♪ >> we are at bloomberg headquarters. >> this week's issue, how to fix capitalism and build prosperity. the magazine investigates what happened to president's four and half billion dollar deal. we begin with the

international cover story, a report that sheds new light on huawei and allegations of trying to steal trade secrets. thisditor is with us, and is a story that reminds us why officials have some new problem. >> it is a special story because it provides a rare glimpse of something only has understood. they claim they are bad actors, yet there has been no tangible proof. erik schatzker pulls off an incredible story. from the moment he came to us with it, we said stop talking and start writing. jason: go wherever you need to go, in a case in the vegas. there's a sorbet stand involved. schatzker undercover. >> where this really began was that has a company glass it thinks will make better smartphones. you know how your smartphone shatters?

he thinks he has that technology. he sends a sample to quality -- huawei and it comes back broken. carol: sitting down with eric, he tells the story so well we do get more from erik schatzker on this great story. there was an investigation underway involving a small start up taste outside of chicago in the advanced materials industry. they are trying to develop a diamond coating that would go on top of your smartphone display, making it harder, more scratch resistant, and ideally of great appeal to the likes of apple, samsung, lg, the major smartphone manufacturers, including quality -- huawei. was happenings was because their interactions with huawei. had been sending samples of their dark glass product to a

bunch of different smartphone makers. carol: which is what a supply will do. >> standard in the industry. to show have summoned prospective customers, you sent to them. carol: and there are rules, correct? case, it wasn this you can have the sample for 60 days and the tests you perform have to be nondestructive. so this company sent to rounds of samples to huawei and we assume they did the same thing with other companies. . after the second round went out, 60 days past and the sample did not come back. they demanded the sample be returned immediately, as you would, and the first thing they got back was an email with a picture in. the picture was, under magnification of the sample, and had a big scratch.

we talk about this diamond glass is being scratch resistant or unbreakable. it is come up to a certain point. it is very thin, it is not like it is a chunk of diamond. it also was not in its final form, this was still a prototype. so they saw the scratch, and they thought, my goodness, they have violated the terms of our agreement, damaged the sample. again, they persisted in asking for the sample back. it was finally returned last august 2018. when the chief operating officer opened up the cardboard box -- carol: tons of safety packaging right? >> it is delicate equipment. threw away the airbags, opened up the case, he rise the sample was not just damaged, it had been broken into two pieces and

three shards of this glass were missing. at that point that he and the ceo and founder of this company realized that something very bad was going up. this is not what companies do when they are engaging in good faith business. destroyed the sample for reasons they did not understand, but that they could surmise and they feared the worst. jason: the worst being that their intellectual property was being stolen. >> that is among the range of worst possible outcome, yes. had damaged the sample in an effort to reverse engineer the process and figure out how to put the diamond coating on the glass themselves and get to market that much faster, and in doing so, potentially destroy the commercial opportunity for a -- for the semi-d

-- semi-conductor. this business because, in theory, there are a lot of potential applications. electronics and defense. if you want to get into the business of laser weaponry, either on an offense of basis or a defense of basis, you need a diamond. i'm not going to go to the details, but diamond is a very good heat dissipating material. it has particular use in defense applications, as opposed to offensive applications. so they worried that maybe it was not just huawei trying to get a jump, but the chinese military trying to get a jump. carol: enter the fbi. coo,o weeks later, the

this gentleman was at an fbi seminar. the field office was holding regular seminars on corporate espionage and he had been going in a bizarre coincidence, a special agent at the fbi field office was delivering a seminar on corporate espionage and the case study something that is now become a little more famous, attempt to steal intellectual property from the t-mobile lab. the coincidence was just too powerful, he decided right then and there without ceo or board approval he had to talk to the guy -- fbi. he approached her during the break and briefer on what had happened. says the fbi took an immediate interest and things began to move very quickly. jason: that is an important thing to point out.

