Our new spinoff show Lots More. We'll be back next Friday, but for now, enjoy this bonus episode with Steve Radner.
Hello, and welcome to another episode of the Odd Blots podcast. I'm Tracy Alloway.
And I'm Joe Whysenthal.
Joe, it is the first week of the United Auto Workers' strike. I feel confident predicting that by the time this episode comes out, it'll probably still be ongoing.
Right so we are recording this September twentieth. I think you're listening to this Friday, September twenty second. Even in the off chance that they get a deal between now and then, there is a lot going on with autos right now, there's a lot going out with labor that even if they're by some miracle there's a deal in the next forty eight hours, it's worth having a deeper understanding of what's going on right now.
Absolutely, and we've obviously recorded an episode on this previously. We spoke to one of theaw leader's Dan Vicente, talked about some of the concerns. But I think this whole saga is interesting from a sort of thematic perspective because it gets it all these big picture conversations that we've been having, you know, questions over the division of labor in the US economy, over productivity, over the future of the US car industry, and how it's responding to environmental
pressures and concerns industrial policy. Even it sort of wraps all of these things up in one complicated package.
Let's put it that way.
Yeah, you nailed it. I mean, there's the question of labor costs and the tight labor markets and whether this is an opportunity for labor to get a greater share of the pie.
So to speak.
There is the transition which was already happening, is already underway, and that poses very unique opportunities and threats to the legacy industry. And then this idea of like, well, we're in an era of sort of industrial policy, and part of this is by design the Bidenomics and so forth, and so you know how all of these things play together. It really, as you said, it comes together in this one story in a unique way in.
The strike, right, So we obviously need to talk more about it. I am very happy to say that we do indeed have the perfect guest. We're going to be speaking with Stephen Ratner, a very prominent American financier, as they say, and someone who was very much involved, in fact spearheaded the big auto bailout, the auto task. Cars are the cars are, That's exactly it under the Obama administration in circa two thousand and eight, two thousand and nine.
Someone who can talk very authoritatively over some of the concerns from the car makers and the broader sort of financial state of those companies. So Stephen is currently the chairman and chief executive officer of Willett Advisors, that's the investment arm for the personal and philanthropic assets of Michael Bloomberg, who is, of course the majority owner of Bloomberg LP. Steve, welcome to the show.
Thanks so much for having me.
We're excited to have you here. I wanted to start out with something that the UAW representative that I mentioned in the intro told us, and it's the idea that the unions accepted a lot of concessions in the aftermath of two thousand and nine in order to get their respective employers, the car companies back up and running.
Is that right?
And was there an expectation that at some point those concessions would reverse.
No question that the unions made concessions as part of what we like to call not the bailout, but the rescue of the auto companies. It was important, it was an important part of committing what ultimately became eighty two billion dollars of tax payer money to this industry that they be shared sacrifice, that all the different constituents around the industry, whether it be labor, whether it be shareholders, whether it be suppliers, whether it be management, all participated
in making shared sacrifice. So yes, that definitely was the case. But as I'm sure we'll get into, as you asked me some more questions, the concessions that the automaker the auto workers made back in two thousand and nine were relatively small compared to what they're asking for today, And what they're asking for today would not just restore whatever it is, whatever they gave up back in two thousand and nine, but add a bunch of other stuff on top of that.
What did they give up in two thousand and nine. The main thing that came up in our previous conversation on the strike was just this idea of tiered labor, a teering system. Certain employees sort of grandfathered into one pay scale and then an acceptance that new employees would not be on that scale. But what did you give your comparison of your characterization of what the UAW gave up or was willing to concede to in two thousand and nine versus what we know about what the UAW is asking for now.
Some of the things that were given up in two thousand and nine were actually given up just before the auto rescue because of the problems that the industry had. So I'm going to lump all that together into what really happened around those couple of years, both right before and right after as part of the auto rescue. It's important to say that no full time Tier one as we called them, member of the UAW took any reduction in their cash compensation. That was a part of the understanding.
There were concessions around things like the Tier two workers, who are workers who get newly hired workers who started out at roughly half of the cash compensation of the established workers. I don't want to get into a huge fight with the UAW, but it's important to note that the way the concession, the types of concessions that the UAW was willing to make mostly affected these newer workers rather than the established workers. It was a case of
the UAW and effect. Think of it as there was a big pot of money and how does it get allocated? And the uaw's attitude is that the existing workers should be protected and the new workers should in effect take a lot of the pain. But there were other changes made around healthcare, especially for retirees, around the so called jobs bank, in which workers were getting paid even if they were laid off during a downturn, they could get
ninety percent of their wages for actually working. And so it was a very complicated package of a lot of stuff, but we did think that in total it reduced the automaker's labor costs by a meaningful amount.
What was it like negotiating with the unions back then?
