AI Cost Reality Check Hits Tech Stocks as Apple Hikes Price

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1:10Ed Ludlow:So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise, proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM.

1:42Scarlet Fu:Bloomberg Audio Studios, podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. This memory chip shortage, it's becoming a thing. I mean, for people like me and you and our listeners and our viewers here, Apple's raising prices for a lot of stuff. Now it's starting to hit home for a lot of people. Ed Ludlow, B-Tech host, he covers all this stuff. He's out there in our San Francisco offers.

2:22Ed, I think, you know, people who weren't really paying too much attention to this chip shortage thing, I guess they're going to start thinking about it when they go to their Apple store. And they're going to have to pay more for some of those products. What's going on?

2:36Ed Ludlow:Yeah, you kind of nailed what's been a very recent change in psychology of the market. We've gone from a place in the middle of the week where Micron is absolutely surging. And the market is cheering a situation where memory chip supply is so tight. and the memory names have pricing power, to now looking at it from completely the other perspective, from the seller of memory to now the buyer. And that Apple case study, the way that Bloomberg put it is Apple raising prices because one single component cost is so high is an extreme measure. And so now extrapolating out and looking at what happened in Asia trading overnight, a little bit the trading of this morning's market, the concern is the next step is we come full circle and demand for consumer electronics is dampened because of high prices.

3:24Ed Ludlow:And by extension, memory ironically sees demand dampen a bit. So it's a really sort of circular debate the market's having with itself here.

3:34Scarlet Fu:Well, you know, when it comes to the memory chip shortage, is this something that is acute at the moment? Or is this going to be the new normal, especially with all the demand for chips from everywhere, essentially?

3:47Ed Ludlow:It's incredibly severe. So like in very simple terms, all these data centers that are getting built specifically with NVIDIA GPUs require lots of what's called high bandwidth memory. High bandwidth memory is just DRAM. Everyday DRAM goes into your own consumer electronics, layered upon one on top of the other. For every NVIDIA GPU you have, there are eight corresponding high bandwidth memory chips, so lots of layers of DRAM. And because A, Micron and other memory names have pricing power, and B, that those building the data centers have lots of money, that's where the supply is being prioritized.

4:22Ed Ludlow:The net result is that the consumer electronics industry, not just Apple, Xbox raised prices on its consoles too. They have no choice but to pay that higher pricing in order to secure supply. It is a very severe situation. And, you know, the weirdness was that in the moment, again, there was euphoria in the markets Wednesday into Thursday. Good for you, Micron. Stock surges. It's a really enviable position to be in. And what Micron said is that this situation is going to last for at least 18 months before it improves. So it's a lot for the market to decide, like, what is good news and what is bad news here?

5:00Ed, when we had those higher egg prices coming out of the pandemic, my genius solution was to just make more chickens. And that basically is what happened. The neck prices came down. That logic, I don't think it's going to apply to memory chips, will it?

5:13Ed Ludlow:So historically, before this whole AI thing, memory was highly cyclical, highly commoditized. It was an industry that went through boom and bust. When consumers got disinterested in PCs and smartphones, the memory market crashed, both in terms of pricing. And so that is an industry that's so sensitive to getting supply right. The story under this administration in particular, but for a longer period of time, has been, let's get these companies to build more capacity. The problem is, what if they build all these memory chip fabs and then demand evaporates and they're left with very large facilities that aren't doing anything?

5:49Ed Ludlow:Well, that would be a really less than prudent financial move. That is still there. The difference is, is that the data center demand seems to be here forever. It has staying power. It's not as cyclical as the consumer electronics industry has been. It's a really hard one for them to get right.

6:08Scarlet Fu:All right. And let's switch gears and talk about this OpenAI IPO, which may not be happening now until 2027. Can you tell us about that?