any of us in our businesses, if we approach the fbi and especially as a small company, we think the fbi is going to proverbially pass on the head and say we will get back to you. stick it in a file somewhere. >> that is not what happened here. we have also been led to believe that because the fbi has been dragged over the mud politically , but in this particular case, they were on it. carol: up next, we hear from the =conductors.semi jason: plus, a play-by-play of the fbi sting operation. carol: absolutely fascinating. this is bloomberg. ♪

carol: welcome back. forn: joined carol and me

businessweek every day on the radio or are -- our daily show. carol: and you can find us online and on our mobile app. jason: we are going to stay on this international cover story. carol: erik schatzker followed an fbi investigation into dealings.-- huawei's akon ceo explains us what he expects to have the next. >> worst-case scenario and what we have been publicly discussing some of the work we are doing. it could potentially put them in the right direction in terms of what to optimize, i would say that is the worst case in a weapon standpoint. in the context of weapons espionage, simply wanting something to differentiate them from the apples and google's of the world.

they are setting up to bring out some sort of finality to the investigation. akhan is looking to file civil litigation concurrent to it. our main purpose is making sure the fbi gets their investigation right. there is in part a national security portion of a corporate espionage, a market value portion. carol: now we get to some of my favorite parts about the story. we talked to eric about the lead up to the fbi sting operation. it happened at the consumer electronics show in las vegas. >> to keep the investigation running, the fbi did not want them to break off contact with huawei. at a certain point, they asked them to reinitiate contact so that the fbi could listen into a conference call, affectively bug the conference call, and have these executives asked questions. what happened to the sample, where to go?

and the course of this call, they learned the sample had actually gone to china. that is a very important point to make coming because diamond coating with its applicability to military applications is on a restricted list. it is not allowed to leave the country, regulated by a regime called the international traffic in arms regulations. if it had gone to china, and they believed it did, that would have been breaking american loss -- law. carol: take us to the consumer electronics show in vegas. >> that to ubaldo the conference call, the same conference call a quality representative admitted it had gone to china. she indicated that while it wanted to continue conversations. it was very difficult to figure out who is playing who. khan is trying to lead them down a path.

at the same time, huawei is han to learnay ak more about the process. of this meeting at the consumer electronics show, where i happen to be. cheap -- chiefhe operation officer with covert surveillance devices. initially, they were going to have this meeting in a room at the consumer electronics show. happened, theyit suddenly and suspiciously change the location of the meeting to the food court at the venetian casino. that is where the sting went down. carol: and you saw it? >> i watched the groups and executives meet. i watched them move towards the food court, they'll walk into a fast casual restaurant called prime burger. that is where the sting went down, trying to look

inconspicuous by a gelato stand. the fbi, thanks to the surveillance agreement, recorded both audio and video of this interaction. there were discussions they are again about what the sample had been. representatives claimed ignorance about the damage and how it got to china and all of that. but they kept pressing for more detail about the operations, try to get a little further along up the value chain understanding how they were able to engineer the film. not even a couple of weeks later, this was about 20 days later, on january 9. on the 28th, the fbi conducted a raid. executed a search warrant on huawei operations in san diego, where the sample had originally gone.

gathered further evidence, and now we are waiting to find out what the government does. jason: one of the tricky things about huawei is that it is privately held. we have taylor riggs to help us understand this market. is so: we know huawei closely held, we do have a lot of information. theave an etf the tracks chinese tech sector and gives us a good gauge of where we all stand, relative to the u.s.. it looks like they actually track pretty closely together, except what caught my eye was at the end. at the forward p/e ratio, this tech sector has had a bit of a run-up in price because some are saying with the 5g rollout. we heard that a lot of analysts and investors boost the tech sector. there have been some

complications and storied history about that, wait and see. carol: interesting to see that cap. taylor, thank you. up next, the strange and similar case of dr. yellen and chairman j. this is bloomberg businessweek. ♪

jason: welcome back to "bloomberg businessweek" carol: you can listen to us on the radio on sirius xm and in new york, in boston, washington,

dc -- area, in the bay london, and on our app. business section, jay powell and his predecessor janet yellen turned out to be remarkably similar policymakers. carol: we spoke with a federal reserve reporter of what could be the final result of the era. >> she is doing he's aptly what janet yellen did still in the fact that they are still pursuing a patient, gradual rate path. the labor market to make as much progress as possible while restraining inflation. we heard him signal at the committee meeting that the fed might be taking a cause for the foreseeable future. still very much taking this kind of cautious approach. i think it is a real story of continuity. jason: let's remind folks that,

