Lots More on America's Electrical Components Crisis

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1:15Bloomberg Audio Studios. Podcasts. Radio. News. What's up, Chris? It's Joe. Hi, how are you today? Hey, Chris. How's it going? Hi, Tracy. How are you today? I'm good, thank you. I'm sorry we kept you waiting. I saw your tweet no problem whatsoever I was just giving you guys a hard time so Tracy we're back with our favorite Dutch Bros bro the bro of Dutch Bros the bro of Dutch Bros I did a deadlift one two three hegemony hegemony barges this is an after school special except I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.

2:02Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that like in a couple of years, the AI will do a really good job of making the Odd Lots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching. The perfect guest. Welcome to Lots More, where we catch up with friends about what's going on right now. Because even when Odd Lots is over, there's always lots more. And we really do have the perfect guest. Chris Hatch, we talked to him several weeks ago about opening up drive-thrus.

2:40But Chris, what are you up to these days? Yeah, just continue to try and build buildings and figure out how to get some of this stuff out of the ground and get these projects built and constructed. It seems like it just grows harder every day, more and more challenges. So, yeah. So, Tracy, we've talked about like almost every supply chain crisis under the sun over the last three years. But there's one thing that's been in shortage for 42 straight months, according to the ISM, and that is electrical transformers and parts. We've never talked about that. You finally get to do your Transformers episode.

3:15Chris, what's a transformer? In the electrical, sorry, I guess I have a six-year-old son and we talk about Optimus Prime. Yeah. Or Megatron, basically nonstop at my household. The Lou Reed album. Oh, it's a great album. But what does it mean when you're trying to build a new Starbucks or Dutch Bros location off the side of a highway in Texas? Let's use Utah if that's okay. And mostly just because it's easier, there's less power companies in Utah. So starting with Rocky Mountain Power, who supplies the power for probably 80 % of the state of Utah. There are a few cities that have a power company.

3:49There's a different power company in southern Utah. You have kind of the main grid. So think of that as like, you know, basically the main power supply that's going into a huge city. And so once you come off of the grid, the first place the electric comes to is a transformer that sits on your site. And the easiest way to think of it is this is kind of, it's a green typically or blue or some kind of kind of darker landscape colored cabinet that sits in the landscaping area somewhere. It's usually two or three feet tall, maybe sometimes four or five feet tall, about three or four feet square. And that's where the power comes in from the power grid to your site.

4:27So that is a transformer. Got it. So Joe finally gets his transformer episode. I think he's been tweeting like religiously every time the ISM survey comes out where they're talking about the shortage. but is it at all common for transformers to go through periods of scarcity or has what we've seen over the past couple years now been unusual? Yeah, that's a great question. Definitely during the kind of over the last four years, let's just call it kind of the post-COVID world, we've definitely seen some real strains on the supply of transformers into the world. At the moment, with at least the type of buildings that I'm building, the transformers actually aren't the longest lead supply item.

5:11So that's the first step of where the power comes off of the line. And it's actually the switchgear. That's the problem right now today is that there's these massive delays with switchgear that are going in the United States right now. What's switchgear? So power comes in from the grid to the transformer, from the transformer to the meter, which makes sense. That's what the power company comes and reads to determine how much power you use in a month. And then from the meter, it goes to the switchgear. The switchgear is where the power comes to your building. So this is usually cabinetry that sits flush or on the back of the building or one of the sides of the building most of the time.

5:49And that is, you know, in the example that I've got of a building that we are done building the building in West Valley City, Utah, I need a 1600 amp switchgear piece. So that electrical supply is enough to power 1 ,600 amps going into the building. So from the switchgear, then the power gets distributed to the panel in each individual tenant space. Wait, so when we say there's a shortage of transformers or switchgears or whatever, what do we actually mean here? Is it that you can't get them so the problem is your lead times expand or the problem is there aren't enough of them to satisfy demand?

6:32And so prices go up maybe to a prohibitive point. Maybe to start with my specific example, I originally ordered my switchgear a year ago, April of 2023. I was told that there was a one-year lead time, which felt like an exorbitantly long time. That's longer than, you know, the lead times kind of were building over the last three or four years, but that was the longest we had heard up to that point. So we set a schedule with my contractor to have the building more or less complete right in April of 2024 so that the switchgear would then arrive and we could power up the building and then the tenants could step in and do their individual build out.

