Many of us remember the mass recall of hundreds of thousands of Volkswagen (VW) cars in 2015. Some may recall that it had to do with the company installing illegal software in diesel engines to cheat U.S. anti-pollution tests. Most thought that the recall would long deter such behavior. But, here we are. Less than four years later, VW faces another investigation by the Kraftfahrt-Bundesamt (KBA) and another potential recall.

The KBA launched an official investigation into VW models equipped with the 1.2-liter diesel engine, including popular models like the Passat. The vehicles’ software allegedly allows VW to cheat emissions tests — a charge with which the company is intimately familiar. The charge could be a special blow to VW’s reputation following the company’s public denial of illegal activity in 2016. However, VW has hitherto cooperated with the KBA.

VW managers could face prosecution for fraud, and the KBA could take as many as 30,000 cars off the road. Such a recall could have a gigantic economic impact on the company. In a much less dire — and far more likely — scenario, the KBA could order VW to perform further remedial work.

The potential economic trouble comes at an unfortunate time for the company as it enters the electric vehicle battery race. Fraud charges could put a damper on the speed with which VW enters the vehicle battery market, leaving an opening for other European competitors.

Volkswagen in Trouble Again?

For the fourth year in a row, Apple plans to release three new iPhone models in 2019. In 2018, Apple released three phones, the latest being the iPhone XR, which went on sale in October. The XR is the most affordable phone within the “X” series, in large part due to its LCD display, which has significantly lower resolution compared to the OLED display used for the rest of the iPhone family. The XR costs $749 while the smaller XS costs $999 and the larger XS Max costs $1099. Analysts expect that the prices of the 2019 generation will closely reflect the prices of the current “X” series.

Though Apple has not yet reported earnings from its fiscal 2019 first quarter, which ended on December 29^th, in early January CEO Tim Cook wrote a letter to investors expressing the anticipated earnings to be about $84 billion. This figure is down from a prior estimated range between $89 billion and $93 billion. Apple blamed the anticipated sales drop on lower than expected iPhone sales in China. China’s economic growth has been slowing dramatically over the past year, likely due at least in part to the ongoing trade war between China and the United States. Though the XR was Apple’s best seller in the U.S. in 2018, its performance in China fell far short of what was expected. In fact, Japan Display Inc., the multibillion dollar company that makes the XR’s LCD screens, now needs a bailout as a result of the low sales.

Though the most affordable of the three iPhones in the 2018 releases, the XR is likely just too expensive to compete with local smartphone companies in China, especially given the troubled Chinese economy. According to Fortune, Chinese companies build devices that look and operate a lot like the iPhone, but come with a much cheaper price tag. Though they are close copies, the companies reportedly get sympathy from the Chinese government and are not often prosecuted for intellectual property crimes. It appears that Apple has not yet found a way around this problem, but it seems it will not be able to increase sales until it creates a more affordable iPhone. At $749, the XR is considered the “most affordable” iPhone but certainly is not cheap. If Apple needs to rely so much on sales in China while the country’s economy is in decline, it will need to tailor its products to that customer base.

The Wall Street Journal reported that Apple plans to release a second addition of the XR in 2019 despite its poor sales because it has been in the product pipeline for too long and would be very difficult to scrap. It will be interesting to see how investors react to this news as there is little reason to believe the new XR will do any better in 2019. Indeed, Apple will likely beef up certain features of the phones with new camera systems and the like, but this is unlikely to solve Apple’s low phone sales in China.

Apple Plans to Release 3 New iPhones in 2019 Amidst Backlash Over iPhone XR

SpaceX, Elon Musk’s rocket company, announced last week that it plans to lay off ten-percent of its nearly 6,000 workers. The company, based out of Hawthorne, California, says it is aiming to become  “leaner” as it attempts two very expensive projects that have “bankrupted other organizations.” As a result, nearly 600 workers in California, Texas, Washington and Florida will lose their jobs. SpaceX has given little details as to where the layoffs will come from, but it appears to be mostly engineers and technicians. Those affected will receive eight weeks’ pay along with assistance in finding new jobs.

While layoffs of this size often signal corporate trouble, SpaceX insists the company is doing well and that the layoffs are not a result of financial struggles. SpaceX, a private organization, was recently valued at $30.5 billion. Last December, it raised nearly $500 million in funding. The company has two known projects in the future that are estimated to cost up to $10 billion each, which may help explain the need for a leaner workforce and the decision to cut employee costs.