back in december, if we were heavens conversation six weeks ago, it would be very different. the markets, the president, was a little grumpy with the jay powell. >> they were impatient with them. but one of the things i think is so interesting about looking at isacies and comparing them that, at the end of the day, they followed a similar reaction function. up whenh moved rates the economy was looking stronger and inflation like it might be headed up. causes when it seemed like there were risks on the horizon or immediate signs that global growth is showing some tracks -- cracks. janet yellen repeatedly took fire from every side because she was going to slow on rate hikes and those this concern she would let inflation get out of the way

jay powell to criticism for the exact opposite reason, there was his idea that he would hike right in the recession and the fed be the cause and that he is positive, it is funny because he is taking heat for capitulating. you cannot win. carol: it is a tricky time. here we are, the few months away from being the longest u.s. expansion on record. we keep talking over the last couple years about a goldilocks economy. it is a tricky time for jay powell in terms of what he does next. >> yeah, absolutely. this is the moment where jay powell's legacy beverages. -- divergence. what he will have to do is create some sort of playbook. we have already seen him decide

what will be with the balance sheet. they decided that there were going to stick with their current operating framework and have a slightly bigger downstream. we've got even bigger decisions down the road, they're going to have to talk about things like is the inflation target the right one to be using. what you do in a world where interest rates are lower? aboutve less information a financial crisis because they know it is cutting that fund. it is their most potent peace of ammunition in their toolkit. so there are these real questions and there are not resolved, and jay powell is monday the person in charge of the committee may have to think through those questions and come up with answers that could be politically difficult. the financein section, what happens when hedge funds are built around one great manager. jason: and what happens when they leave? carol: we profile the investment firns behind for tree --

tree. >> it was founded by a name -- man named jeff tannenbaum and it did not take off until he tapped one of his former classmates, this guy named andrew fredman. fredman comes along in 2000 and takes this firm from being $300 million to $13 billion. carol: that's huge. >> it's been a. he is -- it is big. returnscomping his relative to other firms or hedge funds at large and he really did beat. he annualized 7.5% over his tenure, including bad months when he wasn't even there your he builds it, but he is not the personality that you see often in investing.

he stays in miami florida, even though headquarters are here in new york. got this child of the 60's personality. assessed with every trade that is put on, he is on around-the-clock, dialing up analysts. he is involved in the culture in a very important way. even though jeff tannenbaum was the founder, fredman was the heart and soul of the firm. prime, steps away at his which is never see.

he has his lottery ticket of throws away. he still got very rich, he was just kind of done in. >> we rarely see that, and it shocked everyone. you know they had a succession plan in place, a top lieutenant of his who was the natural successor, he said over and we have a whole group of managing directors that would support the successor. things still fell apart, and that is what is so interesting about the story. plan, but toa execute and see how it comes ,ogether when the time comes that is what is really interesting about the hedge fund. carol: and that is the underlying theme of your story. we talk about him being the heart and soul, when i goes away, it all comes undone. >> you don't appreciate has someone is the glue until they are gone. and you can try really hard to stick to your plan, but at the end of the day, the firm has lost $8 billion. the performance has not gone well. it has been bad, year after back here. last year, they lost 8.2%.

they were mired in a lot of bad traits that came about starting he said that. one of the things that came out, and you mentioned these funds earlier, that is locked up for a longer amount of time. just to a certain point and people start pulling money out. it spiraled downward very quickly. >> they have their capital locked up for two years because they do take more private equity style positions. investors patience is wearing thin. now it has been basically five years of mediocre performance. the capital is locked up, you can see that redemptions are happening. obviously, investors are not pleased. jason: still ahead, a lifeline for the industry. carol: and $8 million nothing

