BLUE'S TURF

Tensions also appear to be rising with IBM, which resells about $3 billion in Cisco gear to clients, analysts say. The spat started when Cisco swooped in to buy Internet conferencing company Webex Communications in 2007, after IBM had thought it had sealed the deal. But the big blow came when Cisco unveiled its new servers, which are designed for the operators of so-called data centers, a prime piece of Big Blue's business. "[Chambers] is known for trying to find a win-win," says one tech CEO. "This isn't a win-win. It's a declaration of war."

About That New, "Friendly" Consumer Contract

Out of the ashes of the financial crisis small flowers are beginning to bloom. One is an initiative in Washington—and among some companies—to curb ambiguous and sometimes abusive consumer contracts, especially in the credit-card industry. But before anyone celebrates the budding reforms, it's worth looking at how an earlier campaign to clean up customer agreements led right back to confusion and frustration.

Democratic lawmakers see an opportunity to take advantage of popular hostility toward banks and other financial-services companies. Committees in both the Senate and the House in recent weeks have approved new restrictions on credit-card interest rates that would go beyond curbs adopted by the Federal Reserve in December. President Barack Obama called bank CEOs to the White House on Apr. 23 to tell them that he backs the legislation and will fight to see it enacted.

Rising consumer impatience with contracts for credit cards, cell phones, health insurance, and cable television has also spurred action in the marketplace. Western Alliance Bancorp's (WAL) PartnersFirst unit is pitching a card that would guarantee some customers no interest rate hikes in the first year or on any existing balances. "PartnersFirst is already well ahead of proposed legislation when it comes to offering consumer-friendly credit-card programs," according to a marketing presentation PartnersFirst is sending to credit unions, which would promote the card to consumers.

Upstart Virgin Mobile and other smaller cell-phone companies are selling monthly service without the baffling one- or two-year contracts that lock in customers of giants Verizon (VZ) and AT&T Wireless (T). "It's not about inventing a new technology; it's about providing better service in an industry where [service] is done poorly," says Peter Lurie, general counsel of Virgin Mobile. In the mortgage field, ING Direct (ING), the country's largest Internet-based bank, is advertising a simplified two-page home-loan agreement. "The marketplace is coming to us," says Arkadi Kuhlmann, ING Direct's CEO. "I don't want to be judged by what is in the fine print, but what [consumers] think is right."

As promising as these developments seem, any enthusiasm should be tempered by experience. In the 1970s, the consumer movement inspired by Ralph Nader sparked a revolt against legalese. Enthusiasm for "plain language" spread through some state legislatures and major corporations. In 1975, Citibank (C) reduced its standard consumer loan agreement from 3,000 words to 600. Other banks followed. "Control by obfuscation was minimized," Nader now says.

The victory was short-lived. Building on the plain-language breakthrough, state and federal lawmakers approved disclosure laws intended to provide consumers with more information about their credit arrangements. But some companies responded by reviving lengthy and confusing credit agreements, notes Katherine Porter, a law professor at the University of Iowa. "The more things we make [companies] say, the more places they have to hide stuff," she argues.

By 1990 the typical credit-card agreement was back up to five dense pages. Today it is more than 30. The plain-language movement "failed miserably," says Duncan E. MacDonald, a former Citibank lawyer who helped write the bank's consumer-friendly contracts in the '70s, and later served as general counsel of Citi's North America and Europe card unit.

The Art of CEO Succession

This is not an easy time to nurture a new generation of corporate leaders. Training budgets are being slashed while a depressed housing market has made it harder to move around for better job opportunities. And yet the need for top talent is growing. A record 1,484 U.S.-based chief executives left their jobs in 2008, according to outplacement firm Challenger, Gray & Christmas. Many more could step down this year as losses mount and executive angst runs high. "The CEO job today is more stressful and draining than at any time in history," says Tom Stemberg, the founder and former CEO of Staples (SPLS). "People have just run out of gas."

At a time when corporations worldwide are crying out for new thinking, BusinessWeek (MHP) decided to take a look at some of the CEOs of tomorrow. These are senior executives who are not yet in the corner office but who have won the attention of headhunters, peers, and their own bosses. Some of the 20 leaders profiled in the next few pages are company veterans. Others have eclectic rsums that cite experience in different industries and jobs. What unites them is an understanding of the global marketplace as well as a knack for sensing and seizing new opportunities.

What's striking about many of these candidates is that they were identified as promising early on and given opportunities to prove themselves. Their careers highlight the critical importance of an oft-ignored management priority: succession. While the median CEO tenure today is just six years, according to Booz & Co., few boards and managers carefully nurture a stable of successors. Last year, the National Association of Corporate Directors found that 42.4% of companies had no succession plan at all.

The economic crisis has exacerbated this problem as resources have diminished. Guy Beaudin, an executive coach at RHR International in Toronto, has seen a 25% reduction over the past year in work helping clients groom future leaders. Veteran coach Marshall Goldsmith, who just wrote a book on succession, compares such moves to cutting back on research and development: "There's a short-term benefit but a long-term cost."

For a sense of how to do it well, look at the seamless CEO transition at DuPont (DD) earlier this year. Chief Executive Charles O. Holliday Jr. had spotted top lieutenant Ellen J. Kullman as a potential successor more than a decade ago. Holliday, a gregarious Tennessean and DuPont lifer who became CEO in early 1998, had mentored Kullman since they met in the early 1990s in Tokyo. He was running the Asia-Pacific operations, and she was visiting as a senior manager in the electronic imaging unit. He was impressed with Kullman's willingness to learn. "There goes a future leader," Holliday recalls saying to himself. Kullman remembers being peppered with questions. "He scared me," she says.

Kullman joined DuPont as a marketing manager in 1988 and was quickly promoted, distinguishing herself by improving troubled units. She was tapped in 1995 to run DuPont's $2 billion titanium technologies business and later turned a newly formed safety-products division into what became the company's highest-earning segment during the time she ran it. "We had to change our business model three times before we found the right one," Kullman recalls. "There were times when I questioned whether we could get there or not."

Kullman was executive vice-president when Holliday told her last September that she would soon replace him in running DuPont. While her appointment came a bit sooner than Wall Street analysts expected, no one was surprised to see her taking over as CEO at the start of this year. (Holliday, 60, has stayed on as chairman.)

Within DuPont, a 206-year-old Wilmington (Del.) conglomerate, executives appreciate the importance of cultivating the next generation of leaders.

Marcial: Medarex, a Bright Spot in Biotech

The world of biotechs is a tricky place for investors. Ambitious young companies aspiring to become future drug kings require huge financial resources to produce life-changing medicines that take many years to develop. Most firms never make it beyond the development stage. Nonetheless, some biotechs manage to reap enormous rewards once they reach near-commercialization of their products.

That is where Medarex (MEDX), a biopharmaceutical outfit focused on monoclonal-antibody-based therapeutics for cancer and inflammation-related diseases, appears to be headed, according to several investment pros. Medarex believes antibodies have proven to be useful elements in making drugs. Analysts note that as of December 2008, the Food & Drug Administration has approved 24 therapeutic products based on antibodies.

Medarex is one of the few biotechs that has chalked up handsome gains this year. It shot up to 6 a share on May 1, from a 52-week closing low of 3.40 on Mar. 3, 2009. On Aug. 1, 2008, the stock had been much higher, streaking to a 52-week closing high of 10.12. So the bulls are optimistic the stock could bounce up some more, to the 10 to 11 level in 12 months. The Standard & Poor's Biotech Index declined 8.7% year-to-date through Apr. 8, 2009.

The company is close to becoming a major biotech player, says analyst Mark Monane of investment bank Needham, given its late-stage development drugs aimed at major diseases, including metastatic melanoma, prostate and lung cancers, psoriasis, rheumatoid arthritis, and clostridium—a deadly form of diarrhea. (Needham has done banking for Medarex.)

