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Quest Means Business
Brazil Oil Auction Protests; Oil Dips Below $100; Britain's Nuclear Plan; US Markets Waver; European Markets Mostly Up; New Bank of Israel Governor; Bombardier in Mexico, Ford's Asia Strategy
Aired October 21, 2013 - 16:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
(NEW YORK STOCK EXCHANGE CLOSING BELL)
RICHARD QUEST, HOST: Now that Monday is over, the bells are ringing. The closing bell on Wall Street, not a brilliant day, but the market has closed just down a tad. It is Monday, it's October the 21st.
In deep waters. Brazil's backlash over its offshore oil. We'll have a report on that tonight.
Begrudgingly, the job has been given in Israel. A governor at the central bank.
And Bombardier buoyed by its Mexican manufacturing. An interview with the chief executive.
I'm Richard Quest. We start a new week together, and I mean business.
Good evening. We begin tonight with energy of all kinds. It's the top of our agenda. In Brazil, it's a controversial oilfield auction that's brought protesters to the streets. In Britain, it's a breakthrough deal on nuclear power, and the price of oil itself has been falling on international exchanges.
We must begin, though, in Brazil, which has just sold the production rights to its largest offshore oil discovery. Four energy giants secured the right to develop the huge Libra oil field. It was a joint bid.
Now, the four are China's CNOOC and CNPC. And then you've got Shell, of course, Anglo-Dutch Royal Shell. And France's Total. The agreement between them all is, of course, revenue-related and it involves the Brazilian state operator Petrobras.
Protesters were out in force. Soldiers, helicopters, even naval warships were deployed today to keep protesters away from the landmark auction. Rio has been rocked by violent demonstrations against the sale, and oil workers have been on strike.
So, that's the situation, but what are they protesting about if it promises to give more revenue -- 41 percent of profits -- to the Brazilian government? Shasta Darlington is in Sao Paulo for us and joins us now live. Answer the question: why are they protesting if these resources have to be exploited and it promises to bring more money into the government?
SHASTA DARLINGTON, CNN INTERNATIONAL CORRESPONDENT: It's a really good question, Richard, because not only does it bring really badly- needed money to the government, but this is the first auction under new rules that really gives more power to the government, more power to Petrobras to control those reserves.
Instead of just receiving taxes or royalties, this time around, the government is going to maintain control over a large percentage of the reserves. On top of that, Petrobras has a 40 percent stake in this consortium.
But the fact is that these protesters said that any amount of foreign intervention in its reserves was not acceptable. You also have to remember these -- the protests were actually organized --
QUEST: Right.
DARLINGTON: -- before the auction when oil workers were looking for an increase in wages. So it is tied to that also. This is, of course, about selling the rights, but they also want an increase in wages and why not take advantage? There is a bit of that.
QUEST: Within Brazil's capacity of oil production -- pardon the pun -- this is a sea change.
DARLINGTON: Absolutely. But I think -- there's also a bit of negative here. We've got to point out, there was only one consortium bidding today, so the fact is, not everybody's happy with the way this is playing out, not only the protesters, but companies. You didn't see any big American companies here --
QUEST: Why not?
DARLINGTON: You saw a couple of Europeans, you saw the Chinese --
QUEST: Why not?
DARLINGTON: It -- because -- because on the one hand, you have these protesters saying you can't sell out to the foreigners, but you have all of the foreign companies saying you're maintaining too much control, we don't feel comfortable in this situation. So, it's a real balancing act, Richard.
QUEST: When does the first oil -- I realize you're not a geologist or about to pop off to the oil rigs and have a look and see how the drilling's going on -- when does the first oil expected from this massive field in serious amounts?
DARLINGTON: Yes. This -- it's going to be a very long process. This is part of the region called the pre-salt, which is because it's buried under very deep water and then a very thick crust of salt, and virtually nobody in the world has experienced trying to extract this. And with oil prices low, it's going to take even longer than was originally thought.
Brazil did want to become one of the major oil producers in the next couple of decades, but it'll obviously depend on the oil price, which could then help finance this very technologically difficult work, Richard.
QUEST: Maybe you are -- with an explanation like that, maybe you are a geologist. Excellent. Thank you very much, Shasta. Shasta Darlington joining us from Sao Paulo tonight.
Now, put this into complete context. Whilst they are talking and auctioning off in Sao Paulo, the price of US crude has fallen below $100 a barrel for the first time since early July because of a build-up in supply. Come and have a look over at the super screen and you'll see.
We just got numbers of inventory build-up, which were delayed, of course, by the US government shutdown, and if you put it into context, you'll see why this is significant. Not only for the price, but also for economic growth.
Just look at how the price has fallen back since September. We hit a high point here of about $111. And since then, way down to the point where it's just at about $100.
So, at this sort of level, manufacturing is cheaper, aviation fuel is cheaper, all sorts of industries benefit from the fact that the price of oil has fallen quite sharply. At $99 a barrel, it's the lowest, as you can see, for some period.