It was very different than today, and I think it was different for a couple of reasons. First, there was a crisis, and as Ram Emmanuel, President Obama's chief of STEFF, liked to say, never let a good crisis go to waste, and so the UIW got it. They understood that without this shared sacrifice, these companies would go bankrupt and perhaps even disappear and lose all of those jobs, and so
they got the message in that. Secondly, they had a president, Ron Gettelfinger, who I dealt with extensively, who was a very reasonable guy. He had an agenda, he had members he wanted to take care of. We respected that, he respected us. The discussions are always very cordial. Nobody, at least in the meetings I was in, ever started yelling and screaming or pounding the table or any of that
kind of stuff. And in contrast, today, for a variety of reasons, the UAW has a leader, Sean Fame, who is much more of a firebrand, who's put these rather large demands on the table, who's actually conducted a lot of these negotiations publicly, which is not the way it worked certainly when I was involved with it, or the way I think it's worked most times in the past. And that reflects a couple of things I think. I don't know Sean Fayne, but I think it reflects a
couple of things. One that, in fact, as I'm sure we'll get into, the auto workers haven't really done that well in the last fifteen years, and so they do have legitimate concerns, grievances, whatever you want to call it around that. Secondly, the UAW, as i'm sure you know, has been through a variety of corruption scandals in the last few years, had a whole succession of presidents. These
are not ron Gettholfinger kinds of guys. And I think the membership is just angry and frustrated and disappointed in their union. And I think Sean Fain has been able to capitalize that. He's really more of a firebrand than he is a dispassionate negotiator.
You mentioned the tiering system, one argument that the union makes that tiering is bad for the It's just bad for the union. It creates divisions. The union is supposed to be sort of one family or one team. And then if you say, as you put tier one tier two workers, that inherently weakens the union in your view, Is it sort of plausible or reasonable that it goes back to a single tier people doing this getting the
same pace goal for the same job. And then what else you said in the beginning that the demands are above and beyond what that sacrifice was like roughly fourteen years ago. So talk to you about what you perceive as being further beyond that.
Well, let's take that in pieces, and you can remind me of a couple of the questions that I'm not going to remember, but because I'm focused on your first question. Yeah, there's no doubt that it is odd, I think unfair in many respects, a bad dynamic to have two people working on the same assembly line performing essentially similar functions.
Maybe one is putting on windshield wipers and one is putting on door handles, and one is getting paid literally, at least back then, was getting paid literally half as much in cash and a much reduced benefits package relative to the guy or a woman who was standing next to him doing essentially the same job. That's a bad dynamic. But it occurred in part for the reason I said that the union was unwilling to have the existing members
make a significant and more significant sacrifice. Sacrifice I actually reduced their cash compensation. And so again you think of it as a pot of money and has to get allocated, and a disproportionate amount of it got allocated the existing workers at the expense of these knew what we used to call here too now they call them temp workers who had just started at the company were getting paid a lot less, all.
Right, I'm going to take up the second portion of Joe's question then, And you've pointed out in an op ed that you think there's no way the automakers will be able to meet some of the asks or all of the asks, rather that the UAW is making. Can you explain that a little bit more. What's the thinking behind that statement.
The auto companies are making very very good profits at the moment. There's no nobody can argue about that. But this is a tough business. The profit margins are relatively thin, the capital expenditures required are large. The transition to EVS is going to be very expensive and painful for these companies. And so when you boil it all together, if you
look at General Motors, for example, it's stock price. When it's stock price from when it went public, I think about twelve years ago it was twenty eleven, has not budged. The overall stock market is up two hundred and seventy five percent, and so Wall Street investors are basically saying, we don't think these companies are actually doing that great, and therefore they have limits as to what they can do and still have the resources and the profits they
need to keep investors happy and do this transition. And so when you talk about things like getting paid for forty hours but working thirty two hours, when you talk about things like restoring the jobs bank where you get paid even if you're laid off. When you talk about going back to a defined benefit pension plan from defined contribution, which would be wonderful, but very few companies even have those anymore.
From new workers, those.
Are demands that the company simply can't meet. I think what this will hopefully come down to is a big ask on cash compensation. The union wants thirty five thirty six percent. The companies have offered twenty percent. This would be over four years and some other one time payments something like somewhere in there. There's a deal to be done, but all the rest of this stuff is mostly going to have to go away to have an outcome that I think is appropriate for these car companies.
We're obviously going.
To talk more about the negotiations, but I want to actually just pause the union component of the conversation for a second setting. Aside the UAW contract, This would be a major period of upheaval for the industry regardless, because the transition that we're talking about and the incredible investment that it's going to take to compete with Tesla, to compete potentially on a global scale with Chinese ev makers,
you name it. Give us your review of just how challenging, setting aside the labor component, how challenging for the business models of the Big three, which make most of their profits from selling cars with internal combustion engines, How challenging is this ev trans.
