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He wants products to show some class

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People – November 2006

He wants products to show some class
By Chris Richter

Phelps Sprinkle knows some parents might cringe at what his Charlotte-based business does: It helps customers get their messages into classrooms. But these aren’t advertising messages. Topics Education Group LLC helps companies such as New York-based Citigroup develop educational materials on financial literacy. It also created a high-school curriculum on HIV and AIDS for Washington-based Black Entertainment Television.

“Our goal is to truly educate, not to find a way to help our clients market themselves,” CEO Sprinkle, 35, says. Their presence on the product usually is limited to logos on the teacher’s guide or material for parents. The business, which employs 11, has rejected work because it didn’t agree with a company’s objectives, he says. Among those that have made the cut have been The Weather Channel and Comcast.

A Durham native who grew up in Greensboro, Sprinkle earned a bachelor’s in English in 1993 from Davidson College, where he was a starting midfielder on its 1992 Final Four men’s soccer team. He enjoyed writing and spent two years in Davidson’s athletics department as director of publications. In 1996, he and two other alumni formed Topics Magazine LLC and started Topics, a publication for middle- and high-school students.

The magazine covered current events, and about half its content came from student writers, who landed interviews with primatologist Jane Goodall and comedian Chris Rock. Expanding through the Southeast, the company also began publishing projects for customers such as what is now Charlotte-based Bank of America. When the partners looked at taking the magazine national, they saw trouble. “We would be competing with people with really deep pockets,” he says. Deciding to focus on custom publishing, they changed the company’s name and, in May 2001, put out the final issue of Topics.

He wouldn’t disclose revenue but says the company has recorded double-digit annual growth since its founding and expects revenue to be about 38% more than last year. “The challenge for me is to make sure I don’t try to cast our nets too wide and focus on where the real opportunity is to do what we want to do, which is help corporations, nonprofits and educational institutions change the face of education in a positive way.”

Consultant has auto motive for this plan

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People – November 2006

Consultant has auto motive for this plan
By Edward Martin

Though he’s 60, Dick Dell never got over hot cars, particularly his first new one, a glacier-blue ’63 Falcon Sprint with four on the floor and a high-revving V-8 under the hood. Now he’s the driving force behind the Advanced Vehicle Research Center of North Carolina, an R&D center on 630 acres in Northampton County. It will, he says, put the state on the international automotive map.

Cars have come a long way since that Falcon, Dell says, through advances wrung out in places such as the research center, scheduled to open its first phase late next year. “Air coming out of the tailpipe of a new Toyota is cleaner than the ambient air of Los Angeles.”

Born on Maryland’s Eastern Shore, he grew up in Baltimore, enlisted in the Air Force at 17 and served in Vietnam and elsewhere. He returned home in 1967 and took evening classes at Johns Hopkins University, then joined IBM in 1968 as a field engineer. After several transfers, he put down roots in Raleigh before leaving the company in 1989 to start Triangle Group International, a consulting business.

As a car buff, he cringed as the state lost bids to land Volkswagen, Mercedes and BMW in the ’80s and ’90s. In 2005, he approached the state Commerce Department with a plan. Three years later, legislators awarded $7.5 million to the nonprofit center, owned by the county, which provided the land, North Carolina’s Northeast, a 16-county economic-development organization, and Dell’s company.

The goal is to attract automobile and parts makers who will lease space to test their equipment. The center will consist of a 4.1-mile track to test ride and handling, a separate track for acceleration and braking, skid pads, research buildings and test equipment.

British sports-car maker Lotus Engineering will design the test track and open its own $1.5 million R&D center, which will employ more than 100. Simon Cobb, director of special projects for Ann Arbor, Mich.-based Lotus USA, believes big automakers will follow. Test tracks in California, Arizona and elsewhere are being crowded by development, he says, and the Tar Heel center’s remote location will be an asset because companies want to test in secret.

As for Dell, Lotus’ participation is fitting. “I’m particularly attracted to British cars.” His Raleigh garage contains two 1950s Triumph sports cars, a 1954 MG, a 1954 Jaguar roadster and a 1974 Jensen-Healey. All British. And a glacier-blue Falcon Sprint. “I’ve still got it.

Cities will be up the river without a ladle

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Tar Heel Tattler – November 2006

Cities will be up the river without a ladle
By Edward Martin

Parting the water may have been easy for Moses, but parting with it can be hard for anyone else. A preacher testifying at a hearing in Valdese on a proposal to divert 22 million gallons a day from the Catawba River to Concord and Kannapolis asked, “What would Jesus do?” He was booed off the stage.

Interbasin transfers are when water is taken from one river system, used, treated and then deposited into another, usually because it’s closer. Places that use the river from which the water is taken usually oppose it. A decade ago, North Carolina lost a legal battle to keep Virginia Beach, Va., from taking 45 million gallons a day from Lake Gaston north of Raleigh.

Hearings on the Catawba proposal have attracted as many as 700 shouting, sign-wielding Tar Heel opponents, not to mention protests from some South Carolinians, who accuse North Carolina of poaching this time. “It’s as if we have now turned to South Carolina and said, ‘Do unto others as we were done unto,” says Donna Lisenby, executive director of Catawba Riverkeeper Foundation, a nonprofit dedicated to protecting the Catawba in both states. It opposes the transfers.

The Cabarrus County towns want to take water from the Catawba, which flows west of Charlotte, then south through Rock Hill, S.C., toward Columbia. The water would be discharged east into the Pee Dee River basin.

It’s not a new concept. Three major interbasin transfers have been approved in North Carolina: 24 million gallons a day from the Haw River basin west of Raleigh to the Neuse River basin east of it; 33 million from the Catawba to the Rocky River east of Charlotte; and 30 million from the Deep River south of Greensboro to the Haw basin. What has changed is burgeoning development and demand. Well-watered towns along the Catawba view the river as an economic-recruiting trump card.

The N.C. General Assembly likely will have the issue dumped in its lap next year, probably with requests to block all interbasin transfers. Some believe, however, that a blanket prohibition could clobber economic development. Scores of Tar Heel towns straddle basins, and 150 or more small transfers already take place. The state regulates only transfers of 2 million gallons a day or more.

Meanwhile, expect more shouts and signs. The Catawba request will go before the N.C. Environmental Management Commission, which has ultimate say-so, in January.

CEO Seeks fans to flame hotter image for this bank

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People – November 2006

CEO seeks fans to flame hotter image for his bank.
By Chris Richter

Scott Custer likes sports. But that’s not why Raleigh-based RBC Centura Banks Inc. and its parent, Toronto-based Royal Bank of Canada, pour money into sports sponsorships. It’s a way to try to stand out when you stand in the shadows of two Fortune 100 members. “We can’t outspend Bank of America,” says RBC Centura’s CEO. “We can’t outspend Wachovia. You’ve got to be more targeted in how you spend your marketing and public-relations dollars.”

The giant banks also invest in sports marketing, but they aim at a wider audience. BofA’s name is on a football stadium in Charlotte, but most of its advertising is geared nationally. So is that of Wachovia, which has its name is on a Philadelphia arena. RBC Centura, based in Rocky Mount until last year, focuses on the Southeast. In 2002, it cut a 20-year, $80 million deal to dub the home of N.C. State University’s basketball team and the National Hockey League’s Carolina Hurricanes as the RBC Center. Earlier this year, it renewed a contract to be the official bank of the Atlantic Coast Conference, airing its ads on regionally televised basketball games. Those moves elevated its brand, Custer says, especially in the Triangle. It will get another boost in 2008 when it completes its $100 million, 33-story headquarters.

Custer, 49, has been a banker since earning a bachelor’s in business from College of William & Mary in 1979. The Newport News, Va., native went to work for Wachovia as a commercial banker in Raleigh. Four years later, he jumped to First Union, then joined Peoples Bank, an RBC Centura predecessor, in 1988, about the time former RBC Centura CEO Kel Landis did. Their career paths paralleled, with Custer serving as president during Landis’ tenure in the top job. They are running partners, though Landis, a marathoner, has the edge. “He runs, and I usually just chase.”

Custer was named CEO when Landis left in October 2004. He inherited a bank that was struggling, in part because Toronto executives were making most decisions. The bank has more autonomy now and can focus on what Custer sees as its bread and butter: small businesses, business owners and professionals. Total assets in June were about $20.8 billion, nearly $1 billion more than when he took over. Net income through June was about $54 million, up about 20% from the year before. The bank employs about 3,700 and plans to add 15 to 20 branches a year to the 275 it has in the Carolinas, Florida, Georgia and Virginia.

