Steven Rattner on the UAW Strike and the Challenges of Bidenomics

26:43There's a lot of emotion and feeling around it. The car industry is 3 % of our GDP. That 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, when I got into the auto rescue job, I did see a couple of things. One was the unbelievable pressure on 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 taxpayer money, which, by the way, we got virtually all of it back.

27:19Out of curiosity, are there other factors that pressure domestic auto manufacturing or maybe manufacturing in general in the U.S. versus other countries not related to labor costs? I don't know whether there are environmental regulations, et cetera. Are there other reasons why manufacturing in the U.S. 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 U.S. and the environmental regulations and all that surrounds it is really, really tough. Let me give you an example that has nothing to do with the car industry.

27:55But we recently looked at a copper investment in a copper mine in Arizona. Fine. 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.

28:35And 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 the semiconductors recently, because I think it's a fascinating subject, is that we, of course, invented semiconductors, basically.

29:15After Sputnik, we basically had our Sputnik moment. We said, we got to become a technology leader. The Defense Department got heavily involved. DARPA and the internet was one outcome of that. Our leadership in semiconductors, with Intel in particular being our national champion, but many, many other companies, Qualcomm, AMD, 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.

29:57Those 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 where 92 % 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.

30:34We 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 50 % 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$52 billion for mostly for tax and grants to build these things.

31:13Another, I think, 12 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 the companies have to provide childcare for their employees. 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.

31:48You 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 child care are going to hobble our efforts to build domestic semiconductor manufacturing. I mean, you could make the argument, right, that the U.S. semiconductor industry is doing really well. NVIDIA is a$1 trillion company. That's twice. TSMC is only a$458 billion company. So So NVIDIA is bigger than TSMC. Do you agree with the even premise that we need to have more domestic semiconductor manufacturing? NVIDIA doesn't make anything. No, I know.

32:29They make nothing. But they make a ton of money. Yeah, but that's not the point. No, no, I know. But do we need – I mean, so the whole thing sort of arose. Because semiconductor supply chains got on everyone's radar in 2020 when the low-end lagging edge nodes that went into cars, there was a shortage of them. But then that eased, and we don't expect pandemics to happen except maybe once every 100 years. Like how much manufacturing do we need to do here? A lot or some. Look, I don't know. I'm rather skeptical as possible. But in a perfect world, you'd want a lot more. NVIDIA does not make anything.

33:09It 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 it. I, at least in my own mind, separate it 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. They 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.

33:44Again, it's not just your phones. It's the Defense 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 make semiconductors in the U.S. 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.

34:22First 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 four Asian countries I mentioned, did in semiconductors, which was heavily through industrial policy, worked. And so there are plenty of examples that worked. 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.

34:57But 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 cost, we're not talking about that much money. I mean, we have a federal budget deficit of$2 trillion. We're talking about$52 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$52 billion somewhere else to pay for this because it should be a priority if we can execute it.

35:30Well, 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 going to ask me about autos in general. We could go into autos, but 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 Manchin, a critical vote, was like, he does not want to be in the same position that the U.S. 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.

36:09I 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 about semiconductors because there are also batteries made in South Korea and lots of other places that are friendly to us. And 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 650 ,000 parts in it.

36:46It'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.

37:18So 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.

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38:17Go 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. Did my card go through? Oh, no. Your small business depends on its internet. So switch to Verizon Business.

38:52And you could get LTE business internet starting at$39 a month when paired with select business mobile plans. That's unlimited data for unlimited business. There we go. Get the internet you need at the price you want. Verizon Business. Starting price for LTE business internet, 25 megabits per second unlimited data plan with select Verizon business smartphone plan savings. Terms apply. 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?

39:40In some industries where the prospects for return don't seem fulsome enough for us to invest, 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 incentives providing an added boost.

40:18We 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 the 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 30 % 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. Okay, solar. 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$500 billion, Goldman Sachs thinks it's going to be$1.3 trillion.

41:02Other 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 that comes up a lot in our conversations is 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?

41:37The learning by doing. And when you talk about, you know, you even mentioned the car industry in the U.S. has been working on its 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, setting aside the labor costs 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 a yin and a yang to this.

42:13I think on the positive side, they have 100 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 they're 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.

42:51And at the moment, the Detroit 3, 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 everything I - 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.

43:38And I think the companies, as I said, and you may or may not agree, there's no possibility that the companies can possibly accept paying people 40 hours and working 32 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 2009 was to basically strip away a lot of the work rules that we felt were impeding efficiency.

44:18General Motors, I believe from my recollection, had something like 300 job classifications for its workers. If you were a plumber, you couldn't touch an electric piece of equipment or whatever. And we reduced 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.

45:04Does 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, the way they structured the strike is unprecedented. They closed 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.

45:40And 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 does. So yeah, this could easily ripple through the entire set of facilities around the big three, the Detroit three. They could shut down. You could have 130 ,000 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.

46:18Most of their parts, they've outsourced those years ago. And this was something we encountered in 2009 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 as like sort of very reasonable and deserved pay increases and then the 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.

46:55If you give the existing permanent workers more than whatever, then there's less to deal with what are 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 2009 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 companies are prepared to give something on that front. But again, as I said, it's as much for the UAW as is for the companies as to where their priorities lie.

47:31Let me ask you one thing about EVs is I think they're less labor intensive and they have fewer parts total, so there's less assembly. 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? just from the transition. Look, 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.

48:06The 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.

48:37I 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 Karzar, what was your favorite or most memorable moment from that period? My most memorable moment, there's all 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.

49:14I 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 been. 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.

49:53They 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, well, the private executive car parking area straight to, I think it was the 49th or 50th floor in 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.

50:26You had to have a certain kind of a pass to get through that door. It was unbelievable, unbelievable to me to see an iconic company run like that. And it was clear from day one that a big part of what we needed to do there was to change management. It was not labor's fault that these companies got in trouble. They have some responsibility, but management had an awful lot of responsibility. All right, Stephen Ratner, 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.

50:59That was really great. Yeah, that was fantastic. Thank you.

51:14so 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 the economic backdrop is for these types of things so steve was talking about how in 2009 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 Karzai.

51:57That was crazy, that last point he made 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 got a, I would guess, although I guess we could confirm. Hopefully, I don't know. 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 5 % or 7%, is going to be the defining question of it.

52:41It still seems like the big question mark in my mind is, can they make cars productively that people want to buy? And can they maintain their businesses, which are still 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 TBD. 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.

53:19And I think there's also a tendency for Americans to want to buy American cars often. There's a sort of brand recognition and value. 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 mine 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 trip i didn't realize i was just looking on wikipedia it all somehow comes back to arizona all right we have to go to arizona visit an alfalfa farm visit like a water treatment plant a car a copper mine a car factory no there's more there's a uh a howard hughes master limited uh master plan community.

54:09Semiconductor fab. And we have to take a self-driving car around the entire tour. All right. Shall we leave it there for now? Let's leave it there. Okay. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Steven Ratner. He's at Steve Ratner. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashiell Bennett at Dashbot. And thank you to our producer, Moses Andam. Follow all of the Bloomberg Podcasts under the handle at podcasts. And for more Odd Lots content, go to Bloomberg.com slash oddlots, where we post transcripts, a blog, and a newsletter.

54:48And check out the Discord. We have a transportation room. We have a climate room. Going to be lots to talk about this one. Discord.gg slash oddlots. 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.

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