Now, staying with energy, we've done the new energy, or at least coming off the ground. We've done the existing. But today, there was a further announcement, which proved alternative energies are also still very much on the agenda.
Britain will get its first nuclear power plant in 20 years. There will be help from a French company and Chinese investors. France's EDF is getting the factory or the power station built, and in return, the British government has guaranteed the company an attractive price for the power it produces. At $150 per megawatt, it's more than double the current market price.
It is a good rate for consumers, for industry, and from government? CNN's Jim Boulden in London explains.
(BEGIN VIDEOTAPE)
JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT (voice-over): Britain is planning to replace its aging nuclear power plants with nuclear power. After years of delay and debate, and despite concerns raised by the disaster at Japan's Fukushima nuclear power plant, the British government wants one new reactor up and running by 2023.
DAVID CAMERON, PRIME MINISTER OF BRITAIN: I think this is a really important day for our country, the day when we have agreed to build a new nuclear power station. I hope the first of many new nuclear power stations.
BOULDEN: This would be the first new nuclear power plant to operate in Britain since 1995. The UK currently gets about 18 percent of its energy mix from aging nuclear plants, some of which will soon be retired.
ED DAVEY, BRITISH SECRETARY FOR ENERGY AND CLIMATE CHANGE: The cost won't touch consumer bills, so we're talking about energy bills in 2023 and beyond.
BOULDEN: The cost to get up and running is estimated around $25 billion. The plant will be built by French energy giant EDF with two Chinese companies as investors. EDF Energy CEO, Vincent de Rivaz, told me they have been working with the Chinese for more than 30 years.
VINCENT DE RIVAZ, CEO, EDF ENERGY: Their role is investors, equity investors. They will share the construction risks with us, and they will join the project as a company who have some competencies, who have experiences in management, in engineering, in all sorts of things.
BOULDEN: But the project faces several obstacles beyond its critics who oppose nuclear power. There are many questions about government incentives. Also, to secure companies to build a plant, the British government has agreed to be locked into paying around double the current price for the energy that will be generated.
In exchange, Britain says the companies will take on the construction risk. Britain joins Finland, France, and China in building new nuclear plants, while countries like Germany have decided to move away from nuclear.
And while many nuclear plants face cost overruns and are completed years after first promised, Britain says taxpayers won't pay a dime for its construction and consumers are protected. The British government says energy bills would rise even more next decade if there isn't nuclear energy to compete with natural gas and renewables.
Jim Boulden, CNN, London.
(END VIDEOTAPE)
QUEST: So, nine minutes after the New York market closed and we have the final numbers. The Dow Jones Industrials are off 7.5 points, barely budging the index on the first day of the week. Alison Kosik is at the Exchange. What was the main driver, if such there be, on such a small move today?
ALISON KOSIK, CNN BUSINESS CORRESPONDENT: There wasn't really much driving the market today, Richard. What was interesting, at one point during the afternoon, I listened out on the floor, and it was so quiet, I could swear you could hear a pin drop.
But interestingly enough, a lot of shares changed hands today. Volume was very high, and I think for those who were trading, I think they were kind of shaking off the cobwebs of the debt ceiling dysfunction and thinking now what?
So now what they're doing is they're focusing on third quarter earnings, which didn't impress much today, with McDonald's falling short, Halliburton falling short.
However, the S&P 500 eked out an itsy-bitsy little gain today, and guess what? It hit a new record high, a record high where the percentage doesn't even register on the percentage scale, but still, nonetheless, the S&P 500 at a third record high in a row. Richard?
QUEST: And the next 24 hours will be oh so very telling as we get a jobs report. We'll talk about that --
KOSIK: That's right.
QUEST: -- we'll talk about that tomorrow. Alison Kosik at the New York Stock Exchange. Europe's stocks gained for the eighth day, the markets, as you can see. Everybody's eking out small little gains. Look at the Xetra DAX, barely budged.
Only Paris was down. There was a nasty row, I'm sure it didn't have much to do with the market, but a nasty row with France and the United States over the NSA listening to French phone calls. Well, the market was down in Paris, everywhere else was up.
When we come back, Karnit Flug finally gets the job she's been waiting for. It also happens to be the job she's already doing but was passed over twice before. So why did Benjamin Netanyahu decide she was the woman for the Bank of Israel? QUEST MEANS BUSINESS, good evening.
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QUEST: Call it third time lucky for Karnit Flug, the new nominee for the governor of the Bank of Israel. She was passed over not once but twice. Now, she's finally been picked for the job for which she's been doing practically for several months. Join me at the super screen again. Ah, yes! Old and familiar faces. Well, less with the old and more familiar.
So, in January, Stanley Fischer announces that he is going to leave the Bank of Israel, he'll no longer be governor. Now, Flug has been the deputy governor since July of two years ago. Fischer recommends Flug to Netanyahu, the prime minister.
Stanley Fischer goes, and Netanyahu wants somebody of international standing. So he approaches Jacob Frenkel, who was the central bank governor in 1990s and is also the chairman of JPMorgan Chase International. A man of enormous stature and reputation globally.