Founder Elon Musk has set high ambitions for SpaceX, but the company is currently “years behind the projections it made” when setting its earlier timelines and goals. Musk, who is known to fire workers when they fall behind their projected timelines, famously fired members of the Starlink team, who were responsible for an ambitious broadband project, when their work pace was too slow.

It is unclear how trimming the company’s workforce will better help SpaceX meet its tight timelines and ambitious feats, especially when they are already behind on many projected deadlines. The salary of 600 employees is arguably a drop in the bucket of a $10 billion project. On top of this, there is reason to believe that SpaceX is already a leaner company than other rocket companies given its smaller size and young history. Only time will tell whether the layoffs were a savvy strategy that will help the company in the future.

Interestingly, Tesla, Elon Musk’s other star company, also announced layoffs last Friday. Tesla announced in a letter to its employees that the company would layoff seven-percent of its 45,000-person workforce. Musk said cutting jobs at Tesla would allow the company to offer its Model 3 car at a lower price.

SpaceX Plans to Lay Off Ten-Percent of its Workforce

“We no longer worship at the altar of character and kindness but of innovators and money.” – Scott Galloway, NYU Stern School of Business

The 14-month parade by Amazon in search of its new home for what is dubbed “HQ2” has finally come to an end, and it seems one city was simply not enough. Amongst 238 cities that submitted bids in the hopes of courting the online retail juggernaut, the D.C. suburb of Arlington, VA and New York City have been selected as grounds for a linked headquarters that will share upwards of 50,000 high-paying jobs and $5 billion in investment that the company is expected to create through its expansion.

Though the decision to split HQ2 across two locations came as a surprise to many, Amazon’s choices themselves reinforce expert predictions as to the company’s aspirations. Mere speculation of Amazon entering an industry has led to wild fluctuations in stock prices—a power that no other company in recent history has held. The ability to immediately bulldoze most competitors by its presence alone raises serious antitrust concerns that legislators seem ill-equipped to handle. Consequently, Amazon’s long-term strategy of loss-leading to gain market share has created a perfect storm of dominance that shows no signs of stopping, short of regulation—hence the D.C. stomping grounds. As one of the first $1 trillion market cap companies, Amazon seems well-poised to rally its army of lobbyists within the nation’s capital, possibly dismantling the only force that stands in its way towards the next trillion.

More shocking, however, was the unapologetic pandering by municipalities in their attempts to woo the e-commerce giant with billions in tax breaks and various other incentives. Make no mistake—the campuses will likely prove to be a big win for the two cities. But there are real concerns about gentrification in the two metros; the cities already rank among the top 10 cities with the worst income inequality. Meanwhile, crumbling infrastructure and a dearth of funding for public services plague many of the other cities that threw their hat in the ring. For example, Montgomery County, MD offered a package worth upwards of $8.5 billion; Philadelphia, PA upwards of $5.7 billion. It may have served these municipalities well to take a step back from the trees to see the forest. No matter how luscious and green, the forest’s roots ultimately hinged on one question: Where does Jeff Bezos want to spend a significant portion of his time? As the most valuable man alive, no other human better embodies the proverb “time is money.”

With this in mind, it could be argued that the magnetic quality of mega-cities shortlisted the possible locations before the free-for-all even began. So, what came about from 14 months of incessant analyst chatter? New York Governor Andrew Cuomo offering to change his name to “Amazon” Cuomo in a half-cry of desperation, billions in tax incentives for a company that likely would have chosen the same cities regardless, and smaller municipalities groveling for a chance to bring appealing new jobs to their cities, only to be shown the door.

Welcome to the altar. Shoes off, please.

Amazon’s HQ2 – With the Winners Selected, What Have We Lost

Boeing, America’s largest manufacturing exporter that specializes in aerospace technology, is seeking services deals to increase profitability and outcompete its long-time European rival, Airbus. In an effort to expand a newly-formed services division specializing in maintenance of its products, Boeing recently acquired KLX, Inc., which specializes in distributing aerospace technology and machinery. This 4.5 billion-dollar deal symbolizes a dramatic stride towards Boeing’s goal of maximizing profits and superseding Airbus in sales.