Medarex's state of drug production is the envy of other biotechs. "Medarex has one of the most robust pipelines in the industry, with 40 compounds in development, either internally or through partnerships, including three that are in phase III clinical trials," says analyst Jeffrey Loo of Standard & Poor's, who rates the stock a buy. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

More Than 50 Partnerships

On Apr. 24, the FDA approved one of Medarex's products developed in partnership with Johnson & Johnson (JNJ) called "Simponi," as a once-a-month subcutaneous treatment for moderate-severe rheumatoid arthritis. In December 2008, J&J got approval from Canada to market another Medarex drug called Stelara, for treatment of severe plaque psoriasis in adults. And in January 2009, the European Commission gave its approval for the same drug. Stelara is still under review by the FDA for the U.S. market.

Medarex has been busy teaming up with some of the biggest pharmaceutical companies. Loo notes that as of Dec. 31, 2008, Medarex had more than 50 partnerships with pharmaceutical and biotech companies to jointly develop and commercialize products, including Pfizer (PFE), Amgen (AMGN), Bristol-Myers Squibb (BMY), J&J, Eli Lilly (LLY), Abbott Laboratories (ABT), Human Genome Sciences (HGSI), and Novartis (NVS).

Why Indians Are So Thrilled by Tata's Nano

For his first meeting with the object of his desire, Rajesh Murthy, 32, clean-cut and handsome, gets a haircut, a new shirt, and a wad of cash. The resident of Ghaziabad, a low-income suburb of New Delhi, wakes up early, calls his boss at the restaurant where he runs the cash register to say he's taking a sick day, and then drives a half-hour on his motorcycle to a dealership in South Delhi. There, he stands in line with hundreds of fans, pushing through the crowd at every opportunity, eagerly craning his neck for a glimpse. "I can't wait," he says, his eyes darting around to look for an opening in the throngs of people. "I saw it once two years ago, and since then I have been dreaming of bringing it home, surprising my parents. Oh, my wife, she will be so happy."

Suddenly, the doors open and he is ushered into another crowded room. There, in the corner, just as he remembered it, is a pristine, white Tata Nano. Brand-new, the factory paint still shiny, a bright red ribbon crisscrossing its hood, its doors invitingly open, the car seems to beckon to Murthy. In the two and a half years since Murthy first saw pictures of a Nano prototype, the car has become an obsession for him and countless other Indians. He dreams about the $2,000 "People's Car," he tells me sheepishly, running his hand through his hair. "Quickly," he says, grabbing my hand, and together we half-run to the car.

Like 350,000 other people all across India, Murthy puts down an $80 deposit to enter a lottery. Only a lucky 100,000 winners will get to buy a Nano in the next 12 months. They have to take their chances, because Tata Motors (TTM), which dreamed up, designed, and then produced the cheapest car in the world, has a problem that General Motors (GM), Ford (F), and Chrysler only wish they had: far too many customers. Pressure from local politicians angry about Tata using farmers' land for its proposed factory in West Bengal forced the company last year to give up and start again in Gujarat, a state in India's west with a pro-business government. The new factory there won't be complete until late 2009, so for now Tata has to ration access to the Nano.

It is difficult for many Westerners to imagine what cars mean for Indians. For decades, Indians chafed under a controlled economy, choosing from two cars—the tank-like Ambassador, unchanged since the 1950s, with its sofa seats and lumbering engine, and the ladylike Fiat, modeled on the 1957 1200D, short and petite, with an awkward gearbox attached to the steering wheel. Few people could afford new cars, and secondhand, thirdhand, and even fourthhand cars were coveted.

Car Blessings

In the early '90s, the economy opened up, and suddenly there were choices, some affordable, most not. New cars, almost always the Maruti 800, designed by Japan's Suzuki (7269.T) and built by the Indian government, would be delivered to houses, their gleaming, factory-fresh bodies festooned with ribbons and flowers. With envious neighbors glaring, the new owner would gingerly drive the car to a temple, where a priest would crack open a coconut and say a prayer, blessing both the car and its occupants.

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Architecture in Recession: U.A.E.

In recent years, architects descended upon Dubai, eager to capitalize on its feverish building boom. But while the Persian Gulf city's sprawling skyline is still dotted with cranes, the market here has fizzled.

As of early February, more than half of Dubai's real estate projects were on hold or canceled, from the 3,281-foot-tall Nakheel Tower designed by Woods Bagot to the Hydropolis, a 220-suite underwater hotel envisioned by designer Joachim Hauser. Analysts predict that Dubai property values, in total, will decline up to 60 percent in 2009 after years of record growth. Given this drastic turn of events, architects are being forced to reconsider their prospects in the region.

"Everyone is taking a real wait-and-see approach," says Wayde Tardif, an American designer who in 2007 co-founded POSIT Studio in Dubai. Tardif remains optimistic, noting that the slowdown will normalize the market and allow architects to catch their breath. He predicts a rebound in 16 to 18 months; he doesn't foresee a forgotten city full of empty towers. "Dubai has too much pride for that," he says.

In the past decade, Dubai, located in the United Arab Emirates (UAE), has embarked on ever-grander projects at breakneck speed in hopes of becoming a major world metropolis. Today, its economy relies on tourism, real estate, and financial services; oil revenues contribute less than 10 percent to its GDP.

Initially some thought the desert boomtown could skirt the global financial crisis. By October, however, foreign investors were vanishing, local lenders were retrenching, and oil prices were taking a dive. In recent months, The National, a UAE newspaper for expatriates, has been peppered with reports of mass layoffs. "There are many instances of consultant firms reducing staff by more than 50 percent, or closing their Dubai office altogether," says Scott Hyndman, a development manager at a Dubai-based property company. Some stories claim that hundreds, if not thousands, of cars sit abandoned at the Dubai airport, presumably left there by foreigners fleeing the country.

While holding faith in Dubai, many architecture firms are shifting their focus 70 miles to the southwest, to oil-rich Abu Dhabi. The capital of the UAE, Abu Dhabi has evolved gradually over the decades and often is regarded as a more livable—and more stable— urban center. "Where Dubai has been a speculative market, I think Abu Dhabi is a much more serious, play-by-the-rules market," notes Steven Miller, FAIA, managing director of FXFOWLE's Dubai office. His firm is actively pursuing work in Abu Dhabi, where major developments such as Saadiyat Island—a $27 billion multi-use project with buildings by Jean Nouvel, Zaha Hadid, and Frank Gehry—are reportedly still on schedule.

Guy Source, a UAE-based employment recruiter for the architecture industry, agrees that Abu Dhabi seems less affected by the financial crisis than Dubai. He adds that other Middle Eastern markets hold promise as well, noting that there are jobs waiting to be filled in Qatar, Kuwait, and Saudia Arabia.

FXFOWLE's Miller is no stranger to Saudi Arabia; he first worked there during the recession of the mid-1970s. Now, as he hunts for work beyond once-fertile Dubai, he is returning to familiar territory. "Saudi Arabia is off the charts right now," Miller says. "We're very busy there."

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Time Warner Backs Away From Pricing Change

Time Warner Cable caved—for now. In the face of widespread consumer outrage over its plan to change its pricing for Internet access, the company said it will shelve plans to implement the new price formula in several new markets.

The about-face comes just two weeks after BusinessWeek.com first reported that Time Warner Cable (TWC) would roll out usage-based pricing to four cities. The No. 2 U.S. cable operator hoped to begin charging high-speed data subscribers for the amount of bandwidth they used in Rochester, N.Y., Austin and San Antonio, Tex., and Greensboro, N.C.

