Manufacturing Bloom

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ECONOMY DECEMBER 7, 2009

Manufacturing Bloom

A few weeks after the 2008 presidential election, United Steelworkers President Leo Gerard got a call from an Obama transition aide frantic for advice on the collapsing auto industry. Gerard put his numbers guy on the call, a former investment banker named Ron Bloom, who proceeded to offer a detailed disquisition on the financial situations of GM and Chrysler. Unlike other experts the transition team had consulted, Bloom was refreshingly blunt about the companies’ prospects, which he deemed grim. “We were like, ‘Wow, who is this guy?’” recalls the aide.

At the time, few in Washington had ever heard of Bloom, much less pegged him for a top administration job. But, several times a week through the end of January, Bloom would chat with Team Obama by phone about the auto restructuring. Every now and then, he’d climb into his beat-up Ford Taurus and drive the four-and-a-half hours from his home in Pittsburgh to Washington in order to share his thoughts. He was not yet on the government payroll, but it gradually became clear that he was angling to stay. “I don’t think it’s because he wanted a cool job,” says the aide. “It sounds sappy, but he just wanted to come down and save the auto industry.”

Bloom, in his mid-fifties, is tall and pale with brown hair that he wears in a buzz cut. His cheeks sag slightly and his eyes slant down toward his temples, giving him a natural dourness he sometimes exaggerates for effect. Bloom knew a thing or two about playing a weak hand. As the top steelworker official in charge of financial restructuring, he’d kept dozens of mills open when their owners were determined to shutter them. (He once went so far as to engineer a hostile takeover of a company called Wheeling-Pitt, whose management he deemed uncooperative.) Bloom has summed up his approach to these situations as “dentist-chair bargaining”--in which the patient “grabs the dentist by the balls and says, ‘Now let’s not hurt each other.’”

Alas, such tactics wouldn’t be necessary to get the job. In February, the Treasury Department tapped Bloom to be a deputy to Steve Rattner, the head of the administration’s auto task force. Within four months, Bloom had managed the negotiation that plucked Chrysler from its deathbed and married it off to Fiat, making him perhaps the most successful yenta in corporate history.

As a reward, the president gave him the one task even more intractable than saving the auto industry: saving the industry industry. In September, the White House named Bloom the country’s manufacturing czar. Suffice it to say, it is not a situation in which Bloom appears to hold many cards. The number of U.S. manufacturing jobs fell from 17 million to under twelve million during the last eight years, and few economists believe they will ever return. The fact that rivals, backed by foreign governments, are targeting U.S. market share makes it even less likely. To succeed, Bloom will have to find unobvious advantages and leverage them relentlessly. Which turns out to be exactly what he does best.

 

In 1983, Bloom was a young organizer at the Service Employees International Union in Boston when an ally lost a leadership election. While casting about for his next move, Bloom read a book called The North Will Rise Again. At the time, global competition was laying waste to domestic manufacturing, prompting companies to slash their labor costs. The book urged unions to exert influence on management through the stock they owned in their pension funds.

Bloom found the idea compelling but figured he’d need an MBA to put such concepts into practice. Knowing almost nothing about business, he set his sights on the most prestigious program in the country: Harvard. An acquaintance put him in touch with a Harvard business professor, whom he asked for a recommendation; he nailed down another one from a prominent labor lawyer. Bloom made the same pitch to everyone: There are 800 students at Harvard Business School who aspire to be managers or investors. Shouldn’t Harvard have one who aspires to work in a union? It worked.

After graduation, Bloom spent several years at the investment bank Lazard Frères, where he split his time between standard deal-making and representing unions. Then, in 1990, he and a colleague named Gene Keilin left to open their own boutique restructuring firm. One of Bloom’s first assignments there was a mill called Algoma, in remote Sault Ste. Marie, Canada. The job would help him appreciate the leverage labor had even in a situation that seemed hopeless.