The Airbus/Boeing rivalry came to fruition following Boeing’s acquisition of McDonnell Douglas, which effectively narrowed the commercial jet market down to two competitors: Airbus and Boeing. In 2017, Airbus acquired Bombardier’s CSeries airplane program, which put pressure on Boeing to further expand its aerospace program. Thus, Boeing’s most recent acquisition of KLX is not only significant in terms of capital gains, but it is a strategic move to grab more of Airbus’s market share by expanding its reach into the services sphere. However, Boeing is not losing steam after landing the KLX deal; they are in preliminary talks with Woodward, Inc., an aerospace parts manufacturer, and nearing a potential joint venture with Embraer SA, a commercial, corporate, and defense aircraft manufacturer.

From the consumer’s point of view, this move towards providing maintenance services for its customer base makes Boeing more appealing because it reduces the transaction costs associated with searching for third-party maintenance providers. At the same time, this has the potential to increase Boeing’s profits by adding an extra level of consumer interaction at the services stage of the relationship, and providing maintenance services can increase profitability margins in comparison to the production of jets. Therefore, Boeing’s strategic move towards increasing the number of services deals highlights its ability to quickly adapt to changing markets while also benefitting consumers.

Moreover, Boeing is ahead of the game. While Airbus intends to incorporate a services sector into its business plan, it has not yet closed any substantial service-related deals. This not only affects the customer base of each corporation, but it can have substantial effects on investment. Between Boeing and Airbus, Boeing’s intentional and successful deal with KLX, coupled with its promising future deals such as its potential deal with Embraer SA, make Boeing the more attractive investment. However, it is unclear how substantial the effect of Boeing’s strategic mergers and acquisitions will be in the long run. Even though Boeing was first to close the deal, this does not mean Airbus will be any more less effective once it successfully expands into the services sector. Thus, while Boeing may be first, this is likely just another countermove amidst the dynamic Boeing/Airbus rivalry.

Boeing Lands Services Deal

News about Russian meddling in the 2016 presidential elections is now common knowledge, however, the actors remain obscure. The Internet Research Agency (IRA) was first known for spreading propaganda online, including Twitter, to give the illusion of a robust pro-Kremlin supporter base. The people working for this agency are essentially internet trolls, whose job consists of spreading false information and amplifying favored narratives, such as anti-Obama sentiment. The IRA began focusing on U.S. politics through fake social media accounts in 2014 to further deepen the division between the opposing parties, which reached at least 146 million people according to Facebook.

On the eve of the 2018 U.S. midterm elections, Facebook removed 115 accounts, between Facebook and Instagram, because of a tip from U.S. enforcement stating that the accounts were possibly linked to foreign entities, like the IRA. Days later, a site alleging to represent the IRA claimed it ran the network of fake accounts attempting to meddle in the elections. This revelation highlighted a foreign actor’s continued eagerness to shape U.S. politics through social media, likely fueled by similar success in the 2016 election. Appropriately, Facebook’s head of cybersecurity policy, Nathaniel Gleicher, stated, “this is a timely reminder that these bad actors won’t give up.”

While the recent revelations of midterm meddling are unsettling, this does not mean there weren’t security improvements since 2016 directed at combating such troll accounts. Since 2016, Facebook has made conserving the integrity of elections around the world a top priority. Its campus in Menlo Park, California set up a “war room” to monitor election manipulation tactics, including disinformation, voter suppression, and other security challenges. Facebook has also hired more people and improved its automated systems that monitor posts and tightened its rules on who can purchase political ads.

While it is necessary and crucial that agencies like Facebook, the platform used by such foreign actors, increase their security measures to prevent the spread of false toxic narratives, it is equally important that users of social media, and the internet at large, be attentive. As social media users and consumers of broader internet messaging, we need to remain vigilant about what we consume and, more so, what we accept as truth. Steps to become more mindful in our engagements with the internet are simple: always source check, consider underlying reasons for the post, look into the author, carefully examine the article, etc. This implores all of us to be critical consumers of information and make decisions for ourselves as opposed to following the recommendations that seem initially reliable.