Custer isn’t trying to shape RBC Centura into another Tar Heel megabank. Its size, he says, is its strength. It can tap the resources of Canada’s largest bank but act like a community bank. “We actually hold to the notion that living in the land of in-between is a good place to be.”

Cashing the first stone

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Cashing the first stone

Hard rock, once the bane of Jamie Hill’s existence, turns out to be a real gem for the Hiddenite emerald hunter.
By Maggie Frank

Even with summer slipping away, greenery envelops Hiddenite, sheathing the hills sliding down from the Brushy Mountains and the pastures flanking the two-lane highway leading into the Alexander County hamlet, about 15 miles northwest of Statesville. If you hang a right, green soon gives way to gray and brown, the colors of stone and soil, the latter also the color of a trailer that squats at the end of the dirt road. Here they hunt a different kind of green. The trailer houses headquarters of the mine that produced the most expensive emerald found in North America and thousands more carats of the gemstone.

Next to the trailer, a machine that resembles a tractor sits idle for the moment. The custom-made rock crusher had been running seven days a week since June, when Jamie Hill went into the gravel business. “I’m not chasing gravel — I didn’t found this company to be a granite quarry,” says the 42-year-old chairman of North American Emerald Mines Inc. “But it’s everywhere, and I’ve got to go through it, and I’ve got to pay to move it. And everybody wants it.” Hill wants the world to know him as “The Emerald Man” and does not relish a reputation as a rock star. But crushed stone from his open-pit mine could be the cash cow that carries on his quest indefinitely. If he can keep selling even half the amount he sold in September, it might bring him in four years what he grossed from all the emeralds he has found in the last eight years — about $2 million.

He has hired a subcontractor to crush the stone — actually migmatite, a metamorphic rock that resembles granite — to sell to paving and construction companies, which haul it away. In September, he was charging $10 a ton; Birmingham, Ala.-based Vulcan Materials, one the nation’s largest producers, was charging $14.20 a ton for crusher-run rock in Charlotte. He says he grossed about $40,000 in August and double that in September. That should increase each month, he says, as the crushing process becomes more efficient and he raises prices a dollar or two per ton. He turned away $53,000 of business in September, he says, because he couldn’t keep up with demand.

Since 2000, Hill has told many a media outlet he was on the brink of finding “the big pile,” a cache of gemstones that would make it all worthwhile. He spent nearly a decade combing fields, making deals with farmers to dig up sections of their land and chip at rocks with a rusty screwdriver, before buying his 100-acre parcel in 1996. In 2001, he told a reporter for Men’s Journal magazine: “Give me one good year of hard-rock mining on that site, and I’ll show the world what’s really there.”

Five years later, what’s really there, even he admits, is a variety of gemstones, some perhaps Tiffany-quality, others certainly not. He has sold several recent finds, uncut, to museums, including the Houston Museum of Natural Science. In early 2004, one of its benefactors bought it a 1,869-carat emerald crystal he unearthed in December 2003. Hill says it’s worth $3 million retail. Though he didn’t want to reveal what the museum paid, he did say he sold about $1 million of emeralds — most not of gem quality — in 2004. A museum in Raleigh wants a 300-pound quartz crystal he found in 1990, says his mother, Lynn Hill, North American Emerald’s president. “We’re not able to donate it right now.” But she adds that it’s available for the right price.

Robert Simon, who owns Windsor Jewelers in Winston-Salem, is skeptical that Hill will again come up with anything that matches the quality of the Carolina Prince, one of the gems cut from an 88-carat crystal plucked from the pit in 1998. The find brought Hill national attention. Simon and a private collector paid $500,000 — $63,694.27 for each of its 7.85 carats — for the dime-size cut stone, making the Prince, carat for carat, the most expensive gem ever found in this country. The collector eventually bought Simon’s share, but the jeweler still has it for safekeeping in a vault at a bank.

“We’re certainly very proud to have sold that gemstone,” he says. Simon also has sold a pair of earrings, each containing a 4-carat emerald from Hill’s mine. Though the jewels’ quality doesn’t compare with the Prince’s, the earrings retailed for between $100,000 and $120,000, he says. But Simon takes pains to distance himself from North American Emerald Mines, mentioning three times during an interview that they are not affiliated in any way. Hill, he says, also has sold some “promotional green gravel that I feel sorry that people have bought, because it has very little value.” As for high-quality emeralds, “common sense tells you there’s more there, but how much money and resources will it take to get it out? And what’s it worth?”

Hill counters that he is only mining two of his acres, that he hasn’t blasted his pit as deep as it should be, that he needs more workers and better equipment to reach its riches. Two geologists, he says, have estimated that he’s sitting on 10 million carats of emeralds of varying quality. But Simon’s question echoes: “What’s it worth?”

Even as a kid, Hill knew he wanted to “chase emeralds.” He grew up in Winston-Salem but spent many weekends with his grandmother in Hiddenite, digging in her garden. Eileen Sharpe, whose husband started Pilot Freight Carriers in 1941, ran the Hidden Crystal Inn. “One day, my grandmother said, ‘Look, Jamie, there’s green stone out there somewhere.’ And I know I wasn’t 6, 7 years old at the time, and she said, ‘If you find one, it’ll be worth a lot of money.’”

Perched on an ancient fault line, Hiddenite has long been a Tar Heel jewel box, a trove of diverse minerals. In the late 1870s, Thomas Edison dispatched two New York mineralogists to what was then called White Plains in search of platinum, which he wanted as filament for his light bulbs. They found no platinum but 62 kinds of minerals and gemstones, including emeralds. One of the mineralogists, William Earl Hidden, discovered green rock that resembled emerald but was a spodumene crystal, rather than beryl. Until recently found nowhere else on earth, it would come to share the discoverer’s name with this community.

Others have come searching for the big pile. Michael Finger found a 1,438-carat emerald on Hill’s site in 1969. But nobody built a business around an emerald mine. Until 1998, most residents and prospective investors rolled their eyes when Hill talked. “But let me tell you, when I had a handful of them — and I picked the best dark-green ice, beautiful crystals — I didn’t have to say a word. When you hold that, you don’t have to talk.”

But that hasn’t shut up the admitted publicity hound, who says he has an agent shopping his autobiography and has shot a pilot for a reality show he would like to sell. “I’ve done 186 interviews in the past seven years, and I’ve been on Oprah Winfrey and in People magazine, Inside Edition, Good Morning America, CNN, I could go on … .” He’s told the story so many times that it seems to reel off from a pre-recorded section of his brain. His voice is hoarse from talking nearly nonstop about his latest find: a 10-inch-long, 591-carat emerald he found in August. He’s hoping to sell it to a museum for around $500,000.

What he has been selling is crusher-run rock. There’s no other source in Alexander County, he says, and customers are hauling it off as fast as he can get it out of the ground. “This isn’t a very glamorous story,” says his mother, who has an MBA from Pepperdine University and also sells real estate in Blowing Rock, a trade she took up three years ago at age 62. “We were just blessed with the fact that this overburden is a desirable product.” Hill says he recently struck a deal to sell his stone to the state Department of Transportation, which will use it to pave, among other projects, the road leading to the mine’s headquarters. “They’re gonna put a road in here 2,700 feet long, 32 feet wide. That’s 10,000 tons of crusher right there. Basically a $100,000 deal right here, literally outside our doorstep.”

A few feet below the surface lies the migmatite, which hides pockets of quartz, some embedded with emeralds. After dynamiting and digging out the loose rock, Hill explores the surfaces uncovered with hand tools. Ed Speer, a Marion geologist Hill first hired in 2004, estimates a sheet of migmatite 500 feet deep runs across the property — more than 62 million tons of it. That’s not much more than a guess, he admits. Drilling and sampling can’t pinpoint where the underground formations begin and end. Speer was one of the geologists who estimated the amount of emeralds on the site. A few hundred feet past the fence that marks its boundary, the migmatite vanishes. Denver, Colo.-based Esmeralda Exploration International has dug nearly 25 feet deep to find nothing but dirt.