It's going to be significantly challenging. And we should talk about the labor piece of it, because that's very relevant. But let me, as you ask, let me talk about some of the other elements of it. Look, you have a whole bunch of new entrants coming into this industry starting from scratch. I'm reading at the moment Walter Isaacson's
new biography of Elon Musk and Tesla. He started with a blank piece of paper when he did Tesla, and he was able to design a manufacturing system, a set of supply arrangements, not without a lot of commotion and difficulty and so forth, and with no unions, by the way,
and build Tesla in effect from the ground up. The legacy companies have a way of doing things that's existed for now one hundred and twenty years plus or minus, and so they have to completely rethink a lot of how they operate a lot of their processes, and they have to compete against not just Tesla, but Rivian and Lucid and the Chinese companies you mentioned are not yet here because of the high tariffs that we have on auto imports, but sooner or later they probably will be here.
And so what has been a tough business is getting even tougher. And it's important for these companies to have a cost structure that they can live with.
You touched on it in that answer just then. But Tesla, of course is famously non unionized, and then of course there is the threat of the Chinese EV manufacturers and cheap labor over there. Could it not go the other way though? Could you not have a situation where instead of competing with non unionized EV companies that maybe some of those start to get unionized, Like maybe these actions start to filter through to companies like Tesla.
I think it's pretty unlikely. I think that it's not just Tesla, but when you look at the auto companies that have been operating in the South for a long time, which were Toyota, Hana, the German companies and so forth. They are also not unionized, and I believe I'm right, although my memory is a little hazy and sad saying that, I think there have been efforts to try to unionize
them that have failed because the workers understood. Look, I think we should step back and talk about the general issue of manufacturing in the United States, not just autos. But this was a real wake up call for me. I had spent my whole career working in essentially with service industry companies, mostly media and telecoms, and then suddenly I'm plunged into manufacturing. And what I saw was really scary to me, which was that we basically have a
high cost structure in this country. Appropriately, we want our manufacturing workers to earn a good living. But an increasingly globalizing world and we can talk about whether the world is now going to deglobalize, but at least has been globalizing. It was getting harder and harder for us to compete. And that's why, in large part, we lost so many
manufacturing jobs over these last fifteen or twenty years. And so you had, from the union's point of view, you had jobs moving from the Midwest to the South, from union jobs to non union jobs. But you also had a lot of jobs moving to Mexico from these same companies, including the Detroit companies. The Detroit Three have twenty facilities
in Mexico of one sort or another. And when you look at the wage structure in Mexico, you're literally talking about GM actually has a unionized plant there which has low wages. But if you talk about the non unionized plants there, you're talking about wages of nine to thirteen or fourteen dollars a day, not an hour a day. And if you talk to auto executives who operate there, they will tell you that they get very good productivity out of their Mexican workers. Some will say they get
better productivity. And the consequence of that is that the number of auto workers in Mexico has crossed the line and has now higher the number of auto workers in the US. Our number of auto workers did recover after the two thousand and nine exercise, but Mexico simply grew faster and has outgrown US and is now a larger source of employment at these very very low ways. And
so this isn't changing. And again you have the Chinese as we talked about coming and potentially other low wage countries, and so it really worries me about the future of manufacturing. The yin and the yang of this whole situation with the UAW in a sense is that it's a tension between jobs and pay. The more you pay, the fewer jobs you ultimately have, because inevitably these jobs will migrate out of the union facilities and into non union facilities.
I don't know if it's pushing back, but intuitively or a sort of big picture I get that, Okay, if you can get high productivity or commensurate productivity out of a plant in Mexico and labor costs are a lot cheaper than over time, are going to have this migration. But labor costs still, like my understanding, I've seen this stat a few times, like they're not a huge part.
They're like I've seen a stat here it says five percent of auto industry costs, so it's like it's significant, but it's not the majority of the cost or even anywhere close to the major.
Costs of a car.
So intuitively, someone I look at five percent, who's like, okay, well, like, what would be the big problem if it moved to seven percent or six percent, I guess I'm just skeptical or I have this intuitive skepticism that the labor component, if it's a bit more radically changes the economics for these companies.
Well, let's think about it this way.
Okay, I think I don't have this figure in my head, but let's just say, and I think it's probably directionally about right that the profit margins all going well, and there are plenty of times when they're not going well. The profit margins for these kinds, for these big companies,
there's maybe ten percent or something like that. And so if your labor costs go from five to seven, as you said, that means your profit margins go from ten to eight, and you've wiped out twenty percent of your profits. And that's a lot to a company. I mean companies like these that are high cost companies with lots of moving parts, no pun intended. They watch, or they're supposed to watch every penny, every cost item, and work unbelievably hard to keep costs down to make some reasonable profit.
These are not companies with forty percent profit margins where maybe it doesn't matter, And so it is important to these companies to have labor costs be competitive with other companies that are basically doing the same thing with labor costs and can behalf of what they are for the Detroit three.