When Bloom showed up at “The Soo,” as it was known, Algoma’s owner had filed for bankruptcy protection and was readying a restructuring plan that called for brutal job cuts. The showdown with the union came a few months later at a meeting in downtown Toronto. Management, flanked by its bankers, lawyers, and a team of McKinsey consultants, put its official proposal on the table. When it was Bloom’s turn to speak, he casually dismantled the McKinsey case with a rapid succession of questions. How, he wondered, could the owner justify taking the biggest stake in the new company when the union was contributing far more through its wage concessions? “The McKinsey advisers couldn’t defend the numbers. Ron showed them they were phony,” says Leo Gerard, then the union’s district director. “The whole thing collapsed like a house of cards.”

Better yet, Bloom and Gerard persuaded the company’s owner and creditors that liquidation would be a terrible idea--not least because they could be on the hook for hundreds of millions of dollars in environmental liabilities. “They’d have to pay to leave,” says Ken DeLaney, who worked on the deal for the steelworkers. Over the next several weeks, Bloom helped hammer out a counterproposal for an employee buyout, an unprecedented concept in Canada. To give the plan credibility, Bloom and Gerard convinced union members to accept wage cuts that would help keep the company afloat while they negotiated a deal. In the end, Bloom cut Algoma’s biggest creditors in for 50 to 60 cents on the dollar and gave them a minority stake in the new firm. The workers would get the rest. As for the owners, they paid tens of millions of dollars just to wash their hands of the situation.

For Bloom, the Algoma deal yielded two key insights. First, you can typically show that liquidating a company is a lousy deal for everyone involved. Second, once you’ve convinced stakeholders that they’re better off with a living company, labor has enormous leverage. The law technically gives lenders and suppliers priority over workers, but you can usually find new lenders and suppliers. The workers, on the other hand, are virtually irreplaceable. “You may wish there were fewer of them,” says Keilin. “You may wish they were paid less. But you can’t do it without them.” Within a few years, Bloom joined the steelworkers’ union full-time.

 

Inside the Obama administration, March 2009 saw the debate over Chrysler’s fate reach a boil. Bloom, barely a month into his tenure on the auto task force, watched with concern as officials at the White House Council of Economic Advisers recommended letting the company collapse to strengthen GM and Ford. Along with Rattner and a White House aide named Brian Deese, Bloom helped convince chief economic adviser Larry Summers and, ultimately, the president that the blow--300,000 lost jobs was the estimate--might be too large for the economy to absorb. “He was very influential because he is someone who has been there in industrial America,” says Summers. The government would send cash, but with a caveat: Chrysler had 30 days to restructure and forge an alliance with Fiat. If there was no agreement by then, the administration would cut off funding.

It fell to Rattner and Bloom to broker the deal. Culturally, the two men were near opposites. Rattner had been a trustee of the Metropolitan Museum of Art; Bloom brought his cherished Mr. Potato Head collection to decorate his Treasury office. Bloom also had a reputation in management circles as a gadfly. “There have been a number of cases where company representatives simply refuse to engage him in debate,” says Jim Robinson, a former colleague at the United Steelworkers. During one negotiation early this decade, management kept insisting that its accountants wouldn’t sign off on a proposal to fund retiree health care. As it happened, the company’s accountant-a partner at a major firm--was on-site but not in the room. “Ron kept telling them to bring the partner in so they could debate the issue,” recalls Robinson. “But he wouldn’t come.”

If Bloom made management squirm, he often made his steelworker colleagues uncomfortable, too. He constantly stressed the need to be “commercial,” to think about how the company could make a profit. “A lot of times I got advice from Ron I would rather not have heard,” says Tom Conway, another steelworker colleague. “But you couldn’t kid yourself about what was going on.” In the end, it was this single-minded focus on the bottom line that made Rattner and Bloom so compatible.