Smithsonian Institution mineralogist Michael Wise has visited the mine five times and is as excited about it as Hill is — but for a different reason: Here he can study how, and why, the quartz and emerald deposits formed. No scientist has conducted a major study of Hiddenite’s geology since the 1940s, he says, and that one just cataloged the minerals found there.

Though he’s a heavy smoker, Hill bounds down an uneven path to the bottom of the pit to show off a section of rock he’s planning to blast. The charges are set precisely, their pattern a secret, foreman David Jarrell says. A piece of quartz peeks through cracks of a section of rock. Hill rubs it, slicing his thumb. An occupational hazard, like a paper cut for an office worker.

A twice-divorced father of three, Hill says his finds haven’t made him wealthy — most of what he makes, from emeralds and crushed rock, goes back into the mine. Until recently, he lived in the Hidden Crystal Inn, which his mother sold last year. (His grandmother died in 2004 at 94.) An aunt is secretary of the company; an uncle, its treasurer. Since 1998, he has attracted big-name investors, whom he’s reluctant to name, and says he’s not seeking others. He has nine employees, but he’s hiring. “I do make a living. And I do meet my needs. I’m not filthy rich today. I may very well be eventually. So what?” His mother wears a ring set with a gem from the mine. But he vows he won’t sport his jewels until he can consistently find emeralds of the Carolina Prince’s quality.

Until then, he waits for the next big find. His most recent blast produced nothing but rock, but chasing emeralds has taught him nothing if not patience. After all, it was 26 years from the time he found his first in a plowed-up field as an 8-year-old before he discovered the crystal that bore the Prince. But he also knows the quicker he can blast and sell away the plain gray rock, the faster he can reach those precious green stones he covets.

Cash over flash

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Cash over flash

As Bank of America’s CEO, Ken Lewis thinks performance trumps personality. And he has the numbers to prove it.
By Edward Martin

Fifty-eight floors below the conference room where the man who runs the world’s most profitable company rattles off numbers — most profitable, he corrects himself, except for Big Oil — what once was called the Crossroads of the Carolinas crackles with commerce. It’s now a nexus of the nation’s business, all because gall and guile grew a Charlotte bank into a global giant. But up here, above it all, Bank of America Corp.’s chief executive makes it seem dull.

Ken Lewis sticks to the script, meting out the metrics. The room, like the man, says little. There’s a rendering of Bank of America Stadium, where the Panthers play a few blocks away, some plaques and awards, a small flat-screen TV. Performance, he and his surroundings intimate, is what counts, not personality. His predecessor was the most dynamic Tar Heel CEO of his generation. But Lewis has something Hugh McColl never had — some of the best numbers in the industry. “Ken always was a better businessman than I am,” McColl says. “He’s better at making money than I am.”

On Aug. 8, BofA nudged out Citigroup as the world’s most valuable financial-services company, with market capitalization of nearly $240 billion. It has been running neck-and-neck with its New York rival since. After reporting second-quarter earnings of $5.48 billion — more than any other bank — the third quarter’s were up 41%, the $5.42 billion profit just shy of Citigroup’s $5.51 billion. That’s basically a tie, BofA’s chief financial officer argues, if you subtract one-time gains and other factors. Total return on BofA stock has soared 142.2% since Lewis took over five years ago. The average gain for big-bank competitors: 59%.

It’s inevitable that Lewis, 59, be compared with McColl, who built what was once North Carolina National Bank into a behemoth through staccato acquisitions in the ’80s and ’90s. He exhales a barely audible chuckle. “We said in 2001 we were not going to be able to double our size every other year through some megamergers. What I’m proudest of is the combination of all these things. Gains come through getting it right every day, as opposed to episodic events.” Lewis proves, as one analyst has said, that in banking, boring is beautiful. Colleagues call him focused. Critics call him calculating. Either way, his push to make his company the most efficient, most profitable big bank in the country is built on millions of small successes. Court mom-and-pop customers. Sell them credit cards and mutual funds. Outflank the big brokerages by offering some customers free trades. Sell more, and spend less doing it.

Now comes the challenge. Facing regulatory limits on deposits gained by acquisitions, BofA can no longer rely on buyouts to boost revenue. “In terms of another bank acquisition in the U.S., we have very few options,” he concedes. So he intends to grow in three ways: by selling more products and services through a network of 6,000 branches — the country’s largest — by expanding abroad and by making BofA a serious player on Wall Street.

Each requires different skills; each pits the bank against tough competitors. In financial retailing, BofA could face one of America’s most fearsome companies. Wal-Mart, its denials notwithstanding, is almost certain to enter full-service banking in a few years. Abroad, the bank will square off with European companies that long ago embraced international finance. Giants such as England’s HSBC Holdings and Spain’s Banco Santander Central Hispano won’t be the pushovers commercial banks in this country have been. On Wall Street, BofA will tangle with the likes of New York’s Goldman Sachs and Switzerland’s UBS. For a decade, it has tried, with scant success, to be a force in investment banking.

Can Lewis pull it off? Investors seem to think so. In early October, he chalked up another record when BofA shares closed at $54.82, adjusted for splits and dividends. His board apparently agrees, making him one of the best-paid CEOs in his industry: $22 million in cash, stock, options and perks last year. But is the man who made Bank of America live up to its name the one who can turn it into a real world power?

Though he no longer has a formal role in the bank, McColl has offices six floors below Lewis in the 60-story Bank of America Corporate Center. Now 71, he recalls when he first realized that Lewis might follow in his footsteps. It started with a fit of temper. In 1981, he had tried to buy Florida National Bank, one of that state’s largest, but had been rebuffed. “One day,” he railed, “we’re going to own this whole goddamn state.” By the end of the next year, NCNB was on its way to doing that. It had paid $225 million for banks that covered the population centers. More followed. Many resembled little First National Bank of Lake City. It was no bargain, even at $6 million. First National was on a government list of banks that might fail, operating at a Margaritaville pace, paying low interest rates to docile oldsters and making shaky loans to bankers’ cronies. In 1986, McColl decided he needed a new Florida president to whip laggards like Lake City into shape, so he asked Buddy Kemp, a key aide, for advice.

Kemp, who died in 1990, suggested Lewis, a middle manager who since joining the bank as a credit analyst in 1969 had earned a reputation as a fierce cost cutter and fanatic about the bottom line. Some called him “Little Hugh.” Though his standoffish personality was a pole apart from that of flashy McColl, he shared the man’s competitive streak. “I picked up the phone and asked him to come up to my office. I said, ‘I want you to go run the Florida bank,’” McColl recalls. “He said, ‘Yes sir.’ I said, ‘When can you go?’ He said, ‘As soon as you finish talking to me.’ That was the turning point, in my opinion, of his career.”

While others at the bank might have seen similarities between them, Lewis knew early on that trying to ape McColl was a fool’s game. “Every era might need a different personality,” he explains, noting that McColl’s predecessor had been the cerebral Tom Storrs, who had a Ph.D. in economics. “I wouldn’t describe myself as outgoing, liking the limelight. But I also saw in my career people trying to emulate Hugh McColl and not succeeding at it, because he’s unique.” In fact, for two white Southern bankers, their backgrounds could hardly differ more. McColl comes from an affluent South Carolina family, the son and grandson of bankers. He loves to portray himself as a scrappy outsider, but even if he hadn’t ended up rich and powerful, he was headed for a life of social prominence. Lewis started out on the wrong side of the tracks. He was born in Meridian, Miss., but his people were from Walnut Grove, about an hour away. Mayor Grady Sims says the town today has about 500 “good family people.” None of the Lewises among them remembers Vernon Lewis and his wife, Byrdine. Or their oldest child, Kenneth Doyle Lewis.

Lewis’ father got no further than elementary school. His choices, Sims says, would have been working in the poultry plant or lumberyard. With a wife and son to support, he joined the Army after World War II, served in Germany and, when his son was about 7, was stationed at a base near Columbus, Ga. The marriage ended there in 1958, and his father dropped out of Ken Lewis’ life. His mother, a nurse, struggled to pay the bills and keep their small tract house. “She essentially raised my sister and me,” Lewis says in a published oral history of his family. “One of the things I remember most is her work ethic.” She often had to pull double shifts, working from 7 a.m. to 11 p.m. Little Ken pitched in. In a nearby trailer park, he sold Christmas cards and Grit, a tabloid newspaper popular in rural and small-town America.