Time Warner Cable CEO Glenn Britt said the consumption-based model was needed to maintain an expensive, burdened broadband network, citing other countries that for years have had broadband-metering models, including Canada. But the plan unleashed a firestorm among the public and politicians who say the new method is discriminatory and would stifle innovation. Some politicians called for congressional hearings.

Surprised by Backlash

Britt and his executive team appear to have been unprepared for the pushback from consumers and are putting the plan on ice. On Apr. 16, Britt issued a statement saying: "It is clear from the public response over the last two weeks that there is a great deal of misunderstanding about our plans to roll out additional tests on consumption-based billing." Time Warner won't broaden its testing of the plan "until further consultation with our customers and other interested parties, ensuring that community needs are being met," Britt said.

What's more, Time Warner Cable said it would be working to make measurement tools available as soon as possible so consumers can learn just how much bandwidth they consume on average. For Britt, the episode was not exactly an auspicious start at the helm of a newly independent Time Warner Cable, fully spun off from parent Time Warner on Mar. 30. Shares of the company rose 2.7% to 29.58 on Apr. 16.

From the moment the news broke on Mar. 31, the blogosphere was filled with vitriolic posts and e-mails from Internet users slamming Time Warner Cable's plans. Within days, hearings were being held in Rochester and Austin. Rochester Congressman Eric Massa threatened to introduce legislation aimed at bringing more broadband competition to his home city. Massa also said he wouldn't rule out imposing price limits on Time Warner Cable, which he called a "functioning monopoly."

On Apr. 16, U.S. Senator Charles Schumer (D-N.Y.) and founders of a Web site called Stop The Cap! stood on the steps of Time Warner's Rochester offices to celebrate the company's decision to abandon broadband metering for now. Among the rally cries posted on Stop The Cap! over the past two weeks: "Caps are for bottles, not broadband, in the United States of America."

Larry Summers on Whether Those Rays of Economic Daylight Are Real

No one in Washington is saying flat-out that the economy has turned a corner, but the Obama Administration is busily making the case that encouraging signs are starting to pop up. On Apr. 9, Larry Summers, director of the National Economic Council, pointed to positive indicators in a speech before the Economic Club of Washington, and five days later at Georgetown University, the President did the same. Is this more than a cheerleading exercise to boost public confidence? I talked with Summers after Obama's speech.

MARIA BARTIROMO

The President today talked about glimmers of hope in the economy, though he added that we are in for some tough news ahead when it comes to unemployment. Where has the growth been coming from most recently and where are the weak spots that remain?

LAWRENCE SUMMERS

Two months ago, you couldn't find anything positive. Every statistic was running negative, and you had a sense of an economy in free fall. I think today the picture is more mixed. There are obviously still problems in the financial market and weakness in housing. But production is now pretty clearly running below sales…which will be followed by an inventory cycle that can be a source of strength. You have a more mixed picture in terms of consumer spending, in part because the stimulus in the Recovery & Reinvestment Act is coming into people's paychecks. You have the fiscal policy coming online. You know, government almost never gets a positive surprise in how much things cost, but it's actually turning out that we're going to be able to do a lot of these infrastructure projects—and 2,000 have already been started—cheaper than we'd expected. That means more employment, more ability to do things.

The budget the President put forth suggests the economy will see 4% growth in 2011. Are you expecting that?
The President made the forecast several months ago in the context of the budget. It was pretty much a consensus forecast at the time. We will revisit the forecast, as governments always do, a couple times a year, and at that point, we'll be in a position to discuss a new forecast.

So if we were to see the economy not grow at 4%, would you be prepared to suggest that perhaps he should pull back his plans to raise taxes on the highest earners?
Let's just be clear here because what you said is not quite correct. The President isn't taking any action to raise taxes. Current law calls for [the Bush tax cuts for high-income earners] to expire [in 2011]. And the President does believe—and he is surely right in this conviction—that given the magnitude of the debt problems the country faces, we can no longer afford those tax cuts for a very small fraction of the population. If you look at the long-run fiscal burden imposed by those tax cuts, it's as great or greater than the entitlement programs that generate so much discussion, and the evidence suggests [the cuts have] very little stimulative benefit. So yes, we are prepared to let those tax cuts expire.

Mall Titan General Growth Cuts Itself Down

The nation's second-largest shopping mall operator, General Growth Properties, which filed for Chapter 11 bankruptcy on Apr. 16, fell victim to the credit crunch and overambitious managers. But it is not likely to be followed into ruin by other big mall competitors, analysts and industry insiders say. Indeed, the bankruptcy filing by General Growth, which owns more than 200 malls in 44 states along with residential real estate and master planned communities, could make for an efficient way for rivals to pick up trophy properties.

Simon Property Group (SPG), the Indianapolis-based leader in the industry with 386 mall properties worldwide, has already been in touch with General Growth about snapping up some of the company's holdings. General Growth's properties include the Fashion Show Mall in Las Vegas and Chicago's trendy Water Tower Place, as well as master planned communities in areas in Maryland, Nevada, and Texas. General Growth also has joint ventures in shopping centers in Brazil and Turkey. "They have been marketing a handful of assets over the last several months. They have not sold any to date," says Stephen Sterrett, Simon Property Group's chief financial officer, confirming that contacts between the companies so far haven't led to a sale. He adds that Simon isn't interested in swallowing all of General Growth. "We have regular conversations with all kinds of people in our business."

For their part, managers at General Growth say they plan to hang onto most of the properties and to emerge someday from Chapter 11 reorganization. Thomas H. Nolan Jr., General Growth's president and chief operating officer, told reporters in a midday conference call on Apr. 16 that creditors and company executives alike want to keep the "strategic platform" together. He recognizes buyers might be especially interested in some of the 25 biggest properties—Boston's Faneuil Hall, for instance—but he said selling off the trophy properties or others in toto is not in the company's plans. "Could we sell off one of those, or two? I guess," Nolan said. "As part of a restructuring strategic review, we would consider looking at that."

To industry watchers, Chicago-based General Growth's fall came as no surprise. The real estate investment trust has been in tumult since early last year when the credit crunch began jacking up the cost of refinancing its staggering debt. John Bucksbaum, a son of the company founder, levered up the once cautiously run outfit with splashy purchases from the time he took over as CEO in 1999 until last year. He was forced out in October, as the company tried to negotiate with creditors to ease payments on a debt load that it reported in its bankruptcy filing to total $27.3 billion. General Growth valued its assets at just $29.6 billion, far less than the $40 billion- plus figures analysts had bandied about as recently as last fall. Bucksbaum remains chairman.

Vegas Shopping Spree

Under Bucksbaum, a hard-charging bicycling aficionado who palled around with racer Lance Armstrong and routinely went on rides in Europe's mountain countryside, General Growth was an anomaly in the world of big real estate investment trusts. While the others carefully tended to their balance sheets and kept debt under control, Bucksbaum had no fears about putting his company deep into debt. He rolled the dice heavily in Las Vegas, for instance, picking up shopping arcades in the Venetian and Palazzo casino complexes and buying Rouse, the big developer, in a debt-heavy $14 billion deal in 2004.

Architecture in Recession: U.A.E.

In recent years, architects descended upon Dubai, eager to capitalize on its feverish building boom. But while the Persian Gulf city's sprawling skyline is still dotted with cranes, the market here has fizzled.

As of early February, more than half of Dubai's real estate projects were on hold or canceled, from the 3,281-foot-tall Nakheel Tower designed by Woods Bagot to the Hydropolis, a 220-suite underwater hotel envisioned by designer Joachim Hauser. Analysts predict that Dubai property values, in total, will decline up to 60 percent in 2009 after years of record growth. Given this drastic turn of events, architects are being forced to reconsider their prospects in the region.