Well, on a similar note, the UAW strikes are happening against this backdrop of historically low unemployment post pandemic, and I imagine that has empowered a lot of the workers to feel like this is the moment when they can ask for all these different things. But the other broad trend that's happening is the sort of post pandemic tendency towards reshoring or building more resilient supply chains, or call
it whatever you want. And of course the backdrop of Bidenomics as well, where Biden has basically said he wants to build more industrial and manufacturing capacity within the US. Does that not potentially put a lid on the threat of moving a lot of car production to places like China or Mexico.
Well, let me try to unpack that.
You're going to again have to remind me of a couple of good questions that you asked that I won't remember. Look, the first point that you alluded to, I just would like to mention for the benefit of the listeners, which is and maybe it's obvious, but as you said, what's happening right now is we have a historically low unemployment rate three point eight percent and about one and a half jobs for everybody who's actually looking for a job, and so that has led workers in many, many industries
to feel empowered to ask for more. And so obviously you have the screenwriters and the actors on strike, you have hotel workers in LA on strike. At the moment, you've had very large contracts to the ups drivers, to the American Airlines pilots and so forth. But those are all service industries and if you pay those people more, sure it cuts into profits a little bit. It may add to inflation a little bit because the companies raise
their prices, but fundamentally, those jobs don't leave. They can't leave if you have to have if you're an LA hotel worker, that's the only place you're going to work. And again, manufacturing, manufacturing is different. So let's talk about deglobalization and industrial policy and bynomics because they are somewhat different.
Obviously related. I think the wake up call during the pandemic and the context of what's going on with China to many American companies and government officials is that we globalized to a great extent to cut costs for Americans.
And it's important to recognize that part of why we had so little inflation until the pandemic was because we were importing manufactured goods from China from other places, not cars, that were much cheaper than anything we could make here, and so prices for things like clothes were very barely moved I think during this period because they were able
to source it more cheaply. Now, companies and again the government are saying, well, the supply lines are too stretched and this is how you get in trouble, and so there will be and it's not an organized effort, it's not a government policy that, it's not a government edict. But companies are reassessing their supply lines and saying, Okay, you know, maybe we shouldn't rely on China. But then
they have to get it from somewhere else. And by definition, if they were getting it from China because it was the cheapest they could get, it's going to cost more to get it from somewhere else, and that does add at some point into inflation and costs for everyday Americans. And so this is not going to be a top down decision from Washington. This is going to be decision made company by company to try to balance secure supply lines with being able to keep prices to consumers at
reasonable levels. And I think when the dust settles, it will not be as big of a It will not be as big as people think it might be for the because of the cost problem that companies are going to find the costs are higher and are going to maybe pull back from some of this deglobalization that you see talking about. So now if you're ready, we can talk about bionomics and industrial policy. Yeah.
Well, wait, can I ask one more question just on the car industry. I mean, you were the cars and before you were the cars are you were in private equity and an investment banker. So you've dealt with all these different types of businesses over the years. What did you learn about the car industry specifically? Is there something that makes that business model special in your mind?
It's an iconic American industry. It's an industry that every country takes some national pride in having their own company. In effect, if you look at Europe, there's been some mergers recently to try to rationalize it. But every country in Europe felt like it had to have its own car company, even though it really didn't make sense for every country in Europe to have its own car company.
And so if I were to stand up and say, you know, we don't really need a car industry in this country, I'd be probably drawn and quartered or burned at the stake or something like that. There's a lot of emotion and feeling around it. The car industry is three percent of our GDP that it may not sound like a lot, but that is a lot. And I think there's a strong feeling that we need to have a robust car industry here. And I get that. As I said I when I got into the auto rescue job,
I did see a couple of things. One was the unbelievable pressure I'm manufacturing that I just described and how tough this was. And secondly, I saw these iconic companies that were really so much a fabric of America that we really felt like we.
Had to save.
That it was the right thing to do with tax paramney, which by the way, we got virtual all of it back.
Out of curiosity. Other other factors that pressure domestic auto manufacturing or maybe manufacturing in general in the US versus other countries, not related to labor costs. I don't know whether there are environmental regulations, et cetera, other other reasons why manufacturing in the US is tough.
That's a great question, and the answer is yes, we obviously do focus on this labor problem. But for example, permitting in the US and the environmental regulations and all that surrounds it is really really tough. Let me give you an example that has nothing with the car industry, but we recently looked at at copper invests in a copper mine in Arizona.
Fine.
It's what I learned, though, is that much and I don't know the percentage of the copper ore that we mine here gets sent to China to be smelted and then it comes back here, all adding to cost. And of course the Chinese don't exactly observe a lot of environmental protections when they do that kind of stuff over there.