Even back then, he tried to work smart. As a high-school senior selling shoes, he memorized the sizes in stock. “If somebody asked for a certain shoe, I’d remember that we didn’t have that size and wouldn’t have to go all the way back to check. You could be much more efficient.” He earned a 6% commission on $6 shoes. Knowing he had to work his way through college, he chose Georgia State University, figuring jobs would be plentiful in Atlanta. He held several, including accountant for a bond firm and reservations agent for United Air Lines. The experience bolstered the finance degree he earned in 1969. “I felt like when I went into the business world, not only did I have a business degree, but I had some background that maybe others didn’t have.”

Intensely private, he admits, “I do better with business questions than I do with personal ones.”

Lewis interviewed with several banks, including Atlanta-based C&S, Charlotte-based First Union and Winston-Salem-based Wachovia. (The latter two are now merged as Wachovia.) Offered jobs — in several cases, on the spot — he dismissed the established banks as stuffy and said yes to scrappy NCNB. McColl, then a comer within the bank, noticed him. “I’d say it was probably in 1969. I’d been with the bank about 10 years then, and I met all the trainees. Most came in as credit analysts.” He and Lewis had something in common. “We both wanted to be president of the bank, and as a result, we were both willing to do whatever we were asked to do. I used to run into people who wanted to be the best loan officer or the best bond trader or this or that. You didn’t run into a whole lot whose goal was to be the president. His was.”

Their similarities ended there. McColl, who had served in the peacetime Marine Corps, styled himself as a hard-charging warrior, Errol Flynn in a banker’s blue suit. He had a vision, too: a Southern-based bank stretching from coast to coast, a financial rebel yell that would shatter the dominance of the Northern money centers. Lewis, in contrast, was a detail man, the buckle to McColl’s swash. McColl made the deals, but in many cases it was Lewis who made them.

In the ’80s and early ’90s, McColl hustled Lewis from crisis to crisis. After Florida came Texas. In 1988 in a $1.3 billion deal, NCNB gobbled up the state’s biggest bank, First Republic, which was choking on bad oil and gas loans. McColl says each First Republic branch ran independently, canceling any economies of scale the bank’s heft offered. Lewis consolidated back-office operations and began rewarding managers based on performance. Texas politicians railed against the Carolina carpetbaggers, but First Republic began bringing in profits. “That’s when Ken’s stock really started to rise in the company,” McColl says.

"Hugh

Clambering up the corporate ladder, Lewis worked in nearly every department, readily accepting transfers as his reputation as a fixer grew. “I know I sent him at least five or six different places,” McColl says. The broad background has helped. “In many cases, yes, I’ve grown up with the company,” Lewis says. “I’ve run most of the businesses.” Even as he rose into increasingly public roles, the intensely private Lewis remained ill at ease in some social settings and uncomfortable revealing much about himself. “I do better with business questions than I do with personal ones,” he says. After divorcing his first wife in 1980, he married a staff member. A friend says he’s making a conscious effort to loosen up socially by pursuing the passions of many an arriviste CEO — expensive wine and fine art. He has filled an Aspen, Colo., vacation home with Persian carpets and Wild West art.

His owlish exterior masks a hawkish heart. Past and current colleagues portray him as fiercely — sometimes ruthlessly — driven and canny about people. Karen Geiger, now a professor at Queens University of Charlotte, recalls her job interview in 1982. He asked one question — why should we hire you? — then let her squirm. “He sat there while I talked for 45 minutes. I was thoroughly intimidated. I’d stop, then he’d wait for me to start again.” When she left the bank in 1993, she was senior vice president for training and family programs.

As Lewis notes, there are different styles for different times, and his might fit these better than McColl’s would. “There was a period in the ’90s when CEOs became like rock stars,” says Joel Smith, a former BofA executive who is dean of Moore School of Business at the University of South Carolina. “People like Carly Fiorina [Hewlett-Packard’s chief executive from 1999 to 2005] were more show ponies than CEOs. A CEO now has the luxury of being who they want to be, not to fit in somebody else’s image.” But in public companies, they still have to politic. They might not seek out the limelight — that might even be frowned on today — but they can’t shun it. They must personify their companies in front of Wall Street, the public and the press. That’s a role in which Lewis remains uncomfortable. In a recent public-television interview, he initially looked wooden, blinking and nervously licking his lips. But when the questions turned tough, he reeled off what he considers the bank’s achievements since he has been CEO.

One was the $35 billion acquisition of Wilmington, Del.-based MBNA, the country’s largest credit-card issuer. Yes, he replied to a question, he had to cut 6,000 jobs. “But it makes us the largest credit-card company in the world.” And if the bank’s size and aggressiveness worry many in the industry, so be it. “I hope so,” he says. “I don’t necessarily want any of them to like me. I don’t mind a little fear when they hear Bank of America.”

He likely inspires fear within BofA, too. Given his relentless cost cutting, many employees come to work fretting about their future. Since taking the reins, he has slashed about 35,000 jobs, including those in banks it acquired. BofA employs about 205,000. “It’s not because I’m a bad guy,” he told the TV reporter. Layoffs are “a brutal fact,” when any industry has overcapacity, which banking does. About half of the nation’s banks that existed in 1980 were bought out by 2000 — some 3,000 disappeared in the ’90s alone — creating massive duplication. Lewis’ cost cutting has paid off. In 2005, he pushed the bank’s efficiency ratio — expenses as a percentage of revenue — below 50% for the first time. In 1998, the year McColl acquired San Francisco-based BankAmerica, it was 61%.

He also has pulled off three major acquisitions. Besides MBNA, he bought FleetBoston Financial in 2004 for $48 billion and a 9% stake in China Construction Bank last year for $3 billion. He says the deals prove analysts were wrong when they concluded that BofA’s acquisitions ended with McColl’s retirement. Tom Brown, an analyst with New York-based Second Curve Capital, argues that this legacy isn’t one that Lewis should boast about extending, saying McColl’s merger binge destroyed shareholder value.

Bumping against a federal limit that says no bank can gain more than 10% of the nation’s deposits through acquisition, BofA’s expansion in the United States depends on other kinds of deals — buying an investment bank would be allowed — or organic growth. It will have to sell more products and services to customers or find ways to lure new ones into its branches. And of course, Lewis will continue to try to wring efficiency out of his far-flung franchise. “Our business — banking — is relatively mature, and you have to focus on operating revenues — the relationship between revenue growth and expense growth. And you have to focus on productivity, to make sure you’re getting gains to be able to reinvest.”

Domestically, Lewis says, the bank is sailing on strong currents. It’s used by nearly 4 million Hispanics — about 57% of the Hispanic households in its territory — and fares well with older customers. But Wal-Mart, the possible threat to its retail banking supremacy, has been just as deft at wooing Latinos. In April, it asked regulators to allow it to offer credit- and debit-card services and electronic-check transactions. Company officials say Wal-Mart doesn’t want to go into full-service banking, but few analysts believe them.

Lewis believes in scale: “I’d rather focus on dominating markets than being unimportant in a lot of places.”

Lewis says his bank has enough heft to fend off the retailer. “The lack of thousands of stores like we have will be a huge competitive disadvantage for them. They don’t have the geographics, and that’s something if they didn’t address, it would be hard to compete as a national consumer bank.” Wal-Mart, with nearly 3,300 U.S. stores, does have fewer domestic locations than BofA. But analysts say Lewis should know that, in an age of electronic bill paying and automated teller machines, folks need groceries and diapers more often than they need to visit a bank.

Lewis is courting the Hispanic market outside the U.S. as well. He has placed a major wager on Mexico, where BofA owns about 25% of Grupo Financiero Santander, the country’s third-largest bank. It’s moving into Europe and Asia, too, but cautiously. Lewis doesn’t see a need for a major retail presence in slow-growing Europe, preferring more profitable spots. China, however, is poised to become one of the world’s largest banking markets, though its state-controlled banking system is fraught with peril. Many banks are larded with bad loans made to state-controlled companies.

Lewis is playing that market prudently, with a relatively small stake in China Construction. After acquiring it last year, he fine-tuned BofA’s Asian presence. In August, he sold a controlling interest in Bank of America (Asia) to China Construction for $1.25 billion. The deal included three offices in Macau and 14 in Hong Kong. He’ll zero in on one of the activities that BofA excels at — selling credit cards — through a joint venture with China Construction. Lewis also recently sold off parts of the bank’s South American holdings to Brazil’s Itau Holding Financeira for a 7% stake in Itau Holding. “In all cases, we’ve said we want a dominant market-share position, or we’ll not be in the business,” he explains. “Places where you’re not important and not in a dominant position, you really can’t get the scale you want. I’d rather focus on dominating markets rather than being unimportant in a lot of places.”