"Everyone is taking a real wait-and-see approach," says Wayde Tardif, an American designer who in 2007 co-founded POSIT Studio in Dubai. Tardif remains optimistic, noting that the slowdown will normalize the market and allow architects to catch their breath. He predicts a rebound in 16 to 18 months; he doesn't foresee a forgotten city full of empty towers. "Dubai has too much pride for that," he says.

In the past decade, Dubai, located in the United Arab Emirates (UAE), has embarked on ever-grander projects at breakneck speed in hopes of becoming a major world metropolis. Today, its economy relies on tourism, real estate, and financial services; oil revenues contribute less than 10 percent to its GDP.

Initially some thought the desert boomtown could skirt the global financial crisis. By October, however, foreign investors were vanishing, local lenders were retrenching, and oil prices were taking a dive. In recent months, The National, a UAE newspaper for expatriates, has been peppered with reports of mass layoffs. "There are many instances of consultant firms reducing staff by more than 50 percent, or closing their Dubai office altogether," says Scott Hyndman, a development manager at a Dubai-based property company. Some stories claim that hundreds, if not thousands, of cars sit abandoned at the Dubai airport, presumably left there by foreigners fleeing the country.

While holding faith in Dubai, many architecture firms are shifting their focus 70 miles to the southwest, to oil-rich Abu Dhabi. The capital of the UAE, Abu Dhabi has evolved gradually over the decades and often is regarded as a more livable—and more stable— urban center. "Where Dubai has been a speculative market, I think Abu Dhabi is a much more serious, play-by-the-rules market," notes Steven Miller, FAIA, managing director of FXFOWLE's Dubai office. His firm is actively pursuing work in Abu Dhabi, where major developments such as Saadiyat Island—a $27 billion multi-use project with buildings by Jean Nouvel, Zaha Hadid, and Frank Gehry—are reportedly still on schedule.

Guy Source, a UAE-based employment recruiter for the architecture industry, agrees that Abu Dhabi seems less affected by the financial crisis than Dubai. He adds that other Middle Eastern markets hold promise as well, noting that there are jobs waiting to be filled in Qatar, Kuwait, and Saudia Arabia.

FXFOWLE's Miller is no stranger to Saudi Arabia; he first worked there during the recession of the mid-1970s. Now, as he hunts for work beyond once-fertile Dubai, he is returning to familiar territory. "Saudi Arabia is off the charts right now," Miller says. "We're very busy there."

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Intel Says PC Demand 'Bottomed'

The worst of the damage that has beset the PC industry is over, says Paul Otellini, chief executive of the world's biggest chipmaker, Intel (INTC).

Reporting first-quarter earnings that beat analysts' expectations, Otellini boldly said PC sales had "bottomed out" in the first quarter, adding that the industry is "returning to normal seasonal patterns."

Intel reported a profit of $647 million, or 11 a share, on sales of $7.1 billion for the three months that ended in March. Analysts had expected a profit of 3 a share, and sales of $6.98 billion.

Otellini's comments are one of the earliest signals that tech is poised to rebound from a several-quarter slump. A maelstrom caused by the mortgage market meltdown and financial crisis sliced demand for everything from chips and computers to consumer electronics and enterprise software and hardware; even Internet advertising dropped. In response, tech companies across the board curtailed production, reset sales forecasts, and eliminated tens of thousands of jobs.

Falling Inventories

Intel's results also suggest the company adjusted well to the drop in demand. "PC manufacturers saw that orders weren't materializing, and so they acted accordingly and stopped ordering new chips," says Dean McCarron, an analyst at Mercury Research, a chip industry consulting firm based in Cave Creek, Ariz. Intel and No. 2 chipmaker Advanced Micro Devices (AMD) reported disappointing earnings in January.

To cope, Intel slowed production and controlled other expenses. "While the global economy continues to be weak and uncertain, our execution this quarter was outstanding," Otellini said on a conference call. "We have adjusted quickly to this new environment where demand remained difficult to predict, and order lead times have contracted." One result: Inventories dropped by $700 million.

Wafer starts, a key metric of manufacturing activity, were reduced by a "significant" level, resulting in a 19% drop in inventory levels from the fourth quarter, Otellini said. Intel chose to forgo the cost of carrying more chips than it could expect to sell and opted instead to bear the costs of idling some of its factory lines. "Management sent the message that they were going to keep their powder dry and that is exactly what they have done," says Doug Freedman of Broadpoint AmTech Research in San Francisco. Chief Financial Officer Stacy Smith said six percentage points of gross margin were lost because of the underutilization of manufacturing capacity.

More Job Cuts

As hopeful as Intel may be about demand, the company refrained from issuing a profit forecast for the current quarter and said sales would be "flat" compared with the first quarter. And its results, while better than expected, showed that the recession continued to take a toll in the first quarter. Profit tumbled 55% from a year earlier and gross margin dropped 7.5 percentage points, to 45.6%, from the fourth quarter. This quarter, gross margin will remain in the "mid-40s," Intel said.

Reflecting the unease over Intel's outlook, the stock dropped in extended trading after the results were released. Intel shares declined 90, or more than 5%, after closing at 16.01, up 3. Shares of AMD fell more than 3% after hours. Freedman rates Intel a "buy" with a price target of 17. "The numbers are going to move higher through the balance of the year," he says.

To make sure it meets such expectations, Intel is pushing full speed ahead with a revision of its manufacturing technology, which will let it build chips with features of 32 nanometers in size, a leap from its previous generation of 45-nanometer technology. Costs associated with that transition are contributing to the decline in gross margin. Smith said he expects the costs of the manufacturing transitions to peak during the second quarter. Then gross margins will return to what he called a "normal" range of 50% to 60% in the second half.

Additionally there will be more cost cuts. Otellini said the company reduced headcount by 1,400 during the quarter, and expects to cut more jobs this year in line with the large-scale restructuring he announced in 2006.

Despite the lack of a concrete profit forecast, analysts were encouraged by the prospect that PC demand has hit a trough. It won't be easy to chart the "slope of growth…going into the recovery," says Ashok Kumar, an analyst at Collins Stewart (CLST.L). "At least it can be said that the worst is over."

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How to Make Acquisitions in a Down Economy

Impulse shopping is rarely a good idea—especially if you're buying a business. But you shouldn't overlook the importance of serendipity, either. The declining economy has left a raft of formerly solid businesses in distress, making it the right moment to consider whether an acquisition might make sense for you. With company performance—and therefore valuations—suffering, a recession can be an opportune time to buy. "It's a great time to be a careful buyer, which is not an oxymoron," says Eric Siegel, president of advisory firm Siegel Management in Bryn Mawr, Pa.

Just ask Larry Browne, chief executive of Houston-based freight forwarder Diligent Delivery Systems. In March, Browne closed on the acquisition of a four-person courier business in Memphis, opening up a new market for his own company. Acquisitions aren't new to Browne—he's made nine since taking over Diligent in 2001. He's still raring to go. "The opportunities were there last year and are here now," Browne says. "I'm feeling good about '09. We're going to do some deals." His company now has 72 employees and about $40 million in sales, up from less than $1 million in 2001. Browne attributes 25% of his company's growth to acquisitions.

There's more to successful deals than price and timing, of course. Any purchase needs to complement your business strategy and your plans for internally generated growth. Whether you're actively seeking out a deal or one falls into your lap, you'll need to know how to maximize and integrate the new assets before moving forward.

In the best-case scenario, an acquisition would improve your company's profitability and margins and provide dramatically better return than you would get plowing the same money and sweat into organic growth. You should be able to wring some cost savings out of the integrated operation—rarely as easy as it sounds. Alternatively, an acquisition could be a good defensive move, or could raise barriers to entry for competitors.