7:14The problem is that four weeks ago, for the first time, the supply house called my electrician who called my general contractor who called me and said it might be up to one more year.

7:28What does that cost you? Because you have to finance this. So it's like, can you tell us what's being built here? Is it another Dutch Bros or Starbucks or something? It's a great question. This is a four-tenant building. It's all restaurants. Cafe Rio is a Mexican grill with a drive-thru. Marcos Pizza, Chip, which is a cookie company, and Jersey Mike's. So what happens when your general contractor or whoever it is gets the call from the electrician? They're like, okay, you've got to wait another year. So you don't just drive to Home Depot and buy one of these parts. They don't exist. So you really have not a lot of great options at that point.

8:09And so it's been interesting because most of the people that are sitting in my seat as the developer have no idea what to do. And, I mean, I have talked to probably 200 or 300 developers over the last two months. month, as soon as this problem became real, I've just started calling every peer I know in the space anywhere trying to figure out how I can solve the problem. And I would tell you that at least half of the people I've talked to are building buildings with a very similar power requirement to mine. And they're not as far along in the process as I am. And they're kind of content because they're like, well, we don't have that problem.

8:47Our switchgear is supposed to be here on this day. And as I've dove in further, 100%, there is a big problem. It's not just me. It's not some micro issue for Chris Hatch's building. This is a massive issue that's impacting the whole, you know, all of North America, really. There should be more switchgear sympathy in general. But okay, I get that this is incredibly frustrating for you and, you know, waiting a whole year for something and then being told that actually it's going to be another year is kind of crazy. But in terms of the actual financial impact, who does that fall on? Is it you as the developer or is it like the retailer, Dutch Brothers or whoever who might have pre-leased that space?

9:32Yeah. In this case, it is the developer that's going to take the brunt of that impact. So it's the developer being me and my investors that are in the building. The good news is we built in a few line items and contingency line items. You don't necessarily hope to burn through all the contingency line items. And it's hard for me to guess when the switchgear is going to arrive or when I'll be able to source it through an alternate means. If I just look at the one year out and we sit with this building, my contractor, by the way, finished the entire building two Fridays ago. So they're done with the site.

10:06There's nothing left for them to do on the building until the switchgear gets here. So there's this whole complete building that would otherwise be totally ready for the Mexican restaurant and the pizza restaurant, et cetera, to move into. And the one thing that's preventing it is this part that could still take another year. Yes. And I mean, we're just, we're not doing anything crazy here. We're trying to serve the world, you know, tacos and pizza and cookies and sandwiches, right? You know? And so if I just sit for one year, you know, first off, I'm going to have to go extend my loan with the bank for sure, because I don't think I have a full year of time.

10:42But if they allow me to continue on at more or less the same terms I'm at today, my dead interest carry, just my interest expense for holding the building for a year will be$158 ,000. Wait, I still don't understand. Why do we have the shortage again? Can you maybe expound on that a little bit more? What is the bottleneck here exactly? So, okay, switch gears, sure, but like who is making these things? Yeah. Sure. So if you think of it in terms, if you start looking at it through first, how the contracting typically works, a developer contracts with a general contractor when he goes to decide to build a building and the contractor is going to build that building for them.

11:23The contractor then signs up subcontractors, one of which is an electrician. The electrician then signs up through a supply house, an order that's going to get filled, you know, and what they're filling is whatever the developer's, you know, electrical engineer had specced for the building, right? So in this case, it's the 1600 amp switchgear, and then, you know, my five panels that I've ordered. And so he's ordering that through a supply, he or she is ordering that through a supply house. And then occasionally a supply house orders through a larger regional supply house. And then the regional supply house then orders from the manufacturer, Right.

12:00So a handful of steps, but that's kind of how the contracting works. That was literally just a description. That was this. You just walked us through the supply chain. Okay. Keep going. But that was fantastic. Yeah. Right. So the real problem that exists here is that there's more or less five big manufacturers of all of this electrical gear. So whether you're talking about the panels or the transformers or the metering equipment or the switch gear, all of it, it's all coming more or less from five big manufacturers. Siemens, Eaton, Cutler Hammer, Square D, and then GE sold off recently their unit a couple years ago.