He drops out in July over some previous incident in Hong Kong where he was accused of shoplifting, but nothing more was ever made of that. Frankel says it was a misunderstanding, but even so, he's had enough of the process. She is still acting governor, he still wants somebody international, and he's gone.
Then you bring in Leiderman, Leo Leiderman, chief economist at Israel's Bank Hapoalim. Well, she's still got the top job, he still wants somebody international, he decides he's got to drop out for personal reasons. There are allegations he was -- he often saw a mystic or a psychic and got some advice over that.
So, we have a situation. Flug, having been passed over twice, is the acting governor. She even lowers interest rates at one of the monetary policy meetings. They have another commission to decide who is going to have the top job. Other names come out, but finally, Flug with 25 years at the bank --
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QUEST: -- she gets the top job. And he, of course, is left wondering what on Earth happened. David Horovitz is the editor of "The Times of Israel," and I put it to him earlier that Karnit Flug doesn't seem to have gained too much credibility with what took place.
(BEGIN VIDEOTAPE)
DAVID HOROVITZ, EDITOR, "THE TIMES OF ISRAEL": Well, I'm not sure. It's certainly embarrassing for the prime minister and the finance minister. As recently as four, five days ago, they were saying this woman is not getting the job. So, they look pretty silly, and the finance minister last night said, yes, it has been a shocking process, but of course I supported her all along, he said.
And for her, I'm not sure, you know? In a way, she's kind of trumped the detractors. She didn't quit when she was passed over. She kept relatively silent. The staff at the bank obviously think she's pretty competent, and she's prevailed.
So, yes, maybe damaged a little bit, but she got the job, and she's conducted herself fairly nobly, and Israel now has its first female central bank governor, and it's her.
QUEST: She has some fairly tough decisions to take. Having cut interest rates at a time when the shekel's already appreciating, now of course, she has some serious problems to address. What's the feeling of what she's going to do?
HOROVITZ: I'm not sure that anyone can predict how she's going to handle things, if she's going to do anything differently than she's been doing. Remember, she's been the acting governor since July the 1st when Stanley Fischer actually stood down.
Israel does have issues. It has budget strains, it's going through a process of cutting back on government spending. But jobless levels are not too bad here. She will want to try and do what she can to help create jobs. You have a widening gulf in Israel between the top decile and the bottom decile. I think America's is worse, but Israel's is growing faster than that in the United States.
We've transitioned in Israel over the years from an agricultural economy to a very much high-tech economy, and that has meant that a lot of people are being left behind. We're in a period now of factories facing closures. Israel's biggest company, Teva, recently announced that it was planning some layoffs, maybe rethinking some of that.
QUEST: Right.
HOROVITZ: But you're right, there are lots of challenges, and she'll have to grapple with them.
QUEST: And that balancing between a monetary policy for stimulating growth and at the same time always having one eye on the currency, which is what Stanley Fischer did so well, tonight is the mood in Israel that they've got the right person for the job at last?
HOROVITZ: I think the mood in Israel is that this has been a really silly and embarrassing process, that the way it was handled was not smart, that in future, you'll need to vet candidates before you name them for the job, which is why two previous contenders dropped out.
But maybe Netanyahu tried abroad again for a governor, including approaching Larry Summers, might have been better off staying at home. But perhaps, ultimately, the right person, the appropriate person, as the opposition leader has termed her, did get the job.
(END VIDEOTAPE)
QUEST: David Horovitz talking to me on the line from Israel earlier on the woman who finally got the job at the Bank of Israel. When we come back, Ford says it is firmly focused on Asia. Chief executive Alan Mulally outlines his plan for the region. It's an exclusive, and it's QUEST MEANS BUSINESS after the break.
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QUEST: The president and chief exec of the aerospace and rail company Bombardier says he's confident in the longterm investments that his firm has made in Mexico despite the forecast for slower growth in the country and across Latin America. Our correspondent Nick Parker spoke to Pierre Beaudoin, who's in Guadalajara for the Mexico Business Summit.
(BEGIN VIDEOTAPE)
NICK PARKER, CNN INTERNATIONAL CORRESPONDENT (voice-over): With investment in Mexico of more than $700 million, Bombardier, the world's third-largest plane maker, was an earlier champion of the country's aerospace industry and also makes trains.
Its latest state-of-the-art Learjet 85, made from composite material, was made and designed here. The plane's launch comes as the country faces a slowing economy.
PIERRE BEAUDOIN, PRESIDENT AND CEO, BOMBARDIER: Well of course a lot of people are concerned about the short-term, but overall, I think it's a great time for Mexico, because there's a lot of the possibilities.
It's really friendly from an investment perspective, and I think that's -- overall, that's how I would categorize the climate. People are here to listen to what Mexico has to offer, and I think overall, it's a very, very good offer.
PARKER (on camera): One issue that often overshadows business in Mexico is the issue of the drug war, which people often use as something that's obviously negative about Mexico. Have you had any adverse experiences of the drug war as a major international company working in Mexico?