And meanwhile, there's a smelter in Idaho I'm told that is built sitting there not operating because it can't get permitted because of environmental concerns and so and of course, copper is a key ingredient in EVS and all the energy transition things we're talking about. And so there is a tension in this country between various goals, and we have a goal of obviously making this energy transition. If we want to make an energy transition, we're going to
have to radically change the permitting process. It would be great if you want at some point we can talk about semiconductors, which is another manufacturing business where there are a lot of issues to be thought about.
Well, all right, I'll take the bait. Let's talk about semiconductors. And I mean this leads nicely into bidenomics as well.
So look, so what happened with semiconductors, and I've actually spent a fair amount of time on semiconductors recently because I think it's a fascinating subject, is that we of course invented semiconductors basically after Sputnik. We basically had our Sputnik moment. We said we've got to become a technology leader.
The Defense Department got heavily involved DARPA, and the Internet was one outcome of that our leadership, and semiconductors, with Intel in particular being our national champion, but many many other companies, QUALCOMAMD whatever also being products of that. But what then happened was that we also encouraged and we were not the main reason this happened, but you then had a semiconductor industry grow up in South Korea, Japan, Taiwan,
and Singapore. We encouraged it because we felt that if those countries were strong economically, it would help resist China better in its own economic expansion. Those countries pursued a very vigorous industrial policy, which relates to your question, to develop those industries there. And so where do we sit now?
We sit now we're ninety two percent of the world's high end semiconductors, the most important ones that power your phones and lots of other things that you use are made in Taiwan, which obviously has a series of issues surrounding it. And now suddenly we want to bring that back here. But what we're finding is, and what we're going to find, is that that is not easy. We don't have the ecosystem of engineers, suppliers and so on
that has grown up around the semiconductor industries elsewhere. We have this permitting problem, we have a high cost structure TSMC. Taiwan Semiconductor, which is the leading company in making this stuff, has a facility up on the Oregon Washington border they've had for a number of years. They say their costs are fifty percent higher than they are back in Taiwan, and so yeah, they're building a fab as these factories
are called in Phoenix. But it's going to cost a lot and it's going to make barely a dent in our semiconductor situation. So we can talk about our industrial policy towards semiconductors. We have. The Congress has approved fifty two billion dollars for mostly for tax and grants to build these things. Another I think twelve billion of it
for research and development. But then they've gone out with an RFP for companies to apply with all kinds of other conditions and things around it, like that companies have
to provide childcare for their employees. One thing, one of the most important things that I learned in the auto rescue and that we were lucky to have, was we were told by the White House, you focus on fixing the companies, We'll worry about all the other issues that are out there, whether it's environment, labor, whatever, You can't have multiple objectives in a policy that's that important and
be successful. In my opinion, you have to have one objective and be willing to make certain sacrifices around it to be successful.
Setting aside whether these sort of other aspects like childcare are going to hobble our efforts to build domestic semiconductor manufacturing. I mean, you could make the argument right that the US semiconductor industry is doing really well. In Vidia is a one trillion dollar company. That's twice TSMC is only a four hundred and fifty eight billion dollar company, so in video is bigger than TSMC. Do you agree with the even premise that we need to have more domestic semiconductor manufacturing.
And video doesn't make anything? No, I know, they make nothing.
But they but they make a ton of money.
Yeah that point, but.
No, no, I know, But like, but do we need I mean yeah, so the whole look, the whole thing sort of arose. This got this semiconductor supply chains got on everyone's radar in twenty twenty when the low end lagging edge nodes that went into cars, there was a shortage of them. But then you know that eased and we don't expect pandemics to happen except maybe once every hundred years. Like, what, how much manufacturing do we need to do here?
A lot or some or look, I don't know. I'm rather skeptical as possible, but in imperfect world you'd want a lot more. Nvidia does not make anything. It doesn't matter what their profits are. They could design chips every day from now till the end of civilization, but if they don't have somebody to make them, it doesn't matter. So in the chip world, you can separate I, at least in my own mind, separated into kind of three groups of chips. You have memory chips, which are basically
a commodity. We make a lot of them. That's not going to be an issue. You have, as you said, low end processing chips. We make some of those. There are made in plenty of places in the world. We can be competitive there. But none of that matters if you don't have high end ships, because you need those. Again, it's not just your phones, it's Defence Department's missiles. It's all kinds of stuff that cannot function without them, and
we don't make any of them here. We literally don't make any of them.
Here.
Okay, if we agree that we do need to semiconductors in the US, and that maybe there is a role for industrial policy or government money to play in that process. I know you've been somewhat critical of the federal deficit in recent years. How do you square those two objectives, you know, not wanting to explode the public debt but also wanting to foster certain domestic industry.
Look, first, let me say a couple things.
