MARKET PERSPECTIVE

By J Mulraj

Sep 16- 22, 2023

The UAW strike will, if not resolved, impact the US economy

For the first time ever, the UAW, known as the United Auto Workers, but actually the International Union, the United Auto, Aerospace, Agricultural Implements Workers of America, has called for a joint strike against the traditional three major auto companies, Ford, GM and Stellantis. Coming on top of other economic problems of USA (debt ceiling, high interest rates, drop in commercial real estate which can impact community banks, political fights leading to threats of impeachment/jail, a possible shut down of Government, etc) this may well be the last straw.

This is because the auto industry accounts for about 3% of US GDP and generates over 870,000 jobs, the largest employer amongst any industry. It’s exports, at $55 b, are the largest, after petroleum exports. It is a large consumer of steel, glass, rubber, semiconductors and other inputs. So it’s tentacles spread across industries, and the longer the strike continues, the worst it’s impact on the US economy will be.

The auto industry in in transition. The big 3 traditional automakers, now facing a strike, were slow to embrace the shift towards electric vehicles (EVs). In fact, in August 2021, President Biden held an EV themed event at the White House attended by executives of the big three. Tesla, then, and now, the biggest EV manufacturer, was not invited! Perhaps because, not being unionized, it incurred the wrath of UAW, and of Biden, who leans towards labor. So it would be ironic, would it not, if the strike called by UAW, which dislikes Tesla, were to result in a boost for its sales, even as the big 3 are shut, due to it. Amongst various demands of UAW are a 40% pay hike, based on a similar hike for top management.

Tesla is more than just a car company. It is often defined as a computer on wheels, as Tesla is a software first company. The software is proprietary, created by Tesla. Over The Air (OTA) updates to the software are done remotely, much like updates on a computer or phone. Imagine needing to take the vehicle to a garage for an update! The big 3 cannot do OTA updates. Ford, for example, has 150 suppliers of different parts, each with its own software!

Tesla is also into generation and storage of clean energy. And now, with DOJO, a supercomputer, it is being looked at, and valued as, a technology company (see the video to better appreciate the threat to the big 3).

By Feb ’24 DOJO will have a capacity of 30 exaflops and become one of the 5 fastest supercomputers in the world. An exaflop is the ability of a computer to handle 1 quintillion operations per second. A quintillion is a 1 with 18 zeroes! By Oct ’24 it will reach 100 exaflops. How will this computing power help Tesla?

The power will be used to store and analyze visual data to enable Tesla vehicles to be FSD, or full self drive capable. Once a vehicle becomes FSD, it becomes a revenue generator for the owner, not just an expense. This happens because of TAAS, or transport as a service.

The car owner can have the vehicle drop him off at his office doorstep, then find itself a parking spot. The owner can then offer the car to TAAS, or Transport As A Service, which is like an UBER service. The owner can inform TAAS, via an app, the location of the car, and for how long it is available for rental use.  The service will then direct the car, remotely, on its errands, generating revenue. The revenue will be split between the owner and TAAS.

Tesla bulls had recognized this potential long ago, but, after its recognition, last week, by Morgan Stanley’s Adam Jonas, MD, Auto and Space Research, who quantified the autonomous vehicle market as  a $ 10 trillion market in which Tesla has an asymmetrical advantage (because of the humongous amount of visual data it has stored), the stock shot up by 10% in a day, ten days ago.  It will shoot up further when Tesla launches its cyber truck, expected soon.

How will DOJO impact the top 3 automakers? Well, with robotaxis the need to own personal vehicles diminishes. US car sales have fallen drastically from 11.4 m. in 1986, to 2.8 m. in 2022. In China 23.6 m cars were sold in 2022. After the advent of FSD, combined with TAAS, the big 3 would see a drop in demand, for which they will need to reinvent themselves. The big 3 are disadvantaged as they do not have FSD. Tesla is willing to license the software but it is near impossible for the 3 to catch up with Tesla; they are too far behind.

Toyota, the world’s largest automaker, (it sold 10.5 m vehicles last year), is seeking to reinvent itself. It has produced FCEVs (Fuel Cell Electric Vehicle), using hydrogen to power it. It believes it’s all hydrogen vehicle will beat Electric Vehicles. Manufacture of EVs is dependent on availability of rare earth minerals, which China has a stranglehold over, whilst hydrogen is abundant and carbon emission free. However, to reduce its dependence on lithium, Tesla can switch to sodium-ion battery, developed by China’s CATL.

So the UAW strike against the 3 majors can have a disastrous impact on the US economy. UAW has an $ 825 m fund from which it provides support for striking workers. Joe Biden is caught between a rock and a hard place. He would be loath to antagonize labour a year before elections, but equally reluctant to harm an industry that accounts for 3% of GDP.

For the rest of 2023, and for 2024 and 2025, $ 2 trillion of long term corporate debt is due for refinancing. This would be done with a minimum rise of 5% in interest costs, pursuant to the Fed hike, which would make a lot of small businesses unviable. Expect a lot of layoffs in 2024.

Last week the BSE Sensex lost 1829 points to close at 66009.

Crude oil prices are rising, after production cuts by Saudi and others, with Brent crude hitting $92/b. The Fed Chairman has hinted at one more rate hike in 2023. The economic woes of the world’s two top economies, US and China, are well spelt out.

Yet, the institutional investors are buying equities, in the absence of any attractive alternative, and looking to a bright future thanks to technological innovations. Now, if only the polity would spit out the venom, discard their blinkers, unfist and stretch their hands, we can have a wild bull disease.

Imagine!

Picture Source: https://miracleimage.com.au/product/silicone-straw/

Comments may be sent to jmulraj@asiaconverge.com