BEAUDOIN: Our experience has been very positive. We've been over 20 years, like I said, in Mexico. To speak of security issues, whether it's in Sahagun or in Queretaro, not really. Of course we have to take into consideration the context in which we work, but I would say that our experience has been very positive.
PARKER: One big policy that Enrique Pena Nieto, the Mexican president, is bringing in is that he's got something like $300 billion in infrastructure spending. Are you going to be going up for the auctions on some of these contracts, and are you confident that you can win them?
BEAUDOIN: First of all, Bombardier is the world leader in transport -- passenger transport, and we have a very broad portfolio of products, so all of these projects interest us very much. We need to be competitive, but we will participate in all these projects. And I think as a local manufacturer, we've been here 20 years, we're very well- positioned to win.
PARKER: And finally, looking at the region as a whole, the United Nations says that the economy in Latin America is going to slow down to something like 3 percent, they estimate this year. Does that give you any cause for concern as somebody that invests heavily in Latin America?
BEAUDOIN: Well, when we invest in an area, it's for the longterm. It's also looking at where does this country fit in the global value chain, and I think today there's no product that's built only in one place, so a lot of what we do in Mexico is not only for the market, the local market, but it's a part that will take into a product that's sold globally. So for me, sometimes it's a good time to invest when there's a slowdown.
PARKER: And finally, let's look at that market. A lot of it must be in the United States, I would imagine, and you've got a situation where the US economy just avoided defaulting narrowly, and some of the job data coming out of the US is a bit disappointing. What's your outlook for the United States?
BEAUDOIN: Well, the way see the US economy at this point is that we see definite good sign of growth, housing starts. We see a lot of signs that this economy is turning and we're going to see growth. Will it happen all in one shot where we see a big spur of growth? I don't think so. But there's good progress and we're bullish on the US.
(END VIDEOTAPE)
QUEST: That's the chief exec of Bombardier. Now, while his company's looking for opportunities in Latin America, Ford is focusing on Asia. It's rolling out its new 2014 Transit Connect Taxi -- picture of it over there. The Transit Connect Taxi, which is built specifically for the Hong Kong market.
China is the world's number one car market and Ford aims to double its quarterly market share there in the next two years. For the first time in its history, it now builds more vehicles in Asia than in Europe. It's outlined plans to open nine new Asian factories in 2015, five of them in China.
Patricia Wu spoke to Ford's president and chief exec, Alan Mulally, in an exclusive interview about the company's strategy in Asia.
(BEGIN VIDEOTAPE)
ALAN MULALLY, PRESIDENT AND CEO, FORD: It really goes back to the strategy that we laid out nearly seven years ago at Ford, and what we decided was actually to accelerate Henry Ford's original vision of not only making great cars and trucks, but make them affordable so everybody could appreciate it.
So, we committed to a complete family of vehicles, small, medium, and large, cars, utilities, trucks, SUVs, and commercial vehicles. And also we made a commitment that every new Ford vehicle would be best in class, and we dimensioned that in terms of what the consumers really value: the quality, the fuel efficiency, the safety, and the really smart design, like SYNC.
So, as you mentioned earlier, China is a tremendous growth region. It's nearly 21 million units already this year. That's compared to like 16 million in the United States and 13.5 in Europe. And we are going to bring all of these vehicles, either made here or import them in on the smaller numbers, and make this complete family available to everybody here in Asia-Pacific, especially starting with China.
PATRICIA WU, CNN INTERNATIONAL CORRESPONDENT: So, who is your biggest competitor in China? Is it Chinese car companies or foreign ones?
MULALLY: Well, most of us that operate in China, we have a joint venture and a partner, a Chinese partner. In our case, we're very fortunate to be in joint ventures with Changan Motors, which is a great company, and also with JMC.
So, we will continue, that's a great relationship. We use our collective knowledge about the country and the consumer, and we'll continue to operate in these two joint ventures.
WU: Now, something you said about sticking to Henry Ford's original vision of making the most affordable cars, but in China, can you realistically expect to make the cheapest cars? What is Ford's positioning in the market?
MULALLY: Oh, you bet. Absolutely not the cheapest car, but Henry Ford's vision was to make the most valuable ones.
And so when you look at the quality and the fuel-efficiency and the safety and the capability, he wanted to use Ford's scale worldwide, operate in every country and which we sell the vehicles so we could also be part of the community and be part of the economic development and energy independence and provide great jobs and great careers.
So with Ford, you get the complete family. You get the cars that you want with the capability you want, but you also get the very best value because of our scale worldwide.
WU: And you know, I cannot let you go without asking you about all of the buzz that you've been approached to run Microsoft, perhaps a leadership role at Boeing. I know if I ask you yes or no, you're going to tell me you're very happy at Ford. So instead, I'm going to ask you, if you were to run Microsoft, what would be the first thing you would do?
MULALLY: Well, I'd really like to go back to the way it is, and that is that I'm very, very happy serving at Ford. We have no plans that are different than that. And also, we don't comment on speculation. I absolutely am pleased to be serving Ford, I'm really glad to be here today.