Richard Bove, an analyst at New York-based Punk Ziegel & Co., says Lewis’ bank remains ill-prepared for overseas competition. “Bank of America is domestically bound, and the real growth in the world over the next 10 or 20 years is not going to be in the U.S.” Lewis, he adds, seems unsure of himself when it comes to “doing business in localities where he does not understand business practices, governmental policies and even the language.”

A way to redress that would be to buy foreign retail and commercial banks. But that could force a head-to-head confrontation with Citigroup. “They’d be involved in a tremendous game of catch-up,” says Frank Barkocy, an analyst for New York-based Keefe Managers. “Citigroup is already positioned in those markets in 50 countries.” Even so, rumors of BofA merger discussions with foreign outfits don’t abate. Talked-about targets have included ABN Amro Holding, Netherlands’ largest bank; Mexico’s Grupo Financiero Banorte; and the United Kingdom’s Barclays Bank and Lloyds TSB Group.

BofA is playing catch-up in investment banking, too. Earlier attempts to beef up its presence in the lucrative world of corporate finance haven’t amounted to much. Its 1997 purchase of San Francisco-based Montgomery Securities, for example, was supposed to make it a serious player in high-tech mergers, acquisitions and stock offerings. But about a year after the deal closed, Montgomery CEO Thomas Weisel left to start his own firm and lured several top employees to join him. In an interview with The New York Times, Weisel described the problem between BofA and Montgomery as “cultural — the bureaucracy of a larger bank being imposed on an entrepreneurial shop.”

BofA would face a similar culture clash if it were to try to buy one of the storied New York investment banks — Goldman Sachs, Morgan Stanley or Bear Stearns. Yet that seems to be the only way it could gain the market share to compete seriously. Lewis, not surprisingly, disagrees. “To put it in the proper context, we’re the largest corporate bank in the U.S. and one of the largest in the world. Our global corporate bank this year will make in excess of $6 billion, after taxes, which would rank us high in the world as a separate company. We get lots of revenues from treasury management, foreign exchange, trade finance and not by providing capital but raising capital. We think it’s a logical extension of serving our corporate-banking base by adding investment banking.”

It may be logical, but it won’t be easy. Banc of America Securities ranked 20th in deals, measured in dollars, over the year ended in mid-October, according to SNL Financial. Citigroup and Goldman Sachs topped the list, with volumes 20 times greater than BofA’s.

Six floors down, Hugh McColl scoffs at the skeptics. By the time Lewis’ retires, he predicts, Bank of America will be the second-most profitable company on earth, trailing only Exxon Mobil. “If we could price money like they do oil, we’d already be making more money than they do.”

Better late than never

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Up Front: November 2006

Better late than never

We’ve been trying to do this month’s cover story for more than five years, and it had been assigned for more than five months. But Ed Martin didn’t get to talk to the subject until after he had finished writing it.

“We’ve been trying to interview Ken Lewis since 2001, when he succeeded Hugh McColl, as well we should have,” our multiaward-winning senior editor says. “The position of president, CEO and chairman of Bank of America, in my estimation, makes the holder the dean of Tar Heel business, and as the state’s most authoritative business publication, we’d have been remiss if we’d given up. That’s true even if, as Lewis’ aides have told us repeatedly, the bank has outgrown its North Carolina roots and become an international powerhouse. Or as one put it: ‘North Carolina’s just another state to Ken now.’”

Last May, we budgeted the Lewis profile for this issue, which focuses on banking, committing to do the piece with or without his cooperation. Ed began laying the groundwork and doing research. He read everything he could get his hands on that’s been written about BofA’s boss — surprisingly, there’s not been that much, of any depth, even in the national media. He scoured public records. He interviewed dozens of sources, including people inside and outside the bank, including one Lewis had hired and a few he had fired. In mid-July, he placed his first call to a BofA public-relations executive, who didn’t hold out much hope that Lewis would agree to talk.

But Ed is nothing if not persistent and was determined to meet this man he’d been working so hard to know. Finally, we could wait no longer. “I began writing what I had reported in late September, still peppering the bank with requests and reminders several times a week that we needed to talk to Lewis and still being told that it would be unlikely. The story was completed in early October and being edited when, quite unexpectedly, on Oct. 10 — already more than a week past deadline — Terry Francisco, BofA’s senior vice president for national media relations, e-mailed me, saying Lewis would be available sometime that week. Within hours, he called and set the time for 10 a.m. the next day.”

Ed and Assistant Editor Maggie Frank spent about 30 minutes with Lewis. Then Ed came back and recrafted the piece from top to bottom. “It added immensely to the story, partly for his take on the bank’s direction and future, but more so as insight into the man, in flesh and blood. The impression we got? He’s a very reserved individual, an executive who has an astounding devotion to — focus on — his corporation, with an amazing talent for making money.”

We got a half-hour with him, which for a guy who BofA’s proxy says pulled down $22 million last year, was very generous. If he were paid wages for a 40-hour week, that’d work out to $5,288 of his time — which Ed probably would have been willing to reimburse the bank just to have the interview. Fortunately for us, he’s the guy who writes great stories for BNC, not the one who signs its checks.

Under pressure

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Under pressure

No closely held company wants to go where Conbraco has been. This family beat long odds to bring it back.
by Mark Kemp

and

Edward Martin

As a boy, Glenn Mosack would trail his father around Conbraco Industries Inc.’s factories, fascinated by the whining tools that machined blocks of metal into valves and left bright shavings that sparkled almost like gold. For the business his grandfather had begun in 1928, the valves were golden. By the time Glenn was in his teens, his dad had turned the Matthews-based company into a manufacturing powerhouse.

Glenn worked there summers during college. “I was just enthralled by the business of manufacturing,” he says. Carl Mosack put his son in different departments. “I painted walls one summer. I worked in some of the assembly departments. I worked in the production-control area. My dad started training me early on to see if I would be interested in the business.”

He was. Conbraco represented financial security for the family. He, his older brother and a sister became executives. But it was more than that: Mosack blood was in the bronze and brass. His grandfather had moved the company to North Carolina from Detroit in the 1950s. Under his father, who took over as CEO in 1968, it thrived. Conbraco valves turned up everywhere. They regulated water temperature in bathroom sinks, controlled the flow of bleach at huge paper mills and precisely measured chemicals in drug factories.

Then, the business that three generations of the family had built almost shattered. In March 2001, Carl Mosack surrendered to FBI Special Agent Eric Davis in Charlotte, facing charges he had laundered money, lied to banks to get loans and committed fraud, all to cover gambling losses that in one year came to more than $30 million. As his world collapsed — he would spend 15 months in federal custody — the dreams of his children and the legacy of Conbraco crashed with him. He had run the business with an iron fist. His children had to wrest it from his grasp, then hold tight. It almost slipped away from them.

Now, five years later, Conbraco is 44th on Grant Thornton’s North Carolina 100, the accounting firm’s annual ranking of the top private companies in the state. With three factories in the Carolinas, it employs about 1,200. Sales topped $190 million in 2005. From 1986 to 2001, it was a fixture on the list, reaching 24th five years ago. Though its woes made the kind of headlines no business wants, many private companies would recognize the problems it faced: an aging CEO clinging to power and resistant to change, directors and managers kept in the dark, competitors poised to exploit any weakness and fluctuating economic and market conditions.

“Succession — both ownership and leadership — can be a major issue for any private company, let alone a family-controlled private company,” says Alan Day, the Grant Thornton partner in charge of the ranking. “As private businesses mature and ownership structures become more complex with time, companies are faced with significant decisions regarding future alternatives. Alternatives they may consider include generational transfer, transition to professional management or sale of the company.”

Those alternatives weren’t top of mind when Carl Mosack’s kids confronted him about his gambling addiction. He threatened to fire Glenn, the ringleader. Glenn’s lawyer said his choices were limited: He could leave, or he and the board could depose his old man. They pushed him out, but the family later would lose control of Conbraco. Not until this past April did the immediate family — led by Glenn; his brother, Cal, executive vice president of sales; and sister Carole Mosack Lee, vice president of marketing — regain control. It cost them and their partners $46 million, money they had to scrape and borrow to find.