It's vital to understand exactly what you will need to get out of a purchase, whether it be cash flow, employees, customers, real estate, equipment, or technology. Be wary of buying a business that you suspect will complement yours but that you don't fully understand. Just because you make a great peanut butter doesn't mean you can successfully produce jelly.

And while many stellar companies may be temporarily cheap, the reverse isn't necessarily true. If the seller is desperate to get out, there's probably a good reason. Likewise, if the reputation of the company has been battered, or if it's difficult to get good financial information, walk away. Then there's this catch-22: While the recession has made plenty of companies newly available, it has also made it much harder to find financing. If you don't have cash on hand, you'll need to find a seller willing to accept a lengthy payout or shares in the merged company.

For the ready buyer, though, options abound. Nearly every industry has been affected by the recession, and those that rely on discretionary spending—real estate, luxury goods, and restaurant companies—may make for particularly rich prospecting.

Sound good? First, confirm that you have both the dollars and the management resources to tackle an acquisition. Once you have a target, you will need to scrutinize the other company's finances, customers, legal standing, and employees. Then consider the structure of the deal and whether it should be an asset or a share sale, which can significantly affect the price. And remember: Just because it's on sale doesn't mean it's a good deal.

LOOK IN THE MIRROR

An acquisition will put significant pressure on both management and finances, so evaluate yours before going on the prowl. "Your own operations should be very routine so that management has the flexibility to focus on the deal," says Siegel. You don't want to leave your core business struggling while you're playing wheeler-dealer.

Making certain that your balance sheet is solid is critical. The best tactic for a strategic buyer, experts believe, is simply to rely on cash.

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Goldman, Give It All Back

If Goldman Sachs CEO Lloyd Blankfein wants to put his money where his mouth is, he won't stop with just giving back the $10 billion in federal bailout money the investment firm got last autumn. He'll also offer to return some of the $13 billion Goldman (GS) got from the U.S. government by way of the bailout of American International Group (AIG).

Goldman's decision to sell shares and raise the necessary cash to repay the government is being seen by some as a show of strength. That's especially so after the firm posted a better-than-expected profit for the first quarter of $1.81 billion—largely driven by its proprietary trading desk. That's the same group of bond and commodity traders responsible for much for Goldman's outsized profits during the credit boom. So everything old is new again at Goldman. Right?

But more than anything, the move to repay the TARP money is being motivated by Blankfein's desire to free his firm of all those nettlesome government mandates on executive compensation and bonuses. Now there's nothing wrong with Goldman giving back the TARP money if it really doesn't need it. After all, government officials have always said they expected the banks to repay Treasury at some point.

AIG's CDOs: How Different from TARP?

Still, if Blankfein really wants to help U.S. taxpayers out, he can go the extra mile and give back some of that AIG money the firm got, too. If the government had allowed AIG to file for bankruptcy, Goldman likely would have incurred an even bigger fourth-quarter loss than it reported. So Blankfein owes a bit of gratitude to Uncle Sam. And as my BusinessWeek colleague Roben Farzad pointed out on CNBC on Mar. 27, Blankfein can thank taxpayers by forking over its AIG largesse.

Now we know Goldman will object that the AIG bailout money is different from TARP. The firm will argue that the dollars that passed through AIG were nothing more than money it was owed on all those credit default swaps it had purchased to insure some of its portfolio of collateralized debt obligations, or CDOs. In Goldman's world, all the government was doing was allowing AIG to live up to its contractual agreements.

But, as we have seen in this financial crisis, some contracts can be broken. Maybe it was a smart move for the government to indirectly bail out AIG's trading partners to prevent a systemic financial collapse. But the government didn't have to make firms such as Goldman completely whole by paying face value for the CDOs that AIG had insured.

If nothing else, maybe Goldman should now take the haircut it probably should have taken on those CDOs at the time of the AIG bailout. The bank could start by offering to give some of that $13 billion back, too.

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The Fragile Flight of the Twitterlings

Twitter executives don't disclose much about their plans to make money from the microblogging site. But that's not stopping scores of other companies trying to build their own businesses on the back of the increasingly popular communication tool. Take Tweetie, whose downloadable software makes Twitter available on Apple's (AAPL) iPhone. Sales of the $2.99 application have been climbing "exponentially," says developer Loren Brichter.

Twitter has inspired the creation of hundreds of third-party products and services, Twitterlings that make up a vibrant ecosystem reminiscent of those growing up around other devices and tools such as the iPhone and social network Facebook. San Francisco-based Twitter makes its code available to outside developers, who in turn use that knowhow to build tools that help people search, organize, or otherwise make better use of the millions of brief messages known as tweets sent over Twitter each day. "It's a symbiotic relationship," says Boris Veldhuijzen van Zanten, who created a site for Twitter analytics.

A variety of business models are emerging among these Twitterlings. Some, like multimedia-upload site Twitpic, rely on ads; others, like TwitterHawk, charge fees for information about potential customers on Twitter. Among 18 app developers contacted by BusinessWeek, almost half said they were drawing significant revenue. Almost all said they were still experimenting with different models.

Suddenly, Obsolete or Impossible to Find

While alluring, Twitterpreneurship carries risks. The site's sporadic service outages can hurt a company's reputation, and changes to its coding platform can have adverse effects on tools. With no notice, Twitter itself could replicate features found on some apps, rendering them obsolete. And the looming prospect of Twitter's acquisition by a larger Internet player with a different strategy further complicates any developer's long-term plans. "What happens when you wake up one morning and your application doesn't work anymore?" asks Oren Michels, founder of Mashery, a consultancy that helps companies, including Best Buy (BBY) and the New York Times Co. (NYT), open their own platforms to third-party developers.

Makers of Facebook-related tools and apps have learned the hard way the risks of hitching one's fortune too closely to a fast-rising social media property. Many third-party developers were left in the lurch last year when Facebook design changes relegated outside apps, or widgets, to harder-to-find locations on the site.

Few third-party Twitter developers need to invest in expensive technology like servers, but their sites suffer when Twitter's own servers get bogged down by the many millions of messages posted to the site each day. "One of the big challenges we face is when Twitter is slow or goes down," says Misty Lackie, CEO of Go Smart Solutions. Her Twitbacks service offers free custom backgrounds for Twitter profiles. "When this happens, our users can't post their backgrounds and oftentimes assume it is an issue on our end," she adds.

Some Twitter offshoots may ultimately find themselves vying with Twitter. "There is already an element of competition from Twitter as it improves Twitter.com," says Iain Dodsworth, the creator of Tweetdeck, a tool that lets users view and send tweets from the desktop. In December, Twitter CEO Evan Williams said at an event that the company is working on adding the ability to sort friends into groups, a feature available on Tweetdeck.

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The Worries Facing Russia's Banks

Is the financial crisis in Russia coming to an end? Or is it just beginning? That seems to depend on who you listen to.

In recent weeks, senior government ministers and officials have been striking an increasingly optimistic note amid signs the economic situation in Russia has stabilized. Russia's Prime Minister Vladimir Putin has been especially keen to emphasize the government's achievements in the banking sector. "Thanks to the actions of the authorities, the imminent threat of a banking sector collapse has been averted," he boasted to Russia's Parliament on Apr. 6.

Indeed, it's no small achievement that, despite the financial turmoil of recent months, no major Russian bank has gone bust, and there have been minimal signs of depositor panic. But in recent weeks, a chorus of doomsayers has been warning the stability won't last. A "second wave" of the crisis is about to hit Russia, they argue—and the epicenter of this coming shock wave will be the Russian banking sector.