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♪ jason: welcome back to "bloomberg businessweek" building al ahead, better economy using ideas from across the political and ideological spectrum. jason: plus, what is special about tunisia? the only democracy left from the arab spring uprising. carol: we start with the cover story. insidetakes us

wisconsin's disastrous deal with foxconn. carol: it was meant to create a manufacturing paradise, but in reality, is a different story. joel, this is a story about promises versus reality. >> $4.5 billion tax break that would create a manufacturing paradise. it is already looking like a total bust. not so long ago president trump was there was senior members of his ministration. >> and it was wisconsin, where scott walker put his political reputation on the line. jason: and important people in business. foxconn is the biggest contract manufacturer in the world. >> yet. -- yeah. this is a story about job creation and a state that will do anything to jumpstart its economy. and yet nobody is holding anybody accountable for anything. there have been a lot of headlines about lcds made here,

not made here, but nobody is talking to people with boots on the ground. we talked almost 50 people to get the inside story on this one. jason: it is really and amazing peace of reporting. there was this big deal promise and subsidies to this taiwanese manufacturer foxconn. there was busted create 13,000 factory jobs, transformative for the state. but so far, things are not going so well where the facility is based in mount pleasant wisconsin. jason: take us back to the scene. you have president trump, a plethora of big political names. president trump, his chief of staff, from wisconsin, paul ryan. former speaker of the house also from wisconsin. wilbur ross, steve mnuchin.

this canopy of people who are there, and this seemed to embody a lot of the promises of the truck campaign. trump on stage said that this is going to return america's industrial might. he said that this was central to his trade war deal with china does it was going to bring factory jobs back, blue-collar jobs back to places like wisconsin. revival we have lost in the last couple of decades. but a lot of the sources that we have who are watching in the audience, they could not have been further from the truth. trump was talk about had everything would be made at the usa, but it turns out the tv's made there are manufactured, they are only assembled, a lot of the parts imported from mexico. indeed, the display still said made in mexico. he talks about how there would be good paying jobs coming. it turns out the production workers were just tempts ---

temps, hourly interns getting paid $13 an hour without benefits. it did not live up to any of the president was making. carol: i turned to jason and said cannot remember what we have the president at different companies saying i we got me back to jobs? -- will be bringing back the jobs? it is just shortly after that that interns working for relaxing i was not going to have my job. things became undone. just a couple of weeks after the president visited mount pleasant, wisconsin for the ceremony, a manager called a group of 15 interns into a room and told them that they're not going to hire those people full-time because there was not enough work for them to be doing. in fact, two of the sources in that room recalled the manager say there was external pressures

changing the wisconsin project, received a pretty cryptic, but foreshadowed what we have recently see. were there ever 13,000 jobs created? >> no, no, no. those were long-term projections. commitments,hiring and they have already missed their first year of hiring. they were supposed to have 1040, their maximum target, and they missed it by about 82%. jason: not to the economics section and a broader focus on the american economy. carol: we are all going to learn something here however from house a wide range of ideas of how to breathe new life into american apple is -- capitalism. modern monetary theory is a way to pay for things.

the idea that countries with their own currency have greater control over debt if they are borrowing in their own currency. they can manage deficits and debt better than a country like maybe mexico or egypt, which depend on international capital markets. carol: so the u.s., for instance. >> right. if you look at our recent experience like the aftermath of the financial crisis, we were able to spend a on rescue programs that were a priority at that time and we haven't fallen off a cliff. m m t is the way that people endorsing the idea are thinking about paying for something like the new green deal. new green deal -- green new deal. tariffs alllk about the time and the conventional wisdom is that they are bad. and yet you have people who are like, hold on a second.

>> there is a camp on the fringe of economics, because there is a thatnsus tariffs are bad, goes all the way back to alexander hamilton's research on manufacturing. to look at how tariffs can be applied in a way that benefits the economy. looking at trump's tariffs which no seat something like $300 billion and may soon expand, they say that it is actually revved up manufacturing. they claim they have created something like 280,000 jobs. some people are skeptical of those numbers. >> yes. but the idea being that they have improved business confidence in certain sector, allowing companies to invest.

being shielded from competition, at least for a moment, will theoretically embolden you to invest mold -- more, in theory. [laughter] the question is the belief over how long those berries would stay in place. down, wes it comes will see that some of these jobs will evaporate as soon as they come down. jason: american workers finding new ways to organize. carol: and how tunisia was able to forge ahead with democracy. jason: this is "bloomberg businessweek."

jason: welcome back to "bloomberg businessweek." carol:

daily show. jason: and find us online. in the u.s., a contrarian take that american workers have less leverage with their employers. carol: we heard how workers and activists are finding new ways to get what they want. >> i wanted to know what was going on. how come if unions were dead and the american labor movement was dead, why am a all of a sudden, did we have workers speaking up and getting what they were asking for. carol: what did you find out? tight,labor market is which gives workers a little bit more among seed they might other moxie than they might otherwise have. social media makes a huge difference because it gives people a way to find each other. facebook, co-worker.org, deep in the threads of rent. -- reddit.