First of all, I am on the more skeptical end of the value of industrial policy. I think when the government gets into the business of picking winners, there are many many ways in which it can mess up. I will freely concede that what the Asian countries, the for Asian countries I mentioned did in semiconductors, which is heavily through industrial policy, worked and so there are plenty of
examples it works. Lots of people like me would say, Okay, if you give me full control of this and I don't have to deal with all this other stuff and politics and whatever, I can make this work. There's a certain amount of hubris in saying that, but that's what a lot of us would say. That's not how it's going to work. It's going to work as a whole different kind of process, and that I think brings a lot of risks in terms of the costs. We're not talking about that much money. I mean, we have a
federal budget deficit of two trillion dollars. We're talking about fifty two billion over a number of years. It is important if we believe we can execute it well. And as I said, I have my questions about that. It is just as important as many many other things the government does. And we just would need to find fifty two billion dollars somewhere else to pay for this because it is. It should be a priority if we can execute it well.
Let me bring it back to autos for a second. You laid out the logic of why we should have some more manufacturing of semiconductors here. Does that logic to you also apply to the battery realm?
I thought you were asking about autos in general.
I think, well, we could go into audit, but like that seemed to be a specific concern, and I think that when they passed the Inflation Reduction Act, a big part of it was probably one of Joe Mansion. A critical vote was like he does not want to be in the same position that the US has found itself in with respect to solar with respect to potentially semiconductors, and find us in that same vulnerable position with respect to batteries.
I would like to see us make more batteries here, because there are a lot of batteries made in China. I don't worry quite as much about that as I do. It's about semiconductors because they're also batteries made in South Korea and lots of other places that are friendly to us. And we're Look, we are living in a global world and we're not going to get away from that. We're not going to get away from that. We have spent
too many years globalizing. There's a company called ASML that you may have heard about, which makes the equipment that makes semiconductors. Their high end EUV what's called an EUV machine has something like six hundred and fifty thousand parts in it. It's one of the most complicated pieces of machinery, if not the most complicated made. Those parts come from all over the world. The intellectual property is owned by
countries all over the world, including by US. Some of those parts are actually made in California, and so we're not going to get away from that. The world's not going to get away from that. We have to accept that we're always going to be at some risk of supply line problems if the world becomes a less forgiving place. So I would like to see us make some batteries here. I think it is a much easier challenge than making semiconductors here. So I think it's possible and likely that
we will make some. Tesla makes its batteries here, of course, But again we shouldn't get overly optimistic about how many we're going to make and what the costs are going to be.
I'm going to ask you to put your banker slash private equity hat on again. As a director of capital, how do you encourage more money to flow into some of these strategically and or environmentally important industries such as semiconductors, such as potentially batteries, things like that, where to date, maybe there hasn't been as much money as certain people would have liked.
In some industries where the prospects for return don't seem fulsome enough for us to invest there may if they're important enough, then the government needs to step in so let's talk about how the government can do this in a way that is most cost effective. If you think about it very broadly, the government can provide subsidies. They can provide tax incentives. The problem with subsidies is then you have the government in effect picking winners, and that
scares me. The advantage of tax incentives is you're basically letting the market decide which projects are going to go forward, with the tax and centives providing and added boost. We have seen in my investment role, we have seen projects that came by a couple of years ago that we could not get pencil out to make returns meet our thresholds,
and so we didn't invest. We literally had one of those same projects come back after the IRA was passed and suddenly there's i think a thirty percent or some large tax credit associated with it, and the project suddenly made economic sense and we invested in it.
What area are we talking about. This was in the solar area. In the solar area.
Yeah, And so that's how the market can work better, and it is working better. In fact, it's working so well that it seems clear that the original estimate for the cost of the IRA, which I think was around five hundred billion. Goldman Sax thinks it's going to be one point three trillion. Other people are somewhere in between.
And that may sound like a bad thing, and it is, obviously from the standpoint of the budget deficit, but it's a good thing in the sense that these incentives have taken so many projects that were not economic and made them economic. And so you've had this enormous take up and we will have a lot of progress made in this country on energy transition projects because of it.
Let's go back to cars more broadly, because something it comes up a lot in our conversations. It's not just about do you have the cash, It's not just about do you have the workers. It's like are you good at it? Are the learning by doing? And when you talk about you know, you even mentioned the car industry in the US has been working on it's sort of
existing model for over a century. The chip makers in places like Taiwan and Korea, like they've just gotten really good at what they do and they know how to do these repeatable processes. When it comes to evs and the legacy automakers. Sitting aside the labor cross again for a second, like, how much of a challenge is it going to be for them to basically get good at producing electric cars at scale.
It's going to be a challenge. But I think there's an and yang to this. I think on the positive side, they have one hundred years of history in a very complicated industry and everything from design, engineering, supply lines, manufacturing, distribution, marketing, and so on, and so that's an advantage that they have. The disadvantage is their legacy companies, and they really need
to reinvent themselves in a way to compete. I was a skeptic about the ability of companies like Tesla to come into a market that was so established and compete effectively, and I was wrong about that.