When it came to the Chrysler deal, the biggest bargaining challenge turned out to be Fiat. Every other party--management, labor, Chrysler’s current and former owners, the Canadian and U.S. governments--had something to lose if Chrysler went into liquidation. But Fiat was a “volunteer,” as Bloom liked to say. Worse, by announcing that it was either Fiat or bust, the White House had deprived Bloom of what little leverage he might have had.

This wrinkle wasn’t lost on the company through the weeks of negotiation that unfolded at Treasury. Its larger-than-life CEO, Sergio Marchionne, was a fiftysomething chain-smoker prone to black sweaters and operatic soliloquies. “He would kind of give us a speech,” says one member of the auto task force. “‘I don’t need to do this deal, I can go back to [Italy] and have a happy life.’” “Sergio,” as nearly everyone called him, had instigated Fiat’s remarkable turnaround earlier this decade and wasn’t shy about invoking that success. “I’m the man. I fixed Fiat,” he would tell the task force, according to this person. “Without me, you’re toast.” (UAW president Ron Gettelfinger was so put off by Marchionne’s antics that Bloom eventually set them up in separate rooms and shuttled back and forth.)

It had dawned on Bloom, however, that the flip side of Marchionne’s outsize ego was an outsize sense of pride. Once he’d invested his own credibility, Sergio would be loath to come home empty-handed. “At some point, even though they were a volunteer … you get a little deal heat, you get pregnant with the deal,” says Matt Feldman, the task force’s lead bankruptcy lawyer. “Particularly one playing out in public in an international way.”

The final week of negotiations shifted about ten blocks, to the offices of Cadwalader, a large corporate law firm. Bloom, Feldman, and Deese would walk over from Treasury around ten or eleven each morning and convene a meeting involving all the parties to go over unresolved issues. After the meeting, the work would proceed until three or four in the morning. Seventy-two hours out from the deadline, there were basically three sticking points: workers’-compensation liabilities (the state of Michigan covers workers’-comp claims if a company fails, and it wanted Fiat to pick up that liability for Chrysler employees); leftover European inventory from Chrysler’s days with Daimler, its former owner (Fiat worried it would crimp future sales); and the amount of money the U.S. government would kick in.

These issues prompted occasional outbursts from Marchionne; Bloom was nearly unflappable. His particular genius is to let an adversary win on an issue, then gradually, subtly reclaim it for his side. So, for example, Fiat might insist that a government loan be forgiven. Bloom would concede it, then offset the loss using the terms of a second loan later on. “Ron has what I refer to as ass power,” says Feldman. “He’ll continue to talk about things, explore them, work on them, not letting the other side see what’s really important to him. Even if it’s important, he’ll bargain it away early and work on getting it back.” In the end, Fiat mostly ate the workers’-comp liabilities; Chrysler and Fiat split the difference on the excess inventory; and Bloom basically held the line on the $8 billion in federal money he’d been authorized to commit.

 

Obama formally introduced Bloom as his senior counselor for manufacturing policy at a Labor Day picnic in Cincinnati. “As my new point person on manufacturing, he’s going to help us craft the policies that will create the next generation of great manufacturing jobs,” the president said.

To succeed, Bloom will have to steer away from the path of Obama’s predecessor. It’s fair to say that the Bushies were resistant in principle to anything that smacked of industrial policy, the idea that government should play a direct role in nurturing domestic industry. Though they occasionally deviated from it in practice, they subscribed to the standard neoclassical model: that countries will naturally specialize in industries where they have a comparative advantage, thanks to certain endowments of labor, capital, and other resources. George W. Bush assumed there was little a government could do to improve on that outcome, exiled his manufacturing czar to the Commerce Department, and, basically, never heard from him. “He mostly ended up speaking at chicken dinners,” says Scott Paul of the labor-oriented Alliance for American Manufacturing.