12:36And I can't remember the subsidiary that they've sold it to. But those five provide the electrical components.

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14:07Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by ZeroHash. Complete disclosures available at public.com slash disclosures. When your developer talks to the electrician or the electrician talks to the supply house or the supply house talks to the regional supply house or the regional supply house talks to the manufacturer, do they give you a reason?

14:44Do they say what's going on or do they explain why, hey, we told you it was going to be April 2024 and now it's going to be April 2025? Do they give you some sort of excuse? Or, yeah, can you call them up and complain? Can you be like an electricity Karen or something? Like, what do you do? Yeah, there's not much recourse. I mean, that's the downer. It's an interesting world, and I don't know why it is exactly. And Joe, you and I were tweeting about this or DMing about this before the show. But for whatever reason, anytime you deal in electrical, electrical is hand in hand with mansplaining. It doesn't matter what you do.

15:20Somebody is going to mansplain you how you're wrong. And so even this podcast episode will come out and hundreds of people will mansplain how you said something or Tracy. Yeah, it just I'm sure they'll mansplain to me. I'm not if if a guy explains transformers to another guy, does it count as mansplaining? Then it's just explaining. Yeah, it's just explaining in a gender neutral way. But what do they tell you? What's the what's the how do they mansplain it to you? Well, that's the interesting thing. It's it's you know, I so I started calling through. I started with my electrician. Then I went to my supply house and I quickly realized my supply house.

15:57We have two supply houses in the state of Utah, and they're both too small. For the vast majority of their orders, they order through a regional supply house. They don't order direct from the manufacturers. And so that's not a very good position to be in. And so I started, I went to Twitter, I went to LinkedIn, I went to colleagues, I started pushing this message out. And since then, I have spoken to somewhere around 100 people that have told me they have a guy or they have somebody that can source the materials that, you know, what I need, the switchgear. and I've been on the phone with them.

16:29And a lot of those folks were the regional supply house contacts. And here I had to try to not lose my cool because multiple times I was talking to somebody at the regional supply house and my particular order is for a Siemens switchgear board. And so the regional supply house person would talk to me and say, well, give me your, you know, give me your specs, send them all over to me. I'll call the manufacturer. I'll find out where you are in the order process. And then I'll call you back and tell you if I can move you up and then what it will cost us for, you know, for the fee to move you up. And you have to kind of not lose your mind right there because you're looking at your supply house saying, why couldn't you move me up?

17:09Are you not, you don't have the capabilities, you don't have the buying power. For what reason can you not get this faster? Why do I have to go through this alternate path to go somewhere else. And, you know, it's really just a buying power thing, you know, and so this is kind of assessing the problem. So I spent 30 days figuring out what the problem was. I feel like I've at least come to some version of a conclusion of what this is. And I don't, I'm not some end all expert. I have no idea. I went to, you know, college and I studied finance. I didn't study electrical supply chains. So nor do I totally understand how electrical systems work.

17:46I just know that I have a building that's burning and I've got a lot of interest carry every month. And so now I'm trying to come up with alternate solutions for how to get my electrical on site. Part of me is amazed that it's now 2024 and we are still talking about shortages that are this impactful. So Joe, I remember when we spoke about residential real estate, we would talk about the idea that maybe there's like a sink missing or something in 2021 or even early 2022. But it is the persistence of this particular shortage is kind of mind blowing. Yeah. I imagine when you were building buildings like in 2021, I assume like many others, you had multiple shortages of things.

18:32Like, is that the case? Like, was there a time when like, you know, like everything was in scarcity for you? Yeah, 100%. And then what is like, so do any of these people that you get on the calls, like have an exploration for why this particular supply chain hasn't caught up? Not, not really great. And so that's had to, I think I've had to really do a lot of homework in other areas to figure out what the problem is. But when you start to think through it logically, it does start to make sense. I mean, think about the amount of electrical vehicle charging stations that have come into the country just over the last couple of years here.

19:09Think about the amount of data centers that are going in. Think about what the amount of energy requirement has increased just with the invention of, you know, like chat GPT, for example, right, and AI. And think about all of that is requiring power. You have solar farms going in left and right. I mean, all of this stuff ultimately all has electrical components. And there are five major manufacturers that produce all the electrical components. And so I think it literally is just a product through the system problem. And I think to totally understand that, you would probably need to get somebody on the pod here from one of those manufacturers.