The promise of a new century seemed to stop at the front door of the black-glass Conbraco headquarters. Glenn, now 42, and his siblings had known for years their dad liked to gamble. No big deal. “We figured what he did with his own money was his business.” But between the summers of 1999 and 2000, their father had lost $36 million and won $5 million, mostly betting on sports events. To cover the losses, he borrowed $21 million from his company and $10 million from Bank of America and other lenders. He told bankers he was buying more Conbraco stock. They believed him. But FBI agents had been tracking his bets for months, not only with local bookies but with mob-related outfits in Florida and the Caribbean.

Carl Mosack threatened to fire one of his sons when confronted about his gambling addiction.

While he was running the company, board members got financial reports only once a year. Glenn first saw evidence of his father’s out-of-control spending in April 2000 when Conbraco’s longtime controller, Everett Lowery, showed him the 1999 annual report and other records, including the loan documents. The numbers worsened, and in late August, Glenn, Cal and Carole confronted their father in his office. Glenn recalls the meeting as “brutal.” His father seethed. If you don’t like how I run the company, he said, get out.

When Glenn was in grade school, he was asked to write a profile of his hero. He had chosen his father. Now, it was clear his idol was not even willing to admit he had a problem. Says Cal: “We tried to talk to him sensibly about what he was doing to himself and to the company and to the employees and their families. But he just kept accusing us of trying to ruin his life. We couldn’t believe the level of denial.”

On Aug. 28, Glenn, then vice president of operations, called an emergency meeting of Conbraco directors. They voted to remove his father as chairman and CEO and named the brothers co-CEOs for 90 days. The FBI showed up the next day with files of evidence against the elder Mosack, Cal recalls. “They told us, ‘It’s a good thing you guys held that meeting when you did. Because if you hadn’t, we were going to come in and padlock this place.’”

In August 2006, Glenn peers across a conference-room table. Fine lines crease his forehead, and faint circles underscore his eyes. From a speaker in the ceiling drifts Tom Petty’s song Free Fallin’ — an apt description of what he’s discussing. In late 2000, the downward momentum of Conbraco had been nearly unstoppable. “I compare it to how hard it is to change the direction of a train running fully loaded in the wrong direction. First, you have to slow it down, then you have to get it stopped and turn it around, and then you’ve got to start back in the opposite direction. It takes time.” When his father was sent to prison, the banks, which had pressed charges, gave Conbraco 18 months to make good.

Glenn continued as president and CEO after the 90-day period while Cal, 47, opted to resume his position over sales. The first thing Glenn did was to come up with a 13-point cost-cutting plan to save $12 million to $13 million a year. It included freezing salaries and slashing benefits and bonuses. During the next two years, 400 people — a quarter of the work force — were laid off. He brought in a consultant from Huntersville-based OperationsRx LLC to help improve productivity, shrink inventory and convert about $20 million of it into cash. “The way we’d always run the business was, build inventory and people will come and buy it. That wasn’t efficient, but it did give us a big chunk of inventory at a time when we really needed it.”

He also had rumors to quiet. “You can imagine what your competition’s doing out there. They’re like, ‘Well, the old man’s gambled away all the money, the company’s gone, the family business is no longer there.’” Says Cal: “There was a time when people actually thought we’d been sold to Wal-Mart.” He booked flights and visited customers. “We wanted to make sure they knew where we were and that we were committed to turning this thing around and that we needed for them to hang with us. And they did. Not one of our customers left us, and neither did any of our distributors or our sales reps.”

But his father’s gambling wasn’t Conbraco’s only crisis. The 2001 recession ravaged manufacturing. Customers were switching to foreign companies with lower-cost labor and just-in-time delivery. After Conbraco’s record sales of $180 million in 2000, revenue dipped to $157 million in 2002. “In the ’80s and ’90s, everything we did turned into something positive on the bottom line,” Glenn says. “Then all of a sudden, we were faced with new competition.”

And Conbraco started slipping away from the Mosacks. Carl Mosack owned 26%, and his children, including another daughter, had about 14%. Carolyn Vanderberg of Charlotte, daughter of Carl’s late sister, owned 32%. In September 2002, Memphis, Tenn.-based Mueller Industries, a publicly owned manufacturer of copper, brass, plastic and aluminum products, showed up at his personal-bankruptcy hearing in federal court in Charlotte. So did Glenn, Cal and Carole. “We came in with the little bit of trust we had to try to bid on [their father’s shares], but there was no way we could bid against the deep pockets of Mueller,” Cal says.

Mueller bought enough to own 15% of the company, and Conbraco retired the rest to compensate shareholders for money Carl Mosack had borrowed from the company. Mueller later bought out some shareholders not related to the family, eventually accumulating 38%. “They thought that over a short period of time they’d be able to offer us some low number and buy the whole family out,” Glenn says. That wasn’t going to happen. “We felt like the three of us were in this thing as a family and that we could get through it together,” Carole, 43, says.

“We felt like the three of us were in this thing as a family and we could get through it together.”

“One thing that’s important to family management is that the family name is attached to the business,” says Tom Ogburn, a management professor at Wake Forest University and director of its Family Business Center. “So it’s very, very important to them to protect the family name in the community and in the business world and therefore protect the company. It’s not just money at risk: It’s the reputation of the family itself.”

Slowly, the momentum turned. By 2004, sales had rebounded. The programs Glenn had begun enabled the company to pay down debt by more than $50 million. But by early ’05, Mueller and Vanderberg, who now owned 34%, wanted out. The board hired Fidus Partners, a Charlotte investment-banking firm, to sell the company. The siblings, borrowing against their own stock, joined senior managers and other investors to buy Mueller’s and Vanderberg’s shares. They paid dearly — $270 a share for stock that had cost Mueller an average of $210. But when the deal closed April 28, they controlled 70%, more than they ever had.

Carl Mosack took a long time to admit and understand his addiction, Glenn says. “It wasn’t like he just sat down and said, ‘Gee, you’re right. I really do have a problem, and I’ve got to get this fixed.’”

But after bankruptcy, prison and treatment for the gambling addiction, his father says the compulsion is under control. “It took over my whole life for a couple or three years. I can enjoy life with my wife and my family and my grandchildren again.” He’s 75, lives in Charlotte, travels to the Caribbean with his fourth wife, plays golf and follows business trends. He often gives his kids advice, and they don’t rule out his return to the board.

His anger at them has faded. “I’m extremely proud of all of them. They just dug in and did the best they could, and it paid off.” In more ways than money. Cal says he and his siblings are closer than ever. “You know, there were certainly emotional moments when things didn’t look too great, and we’d get frustrated and emotions would run high — but overall this whole process has really solidified the three of us as brothers and sister.”

They hold no grudges against their dad, Carole says. “In his mind, he never did anything to anyone but himself, because everything he did, he had backup, in his mind. He had collateral, he had a plan. But it was getting bigger and bigger, and he just couldn’t see it for what it was because of the addiction. He’s always provided us great jobs here, great opportunities. People that worked for him still miss him, still wish him well.”

Mark Kemp is a Charlotte-based freelance writer.

NC 100

"Logo"

Grant Thornton’s North Carolina 100, the accounting firm’s ranking of the top closely held companies in the state, always has been different. Unlike most rankings published by Business North Carolina, participation has been voluntary since the list started in 1984, just three years after the magazine began publication. The firm compiles the list by sending questionnaires — more than 2,000 this year — to privately held North Carolina-based companies. Subsidiaries don’t qualify. Rankings are based on 2005 revenue.

Top 15 Private Companies

05
RANK
06
RANK
COMPANY Headquarters CEO EMPLOYEES BUSINESS
$500 MILLION + IN 2005 REVENUE
1 1 The International Group Inc. Raleigh O. Temple Sloan Jr. 14,250 Distributor of automotive replacement parts
2 A.T. Williams Oil Co. Winston-Salem Stephen T. Williams 2,000 Operator of Wilcohess convenience stores, travel plazas and restaurants; petroleum-products distributor
2 3 SAS Institute Inc. Cary James Goodnight 10,076 Software developer
5 4 National Gypsum Co. Charlotte Tom Nelson 7,750 Wallboard product manufacturer
3 5 Baker & Taylor Inc. Charlotte Richard Willis 2,607 Distributor of books, DVD, software and other media
    Median of all reported $468 5.5 $258.4 12.7

The China trade

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The China trade

Our jobs for their cheap goods is how these workers have shaped the Tar Heel economy – and they’re not finished.
by Alex Frew McMillan

Few people can sew jeans as well as Lee Chitak. His bosses at Comeglory Trading Co. say he’s due for promotion because he is so efficient, one of the best on the shop floor. He should be. Lee has been sewing clothes for 16 years — half his life. He hails from Heyuan, a forest-ringed city in southern China that scientists believe gave birth to the SARS epidemic four years ago. He left school after nine years and, like many of those born in China’s backwaters during the last few decades, moved to a bigger city to make more money. A few years ago, he landed in Dongguan.