Bloom and the steelworkers, on the other hand, have long been skeptical of this view. They believe it ignores how few countries actually leave it to the market to sort out industrial winners and losers. During the Asian financial crisis of the late 1990s, for example, several countries in the region began flooding the United States with exports of commodities like steel. The steelworkers felt the Koreans and Japanese were dumping these goods at below-market prices to stabilize their economies, and they urged Congress and the Clinton administration to stop it. “Philosophically, Ron, myself--no one was against trade. We were against trade that doesn’t have rules,” says Bill Klinefelter, a former colleague. “We were not going to give away American industries.”

An anecdote illustrates the differences in approach. Sixteen years ago, a Ukrainian immigrant named Igor Khandros conjured up an ingenious method for testing semiconductors, until then a labor-intensive process that could only be done cost-effectively offshore. Khandros founded a company called FormFactor in Livermore, California, and attracted some venture capital. By the middle of this decade, the company had hundreds of millions of dollars in sales, a booming export business in Asia, and roughly 1,000 employees, many of whom started at $40,000 plus benefits with only a high school diploma. FormFactor was, in other words, a model for the future of U.S. manufacturing.

But trouble was brewing. A few years earlier, a government-backed company in Korea had hired some of Khandros’s engineers and cloned his technology. Soon Khandros noticed that they were vacuuming up his Asian market share. He sued for patent infringement but would eventually lose in the country’s Supreme Court. In 2007, he shared the whole sad story with Bush Under Secretary of Commerce Frank Lavin, who was not unsympathetic. But, when Khandros finished, recalls Clyde Prestowitz, a former Reagan Commerce official who has advised FormFactor, Lavin politely asked if he’d thought of opening a plant in … Singapore, This, again, was the U.S. Commerce Department. (Lavin stresses that he meant opening a new plant, not relocating.)

If Bloom does nothing more than neutralize the most overt industrial policies of other countries, he will have exceeded expectations. Prestowitz, who is writing a book on the subject, notes that there’s a trade agreement currently pending between the United States and Korea. Assuming he’s allowed to weigh in, it shouldn’t be too hard for a master-leverager like Bloom to persuade the Koreans to play nice.

Farther down the list of challenges Bloom will face is green technology. In recent years, politicians have grown fond of suggesting that exporting this equipment might be the solution to our chronic trade deficit. But the Danes are world leaders in the production of wind-energy equipment, the Germans in solar, and the Koreans and Japanese in advanced batteries. The saving grace for U.S. manufacturers is our huge domestic market. But, given the furious competition, even that may be out of reach for them without a major push from the government.

In fact, as of today, we actually run a trade deficit in green technology, thanks in part to the industrial policies of our competitors. One recent controversy involves a $1.5 billion West Texas wind-farm project eligible for $450 million in tax credits under the Obama stimulus bill. The companies involved plan to import 240 turbines from China, which is providing financing and would enjoy 85 percent of the job-creation benefits. To boost domestic manufacturers, Bloom could help line up federal loans--say, for an old auto-parts maker looking to produce equipment for wind turbines. (Manufacturers complain that capital for such repurposing is extremely scarce.)

But Bloom’s biggest challenge may simply be negotiating the manufacturing czar’s status. For example, no one expects him to have much influence over currency policy, even though China’s exchange-rate manipulation is arguably as important as any factor in the decline of U.S. manufacturing. Bloom needs “a mandate to accompany the title,” says a source close to the White House. “As he sits today, he has himself and a secretary. That’s literally it.” It doesn’t exactly sound promising. Then again, that’s a lot more than Bloom had when he first drove down from Pittsburgh.

Noam Scheiber is a senior editor of The New Republic.

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posted in: economy, metro policy, boston, marie, pittsburgh, toronto, washington, chrysler, fiat, ford, gm, lazard, lazard fr, united steelworkers, america, canada, united states, brian deese, clyde prestowitz, frank lavin, gene keilin, igor khandros, jim robinson, ken delaney, larry summers, leo gerard, matt feldman, ron bloom, ron gettelfinger, sergio marchionne, steve rattner, tom conway, department of the treasury, harvard, obama administration, u.s. government, white house, white house council, ford taurus

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