6:15Ed Ludlow:I'm just looking at my bio to see if we've published yet. We haven't. What I can say is that it's consistent with what OpenAI said on June 8th when it disclosed its confidential filing, that they would stay private for quite a long time because there are things that they want to do that are more achievable as a private company than a public company. There is a lot going on in capital markets, as you know. We had the biggest IPO of all time in SpaceX. There is a lot of activity in the bond market, not just SpaceX, tapping the bond market, NVIDIA as well being the most recent. And there is a finite pool of capital.

6:52Ed Ludlow:It's consistent that OpenAI would take its time. But I think what I can say safely on air is like, I think OpenAI is also pretty calm about the idea that Anthropic goes public before them, you know, if you put it in the context of a race between two AI companies.

7:07Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. At Brookfield, we invest in the thing behind the thing behind the next big thing. Our focus across infrastructure, energy, real estate, private equity and credit is helping build the backbone of the global economy. We combine deep operational expertise with disciplined long-term investing, uncovering value and partnering alongside clients to shape tomorrow's economy today. Brookfield. Own what's next. Learn more at brookfield.com. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital.

7:44Ed Ludlow:So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now, a global workforce of 300 ,000 can use AI to fill their HR questions, resolving 94 % of common questions. Not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. Wise is the smart way to manage the currencies you need around the globe. If you've ever sent money internationally using a traditional bank, there's a good chance you've paid more than you realized.

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9:17Scarlet Fu:You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Let's switch it over to the auto business. Boy, I saw this headline. Some big numbers. Volkswagen is cutting 100 ,000 jobs, closing plants. That's big news. David Welch, Bloomberg Detroit Bureau Chief, joins us here. David, what's going on with our friends at Volkswagen? Yeah, look, the company's been struggling for a while now with revenue flatlining, profits stagnant at best.

9:59And they're facing costs from tariffs into the United States. They're facing competition in Europe from China. And they're Chinese business. Like General Motors, Volkswagen was one of the first pioneers there. and the Chinese have been, first off, their companies have waged price wars and taken up a lot of market share. The Chinese government doesn't love foreign companies in the market so much anymore, and it's just been tougher for them to compete. So really, they're seeing their business challenged in every major market where they play. And they've always had a massive industrial complex in Europe with their parts units, engine units, different brands.

10:40and with the way things are run in Europe, it's always tough to cut jobs. And so they've always kind of pushed that reckoning off as much as possible because it's politically thorny to go and lay off a bunch of factory workers. And they've got union people on their boards. The unions are very tough over there as well. And I think they're finally at a point where they have to really get the company leaner in order to compete with everything that's going on around the world and keep their profits up. They're in a tough spot, and they've got a lot of work to do. They've started some of it, but it's going to be difficult for them going forward because it's hard in Europe to cut a lot of jobs, and they really have earmarked some massive numbers here.

11:23Scarlet Fu:Yeah, I mean, definitely part of the challenge, of course, is implementing those plans to cut labor. And as you mentioned, David, a lot of labor leaders are probably going to be pushing back on this latest round, but how difficult would it be to implement the plans at this stage Or is the direness of the situation going to overtake any of that issue? It's going to be really hard. You know, Ige Mattel is the big German union, and they're going to be pushing back. Volkswagen has operations in other countries with different unions. They will push back. And politicians, too. The German government doesn't love people laying workers off either.

12:00And, you know, Volkswagen's got some government ownership with Lower Saxony, the province that owns some of the company. So, you know, when you've got government kind of playing around in the business as well with people on the board, you know, it all becomes politically very difficult to do. And I think they'll make some cuts, you know, and it's clear that they probably have to. But how much can they do and how fast can they do it? Those are the big questions. You notice the stock didn't roar on this thing. Usually when companies say they're going to cut a bunch of people, investors love it and the stock goes up a lot.

12:37I think the last time I looked, it was up like 1.2%, which is not a big bump. And I think investors, particularly European investors, know that these things are time-consuming and difficult to do. And look at Stellantis. They've acquired a bunch of different European brands over the years, starting with Fiat and Peugeot. They bought Opel from General Motors and put all that together. And they've made, honestly, pretty decent sense out of it, but still not a super profitable unit for them. And they have leaned it up. They've made it more efficient. They've cut workers. They've merged up engines and vehicle platforms and all kinds of hardware.