The government now appears to be taking the threat seriously. It can hardly ignore the likes of German Gref, the chairman of Russia's largest bank, state savings bank Sberbank (SBER.RTS). In a conference presentation on Apr. 8, Gref pulled no punches when he warned of the scale of Russia's banking woes. "The banking crisis in Russia is in its very beginning," he said, accusing the government of "slow decision-making" in tackling the problem.

Gref's comments echo similar remarks by Petr Aven, president of Alfa Bank, Russia's largest commercial bank, who has also caused a stir by warning that hundreds of Russian banks could face bankruptcy this year.

More Bad Loans

At the root of these worries is mounting evidence that, as the recession bites, Russian borrowers are struggling to repay bank loans. As a result, the share of nonperforming loans appears to be mushrooming. "A month ago, 15% seemed like a negative figure. Now people are talking about [the share reaching] 20% to 30%," says Natalia Orlova, banking analyst at Alfa Bank. She estimates that around 10% of loans are already bad, but expects the figure to reach at least 15% to 20% by the third quarter.

The precise figure makes a huge difference, with the cost of recapitalizing the banks rising exponentially as the share of bad debts grows. According to estimates by Sberbank, if 10% of loans go bad, the government will need to inject some $6 billion to recapitalize the sector. But that figure skyrockets to $35 billion if the share of bad loans doubles to 20%—and no less than $80 billion if the share reaches 30%.

True, it's still far from clear whether the bad loan problem is actually as bad as the pessimists fear. Elena Romanova, banking analyst at Standard & Poor's (MHP) in Moscow, says that in general banks now regard around a third of loans as potentially "problematic." But it still remains to be seen how many of those loans will actually go bad and how many will be restructured. "The risk is serious," she says. "But it's difficult to say how the situation will develop in Russia, because we've never been through such a calamity before."

It doesn't help that Russia's system of accounting differs in important respects from Western standards, recording unpaid loans (including loans on which the interest is unpaid), rather than estimating which loans are fundamentally unsalvageable.

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Marcial: Pros Gazing at Star Scientific

Investors will be watching intently as a big tobacco industry patent-infringement case goes to trial in mid-May: a David-and-Goliath court battle pitting the second-largest U.S. cigarette maker, R.J. Reynolds Tobacco, a unit of Reynolds American (RAI), against the tiny and little-known Star Scientific (STSI).

Shares of Star Scientific, which has developed tobacco-curing technology that prevents the formation of certain carcinogenic toxins in tobacco, have started to attract some big investors. They're betting that if it wins a lawsuit it has filed against Reynolds, seeking damages of about $1 billion, the potential rewards to the small-cap company would be huge. The stock has been on the rise, climbing from a low of 1.48 a share on Nov. 20, 2008, to 4.84 on Apr. 9, 2009. Reynolds stock has also gone up recently, from 31 on Mar. 6 to 39 on Apr. 9.

Wall Street analysts haven't had much to say about the lawsuit. Of the 11 analysts tracking Reynolds, four of them rate it a buy, including MatrixUSA, which tags it a strong buy. But no analysts cover Star. While the disparity in size between the two companies is huge, investors in Star are upbeat. "Despite Reynolds' legal efforts to derail and delay the patent-infringement suit, Star Scientific succeeded in getting a trial date," says Neal Goldman, president of Goldman Capital Management, which holds a 4% stake in Star. That indicates Star has a chance of winning, "and we believe it will," says Goldman. The stock, he adds, is very undervalued, based on its technology, products, and likelihood of winning the patent fight.

Goldman notes that if Star emerges victorious, the loss to Reynolds would be huge. So he figures Reynolds may agree to an-out-of court settlement. At the same time, however, he doesn't discount the possibility that Star may be bought out before the case is resolved in court. A large tobacco company, he argues, could make a bid to acquire Star. Goldman puts Star's worth at 20 a share.

Reexamining the Patent

At issue in the litigation: Star's patents covering a technology invented by CEO Jonnie Williams, the company's largest shareholder with a 15% stake. Williams began work on the project in 1996. The result: He developed novel methods to inhibit the "microbial nitrate-reductase" activity in tobacco that leads to the formation of nitrosamines. Williams says those are among the most active cancer-causing agents in tobacco and have been identified in animal and clinical tests as contributing to a variety of cancers, inducing tumors of the lung, oral cavity, esophagus, pancreas, and liver. Star was issued a patent for the technology on Mar. 20, 2001.

The legal battle started on May 23, 2001, when Star sued R.J. Reynolds Tobacco, accusing it of using and selling tobacco made by a process that infringed on Star's patent. Reynolds adamantly denies the charge and also questions the patent's merit.

David Howard, a spokesman for R.J. Reynolds, says the U.S. Patent & Trademark Office has granted Reynolds' request to reexamine Star's patent because of questions about its validity. The reexamination could take six to eight months, he says. "We are confident of winning the case," says Howard.

But on Mar. 9, 2009, the U.S. Supreme Court dealt Reynolds a severe blow by refusing to hear its appeal on the case. And on Mar. 31, Reynolds suffered another setback when U.S. District Court Judge Marvin Garbis denied its request to suspend a jury trial while the U.S. Patent & Trademark Office was reexamining Star's patent. The jury trial is scheduled to begin on May 18.

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Jack Bogle's Last Crusade?

It's only 7 a.m., but John C. Bogle, 79, is already throwing elbows. He's impatiently boarding the Amtrak Acela in Philadelphia en route to Washington, where he's giving a lunchtime talk to a group of investment advisers. Today's speech is just the latest in a career-long campaign, on behalf of small investors, to wrest the financial system from overpaid financial middlemen. It's a quest he began even before he founded Vanguard Group, a pioneer in low-fee mutual funds, in 1974.

Bogle slowly takes his seat on the train, then contorts his arthritic hands to push the recline button. After taking a pull from his coffee, he ticks off some grim statistics: U.S. family wealth plummeted 18% last year, the most since the 1930s; $9 trillion in stock market value has vanished since 2007; the Dow Jones industrial average touched 6500 in March, a level not seen since Bill Clinton's second inauguration. And yet (and yet!) the financial services industry took home some $500 billion in fees last year. "What the hell for?" he thunders. "If they looked after other people's money with the same care they look after their own, we wouldn't have to be bailing out banks."

Bogle's latest mission may be his most ambitious yet: to persuade regulators to overhaul the U.S. retirement-savings system by simplifying account options, clamping down on fees, and making risk more understandable. It also might be his last. Bogle tells BusinessWeek his body has started to reject his 13-year-old transplanted heart. The attack, which began last summer, has landed him in the hospital on four separate occasions. Not that he's looking for sympathy. "I'm not introspective about my health, nor do I live in fear of dying," he says. "Your life expectancy is not enormous when you're 80."

Surely no one would begrudge Jack Bogle, who created the world's first "index" mutual fund in 1975 and retired from Vanguard a decade ago, the right to take it easy. But he won't hear of it. Much to the consternation of Eve, his wife of 52 years (who declined to comment for this story), Bogle spent seven hours a day during hospital stays last summer editing his seventh book, Enough: True Measures of Money, Business, and Life. In May he's bringing out a new edition of his 1999 best seller, Common Sense on Mutual Funds, and he has accepted at least eight speaking invitations between now and then. He's also making regular rounds on TV. "I need to be out here doing this," he says. "I'm a worker by temperament."

"It's a calling," says Jeffrey A. Sonnenfeld, a professor at the Yale School of Management. "He is the country preacher of finance. Henry Fonda would have played Jack Bogle in the movie."

THE GADFLY GENE

As the train reaches cruising speed, Bogle's rhetoric heats up. The financial system, he charges, is too far skewed toward Wall Street and money management firms. At the same time, he says, individual investors have far too much freedom to make ruinous decisions with their retirement accounts.