(END VIDEOTAPE)
QUEST: Got to hand it to him: smooth as silk at dealing with the question, even though you know it's coming, it's the way you handle that sort of question that sorts everyone out.
All right, when we come back, Jamie Dimon's legal bill is getting bigger. It looks like the JPMorgan chief executive's agreed to pay one of the biggest settlements in US history. The numbers are frighteningly large. QUEST MEANS BUSINESS, we're live in New York, good evening.
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QUEST: Hello, I'm Richard Quest. There's more QUEST MEANS BUSINESS in just a moment. This is CNN, and on this network, the news always comes first.
At least 6 people have been killed and 32 others injured when a female suicide bomber attacked a passenger bus in Volgograd in Russia. Russian authorities have identified the bomber as a 30-year-old woman from the Russian republic of Dagestan.
Two people are dead and two others injured after a school shooting in the US state of Nevada. One of the two people killed was a staff member at the school. Police believe that the other person who died was a student and the suspected shooter.
France's foreign minister plans to discuss allegations of US spying when he meets with the US secretary of state John Kerry. The French newspaper "Le Monde" says the US National Security Agency, the NSA, intercepted more than 70 million phone calls in France earlier this year. The French government has called the accusations totally unacceptable.
A desperate battle in southeastern Australia to keep three large bush fires from merging into a single mega fire. Scores of blazes are burning. They've already consumed an area larger than New York City. They're being fueled by hot, dry, and windy conditions.
A Roma couple in Greece have been charged with abduction. Their lawyer says the girl found living with them was adopted from her biological mother. However, he acknowledges the adoption was not legal. The girl they call Maria is now in a group home where she's said to be doing much better.
There are fines, there are penalties and then there's the sort of money that JPMorgan Chase is going to have to pay. It has reached a tentative agreement with the U.S. Department of Justice over the bank's conduct in the run up to the financial crisis of 2008. The size -- $13 billion. It's a vast amount of money, and if it stands, it will be the most a company's ever paid to the U.S. government. And that money, not only is it a record, it only covers civil charges. It won't clear Morgan of potential criminal liability. It's a vast amount of money for arguably something they didn't even do because they bought the companies, Bear Stearns and Washington Mutual, that created the problems for them. Now that's the first question for James O'Toole from "CNN Money." Good to see you, James.
Look, they are paying $13 billion because they bought a dodgy company that had bad apples at the bottom of the barrel. Is that the gist of it?
JAMES O'TOOLE, CNNMONEY.COM: I think that's most of it, yes. You know there will be some percentage of the settlement that'll be related to JPMorgan's own business, but you're absolutely right that it looks like the lion's share of it is going to be related to Washington Mutual and to Bear Stearns.
QUEST: Is that fair?
O'TOOLE: Well, that's a question that a lot of people on Wall Street are asking. You know, JPMorgan -
QUEST: Let me just interrupt you. Because they did help out the government. All right, they got Bear Stearns for a bargain and same for Washington Mutual, but they got those companies when nobody else wanted them.
O'TOOLE: Right, and I think that you know certainly that's what Jamie Dimon would say is we were doing a favor to the government here and now they're coming back to bite us. It is true that these were exceptionally good deals at the time or at least foreseen as such. You know, JPMorgan has certainly enjoyed the benefits of these companies, expanding their business in the past couple of years and allowing them to become the country's largest bank by assets, but you're absolutely right that I don't think they saw this coming when they made these agreements initially.
QUEST: And Dimon basically went to all -- I mean if "The New York Times" is to be believed, that right away with that initial with U.S. Attorney General -- by the way, what's your understanding of how this deal was put together?
O'TOOLE: Well it sounds like the Justice Department is really making an effort now, you know, somewhat belatedly perhaps five or six years after the heart of the crisis to really bring some accountability on Wall Street, and they were ready to announce a lawsuit and just sort of air all this publicly and Dimon stepped in, was dealing with Holder directly and they were able to hash this out it sounds like.
QUEST: The way in which criminal liability still rests -- who stands to feel the force of that?
O'TOOLE: It's not clear at this point, you know, it sounds like from what we've heard so far that there's an investigation out of California that won't be resolved by this particular settlement -- a criminal investigation. I'd be very surprised if that reached anywhere near the executive suite. We're probably looking at more people that were closer to the ground that had a little bit better sense for the quality of these funds that were being handed out. But, nobody back in New York I wouldn't guess.
QUEST: (Fine I guess). When JPMorgan writes the check and transfers the money -- $13 billion, what will the government do with it? Or do we know?
O'TOOLE: Well, that $4 billion of it sounds like is going to come in the form of relief for consumers to that could be principal reductions, perhaps short sales This is in similar nature to the foreclosure settlement last year.
QUEST: And the rest?
O'TOOLE: The rest -- I think that this will be remitted to the Justice Department and -
QUEST: Paid the cost.
O'TOOLE: Exactly.
QUEST: Paid the cost. It's an extraordinary story -- $13 billion. Did your eyes water a bit when you saw that number?