Russian Meddling in the 2018 Midterm Elections

Goldman Sachs, one of the dominant players in mega-M&A deals, recently hosted a dinner over the summer with executives of approximately twenty private equity firms. Rather than wooing buyout industry titans that the bank normally advises, such as The Blackstone Group or KKR & Co. Inc., Goldman Sachs invited firms that focus on middle market transactions. These acquisitions range from $500 million to $3 billion in size, a far cry from the goliath deals that Goldman Sachs has used to cement its investment banking empire.

Spearheaded by John Waldron, its COO, mangers of the investment banking division review clientele to identify neglected industries that the bank can fan out to encompass. The executives seek to hire senior bankers in industries where the firm lacks a presence, extending regional offices to exert a bigger impact on local businesses. Initial inquiries reveal that Goldman Sachs has lists with about 10-15% more companies on them than those currently on the bank’s roster.

The initiative is part of a targeted strategy to drum up additional clients and business. The bank plans to offer middle market companies a host of services: raising finance, selling stock to the public, or helping the companies sell themselves to larger competitors. The action in this segment of the market is rising, as smaller companies form an ever-larger portion of takeover targets. Goldman Sachs has noticed the trend, facilitating 187 deals this year, with 47% worth $1 billion or less, up from 39% the previous year.

Part of the change in strategy comes with the new change in power structure within the firm. Goldman Sachs’ new CEO, David Solomon, hopes to remove the bank’s reliance on volatile trading revenue. Goldman Sachs aims to hit a projected $5 billion in revenue by 2020.

This is revealing of a bigger trend within the industry. While revenue and trading took a dive after the financial crisis of 2008, both are now actively growing. 2018 has been one of the most active years in terms of hiring among senior ranks. The power structure was revamped not only at Goldman Sachs, but in a number of other high-ranking bulge-bracket banks, including Bank of America, Merrill Lynch, Citigroup, and the like. Additionally, global M&A activities have reached a new high. Amidst the flurry of transactions, the middle market now looks ripe for increased activity.

Goldman Sachs Frying the Smaller Fish

Uber has asked Pennsylvania regulators for permission to resume testing of its self-driving cars, the company announced November 2. Uber’s self-driving car ambitions were seemingly dashed when one of its test vehicles crashed in Tempe, Arizona this March, tragically killing a pedestrian. There have been concerns about the driver, who may have been watching The Voice while driving and may face charges. The crash put the spotlight on Uber’s software, however, as it recognized the pedestrian but failed to react in time. Uber ended self-driving tests in Arizona after the governor banned them and temporarily suspended all testing on public roads pending an NTSB investigation, including terminating its operations in Pittsburgh. Ever since Uber and Carnegie Mellon announced a partnership—to some criticism—Pennsylvania had been ground zero for its self-driving efforts.

Testing on public roads is critical for self-driving cars. Self-driving cars are machine learning technologies, meaning that they teach themselves from data, so increasing miles driven on public roads is paramount—according to one RAND study, possibly 8 billion miles of real-world testing are needed. Uber’s autonomous vehicles division has a long history of technological struggle, and is widely reported to be far behind its peers with only 13 miles per intervention—lower than its peers by a factor of 100. Overall, though, most crashes in self-driving tests are caused by humans; Google famously went without a crash for years. Human error is a contributing factor in over 90% of traffic deaths, leading some to calculate that self-driving cars could save 300,000 lives per decade. With Waymo and Tesla leading in miles logged, Uber is hardly ahead of Cruise.

Regulations are key for testing. Testing on public roads requires state approval from individual Departments for Motor Vehicles, and all self-driving cars interact with several federal regulators via the Department of Transportation. The government has produced several voluntary guidelines, including the DOT’s Automated Vehicles 3.0 guidelines. U.S. Secretary of Transportation Elaine Chao has directed the NHTSA to consider permitting cars without steering wheels. California and Arizona are the main testing grounds for autonomous vehicles, and there has been a regulatory race to permit self-driving tests, with both states recently announcing that fully self-driving cars will be permitted on their roads. Some other states, like Florida, have also been aggressively permissive; others, like New York, just recently permitted drivers to take their hands off the wheel while self-parking, which has been commercially available since 2003. States also compete on disclosures, with California requiring a safety disclosure and Arizona requiring none at all. Uber will likely be under close scrutiny as it cautiously restarts its efforts.