it allows them to make their case to the public, which companies have become sensitive to. jason: an interesting thing is you talk about different generations having different approaches, but ultimately similar approaches to just wanting a fair workplace. increasingly, it is younger people who are driving this. up in who may have grown the labor union families or may not have, but they're finding a voice. >> that's right. something that was interesting to me as a spoke to a woman as part of the union at half post, which recently -- huff post, which recently went through a round of layoffs. this woman, an immigrant, said up with a lot of

precariousness. so when they unionized, it made sense, because she wanted a lot of ways in an unstable industry to shore up her financial situation. the difference between when they had of layoffs and then buzzfeed did recently. buzzfeed was a nonunion workplace. you really saw a lot of those workers, current and now former, on twitter advocating that they should be paid for vacation days that they had accrued. jason: one of the things to point out to the top of the story is that it was not expected to be this way, especially given what the supreme court has said about labor unions of late. >> yes, and i don't want to overstate what is happening here . union activity is historically way, way down. the supreme court rulings have been really damaging to the protections of workers who are

speaking up. carol: remind us of those rulings. >> there were two. one made it harder for public-sector unions to fund themselves, the other made it harder for them to bring class actions. the legal challenges are real and the formal protections have really been eroded. companies have a lot of legal power. but sometimes, power is not manifest in a legalistic way. carol: and the international remarks, tunisia is the only democracy left from the 2011 uprising. jason: we talk about what lessons they hold for the rest of the region. afterent back to tunisia several years, having covered extensively in the arab spring. person, a young woman who was an activist blogger. she was the one who brought international attention to the

protests taking place in a small town in tunisia, which eventually exploded to become the arab spring. our member meeting her that and she was optimistic about the future of her country. i wanted to go back and find out where she was. i also took the opportunity to meet a new class of people in tunisia, free politicians. people elected to parliament in free and fair elections. this did not exist in tunisia eight years ago, does not exist almost anywhere in their world. just one of two places where that is absolutely true. this was a chance to take soundings of people i already knew and a whole new category. trying to understand where democracy is in the one country that somehow survived the arab spring with its democracy intact. that was the purpose of my trip. jason: it is such an interesting

point. because as you say, tunisia kicked all of this off. aen the history is written in demonstrative way, that is where it all began. and yet, so many things, especially here in the west, people think about egypt and other places as much more dramatic examples, and yet, as you say, democracy has taken root. why there and not elsewhere? reasons.l different perhaps because tunisia went first, they had institutions that worked very hard to protect the democracy once they had. -- had it. bunch of civil groups were given the nobel peace prize for doing exactly that. thelargest labor union in country at civil groups got together to protect the democracy. that did not happen in some other countries.

also had a large proportion of the middle class copper -- middle class. a robust tourism industry and exposure to international, particularly european affairs. all of these things also helped tunisia, and they will say this all the time. small, foreign countries did not feel like they had to interfere. they managed to skate under the radar a little bit. whatever the reasons, it is working. it is messy, cluttered, confusing. not all tunisians understand this thing they have gotten their hands, but they value it. they're glad to see it and they would not have it any other way. carol: up next, what facebook's data collection practices are like i rl. jason: ir l means in real life. this is bloomberg businessweek -- "bloomberg businessweek."

♪

carol: welcome back to "bloomberg businessweek." jason: you can listen to us on the radio, on sirius xm, in new york, boston, in washington dc -- in the bay area, in london, and of course, on the bloomberg is in this app -- business app. carol: facebook has increased limits on the outside use of data. jason: but they are ratcheting up their own data collection practices. . >> for the past year, we have heard this over and over, the argument that they do not sell your data. they come out and say technically you do, it is just semantic arguments. you collect the data, and then you rented to advertisers, you