O'TOOLE: It's quite a sum, and particularly when you look at everything that's happened since the crisis you know that we haven't had to pay out anywhere close to this before. You know we had the $20 billion settlement last year, but that was split amongst five institutions, so this is a real shock.
QUEST: Good to see you.
O'TOOLE: Thank you.
QUEST: Many thanks for you joining us. Now, it's one of the biggest gainers on Wall Street and, in fact, today it's up 18 percent. I will tell you about Netflix after the break.
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QUEST: Get back, step back all of you. Free food on the table, and need one say more. We've got results and they are interesting. McDonald's is facing pressure at home and abroad. The company admits weakness in its key international markets -- China, Japan, Australia, and all blaming an ongoing, challenging environment. Global sales in October are expected to be relatively flat which of course is more than one can say for the burgers and the fries that we got earlier today. Staying with more results, and Philips almost tripled its profits in the third quarter as it benefits from a streamlined operation. It's the Dutch electronics firm's results -- they were better than analysts had expected. Up 167 percent for net income, $400 million on a year-by-year basis compared to last year's stronger sales across all divisions, continued cost-cutting helped boost the company's profitability.
Now, Jim Boulden spoke Chief Exec of Philips Frans van Houten who said the results given are fair bearing in mind the current global environment.
(BEGIN VIDEOCLIP)
FRANS VAN HOUTEN, CEO, PHILIPS: Three percent growth in the third quarter is a reasonable achievement given the economic headwinds around us. We saw a bit of turmoil in the United States, so it'd be the health care market there is affected. Europe is still in the doldrums. Philips was able to grow 10 percent in the growth markets, and China/India leading the pack, and I was very happy with that. It shows that we have good traction in those parts of the world where we can see future expansion.
JIM BOULDEN, CNN INTERNATIONAL CORRESPONDENT: If I can ask you about the U.S., then, were you concerned particularly about the shutdown of the government given how much health care is a critical part of Philips?
VAN HOUTEN: The shutdown itself doesn't have an immediate, direct effect to Philips. Most of health care is a critical service in the United States, but it does raise the overall uncertainty which was already high due to the health care reform that is going on. We see health care CEOs and hospital CEOs being very reluctant as they go through an industry polarization, they are very reluctant with investments. I think this will be with us maybe for a few more quarters before that market improves.
BOULDEN: You saw decline of health care order equipments year on year in the third quarter What do you attribute that to?
VAN HOUTEN: There was a small decline, but we had some very big orders last years that makes the comparison much more difficult. I remain positive and optimistic about the opportunities in health care and especially as we become much more of a solutions provider. Along the continuum of care we will have many opportunities.
BOULDEN: Now you're starting a buy-back program -- 1.5 billion euros starting on the 21st of October. I'm always interested why companies decide to do buy-back. Why in your specific circumstances did Philips decide to give shareholders a buy-back opportunity?
VAN HOUTEN: I'll paint you the overall picture and then place the buy-back in that context. For the last two years, Philips has been working on accelerate and we have raised profitability already considerably. We're committed to make our 2013 targets, and last month's involvement at our capital markets day, we set the next wave of targets for 2016 where we will further improve profitability to 11 to 12 percent with an ROIC north of 14 and a strategy that is primarily anchored on organic growth as we have so many good innovations in our pipeline that we are excited about, may be complemented with some bold (inaudible) acquisitions. As our cash generation is improving a lot over the next few years, that leaves money that we will use for dividends and share buy-backs to return some of that value creation to our shareholders. So it's a balanced capital allocation policy, and doing a $1.5 billion share buy-back between now and two to three years we feel is a reasonable allotment of a larger pie that is available to Philips.
(END VIDEOCLIP)
QUEST: The CEO of Philips with his results. In the last hour Netflix, the company -- the stock has soared as much as 18 percent in after-hours trading, it's one of the best performers on Wall Street. It's up more than 280 percent this year. The company's reported strong earnings and a growing subscriber base. Our business correspondent Samuel Burke is with me. First of all, for those who don't know what or who Netflix are, in a nutshell, what do they do?
SAMUEL BURKE, BUSINESS CORRESPONDENT: It allows you to watch movies and television on demand, Richard
QUEST: And why is that any different from, say, a Blockbuster or anywhere else that you can watch movies on demand?
BURKE: Well, let me tell you a little story. They brought television and movies to all of these devices. Blockbuster you could just do it on your tape player. But everybody thought it was YouTube that was going to bring television to all of these devices. But it was really Netflix that connected all these devices, allows you to watch movies that are no longer in the cinema on your laptop, on your iPad, on your phone. But everybody thought it was going to be YouTube.
QUEST: Why?
BURKE: People uploading movies left, right and center but -
QUEST: But YouTube doesn't do that. YouTube's just small clips of people doing silly things when they've had too much to drink.
BURKE: Exactly, and they do it for free, which is great for us but not a great business model.
QUEST: Right. But what with You -- but what Netflix has done if you're telling me right, is they're basically just taking the content of this and merging it with all of the rest of it?
