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    Steven Rattner on the UAW Strike and the Challenges of Bidenomics

    enSeptember 22, 2023

    Podcast Summary

    • UAW Strike at GM and Ford: Interplay of Labor, Productivity, Industrial PolicyThe UAW strike at GM and Ford underscores the evolving relationship between labor, productivity, and industrial policy in the US auto industry, with demands for higher wages and improved working conditions reflecting broader economic themes.

      The ongoing UAW strike at General Motors and Ford highlights the complex interplay of labor, productivity, industrial policy, and the future of the US auto industry. During the financial crisis in 2009, the auto industry received significant government support, which required concessions from various stakeholders, including labor. However, the concessions made back then pale in comparison to the current demands from the UAW. Steven Ratner, the former CAR czar under the Obama administration, will provide valuable insights into the financial state of the carmakers and the implications of the strike. The UAW's demands for higher wages and improved working conditions reflect the broader themes of labor's role in the US economy and the challenges faced by the legacy industry in the era of industrial policy.

    • UAW Concessions During Auto Industry CrisisDuring the 2000s crisis, UAW made concessions to save jobs, affecting new hires with wage reductions and healthcare changes. Current UAW, under new leadership, is taking a more confrontational approach with larger demands.

      During the auto industry crisis in the late 2000s, the UAW made significant concessions, primarily affecting newer workers, to help save the industry and protect the jobs of established workers. These concessions included wage reductions for new hires and changes to healthcare and jobs bank benefits. The negotiations were cordial due to the shared understanding of the crisis and the leadership of Ron Gettlefinger. However, the current UAW, under the leadership of Sean Fain, is taking a more confrontational approach with larger demands, likely due to the union's perceived lack of progress in the last 15 years and recent corruption scandals. As for the possibility of returning to a single tier system, it's plausible but would depend on various factors such as the financial health of the automakers and the willingness of both parties to compromise. The current demands from the UAW go beyond the concessions made during the crisis, including wage increases and job security guarantees.

    • Union wage disparities and industry challenges complicate negotiationsThe UAW's demands for higher wages and benefits clash with the auto industry's financial pressures and the need to compete in the transition to electric vehicles, making a compromise on cash compensation likely.

      The union-negotiated wage disparities between existing and new workers in the automobile industry created an unfair dynamic, but the union was unwilling to make significant sacrifices to change it. Additionally, the auto companies are currently facing significant financial pressures, including large capital expenditures for the transition to electric vehicles and thin profit margins, making it difficult for them to meet the UAW's demands for increased wages and benefits. The industry as a whole is facing significant challenges with the transition to electric vehicles, including competition from new entrants and the high costs of research and development. Overall, the negotiations between the UAW and the auto companies will likely come down to a compromise on cash compensation, with the union seeking significant increases and the companies unable to meet those demands without making cuts elsewhere.

    • Pressure on US Manufacturers to Rethink Operations and Cost StructuresHigh labor costs in the US make it challenging for American manufacturers to compete globally, leading to job migration to countries with lower labor costs and higher productivity.

      The manufacturing industry, particularly in the automotive sector, is facing increased competition from both domestic and international non-unionized companies, putting pressure on legacy companies to rethink their operations and cost structures. The speaker, who has spent most of his career in service industries, was surprised to find that the high labor costs in the US make it increasingly difficult for American manufacturers to compete in a globalizing world. As a result, many manufacturing jobs have moved to countries like Mexico and China, where labor costs are much lower and productivity is high. The tension between jobs and pay is a significant issue, as higher wages lead to fewer jobs due to the inevitable migration to non-union facilities. While labor costs are not a huge part of the industry's expenses, they are still a significant factor, and the competition from low-wage countries is only going to increase.

    • Labor costs impacting company profitsA 2% increase in labor costs could erase 20% of a company's profits for high-margin firms, especially during UAW strikes and low unemployment rates. However, reshoring and industrial policy could increase costs for manufacturers and consumers.

      Labor costs, though not the majority of a car's cost, can significantly impact a company's profits. For instance, a 2% increase in labor costs could wipe out 20% of a company's profits, which is a substantial loss for high-profit margin companies. This is particularly relevant in the context of the UAW strikes and historically low unemployment rates, which have empowered workers to ask for higher wages. Additionally, there's a broader trend towards reshoring and building more resilient supply chains, which could limit the threat of moving car production to countries with lower labor costs. However, this shift towards deglobalization and industrial policy could lead to increased costs for manufacturers and, ultimately, for consumers.

    • Balancing supply lines and consumer pricesCompanies must find a balance between securing supply lines and maintaining reasonable prices for consumers in industries like automotive and semiconductors. Challenges include labor costs, environmental regulations, and complex supply chains.

      The ongoing supply chain challenges, particularly in industries like automotive and semiconductors, won't be solved through top-down decisions from Washington. Instead, companies will need to find a balance between securing supply lines and maintaining reasonable prices for consumers. The car industry, in particular, is an iconic American sector with significant emotional and economic attachment. While labor costs are a significant factor, other pressures on manufacturing in the US include stringent environmental regulations and permitting processes, which can lead to higher costs and outsourcing to other countries. The semiconductor industry, another area of focus, is a prime example of the US's historical leadership in technology but faces challenges due to global competition and complex supply chains. Ultimately, addressing these issues will require a multifaceted approach, including policy changes and industry collaborations.