Work is why most people come to this city of 1.6 million that sprawls over 952 square miles — bigger than all but a few North Carolina counties. It’s a broad swath of factories, worker dormitories, warehouses, commercial districts, construction sites and farms. Sometimes it’s hard to tell whether the brick buildings are being built or falling down. The taxis have thick, stainless-steel bars between the front and back seats so customers can’t attack drivers.

Dongguan’s workaday gloom contrasts sharply with the skyscrapers and glitz of nearby Hong Kong. In the 1960s and ’70s, companies based in the former British colony opened many small factories and later ended up here, in the Pearl River delta. Foreign investment followed after China began opening up to the West in the late 1970s, helping to make the region the most dynamic part of that country’s blossoming economy. Comeglory, started two years ago by three brothers from Hong Kong, tapped into the region’s pool of apparel workers.

North Carolina has people who do the kind of work that Lee does. It used to have many more. Since June 1990, the number of jobs in apparel manufacturing has plummeted 78%. Now there are fewer than 22,000. Some were eliminated because of technological advances that increased efficiency, but many apparel companies have closed or shifted their production to places such as China, where labor costs much less. In North Carolina, cut-and-sew workers average about $2,000 a month. In Dongguan, Lee’s base pay amounts to about $100 a month. He also gets paid for each piece he turns out — usually boosting his monthly pay to about $250.

Work consumes Lee’s life to a degree seldom seen among rank-and-file workers in the United States. He lives in a dorm next to the factory, which makes designer jeans for companies in Europe and North America. He eats in the company mess hall and normally knocks off late, sometimes 11 p.m. That leaves him little time to play billiards in the café around the corner or watch soccer on TV. Curfew is midnight. The next morning, he starts work at 8. He gets to see his wife and two children in Heyuan, about 60 miles away, on his two days off a month.

He says he’s satisfied with his job on the production line, but he wants better things for his sons, who are 9 and 3. “I want them to get to a high grade in school, go to university and then work in government offices. I didn’t do that much school, and working life is too tough. I want my sons to have better work.” He hopes he can arrange for them to enter one of the prominent Beijing universities — which might involve bribes. Wouldn’t he miss them if they moved hundreds of miles away? “It doesn’t matter, as long as they can get much better prospects.”

Lee’s yearning for a brighter future is shared by many of his countrymen. They live in a nation that has careered from communism to something approaching capitalism in just a few decades. When Business North Carolina began publishing in 1981, there wasn’t a privately owned business in China. In 1990, the private sector employed 5% of the work force. Now, though the nation still is run by the Communist Party, that figure is about 75%. China has 786 million workers, and the number will swell to 813 million by 2030. It edged past Britain in July to become the world’s fourth-largest economy. Only the economies of the United States, Japan and Germany are bigger. In fact, China could be the world’s biggest exporter as soon as 2010. “Sometime in this century, China is going to be the biggest economy in the world,” says Ken Davies, the senior economist in the investment division of the Organisation for Economic Co-operation and Development in Paris.

Because so many Chinese workers can produce goods so cheaply, they have started to exert a strong influence over North Carolina business during the past 25 years — and they aren’t finished. Above low-level workers such as Lee are managers who are ambitious and better-educated than the workers they oversee. They, too, work for a lot less than their Tar Heel counterparts and likely will shape the future of North Carolina’s economy as they try to improve their own lives. Chinese workers and managers could be the biggest foreign influence on business in this state in the next 25 years. They will make your products, buy your products, compete with you, steal your ideas, come up with some better ones, become your partner, build a factory near you, take over your company, maybe even make or break you.

You can see it starting to happen in Dongguan.

Guangdong province looked very different when Zhang Xiu Ying came to Dongguan in 1989. Small roads — little more than footpaths — linked villages and towns. There was more countryside and less concrete. Zhang was 20 when she left her home in Sichuan, a mountainous province in central China best known for its spicy food and pandas. She had struggled to find work as a seamstress there. During a good month, she could make the equivalent of $50, getting paid by the piece. She was sharp enough to get promoted to midlevel roles in quality inspection. But it wasn’t long before she was looking elsewhere for advancement. “My sister told me I would make much more money in Guangdong.”

About 60% of the population still lives in the countryside. That will dwindle to 25% within 25 years.

When she arrived in Dongguan, her sister housed and fed her and referred her to a company that was hiring. Zhang found a job, and her salary soared. As a supervisor in Sichuan, she was making only $88 a month. Junior sewing girls in Guangdong started at $138 a month.

As Dongguan grew, Zhang rose through the ranks. Now 37, she is production manager at Comeglory. Her ascent moved her from a factory floor cooled by fans in the summer into an air-conditioned office. She sits at a computer in her cubicle, part of a pod of workers supervising production. Her job is to take a sample garment that a customer wants the factory to make and tear it apart so she can decide which piece the factory needs to make first and which to make last. She then decides how long each task will take and how many will work on each step. She assigns the sewing jobs so the work on the garment will finish in sequence.

As work begins, it becomes obvious why these kinds of jobs have been leaving North Carolina. Individual workers sitting at sewing machines do almost all the stitching, rapidly working through boxes of fabric. Men and women turn each piece of denim this way and that under a needle as it hammers up and down to sew the stitching. There’s some chatter, but not much. Workers dress casually and lightly to stay cool on a hot day. Sewing machines whir. Fans hum. A radio blares lilting Cantopop tunes. Little of the process is automated.

Comeglory makes that a selling point: Factories in America will not bother with the kind of work done in Dongguan because their assembly lines can’t do it efficiently. The more streamlined the production process, the better. The jeans Comeglory is producing are complex, often involving more than 20 processes with 20 to 30 pieces of fabric. On average, 16 people will work on a pair of jeans or shorts.

The first stage of production is cutting. Workers measure each piece to be cut by placing tracing paper with actual-sized computerized maps over the denim — the shape of a pocket here, an outline of a belt loop there — then slice up huge piles of material. Assembling the pieces into finished items of clothing requires a lot of hands. Though it grosses just $5 million a year, Comeglory employs more than 200 people.

Some, like Lee, speak Cantonese, the local dialect. Zhang and others from farther away speak Mandarin. In Dongguan’s factories, Cantonese speakers often hang out together, while Mandarin speakers form cliques of workers who grew up in the same region. Though he sees his family only two days a month, Lee is better off than many Chinese workers who are too far from their hometowns to visit more than once a year. Many send the lion’s share of their paycheck home.

Most Chinese students end formal education after middle school, as Lee did. They usually occupy the lowest rungs on the labor ladder, according to Min Tang, principal economist in the Asian Development Bank’s Beijing office. Middle-school graduates have been heading from the countryside into the cities to work on assembly lines, construction sites and wherever else they can make more money. “This is usually their first job, and they need some training. But they are quite disciplined and can tolerate lower wages, and they work very hard.”

That migration is reaching a tipping point. About 60% of China’s 1.3 billion people live in the countryside. Within 10 years, the percentage will drop to 50 and, within 25 years, to 25, Tang says. Most of the new city dwellers will be young, and they also will climb the labor ladder. They will move beyond the unskilled jobs by receiving technical training at a vocational school.

Every year, about 8 million graduate from these schools — 80 million skilled technicians will enter the market in the next decade. “As we get more of those type of people coming into the market, the labor force will improve,” Tang says. “They know some machinery. They can do some high-tech industry as a low-end worker. They can operate some computers, not only an assembly line. Or they can run an assembly line.”