BURKE: That's what they did at first. They took on so they could get anywhere. But then they decided to cut out the middle man. They didn't want to have to deal with the big movie conglomerates and television conglomerates, and they would just make their own shows, and they did it with "House of Cards." And they didn't just do it, they did it big time, winning awards and winning over the critics. In fact, they won not just one Emmy -
QUEST: Right.
BURKE: But they won three Emmys.
QUEST: So they have been winning these Emmys left, right and center.
BURKE: Left, right and center. A primetime Emmy and two other creative Emmys. So not just one, but three Emmys all together, and they didn't just stop with these puppies. They could've just said, 'OK, that's it,' but very quickly after winning these Emmys, they have another series. "Orange is the New Black" generating tons of buzz on -- with people, on social media, and they've had another series and with these earnings, they've come out and said the increase in subscription base is because of these new series -- "Orange is the New Black" which you're seeing right there on the screen, and that's what's driving people to sign up.
QUEST: So, let's get this right. They managed to merge television to computers with streaming, to this. They get a bit of original content and they get a few Emmys on the way. Where do they go next?
BURKE: They're next -
QUEST: Eighteen percent up on the share price, by the way.
BURKE: Their next move is kind of counterintuitive in a way. Everybody's talking about how to get television onto these, they've already done that and now they want to go back to the television, Richard. They actually want to make deals with cable subscribers. "The Wall Street Journal" says they're in talks with Comcast, a big cable provider, to bring those shows to people sitting in their living rooms on their televisions. And in fact, they've already done it in the U.K. -- a deal with Virgin, another deal in Sweden. So, now their original content, they want to make it available on your cable box so that you can see it back on this old thing.
QUEST: Less of the old, thank you very much. Many thanks. Samuel Burke with the Netflix story. Leave them alone, get away. Put it back. In Australia they are fighting the fury of nature. Several bushfires threaten neighborhoods near Sydney. Officials fear they could create a mega fire. We talked about it a moment or two ago, but we'll have the details after the break -- "Quest Means Business."
(COMMERCIAL BREAK)
QUEST: Bushfires are consuming hector after hector in New South Wales in Australia. It's the most populous state of the country. They've into an area bigger than New York City, and some of the fires are threatening to combine. If they do that, it would create a single mega fire. Firefighters are back burning in the Blue Mountains by choosing small controlled fires to burn away flammable material in bushfires' path. Adam Walters from Australia's Seven Network has an update on the battle.
(BEGIN VIDEOCLIP)
ADAM WALTERS, AUSTRALIAN JOURNALIST WITH 7 NEWS NETWORK: A day of watching and waiting ends with high alert this afternoon at (Forkembridge)
GRAEME WINCHESTER: I've got the kids gone. I have got the firefighting hose 'round the corner, we got a bunker next door, so we'll wait 'til it comes.
WALTERS: Bushfire winds from the northwest, fire in the grass valley headed towards homes. At first residents were warned to evacuate, but later they were told it was too late and to stay and seek shelter.
STEFAN KREMER, RESIDENT: The tornado nasal gas mask from the '80s -- it was used obviously for nuclear warfare, but it would do a fine job here in the smoke as well.
WALTERS: It had been a hot day for the battle-hardened people of Springwood who were keeping a cool head in the crisis. They'd been overwhelmed by the generosity of others.
HEATHER GWILLIAM, ANGELCARE: Female: If people want to give and donate, they need to be doing that in cash.
WALTERS: Although the breeze was gentle early today, residents heeded the Premier's warning to avoid complacency.
BARRY O'FARRELL, PREMIER OF NEW SOUTH WALES: People shouldn't be scared. What they should know is the emergency services are planning for the worst-case scenario. Better to be safe than sorry.
WALTERS: And there was a plea for those in the Lower Blue Mountains not to be deceived by falling temperatures.
O'FARRELL: If people wake up tomorrow, it's overcast, it's cooler, they shouldn't think that the crisis over. With the forecast gust and winds tomorrow, it's every bit as bad as it was over the last couple of days.
WALTERS: The firefighting focused on water bombing the valleys near Winmalee. A nor 'easterly provided a valuable opportunity for back burning just as crucial as the water bombing aerial surveillance. Interstate firefighters are providing valuable back up, reinforcing the effort on containment mines near Springwood and playing a vital role in doo-to-door damage assessment.
UNIDENTIFIED MALE: Hello, how are you doing?
UNIDENTIFIED FEMALE: Hi, I'm (inaudible) thank you.
UNIDENTIFIED MALE: We're just doing preemptive fighting for the (inaudible) in the area.
WALTERS: For the North at Richmond they were ready after all the predictions of another ferocious firestorm.
MICHAEL GALLACHER, POLICE MINISTER: Right now it's quiet, but it's very likely that this part of the (inaudible) is going to see a significant inflow of inquiries and people looking for support.
WALTERS: The destruction of so many homes in the Lower Blue Mountains has created a severe accommodation crisis. All the hotels and motels are fully booked. Adam Walters, 7 News.
(END VIDEOCLIP).