13:10But still tough to work through those stuff over the years and undo many decades of how these companies work in terms of their factories and all those sort of things.

13:21Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. Wise is the smart way to manage the currencies you need around the globe. If you've ever sent money internationally using a traditional bank, there's a good chance you've paid more than you realized. Hidden fees, exchange rate markups, and extra charges can quietly add up before your money even arrives. There's a better way. Try Wise. Wise uses the exchange rate you'd usually find on Google, helping you avoid the unwelcome surprises that often come with international transfers. Whether you're sending money to family overseas, spending while on your holiday abroad, or paying bills across borders, Wise makes moving money simple, transparent, and straightforward.

14:03Wise offers 24-7 customer service and runs over 7 million daily checks to spot and stop fraud. And most transfers happen in under 20 seconds, which means your money arrives in less time than you've been listening to me. Join millions, saving billions. Be smart. Get Wise. Visit wise.com or download the Wise app today. T's and C's apply.

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16:57I want to get real quickly to Boeing. Boeing inked a deal with China's Southern Airlines to sell some jets. It's not a huge deal,$3.6 billion by aerospace standards. But it might signal, at least to me, I'm wondering if it signals maybe an opening up of this China market, which has been kind of close to Boeing for maybe 10 years now. And that would be a significant positive. George Ferguson joins us. He's been covering Boeing for decades. He's a senior aerospace defense and airlines analyst. George, what should we take away from this China Southern Airlines deal with Boeing? I think, first of all, good afternoon.

17:35Every order is a good order, right? There used to be a song out there, I guess. Every love is good love. Every order is a good order. So good to see it. When I took a look at it, I haven't seen an official announcement on Boeing's site, but I've seen it reported in some news outlets. It's 777s, 777 freighters. Boeing's got a pretty strong product lineup in that 777 freighter world. 777's going to be the biggest airplane in the sky with the new version of it. Freighters quite large, pack it out pretty well. So, again, it's a good order, but I would have liked to have seen things like narrowbody orders.

18:18I'd like to see 737 orders going into China. That would get me more excited. That's a bigger portion of the marketplace. So, again, good to see China on the book here. But this is an airplane that Boeing has a really strong airplane to offer. Airbus doesn't have as good of an offering. And so I could have seen them potentially order this even away from the Trump visit and hopefully the rapprochement.

18:51Scarlet Fu:Well, George, as Paul mentioned, it seems like for years, the China airlines market just in general seems to have been close off to a lot of the outsiders. But with this deal, do you foresee some of that starting to thaw? And could this be the beginning of even more deals between the US and China companies? Well, so we've put actually a China calculator on the Bloomberg terminal, because we really look at that market. Prior to the pandemic, it was the most important market in the world, I think, for Boeing and Airbus. You know, they were selling, there was over 300 narrowbodies going in there a year, it was a significant portion of narrow body production.

19:34It's really slowed down. But I would say it's still open for Airbus. Airbus has made a lot of deliveries into the market and orders in the market. And so it's been closed largely to Boeing since the first Trump administration. I think they kind of used the grounding of the MAX, the MAX crash, grounding the MAX as a reason not to take it. Now, China's slowed since then considerably. And so China just doesn't need the airplanes, we think, right there. The GDP growth is, you know, from 8 % down into the fours now. China's been a little bit inward looking. And, you know, they're building their own competitor to the Airbus and Boeing, Airbus A320, Boeing 737, the Comac C919.

20:22That has ramped much slower than we expected. I want to say there were some 20-some deliveries of that last year. In time, I would expect them to replace Boeing and Airbus orders and deliveries with that airplane. But again, right now, the way it looks to us is they're absolutely still buying from Airbus, taking the majority of their deliveries from Airbus. and Boeing has just been blocked out since the first Trump administration where we sort of entered into the trade war. And so that's kind of what we're looking for to lift because it could be more opportunity for Boeing. But we see a lot of orders on the books for Airbus.