19:50By the way, Tracy, you know, obviously we touched on some of this stuff recently with our episode with Steve Eisenman. Like some of these like old school industrial players that went to the moon. I just looked up Eaton, which I don't think had come up on a previous episode as one of the names we talked about. That is another stock that basically looks like NVIDIA right now when you look at it. Here is this like sleepy stock from a few years ago. And then now in this great era of electrification, that is like another stock that has gone absolutely to the moon. It is truly remarkable that there are those sort of old school companies out there.

20:23I mean, tractor supply is another one, but these businesses in the business of doing these old fashioned things that look like semiconductor stock charts. Yeah, it's really remarkable. So, Chris, you posted on Twitter, you're like, someone just go start a electrical components factory in Mexico. You get upset. Did anyone take you up on that offer? Is something going to get built to expand this capacity that you know of? There are a number of people that are trying to figure it out. I would – the obvious statement here is that when Siemens is one of the companies that you're competing against or – I mean I don't know.

20:59You've got the stocks in there. I'm not sure what the market cap is on Eaton. None of these are small companies, right? So I think there's pretty good fear from those that are in the manufacturing space that they are concerned about how do we actually – Eaton is a$139 billion company. Oh, no, no. Sorry. Wait. Siemens is a$139 billion company. Eaton is just a, oh yeah, it's$125 billion. Yeah, so these are massive companies we're talking about. Right. So the concept that you're just going to walk out and grab a PE firm that's worth$20,$30 billion and go just compete head-to-head against these companies is a little bit intimidating, I'm sure.

21:35what is interesting is the reason i reference mexico is because i one of the possible solutions that's come forward here on our building and one of the paths i'm actually going down is we have a friend that runs some factories in muarez and i got on the phone with his engineer that runs his five factories they have like six or seven thousand employees a whole bunch of people that work for them there and so these are very large facilities i got on with his engineer and his engineer reached out to his electrician and we have actually sourced the exact same Siemens spec item that's going to come from a Mexican supply house that is supposed to deliver in eight weeks from today.

22:15Oh, well, this is like I was this was going to be my concluding thought, which is that in any business, a delay is awful and costly. But it feels like when interest rates are as high as they are right now, it just sort of compounds the crisis. And so like, you know, obviously, eight weeks versus a year is always going to be like a massive difference for anyone in business. But with interest rates high, it really is striking the degree to which these sort of like supply chain constraints and high interest rates are like these like interlocking problems that compound each other. Yeah. My concern is I have no idea if this is going to show up in eight weeks.

22:53you know so here you are you know you're setting off a wire for a substantial deposit for these units and you have no idea if this is going to show up any faster right at one point i was told 12 months and then we got to 11 and a half months and then i was told maybe 12 more months could be longer don't know and so you know it's just such an unknown world one of the other things that's causing some constraints on the supply as well so you know trace you asked the question about what's causing the problem. Well, the factories is just a throughput issue, I think. But then on top of that, you have a number of tenants that have identified that this is a big problem.

23:31And so if you're in hyper expansion, you know, we started talking about Dutch Bros. If you're in hyper expansion, it's the same switchgear to build the Dutch Bros, whether you're in Arkansas or Florida or Texas or Utah or wherever else you are. So companies like that are going out and buying 50 and 100 switchgears at a time. Wow. And then they basically what they do is they sell me as the developer a switch gear when we're ready for the switch gear. It's crazy that you have to switch gears because of the switch gears.

24:01Just saying. Yes, exactly. And then there's this whole other world of people. These are a lot of the mansplainers for sure. There's this whole other world of electricians that have seen this problem coming down the line here. And what they've been doing now is basically buying parts opportunistically over the last 24 months. And so my switchgear in West Valley is$62 ,000. That's what it cost me to order it through from Siemens. And then there's markup to the supply house and everybody else involved. But the actual unit costs$62 ,000. So that unit, I have been getting quoted. There are people who are building these, and they're kind of Frankenstein switchgear boards because they're basically piecing anything together they can find to make it work.