QUEST: The situation is serious. Thomas Sater is at the World Weather Center. Tom, talk us through this idea of the mega fire being created, because I recall earlier this year in California when we had several fires on Northern California going into other states. There was always the fear then that there would be this mega fire. Now it's happening in Australia.
TOM SATER, CNN METEOROLOGIST, Yes, this is actually quite interesting how they're fighting this. I do have some graphics here to show you -
QUEST: Please.
SATER: -- exactly what they're doing, Richard.
QUEST: Please, please do.
SATER: Because, I mean, this is risky work. I mean, extremely risky work. First of all, look at this young man. This is (Linden Dunlop) as he inspects the remains of his grandfather's home of 41 years. The temperatures right now even though it's after 8 in the morning are cool. They've had some cool days. But we've got a cold front on the way that could be disastrous for this mega fire if it happens. Let me explain what's happening. Here is a cold front that is on its way. There is rainfall with this and it's great. Unfortunately, the rain stayed down in the Victoria. Once the front moves through, the winds kick up, they get erratic and unfortunately with each computer model run, it wants to give us less and less rainfall. Sydney's winds right now out of the south at 30. They're going to pick up. It's going to get worse for it gets better, especially with the passage of a front on Wednesday. This is what happens in Sydney when you have a westerly wind. So, if we look at the forecast, this is where they are now. Now, they're going to become more northerly. Here is the wind shift. So when the winds get up to 20 and 28 kilometers per hour, this is the cold front coming through. This is when it gets erratic and the winds change directions. Unfortunately, we may only see a millimeter or two out of this, and that could come with thunderstorms with what we call dry lightning. And we see that around the world as well. But let's break this down, because if this front stays south, we're a hero with Mother Nature. This is what the firefighters are doing. This is Mount Victoria -- keep that in mind. This is controlled burning -- see what he's got in his hand here? It's called back burning. The reason this is so risky is because when you look at the smoke and you can see what the winds are pushing this -- they were pushing it into of course Sydney the other day -- here is the state mine fire. The front line is 300 kilometers. This is the Victoria fire. So what they're doing is there's only two kilometers in between these two areas. So they're afraid that this is going to merge. So what they're doing is that firefighter was in this inside edge -- it's tremendously scary here because these flames could jump and close that two-kilometer distance like that. So they're back burning to try to burn up any fuel that these fire may have to jump. Then, if it does get in touch and it gains strength, those northerly winds will drop it down here where it's more populated.
QUEST: Tom, I've got a question here. Stay, with your graphic, when they do that back burning of the fire, what's to prevent that back burning fire from getting out of control and being exactly the accelerant necessary for it to jump across?
SATER: No, you are so right because, Richard, what we've seen in these high terrains, the winds can blow these embers six, seven kilometers. But the authorities there do believe it's working, although several in the command center believe this is still going to merge.
QUEST: Do we think, I mean, do we think that these fires -- are they multiple fires that are merging, or was it one fire, I mean, how did they start is what I'm asking?
SATER: Yes. You know, that's a wonderful question. Without being there at the command center -- because last Thursday, we had a number of 98 fires, and then we head down to 62, but 20 of these 15 or 20 are major blazes. So, with 1,500 firefighters, it's amazing how they can control this in the command center alone especially with these erratic winds. But if we talk about what's next, and we get down to the higher populations, just to the south of the state mine fire, I mean, we've had 300 homes that have either been damaged or destroyed -- there's many more on the way. Here's the Springwood fire. You can see the burn scar in these flames, Richard, were jumping the river. So if these fires come towards Sydney -- we're only 50 kilometers from interior Sydney -- they could come in through the south or even to the west.
QUEST: We'll talk about this tomorrow.
SATER: Yes, we -
QUEST: We'll talk about this as we look at the diagrams and we look at the maps tomorrow. Keep an eye on Sydney -
SATER: Yes.
QUEST: And we'll focus in on that in our program tomorrow. Tom Sater at the World Weather Center. I'll have a "Profitable Moment" after the break. "Quest Means Business," start of the week.
(COMMERCIAL BREAK)
QUEST: Tonight's "Profitable Moment." And the moral of the tale is hang on in there, don't give up regardless of what might come your way. We look no further than the Bank of Israel and the fiasco of choosing who would be the next governor of the Central Bank. After Stanley Fisher went recommending his deputy for the top job, well the PM thought better and tried to put one person in who didn't work and then another person who didn't work, and throughout, the deputy Karnit Flug was calm. She was serene. She just got on with her job. Now, a hothead might have said 'I'm taking me bat home' if you don't give me the job the first time or the second time, I'm not taking it -- get on your knees and grovel. But, no, she played for the long term. A bit like Janet Yellen with the Fed who, having been turned down perhaps for the first time with Larry Summers, decided she would still stay in the game. Karnit Flug did exactly the same. And tonight, the new Governor of the Bank of Israel because ultimately it counts how you end the game, maybe more than how you played it. And that's "Quest Means Business" for tonight. I'm Richard Quest. Whatever you're up to in the hours ahead, hope it's profitable.
END