The top steps on the labor ladder are reached by going to college. Enrollment has increased fivefold since 1998, and about 5 million university students graduate each year. That makes China the biggest producer of university grads in the world. About 20% of Chinese students go to college, up from 5% six years ago, Tang says. The government plans to boost that to 40% by 2025. “The majority are engineers, though of course there are others. But this is becoming a higher-level work force. Many of them may still be working in factories in engineering and probably in high-tech enterprises. More and more of those graduates will become our important working force.”

Technicians and people with vocational training can make about as much money as college grads because there’s such a glut of graduates. But Tang says China needs them to move its economy into higher-revenue industries. “In 25 years, this low-cost China production is going to have a lot of competition — from Bangladesh, India, Vietnam,” Tang says. Chinese workers “have to increase their value, increase their training and improve their efficiency. This is the only way they can compete.”

China’s explosion of college graduates might be an even bigger threat to the U.S. economy, one observer says.

Though Lee sews alongside a handful of other men at Comeglory, many assembly lines in Dongguan rely exclusively on women. The reasons companies give vary: Women have smaller hands that are better suited to assembly, they are more detail-oriented than men, they’re more reliable. Men often end up in construction or day labor. Women in their late teens or early 20s often move from the farms and smaller cities to China’s east-coast industrial belt. About 90% work five or six years to save enough money to go home and marry, then raise a family or open a small shop.

Zhang, the production manager, is different. She has worked in at least five factories, changing jobs to grasp a better opportunity. Her longest lasted six years, where she moved from senior supervisor to technical supervisor to her current post. She may be on the second rung of Tang’s labor ladder — a skilled technician at the top of the production line but still intricately linked to it. She lives next to the factory — on the other side from where lower-level workers such as Lee live — in management quarters: several concrete one-room apartments in a two-story building.

Zhang makes the equivalent of $376 a month — about $4,500 a year. Most Chinese workers get an extra month’s pay around Chinese New Year and sometimes another one as a bonus. That could boost her pay to almost $5,300, pretty good by Chinese standards. The country’s gross national income per person was $1,100 in 2003, according to the latest figures from the Asian Development Bank. That is slightly more than the Philippines’ $1,080 but below the $1,170 of Myanmar, a country ruled by a military junta and subject to U.S. trade sanctions in recent years. In a developed economy, the figures are about 20 times that — $25,860 in Hong Kong and $21,230 in Singapore.

To earn her keep, Zhang gets up at 7:30 a.m., eats breakfast and arrives at the factory for a long day broken up by an hour and a half at lunch. At 5.30 p.m., she breaks for dinner, then goes back to work at 7 p.m. to make sure the night shift is going smoothly. She might work until 10. After her day is done, she showers and maybe watches a little TV. She often goes back to the office to surf the Internet. Married to another clothing worker, they have two daughters in middle school. The family gets back to Sichuan once a year. Like Lee, Zhang says she is satisfied with her job. It’s not something she thinks about often. Nor does she think much about U.S. workers. “I have no real idea. I only know them from the TV.”

Americans know more about their Chinese counterparts, thanks to media coverage devoted to China’s economy and its impact on U.S. jobs. Some argue that the threat has been exaggerated. John Kasarda, a professor at UNC Chapel Hill’s Kenan-Flagler Business School, says research has shown technology improvements have caused most job cuts in North Carolina. “Probably the heaviest blows to manufacturing already happened by the time China entered on the scene — from Latin America first and then Southeast Asia and then of course China in the last 10 years.”

The share of U.S. imports from Asia hasn’t grown, and most of the jobs China has taken have not come directly from the United States. The rise in college graduates in China is a greater threat, Kasarda says. “There’s the potential to have even greater effects on the service sector in North Carolina. These people are learning English. They’re becoming very facile with computers and data processing. They will have the advanced degrees, and they will be competing very effectively with the white-collar American worker that deals with information.”

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Not only will they compete with North Carolina companies, they’ll cooperate with them, Kasarda says. The recent purchase of IBM’s PC operations by China’s biggest computer maker, the Lenovo Group, provides a beachhead and a sign of things to come. The deal may encourage other Chinese-owned businesses to open nearby. Last year, Chinese companies invested less than $7 billion abroad, but experts expect that number to leap. China lured much more, $72 billion, in foreign direct investment — more than any nation except the U.S. and the United Kingdom. “Is China a competitive threat to North Carolina, a potential market or a potential partner? The answer to that is yes,” says Davies of OECD.

Chinese workers also may affect North Carolina another way. As Chinese salaries increase, the country is rapidly becoming a major tourist source. Only 4.5 million Chinese traveled abroad in 1994. That rose to 31 million in 2005. By 2020, travel analysts forecast, the figure will hit 100 million, many more than the 62 million Americans who now travel abroad each year. “If North Carolina markets itself appropriately, there’s a real opportunity to capture that coming wave of Chinese tourists,” Kasarda says. “The biggest waves are in the Pacific, and the origins of those huge waves are in China.”

Unlike some of her colleagues, Kwan Hangsiu has thought about America. Now 42, she started working in clothing factories at 18 and is a senior supervisor at Comeglory, a level between Lee and Zhang. “I have friends in San Francisco and New York, and they asked me when I want to come join them, but I didn’t want to leave my family.”

Her husband also works in the garment industry but in Guangzhou, the capital of Guangdong, about 30 miles away. She has a 17-year-old son who goes to school there and lives with his father. She rents an apartment near the factory for about $35 per month, visiting her husband and son every two weeks on her days off.

Kwan has experienced capitalism in a way Lee and Zhang have not: She owned a company with 80 sewing-machine operators. But she says she was put out of business by traders, who asked her to develop products and then didn’t pay. She complains about having to work for someone else, but it pays the bills and keeps her hopes alive. “I want my son to have a better living. Whatever he thinks is comfortable. But I don’t want him to be a sewing worker. It’s tough.”

According to Andy Rothman, the Shanghai-based China macro strategist at CLSA Asia-Pacific Markets, a Hong Kong brokerage and investment bank, people like Kwan’s son have increasingly better chances of becoming entrepreneurs. “The story of low-cost goods produced by lots of cheap labor is kind of the story of the last 10 years. The story for the next 25 years is two other things: the growth of entrepreneurs and small to midsize companies and China moving up the value-added chain in terms of what it produces and develops.”

Right now, it mainly produces goods other countries design or develop. Rothman expects China to produce major innovations within the next 10 to 15 years. “I don’t see it as a threat, but it’s certainly a challenge. The Chinese are going to say, ‘We’re going to keep chasing you. So you have to keep moving up the value chain, so we don’t catch you.’”

Alex Frew McMillan is a Hong Kong-based freelance writer.

Market fears buyers put off by inn crowd

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Tar Heel Tattler – October 2006

Market fears buyers put off inn crowd
By Edward Martin

Quit biting the hand that feeds you, the High Point Market Authority is pleading to hoteliers who routinely triple room rates for the twice-yearly furniture markets. Pretty please. We’ll try to scratch your back if you scratch ours.

Officials can only appeal politely on behalf of 100,000 buyers who flock to the city each spring and fall for the markets, which pump an estimated $1.2 billion a year into the state economy. Pressuring hotels to keep a roof on their rates could be construed as coercion, restraint of trade and even price fixing. “We can’t legally sit in a room and talk about those factors,” says Brian Casey, authority president.

The issue has been around for years but assumed urgency last year when Las Vegas started a market (cover story, June). “Vegas is expensive for exhibitors but inexpensive for retailers,” says Jerry Epperson, managing director of Mann, Armistead and Epperson, a Richmond, Va., investment-banking firm. He tracks the market. “High Point is less expensive for exhibitors and more expensive for the retailers.”

Vegas’ exhibit space rents for about $40 a square foot, compared with High Point’s $12. But Vegas has 120,000 hotel rooms, and the High Point region has about 15,000. Vegas room rates during markets are as little as a third of those in and around High Point, where Epperson pays about $360 a night. Hoteliers are responding, he says. “Rates have already gone down for two markets in a row. High Point isn’t Las Vegas with a convention every week. Those guys have to make some money.”

Casey says the authority might help by buying blocks of rooms at cooperating hotels and renting them to attendees. It also could advertise cooperating hotels, but it won’t subsidize rates. “I’d rather go to the core of the problem, rather than just throwing money at it.”

One change the authority has made is dumping the old International Home Furnishings Market name. Call it the High Point Market. “The others, regardless of where they are, are referred to by the city of location — Tupelo, New York, Shanghai, Cologne,” Casey says. He doesn’t mention one: Las Vegas.