rented the targeting of us to advertisers. then we get into this debate over whether facebook should be doing this or not. is not what i am arguing the real privacy debate when it comes to facebook. the real debate is how much data are we giving them and how transparent are they being about the collection of the data. i think some instances over the past year have shown that that is probably a more important discussion to be having. because we really don't know and they really don't talk about the extent to which that occurs. jason: this has really come to the fore more recently as they started to talk about maybe consolidating some of the back end, at least, of their more popular applications. but they are really counting on to grow the business. help us understand how that goes in the plant. >> you have facebook, who knows who everyone is. if you log into facebook, you have to use your real name. what's at and instagram, you

don't. to haveave been able semi-anonymous identities, and what facebook is doing is combining the back end of those platforms so that you can send messages to your self on a different service. this is not something that people have been asking for, but it is something facebook argues we want, he ability to send a message through whatsapp or through instagram, vice-versa. and what will that -- what that will do for facebook and what they have not discussed is it will allow them to know you are on the spot it will collect your identity to the data facebook has. it is just another way facebook has been connecting the dots and, get this, their arguments about the combination. and sending encryption messages.

this saying they are doing it in the name of privacy, but they're actually going to get more data out of this. so we will see that over and over again. facebook say they're doing something for privacy that gives them a lot more information. in the business section, sales of streaming music artists surging. the purple you see, that is the physical. the lps and cassettes, that is been going down. streaming has been languishing for a while. carol: streaming is in yellow, and for many years, streaming in terms of revenue growth kind of going nowhere. but taking a look at the last few bars, you can see that streaming revenue has really taken off. that goes to the case of content at those music levels -- labels. also explains why universal could be valued over $25 million in a sale by vivendi. >> the initial decline in music

was because first you have piracy, and then you had itunes. itunes made it so that somebody could go for spending $20 on a cd to spending one dollar on a song. ,treaming flip the equation where all of a sudden, people can pay $10 a month, or a little bit less, and that is actually a better deal for record labels van they were getting some cases in the cd era. lot of tension between the big internet companies and the music companies that is ever present. record companies now like to claim they are responsible for the success of spotify, which i find to be a little bit ridiculous. but there is no question that the streaming services are turning on all over the world. the opportunity a lot of these companies see, and what universal or vivendi will try to tell investors, is that what you are seeing in the u.s. and europe will play out all over the world. you will see streaming services

develop in india, china, may places like indonesia. if that happens, there is a chance music as this can get back to where it was before. even though it is growing again, the music business is still a fraction of the size that was in 1999 or 2000, especially accounting for inflation. jason: i want to talk about that potential sale, but before we get there, remind us of the economics of streaming. how does everyone get paid? it is different than going out and buying a record or cd. >> it also very space on the service and country. service,he biggest spotify collects their price from you every month. 990 nine dollars, the real prices more like six or seven dollars month. split that amongst the different rights holders space of their share of streaming.

if you are warner music, you are getting a cut of every customer they some how much your artists get really good job developing artists and holding onto new catalogs. this is boost the value of copyrights, because the more you have, the more you get paid. carol: what i love about your story is you dig into the value of music content. that is growing and place in the whole idea of vivendi thinking about a portion sale. -- partial sale. >> yeah, music is always able to trade because it is a sexy industry. even in 2011 when the industry was near the bottom, warner music that sold for $3.3 billion to a ukrainian billionaire in large part because he wanted to be close to the music business. she likes being at the parties, with the celebrities. but how does being seen by

investors and financial institutions as a real potential or opportunity. you saw with sony atv, a music publishing app, that a consortium of investors bought 2012,ow value in 2011 in traded it six years later, and got a killing. bloomberg businessweek is available on newsstands now. jason: your must-read? carol: the story by austin and foxconn. it is so timely comment hearing about president and his initiatives. to greatsupposed thousands of manufacturing jobs and the reality is that it has not lived up to that. jason: that is the u.s. cover, minus the international cover. erik schatzker, what a tour de force of reporting. , whichyou inside huawei has been in the headlines, but from a different angle. carol: and you can find more stories online over the weekend.

jason: and check out our podcast available on itunes, soundcloud, and bloomberg.com. carol: more bloomberg television starts now. ♪

♪ >> i'm emily chang and this is "the best of bloomberg technology. " 2018 marked twitter first full year of profitability, but supplies investors by reporting daily active users for the first time, the number is even smaller than snap. has goneer mcnamee from one of facebook's biggest