    • US push for domestic semiconductor manufacturingThe US aims to bring high-end semiconductor manufacturing back home due to economic and security concerns, but creating a domestic ecosystem is complex and costly.

      The US is currently heavily reliant on Taiwan for high-end semiconductor manufacturing, but there's a push to bring this industry back home due to economic and security concerns. However, creating a domestic semiconductor manufacturing ecosystem from scratch is a complex and costly process. The US government has allocated significant funds for this endeavor, but other factors like the lack of an established ecosystem and high costs could hinder progress. It's important to note that while US companies like NVIDIA are financially successful, they still need foreign manufacturers to produce their chips. In the chip industry, high-end chips are crucial, as they power various essential technologies, from smartphones to military equipment. Therefore, the US's lack of domestic production in this area is a significant concern. While there's a debate about the extent of domestic manufacturing needed, there's consensus that having some capacity would be beneficial.

    • Balancing economic objectives and industrial policyThe US aims to foster domestic industries in areas like semiconductors and nanotechnology, acknowledging the success of industrial policy in countries like South Korea and Taiwan, but also the risks and challenges involved. The Inflation Reduction Act addresses vulnerabilities in battery production, but funding and effective execution are crucial.

      While there is a desire to reduce public debt and the risks of industrial policy, there is also a need to foster certain domestic industries, particularly in areas like semiconductors and nanotechnology. The speaker acknowledges the success of industrial policy in countries like South Korea and Taiwan, but also the risks and challenges involved. In the case of semiconductors, the US has found itself vulnerable due to reliance on foreign production. The same concern applies to batteries, which are largely produced in China, and the Inflation Reduction Act aims to address this. However, the speaker emphasizes the importance of finding the necessary funding and executing these policies effectively. The production of batteries is seen as a more feasible goal than semiconductctor production, but optimism should be tempered. Overall, the discussion highlights the complexities of balancing economic objectives and the importance of strategic planning and execution.

    • Encouraging investment with tax incentives instead of subsidiesThe government can promote growth in strategic industries by offering tax incentives, allowing the market to determine economically viable projects, and leading to progress in areas like renewable energy and semiconductors.

      The government can effectively encourage more investment in strategically important industries, like semiconductors and renewable energy, by providing tax incentives rather than subsidies. This approach lets the market decide which projects are economically viable, and the success of such initiatives, as seen in the solar industry, can lead to significant progress in energy transition projects. However, the challenge for traditional industries, such as the automotive sector, lies in their ability to adapt and compete in the electric vehicle market. While they have a century-long history and expertise in various aspects of the industry, they need to reinvent themselves to stay competitive. The ongoing UAW strikes add to the complexity, and a resolution may take time as the gap between the two sides seems vast, with companies unlikely to accept significant wage increases.

    • Detroit Three automakers vs UAW: Significant job losses if ancillary demands not droppedThe UAW's ongoing labor dispute with Detroit Three automakers could lead to 130,000 job losses and financial pressures for parts suppliers due to the strike, while the transition to electric vehicles may also cause job losses. Both sides must prioritize and negotiate to find a compromise on ancillary demands and temporary worker system.

      The ongoing labor dispute between the UAW and the Detroit Three automakers could lead to significant job losses and economic consequences if the union does not drop some of its "ancillary demands" and focus on a reasonable wage increase. The companies have offered a pay raise, but the gap between the offer and the union's demands is substantial. If the strike continues, other facilities may close due to a lack of parts and assembly workers, potentially affecting 130,000 workers and causing financial pressures for parts suppliers in the upper midwest. The transition to electric vehicles, which require fewer parts and less assembly labor, is also a concern for the UAW as it may lead to job losses. The union and companies must prioritize how to allocate resources to address these issues. The temporary worker system is another point of contention, and finding a compromise on this issue will require negotiation from both sides.

    • Balancing labor and the energy transition in the EV industryEffective management, innovation, and adaptability are crucial differentiators for traditional automakers in the EV market, while labor market conditions may not be the sole determinant of success.

      The ongoing tension in America between the prioritization of labor and the energy transition is complex, especially in the context of the EV industry. Steve Rattner, a former investment banker and Car Czar during the 2009 auto industry bailout, emphasized the need for balance between preserving jobs and remaining competitive in the global EV market. He shared his memorable experience of encountering the mismanagement within General Motors during the bailout, highlighting the importance of strong leadership and effective management. The economic backdrop significantly influences the power dynamics between labor and companies, with the current favorable labor market potentially emboldening unions like the UAW to strike. However, the cost of labor might not be the defining factor for the success of traditional automakers in the age of electric vehicles. Instead, innovation, adaptability, and efficient operations could be crucial differentiators.

    • Uncertainty in EV market for automakersAutomakers face challenges in producing profitable EVs while maintaining profits from traditional cars. Unique industry factors like brand recognition and consumer preferences may impact pricing and demand. Innovation in areas like self-driving cars and semiconductor fabs could offer opportunities for growth.

      The future profitability and competitiveness of automakers in the electric vehicle (EV) market is still uncertain. The industry faces challenges in producing cars that people want to buy while maintaining profits from traditional internal combustion engine cars. The uniqueness of the car industry, including brand recognition and consumer preferences for American-made cars, may also impact pricing and demand. However, the potential for innovation and investment in areas like self-driving cars and semiconductor fabs could provide opportunities for growth. The ongoing transition to EVs and the impact on labor costs, consumer preferences, and competition are topics of ongoing debate and exploration.

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