Obviously it can be done.
And you now also have a whole bunch of other startups coming along, and at the moment, the Detroit Three as we call them, are losing a lot of money on their evs and just really beginning to roll them out in force, and it's going to be a tough competitive experience for them, and that's why things like labor costs become important.
Just going back to the UAW strikes, what's your base case for how this all works out, and what is the trigger I suppose for the two sides to come to a resolution.
Well, first, in relation to your opening comments to your listeners, I think this podcast will be relevant for a long time from every Unfortunately, unfortunately, certainly, the attitude at the companies is that this is not going to get settled quickly because the gap between the two sides is so vast, and I think the companies, as I said, and you may or may not agree, there's no possibility that companies can possibly accept paying people forty hours and working thirty
two or anything like that. It's just it's not in the realm of reality. And so I think at the end of the day, what I hope will happen, and what would be the right thing to happen, is for the union to drop a lot of these ancillary demands. And there are also, by the way, demands and requests around the issue of workplace flexibility. One of the things that we did in two thousand and nine was to basically strip away a lot of the work roles that
we felt were impeding efficiency. General motors, I believe from my recollection, had something like three hundred job classifications for its workers. If you were a plumber, you couldn't touch a piece of electric, piece of equipment or whatever. And we reduce those to six and that is still more or less where things stand. But there are other kinds of flexibility that the companies need to manage, especially in
relation to the ev transition. So what I would like to see happen is a robust pay increase, and I think the companies have offered a reasonable one, but there's more to go, I'm sure, and the gap there, as I said, I think is bridgeable. And for the union to give up most of these I'm going to call them crazy demands and hopefully also address any kinds of workplace flexibility issues that the companies feel they need to be competitive.
Does it have to get worse though, before it gets better, Well, it.
Will get worse because what's happened is, as you know, first of all, is the way they structured the strike is unprecedented. They close three plants, one for each of the companies, and they did that in part because they didn't want their strike fund to get depleted too quickly. They couldn't afford to strike all three companies. They didn't want to do what historically has been done with strike
one company. But what's going to happen now is that gradually other facilities are going to close because there's no place to send the parts because there's nobody to assemble the cars and trucks at these three facilities that have been shut down. And then those facilities will shut down
and those workers will be laid off. Under the rules, the companies can't simply shut those facilities and lay off the workers unless they have a legitimate business reason to do that, i e. They're oversupplied with whatever that particular facility, what facility does. So yeah, this could easily ripple through the entire set of facilities around the Big three in Detroit three they could shut down. You could have one hundred and thirty thousand workers on strike or not on strike,
but laid off and on strike. There will be significant effects on parts suppliers. By the way, let's not forget that these companies don't make a lot of their parts. Most of their parts they've outsourced those years ago. So those and this was something we encountered in two thousand and nine as well, And so those companies are going to suffer financial pressures and they will be concentrated in the Upper Midwest, and none of this is a good thing.
You broke the UAW demands between what you see is like sort of very reasonable and deserved pay increases and then this so called crazy demand. Where does ending the tiered system fall into that? Do you consider that crazy or is that something that can be solved?
Well, again, that's a money issue, really, and so it's a question of how you want to allocate the money. If you give the existing permanent workers more than whatever, then there's less to deal with what they're called the temp workers now, and so it's really a question as much for the union as for the companies as to
how they want to allocate it. The temporary worker thing has been significantly improved since two thousand and nine in terms of the amount of time a new worker is a temporary worker before they become a permanent worker, and I think that will continue to shrink under this new contract. I think the company's prepared to give something on that front. But again, as I said, it's as much for the UAW is this for the companies as to where their priorities lie.
Let me ask you one thing about EV's is I think they're less labor intensive and they have fewer parts total, so there's less assemblies. So even under again saying there was no contract issues, I believe the perception is that the transition would require less labor. Is that the case, Like, what is the stress that's going to become on the labor force in your view, regardless of this contract from But this is.
Something the UAW is worrying about, and it's analogous in a way to what the screenwriters are worrying about. They're worrying that AI is going to put them out of work. The UAW is worrying that the evs are going to put them out of work. And this is again where there's a very interesting tension in America today between the people who care passionately about labor and the people who
care passionately about the energy transition. Many of them are the same people, and I certainly would even consider myself one of them. But you have to decide what your priorities are, and if we want to be competitive in evs and not end up like semiconductors where they're all made somewhere else, then we have to accept that there are going to be some costs to that. I don't
mean financial costs. I mean costs in terms of jobs, because, as you correctly said, evs require a good bit less labor and we just have to accept that, and trying to protect old jobs is never a winning strategy for any country or any company.
I want to ask one more question. This is what we call a giveaway question. Well, you're a former journalist. You know your time as cars are.
What was your.
Favorite or most memorable moment from that period?
