Union Karenina
Malt Liquidity 116
Each unhappy union is unhappy in its own way — Ven Tolstoy
A seemingly hard “paradox” for the human mind to square away is that a coordinated effort gets stronger and stronger as the numbers get larger while the value of the individual themselves gets exponentially closer to zero. Take a massive dataset of Facebook users, for example — a dataset of 50 has no utility, but an individual entry makes up 2% of the data and is critical to the process of data accumulation and marketing. But by the time this dataset grows to 50000 users, the individual could be deleted from the set and nobody would notice. Therein lies the issue with attempting to compensate individuals for their data being sold in massive quantities — the actual value of the individual itself is useless. How exactly are we supposed to square away the mismatch of what Google can sell its data for versus who makes it up?
Union bargaining operates in a similar manner. A union with a dozen members is not going to be very powerful — take, for example, this bizarre, tragic story of an attempt by a few 7.25-an-hour employees to unionize a Scranton McDonald’s, where dozens of months of Facebook chatting and planning got rugged by an employee who apparently didn’t even get anything out of it:
The union groupchat got leaked to management.
Everything we had discussed, everything we had planned, was all revealed to management, going up the ladder to not just the regular managers, but the regional, the district, and even the owners of the entire chain had all been made aware of what was going on with the union. Someone had revealed everything we were planning to them, someone had revealed all of the things we were talking about. But who could it be?
I asked Mia this, and she flat out revealed that it was Dan. Dan had, immediately after joining the groupchat, took extensive screenshots of everything and sent it all to upper management. He wasted no time in spreading this information around the workplace, making sure every manager knew of our project. All these months that we had spent keeping it a secret, keeping everything secure, it all was thrown out the window in an instant. With one fell swoop, Dan had caused a huge loss to us…
Dan didn’t get anything out of snitching on us, and instead ended up leaving the job shortly after the events transpired. Dan’s story shows what happens when you reveal the details of a union to your boss—you won’t get anything more than a pat on the back. He didn’t get any raise, he didn’t get any notoriety—as a matter of fact, he was regarded as one of the subpar employees.
But if you do get a critical mass of numbers (either in relative or absolute terms), your negotiating power totally inverses — if everyone agrees to do it, they get to hold fluid facilitation hostage until they get what they want. How many of us have bitched about severely underperforming baseball umpires, for example? Not to wade into politics, but the strength of unionized government agencies like police or teacher unions is so powerful that it’s illegal in many states for them to strike due to the chaos that holding essential government services hostage would cause. The difference between a dataset and a union, however, is that the union must value the individual even though one less person on the picket line doesn’t physically matter — the prisoner’s dilemma would cause the united front to break if even one person is left out to dry from the union’s largess. A union’s power derives from (3,3), which should be familiar to anyone who’s read this newsletter:
The question we were trying to answer for the past decade — “what is the value of the dollar when there’s no value in holding the dollar itself” — resolved itself with no concrete thought, but rather the fatalist conclusion that if the dollar didn’t matter, nothing really mattered, which resulted in the punting of gobsmacking amounts of money into blatant pump and dump schemes and outright fraudulent markets, where otherwise smart people would pontificate to me about the merits of “Ponzinomics” with a straight face and postulate that we might be able to invalidate the prisoners dilemma by simply coordinating the holding of hot air, thus making (3,3) the first verb written in “math”.
With the pressures to make money, to not leave factories running, to satisfy investors, and to deliver products, the (3,3) is a massive game of chicken — how long can we sit in the same room bleeding out until one side eventually caves to the loss of income? Thus brings us to the UAW strike in the latest dispute between carmakers and their workers:
The United Auto Workers union hit the picket lines shortly after midnight, striking all three Detroit car companies at once for the first time. The work stoppages targeted factories in Michigan, Ohio and Missouri. UAW officials initiated the walkout after failing to clinch new labor deals with General Motors, Ford Motor and Jeep-maker Stellantis for about 146,000 U.S. factory workers…
As of Wednesday, the companies had offered wage increases of 17.5% to 20% over more than four years, short of the union’s mid-30% demand, Fain said. Other issues also remain sticking points, such as cost-of-living adjustments and retiree medical benefits.