Former CEO Travis Kalanick called self-driving “existential” for Uber, as labor is the company’s most significant cost. Though the NHTSA Tempe report is expected early next year, Pittsburgh’s regulators expressed confidence in Uber’s new controls. Uber’s first self-driving car was a Volvo XC90, launched in 2016 in Pittsburgh.

Uber Seeks Permission to Relaunch Self-Driving Tests in Pennsylvania

Following a great year for Berkshire Hathaway, the investment conglomerate bought back nearly $1 billion of its own stock in the third quarter of this year. Previously a critic of share repurchases, Chairman Warren Buffett and his board removed limits at a board meeting in July that prohibited share repurchases — opening the door for a big boost to shareholder earnings.

Over the past year, Berkshire Hathaway’s net income jumped from $4.1 to $18.5 billion. Available cash followed suit, soaring from $25.5 billion to $36.5 billion at the end of September. Shares are up more than 4%. Apple, the most valuable stock Berkshire owns (an investment totaling $57.6 billion), naturally played a big part in Berkshire’s portfolio earnings. Cash flow from Duracell, Geico, and BNSF Railway did not hurt either. It also goes without saying that the new U.S. tax code gave an enormous boost to massive corporations like Berkshire, whose effective tax rate is down from 27.2% in 2017 to 19.2% this year.

The last time Berkshire did a share repurchase was in December 2012, when it bought back nearly $1.3 billion worth of stock, mostly from one longtime shareholder. This time, the overall consensus is that a share repurchase is a net/net win for shareholders and Berkshire. While fewer shares mean higher earnings per share for investors, this share repurchase also indicates that Berkshire’s stock is as good an investment as any that the company could buy in the market. As put by Valuewalk, the decision signals that Berkshire is “one of the best investment opportunities available on the market.” With an average share price of $312,806.74 per A share and $207.09 per B share, Berkshire remains one of the most exclusive and profitable investments around.

Warren Buffet is known for his belief that investments are a better way to increase shareholder value than buybacks or dividends. Berkshire’s previous buyback policy allowed share repurchases only if the stock price was below 120% of book value. While the decision to eliminate this restriction represents a shift in how Buffet gives value to his shareholders, many critics believe that cash could be better spent on capital expenses or wages. Nevertheless, Buffett remains a catalyst for trends in the broader market: Predictably, stock repurchases by S&P 500 companies hit a record high in the second quarter of this year.

One thing is for certain: Warren Buffet knows investment opportunities. Any decision to repurchase shares indicates that the Chairman is less than impressed with other investment options in the market. This may be a signal to companies to align themselves more with attractive options like Apple…if they didn’t know that already.

Good News is Good News

A dispute over immunity for the International Finance Corporation (IFC) made its way to the Supreme Court in late October, after a power plant in India (financed in part by funds from the IFC) caused environmental harm to a group of farmers and fishermen living near it. Under the International Organizations Act of 1945, international organizations headquartered in the United States like the IFC have immunity from all forms of judicial process in the U.S. similar to that enjoyed by foreign governments.

Concerns over this particular suit include whether U.S. law gives absolute immunity to the IFC, the private lending arm of the World Bank, and whether allowing this type of suit to proceed would open the floodgates to more lawsuits. Supporters of the IFC highlight that it often loans money where private capital will not go, such as in developing countries. Due to the fact that commercial activity is the organization’s sole purpose, some worry that placing blame when others have failed to meet standards will hamper their ability to promote sustainable private sector investment in the developing world.

Beyond the obvious question of whether the IFC should have complete immunity, an underlying question remains about whether this immunity diminishes intentional accountability. If these types of organizations are meant to help reduce poverty and promote economic development, a chief precaution might include protecting vulnerable communities and the environment. Moreover, if an organization, one with immense influence over a project given its financial backing, is briefed and knows about the plausibility of harmful impacts, it may follow that one should minimize such impact or compensate those harmed.

What happens when we give certain organizations the opportunity to be above law? What is the social value of the privilege of immunity and does it depend critically on the extent to which its existence encourages these organizations to fulfill their missions? How can international organizations stay true to their mission while ensuring projects they fund meet environmental and social standards? The answers to these questions, undoubtedly complex and multifaceted, lie in a reconsideration of the balancing of these values against the pursuit of justice through legal accountability.

Does Immunity Outweigh Accountability for International Finance Organizations?