So how would he fix things? Bogle proposes the creation of a federal retirement board to simplify and clarify the retirement-savings process. The board would oversee a new kind of defined-contribution account to replace the salad bowl of options—401(k), IRA, Roth IRA, Roth 401(k), 403(b)—that currently confront and confound investors. It would also monitor savers' investment choices to help them determine just how much risk they can tolerate and would emphasize low-fee mutual funds over pricier ones. Just as important, Bogle is urging Washington to require retirement plan providers—and all money managers, for that matter—to meet basic client protection standards. He wants fuller and clearer disclosures of all potential conflicts of interest and any other information that might affect investing decisions.

If there's a gadfly gene, it runs in Bogle's family. Way back in 1868, his great-grandfather, Philander Banister Armstrong, needled his fellow insurance executives. "Gentlemen, lower your costs!" he challenged in a speech. In 1917, Armstrong, whom Bogle calls his "spiritual progenitor," published a 258-page diatribe called A License to Steal: How the Life Insurance Industry Robs Our Own People of Billions.

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Architecture in Recession: Spain

The boom in Spanish housing construction, fueled over the past decade by low European Union interest rates, was dealt a fatal blow by the crisis this past fall. According to the Madrid College of Architects, a professional association, permits for new construction virtually came to a halt in 2008. Paloma Sabrini, head of the organization, estimates that at a national level, the market will require three years to absorb the existing overstock of one million units. In Barcelona, Carlos Ferrater, an architect who works in both the private and public sectors, reports that "Most developers have come to a full stop. We've gone from euphoria to ruin in three months."

Spain's investments in infrastructure over the past 30 years have turned the public sector into a major source of commissions and catapulted the country's architecture into the international limelight. But overspending has stretched local governments to the limit. Ferrater notes, "Municipalities like Madrid and Valencia are heavily indebted, and can't even handle projects already under way."

Rafael de La-Hoz, head of one of Madrid's largest studios, finds many public works in undeclared paralysis. "If you ask the clients, they'll tell you that everything is going forward, but the fact is that work has halted." Among the projects affected are his two courthouses for Madrid's Campus of Justice.

In response, President Jos Luis Rodrguez Zapatero announced a $10.6 billion program to finance municipal works in 2009. The funds will permit Madrid to revive lvaro Siza's modernization of the spaces around the Prado Museum and the reconstruction of the banks of the Manzares River over a buried highway, designed by a team led by local architect Gines Garrido. The city has dusted off plans for 269 projects, including 20 new child-care centers. Barcelona will spend $375 million on public spaces and social services.

Architects report slowdowns in roughly 20 percent of their current work. Francisco Mangado in Pamplona says, "Though the municipalities aren't paying right now, you know they'll eventually come through." Younger firms are especially vulnerable, but Csar Jimnez de Tejada of Estudio Entresitio in Madrid, reports that the open competitions for public housing and other local services on which they depend continue to be announced.

De La-Hoz has found some relief in international commissions. His newest clients are in Eastern Europe (including one in Bucharest); they look to Spain as a model for integration in the European Union. But he foresees that, "In the long term, the situation is unsustainable."

Like many architects, Ferrater balances design work with teaching, which allows him to take a long view on the crisis. "I want to focus more on the fundamental mission of the architect, in social, cultural, academic and professional terms. You've got to take a positive attitude, looking ahead, instead of behind you."

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How Microsoft Is Fighting Back (Finally)

For 25 years, Microsoft (MSFT) held unquestioned dominance in the personal computer business. But last year the maker of the Windows operating system started to look like a weary, vulnerable champ. Fueled by iPhone-mania and the iconic "I'm a Mac" TV ads, Apple (AAPL) was nearing a double-digit share of the PC market. At the same time, a new generation of sub-$500 "netbooks" that ran on the free Linux operating system was taking off.

Now, Microsoft has launched a determined counteroffensive. Its uncharacteristically cool TV ads emphasize the affordability of PCs vs. Macs. And it has started offering PC makers a version of Windows, normally around $70, for as little as $15. Mac sales are sliding, and Linux is disappearing from most netbooks. Researcher NPD says 95% of PCs with a small screen and a sub-$500 price tag run Windows today, up from 10% in early 2008. "Microsoft has driven Linux off the lot in netbooks," says Roger Kay, founder of tech research firm Endpoint Technologies Associates.

Microsoft CEO Steve Ballmer and his top lieutenants say they're not done yet. They predict the introduction of the next Windows upgrade this fall will spark a renaissance in the company's flagship business. Named simply Windows 7, the program promises greater ease of use and reliability, rather than new bells and whistles. And while every major Windows overhaul in the past has required more powerful computers, Windows 7 can work with slower microprocessors and fit into less hard-drive space. That means it will run on a full range of PCs, including netbooks. "Although we make less per unit, we're making very decent money" on lower-price PCs, says Brad Brooks, Microsoft's corporate vice-president for consumer-product marketing.

Still, selling millions of copies of Windows 7 for $15 or so is hardly a positive trend. Microsoft investors are used to the massive profit margins that come with selling Windows for four times that amount. But Brooks says the company has found a way to attract new customers with cheap models, while minimizing price erosion. The secret is a new strategy behind its "Windows Anytime Upgrade."

EASIER UPGRADE

Because of the smaller size of Windows 7, three versions of the program will come loaded even on lower-end machines. If a consumer on a cheaper PC running the "Standard" version tries to use a high-definition monitor or run more than three software programs at once, he'll discover that neither is possible. Then he'll be prompted to upgrade to the pricier "Home Premium" or "Ultimate" version.

Microsoft says the process will be simple. Customers enter their credit-card information, then a 25-character code, make a few keystrokes, then reboot. Brooks says pricing hasn't been determined, but upgrading "will cost less than a night out for four at a pizza restaurant."

Even at Pizza Hut prices, it's a risky proposition. Consumers may not appreciate having to fork over more money to accomplish routine tasks. "It could create a backlash from consumers," says analyst Toni Sacconaghi of Bernstein Research. "Such a move could be viewed as a bait and switch." The current version of Windows, called Vista, also has different tiers, but few customers upgrade because it means ordering a DVD and going through a clunky installation.

The strategy had better work if Microsoft is to maintain its Windows franchise's high level of profitability. The business pulled in $13 billion in operating profits for the past fiscal year, on revenues of $16.9 billion. While the Linux threat may have cooled for now, reports have leaked out that major PC makers including Acer, Dell, and Hewlett-Packard are interested in using Android, another Linux-based platform championed by Google.

The leaks may well be a tactic to influence discussions Microsoft is having with PC makers over the pricing for Windows 7. Nevertheless, "Microsoft is trying to freeze average selling prices when everyone else is trying to go the other way" and lower prices, says Endpoint's Kay.

That's where the new ad campaign comes in. A year ago, the company devised a three-year strategy to reestablish the Windows brand with consumers. The latest ads, which feature volunteers who hunt for a laptop using money from what they think is a market-research firm, resonate particularly well with the thrifty mood of today's shoppers. In the first, a part-time actress named Lauren chooses a $700 laptop over a $2,700 MacBook. "I'm not cool enough to be a Mac person," she says. In the second, a techie named Gianpaulo picks a $1,500 PC. The third will feature a mother and her 11-year-old son, who opt for a Sony after the boy dismisses a pink PC and Macs, which can't run the Blu-Ray DVDs on which many games are printed.

Lauren has become a YouTube sensation, but Microsoft recognizes it still has work to do. "We're not cool yet. Trust me, my daughter tells me that every day," says Brooks. "But we're having a lot of fun telling our story. It's been a long time coming."