The pressure on the auto manufacturers is threefold — the first is the fact that they primarily build “legacy” oil cars, limiting the amount of dollars that can be reinvested in their electric car production, while the Biden administration (and California) is mandating rapid EV transition:
Yet the Obama and Biden EPAs have granted California waivers to set stricter greenhouse-gas emission standards and mandate electric vehicles. California is now asking the EPA for a new waiver to require that EVs make up an increasing share of cars sold in the state, from 35% in 2026 to 100% in 2035. Fifteen states have adopted California’s “zero emission vehicle” regime.
Next, there’s the fact that, well, these car companies are severely outmatched in the marketplace:
It appears that Ford Model e recorded a loss before interest and taxes of $700 million. This is $100 million more than in the fourth quarter of 2022. The margins are also in the red. The EBIT margin (Earnings Before Interest and Taxes), which allows investors to assess the true costs of the activity, is -102.1%. This is more than twice as much as in the fourth quarter of 2022, a period during which the EBIT margin was -40.4%.
On the revenue side, the sales of electric vehicles, amounted to $700 million in the first three months of the year, is less than half of the $1.6 billion in revenue generated by Ford Model e in the last quarter of 2022.
One fact is striking: Ford only delivered 12,000 electric vehicles in the first quarter, which means that the carmaker lost $58,333 for each clean car sold during this period.
All my kvetching about Tesla’s insane share price movement comes with the fact that I’m truly astonished by the scaling of production and the limitation of costs and the absolute denial of the Biden administration to acknowledge this in any way:
Lastly is the fact that these companies’ share performance is awful over the past decade. These executives really have no breathing room whatsoever — they have to pull off massive turnarounds or they will inevitably be replaced by another helpless, handcuffed person.
You might be asking why Tesla doesn’t suffer any of these issues. Setting aside the legacy business vs startup culture difference, the rawest edge here is that Tesla workers aren’t unionized.
The Detroit companies’ labor costs, including wages and benefits, are estimated at an average of $66 an hour, according to industry data. That compares with $45 at Tesla, which isn’t unionized and was founded 20 years ago. Meeting all of Fain’s initial demands would boost average hourly labor costs to $136 for the Detroit companies, Wells Fargo estimated.
A key difference between Tesla employees’ compensation and that of the UAW workers revolves around company upside. UAW workers have been getting profit-sharing bonuses while Tesla workers receive stock options, which don’t have a direct cash cost to the company. Over the years, Tesla shares have risen like a rocket, though there have been periods of turbulence. Shares this year have more than doubled.
GM and F have been stuck in the kind of doom-loop I talked about with Credit Suisse:
Turmoil begets more turmoil. Losses and scandals (and the occasional mysterious death) require constant restructuring and replacement of executives, who will all have different ideas on how to “recover” from the business, but the reputation loss is the real death sentence. Furthermore, how are they going to retain any remaining talent through their “bonus now pay later” structure in a bonus-driven industry? Admitting that business lines aren’t going well just shows even more incompetence which leads to more caution from potential clients which leads to even more business lines being shut down — it’s the death spiral. I don’t really see how Credit Suisse recovers without being absorbed by another institution at this point. As Agassi would say, “Image is Everything.”
Post-2008, the doom loop essentially started with federal bailouts subsidizing a business that didn’t really work in its current state and didn’t have any incentive to get into ship-shape with the flood of federal cash. So companies plodded along, with new executives constantly being brought in to “fix” things and finding themselves unable to. Ford has 20000 engineers; Tesla has around 300 (and 700 labelers). The numbers are truly astounding in every which way. This is why F and GM are worth around 50 billion each, while TSLA clocks in at around 15 times that.
It’s hard for me to see how this ends in any other way other than the government stepping in and subsidizing both sides of this transaction, because the automakers’ EV businesses are absolutely doomed, having not even made it to the starting line while TSLA is on lap 450. Of course, F and GM are not going under, and a mandate without penalties is not truly a mandate but more of a strongly worded suggestion, like a UN letter. But remember what I said about how the market moves in the long term:
The vast majority of money that moves in and around the market is based on the philosophy that whatever is invested in will create future cash flow rewarding current shareholders, who hold a right to their share of the output. When this money sloshes around, it creates market impact, which in turn creates trading opportunity. Note that these investors generally operate with a philosophy that they don’t want to react to day-to-day market movements. They are in it for the cash flow created over time and the movement in share price that will reflect that. So we want to focus on what will motivate them to decide that they want to demand liquidity and increase or downsize their positions.
Frankly, I don’t know how we’re ever getting sizable bid on these stocks for the next few years. No matter how this strike plays out, the winner is already decided — it’s Elon Musk.