My most memorable moment, there's a competition for that. For that award, I had many many It was a fascinating experience. It was the best thing I ever did with my life. I felt like I actually made a contribution and we were able to achieve it. I would say, interestingly, and this this is a little different than what we've made. My most memorable moment was when we got inside of
General Motors. I had been taught and brought up in my investment banking world to think that General Motors was a really iconic company, well managed for the most part, especially in finance. They were renowned for their finance department. When we got inside General Motors, I could not believe how badly that company was run. They didn't even really have a model, a financial model that we could use
to project the results for five years. They had some cut and paste thing, but they didn't even have really a model that could be manipulated and where you could change assumptions and things like that. The culture of the company was terrible. It was a get along, go along
kind of culture. Nobody would challenge anybody. The CEO had an elevator that took him from his private executive or the private executive car parking area, straight to I think it was the forty ninth or fiftieth floor and the Renaissance tower to his office without stopping any of the floor, so he didn't have to mingle with any of the ordinary people. The executive offices were behind a locked door. You had to have a certain kind of paths to
get through that door. It was unbelievable, unbelievable to me to see an kind of company run like that, and it was clear from the from day one that a big part of what we needed to do there was to change management. This was this is not labor. It was not labour's fault that these companies got in trouble. They have some responsibility, but management had an off lot of responsibility.
All right, Steven Rattner, thank you so much for coming on all thoughts and reminiscing with us and sharing your thoughts on the current situation. Appreciate it.
It was fun. Thanks so much for having me.
Thank you. That was really great.
Yeah, that was fantastic. Thank you, so Joe. I thought that was a.
Very nuanced discussion of a topic that clearly people have a lot of feelings about. I did think one thing that jumped out to me was just how important that echomic backdrop is for these types of things. So Steve was talking about how in two thousand and nine you were able to get concessions out of the union because
the economy was not doing very well. Obviously, fast forward to today and it feels like the balance of power has shifted potentially more in favor of workers, and so you can see why the UAW thinks this is the moment to strike.
Absolutely, I mean absolutely, the macro backdrop couldn't be more different from the time when Stephen was the cars. It's crazy that last point. I'm yeah, about the elevator going straight up to the top of the Renaissance Tower in Detroit.
I mean, he was talking about how a lot of companies, especially car companies, don't have defined pensions anymore. I wonder if they still have executive dining rooms and bathrooms and things like that.
They get a I would guess so, though I guess we could confirm hopefully. I wonder if they still have that elevator. But you know, like there's a lot here, and so, you know, obviously, the labor component, like in my mind, like when I think about will the big three companies thrive in the age of electric vehicles, I guess I'm skeptical that the cost of labor, whether it's five percent or seven percent, is going to be the
defining question of it. It still seems like the big question mark in my mind is can they make cars productively that people want to right and can they maintain their businesses which are still, like, you know, heavily driven by profits from internal combustion engine cars priced over a long time. Can the pencil out in the end where the profits from evs against all kinds of competition that they didn't have in the previous era, does it work?
Are they competitive in this space? And I think it's still kind of TVD Yeah.
And the other thing and Steve kind of touched on this is just the uniqueness of the car industry on
the whole. So, you know, we associate a lot of car makers with American industry, and I think there's also a tendency for Americans to want to buy American cars often there's the sort of brand recognition of and so I kind of wonder, to your point on the labor costs, if maybe people are willing to give up a little bit of price in order to you know, support and buy American and all of that type of stuff.
By the way, Tracy, did you hear where that copper mind he was looking to invest in?
Is I knew? I knew you would notice that. Arizona.
Yeah, another another Arizona angle for when we do our Arizona I didn't realize. I just look at on Wikipedia.
They all somehow comes back to Arizona.
Right.
We have to go to Arizona, visit an alfalfa farm, visit like a water treatment plant, car a copper mine, a car factory.
No, there's more. There's a Howard Hughes Master Limited, a master Plan community semiconductor fab and we have to take a self driving car around on the entire tour.
All right, shall we leave it there? Right now?
Let's leave it there.
Okay, this has been another episode of the Odd Blots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Jill Wisenthal. You can follow me at the Stalwart. Follow our guests Steven Rattner. He's at Steve Rattner. Follow our producers Carmen Rodriguez at Carmen armand dash Ol Bennett at dashbod. And thank you to our producer Moses Ondam. Follow all of the Bloomberg podcasts under the handle at podcasts, and for more odd Loots content, go to Bloomberg dot com slash odd Lots, where we post transcripts, a blog, and a newsletter. And check out the discord. We have
a transportation room, we have a climate room. Gonna be lots to talk about this one discord dot gg slash odd Lots. Talk about this and all the other episodes with fellow listeners.
And if you enjoy odd Lots, if you like it when we talk about labor movements, then please leave us a positive review on your favorite podcast platform. Thanks for listening.