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How to Cut Payroll Costs Without Layoffs

Ask any entrepreneur about his worst business experiences, and laying people off is sure to top the list. After all, people who work together in an intimate setting often form personal connections that mirror family bonds. Craig Lindell, chief executive of 17-person wastewater treatment company Aquapoint, remembers having to lay off staff in the mid-'80s, when he was chief operating officer of a fashion accessories company. "I faced those people when they lost their jobs," says Lindell, who still gets choked up talking about it. Reka Mostella, area manager of the Small Business Development Center at the University of South Carolina Aiken, sympathizes. "Business management is not about running a company under ideal circumstances," she says. "It's knowing what to change when things change."

Aside from the personal toll, losing highly skilled workers can inflict long-term damage on a business, making it hard to bounce back and forcing managers to spend precious time and money recruiting and training when conditions improve.

But salaries and wages typically account for 60% to 80% of a small company's expenses, according to Jeff Cornwall, director of the Center for Entrepreneurship at Belmont University in Nashville. And with nearly 70% of small businesses suffering sales declines, their owners are doing "things that they hoped they would not have to do," says Alice Bredin, an adviser to American Express Open, AmEx' small business division. That often includes tightening payroll. In a survey fielded by Open late in January, one-quarter of small business owners said they were cutting staff hours or jobs, and 9 out of 10 said they were curtailing hiring plans. It adds up. In January, small businesses with fewer than 50 workers shed 175,000 jobs, according to payroll firm ADP.

Yet many entrepreneurs are trimming payroll costs without laying off hard-to-replace employees. Some, including Jim Strite, CEO of Strite Design & Remodeling, are working with staff to devise ways to save jobs and minimize the blow to workplace culture if cuts are unavoidable. Naturally, the first line of defense has been to shrink nonessential expenses such as travel and business meals, make do in smaller quarters, and postpone or cancel big-ticket investments. But some business owners are preserving jobs by reducing hours, encouraging employees to take unpaid leaves, and chopping pay (often their own).

If you're feeling the squeeze, it may be possible to squeak by without losing your company's best assets. Following are three strategies to help keep your prized employees on board.

TALK STRAIGHT, GET EMPLOYEES INVOLVED

Jim Strite, Strite Design & Remodeling

On Thursday, Mar. 20, 2008, Jim Strite gathered his staff around the oval table in his "education room," where charts illustrating the company's progress adorn the walls. The owner of Strite Design & Remodeling in Boise, and a former economics lecturer, Strite showed his 14 employees how the housing meltdown was affecting the company: Revenue was a third below target. Gross profit, off 40%, wasn't enough to cover overhead, putting the firm in the red. Quick improvement was unlikely. Spring usually yielded projects that lasted through the summer, but calls about kitchen remodels, bathroom makeovers, and dream additions weren't coming in nearly often enough, despite a stepped-up marketing effort.

Strite's employees were accustomed to straight talk, although they were surprised at the urgency of Strite's message. The firm is an "open-book" company, where employees see finances regularly, are schooled in the business, and are expected to drive its success. "Communication is important at all times. In tough times, it just becomes all that more important," says Rich Armstrong, president of Great Game of Business, a Springfield (Mo.) consulting company that promotes open-book principles. Armstrong says that candid dialogue eliminates distracting rumors and fears and fosters teamwork.

In Strite's case, staffers immediately volunteered cost-cutting ideas, including offers to cut their own hours and take unpaid vacation.

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Soros Sees Strides in Fixing the Global Financial Crisis

By the end of the day on Apr. 3, the Dow closed just over the 8000 mark, and a rally appeared to be taking hold on the heels of the G-20 summit in London. But at press time on Apr. 8, the Dow had dipped to 7837—in part because of remarks made by George Soros, the storied hedge fund investor. Two days earlier, Soros called the upswing of the Dow and the S&P 500 "a bear market rally," but he may not be as pessimistic as those words imply. I talked with Soros after the G-20 and again on Apr. 8, and while he remains cautious about the remaking of the world financial system and the direction of the market, he was heartened by the outcome of the summit. Soros, who came out of retirement last year to take charge of Soros Fund Management, now says he is back in retirement mode. Apparently, though, the lion in repose can still scare the jungle.

MARIA BARTIROMO

When do you expect a true turnaround in stocks?

GEORGE SOROS

I think we are in for a long period of bottom-building. We had a good bottom in February and a good rally following it. We are going to have a number of bottoms in the years to come. Whether they will be higher or lower than the February bottom, I cannot predict—especially since I argue in my new book [The Crash of 2008] that financial markets are inherently unpredictable.

What was your reaction to the outcome of the G-20?

They pulled a few rabbits out of the hat, and it was a very impressive communiqu [coming out of the meeting]. It was probably [British Prime Minister] Gordon Brown's finest hour. He really did see the need to address the global problem because you have the less developed world facing a potential collapse as the banks don't roll over their loans. I would say this is probably the first time the authorities are actually ahead of the curve. They've managed to forestall a crisis in the developing world.

The money that will be pumped into the IMF could rise to $750 billion. Is that enough?

What's very important is special drawing rights of $250 billion. That is internationally creating new money and will allow countries that are unable to print their own money the way the U.S. can to stimulate their economies. And it will provide additional stimulus for the world, and particularly the part most in need—less developed countries that have been hit by a crisis not of their own creation. So I think it was very important not just for moral purposes but also for our own self-interest because this will...help restart international trade.

When do you expect the U.S. recession to end?

It will take time. The magnitude of the problem cannot be overstated. It is bigger than it was in the 1930s. But [the outcome of the summit] is a very positive development.

FASB [the Financial Accounting Standards Board] says it will relax the mark-to-market rules—the way assets are valued on banks' books. How much will that help?

I remain critical because I think it would have been much more effective to recapitalize the banks, create clean banks that are able to lend. The way the TARP money was spent was very messy and badly done. And because of that, there's a reluctance by Congress to make new money available. So it will take a long time for the banks to dig themselves out. And while they're doing that, they will not be providing sufficient credit to carry on business, they'll be charging a lot, and that generally is going to weigh on our economy.

Are you expecting that we'll see more banks go down?

No, I think it's clear that no major [U.S.] bank whose failure would have a systemic effect will be allowed to go under.

They'll be nationalized?

It would be better to nationalize [the banks] than merely to nationalize their debt and leave them with the profits, because that's really to the disadvantage of the taxpayer.

Secretary [Tim] Geithner says the Treasury should be able to regulate nonbanks such as an AIG. Do you agree?

I do. Basically, this whole financial system collapsed because regulators failed to regulate. There was a belief that markets are self-correcting. That turned out to be wrong. So we have two tasks: One is to arrest the collapse and reverse it, and I think we are making good progress. And what happened at the G-20 is an important step. Now comes the task of rebuilding the financial system from its foundations, because it was built on false premises. That will take longer. There's much less clarity on that than there is on what needs to be done to stop the collapse.

What will the banking industry look like once we emerge from this crisis?

It will look fundamentally different because if you recognize that there has to be a guarantee for the deposits, then you also have to regulate those entities that are guaranteed. So it's not enough to regulate the money supply. You have to regulate credit. And you have to recognize that markets are prone to create asset bubbles and accept the responsibility of preventing those bubbles from becoming too big and self-reinforcing, because that's what a bubble is—a self-reinforcing process. And you have to recognize that markets have moods that regulators must counterbalance. You also have to recognize that if the markets don't know what equilibrium is, then regulators can't possibly know either. So you have to accept that regulators will be wrong. But with the benefit of feedback from the market, you can judge whether you've done too much or too little.

You saw the story about some hedge funds saying: "We're leaving London. The tax situation is not favorable. We don't like business conditions here."

Where are they going, another planet? There's general agreement that regulation has to be global. If you have global markets, you must have global regulation. There is no alternative now with tax havens being brought under control. Hedge funds will have to get used to being regulated.

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