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Speaker 1: Kind of thing today is Wall Street returns to a
Speaker 1: T plus one stock trading after a century Only in Bloomberg.
Speaker 1: When people read that kind of story, and maybe I'll
Speaker 1: find one other person that cares about this, Larry Tapp,
Speaker 1: He's head of market Structure a Bloomberg Intelligence. Larry, can
Speaker 1: you explain to us what is going on here? To
Speaker 1: explain it? Like I'm five years old, because when I
Speaker 1: started the business, I think it was T plus seven.
Speaker 1: That was a gentlemanly timeframe. Now it's T plus one.
Speaker 1: What's going on?
Speaker 5: Not a problem, Paul? Yeah, you know, starting today, securities
Speaker 5: traded today will actually settle tomorrow instead of on on Thursday.
Speaker 5: So what that means is that we buy I buy
Speaker 5: Apple today, and on tomorrow tomorrow, I get the shares
Speaker 5: in my account and my broker takes the payment out
Speaker 5: of my out of my account. Now for most retail
Speaker 5: it's not going to be that big an issue. It's
Speaker 5: much more of an institutional issue where the securities in
Speaker 5: cash don't reside at the broker, where they reside at
Speaker 5: a third party custodian, and that becomes a little more complicated.
Speaker 6: So how does it become complicated? Like it seems like
Speaker 6: a pretty straightforward thing, right, So where do the problems lie?
Speaker 5: Well, there are there are problems will lie in four
Speaker 5: or five different areas. The biggest problem is with foreign exchange.
Speaker 5: So let's just say I am Aberdeen and I'm located
Speaker 5: in Scotland or wherever, or in London. If they buy Apple,
Speaker 5: they're going to have to actually send over currency pounds
Speaker 5: and convert that to dollars and pay for that. The
Speaker 5: problem is that currency takes two days to settle in
Speaker 5: standard currency settlement, whereas the securities will settle in one day.
Speaker 5: So if they buy Apple today, will have to pay
Speaker 5: for the securities tomorrow. But if they send over pounds
Speaker 5: to pay for that to cover that, the pounds won't
Speaker 5: actually get converted to dollars till Thursday, which means they
Speaker 5: won't have the cash there on time, which means they
Speaker 5: either have to finance that purchase, or they have to
Speaker 5: move the cash earlier, or they have to instead of
Speaker 5: using Swift or CLS, which is the currency settlement system,
Speaker 5: they actually have to call somebody and say, hey, let's
Speaker 5: do this on an emergency basis and get this taken
Speaker 5: care of. And so that's an issue. The second it
Speaker 5: has to do with securities lending. So if my security
Speaker 5: is of my apples out on loan, they have to
Speaker 5: get that back so that I can actually make sure
Speaker 5: that can get delivered. Now, Apple's probably not a big
Speaker 5: issue there, but if it's hard to borrow security, it
Speaker 5: might be much more difficult to find the securities, you know,
Speaker 5: if I've lent them out to try to collect a feed,
Speaker 5: getting them back maybe a little bit more problematic. Other
Speaker 5: issues which impact actually everybody in the US is the
Speaker 5: allocation confirmation process. So if I'm FIDELI or if I'm
Speaker 5: a big asset manager, I'm not buying one hundred or
Speaker 5: two hundred shares of Apple. I'm probably buying one hundred
Speaker 5: thousand or a million shares of Apple. Trays these days
Speaker 5: don't necessarily occur in these big blocks like they used to.
Speaker 5: They get broken up into algos and they get executed
Speaker 5: in hundred share increments. That said, the und share increments
Speaker 5: don't settle immediately. They have to be badged up. We
Speaker 5: have to create an average price. There's a lot of
Speaker 5: manual or at least what used to be manual effort
Speaker 5: involved in managing that, and the process just needs to
Speaker 5: be sped up. And the close out time is generally
Speaker 5: nine nine PM for that, and so they have between
Speaker 5: you know, four and nine to get all that operational
Speaker 5: stuff done and that just takes, you know, takes time
Speaker 5: sometimes when when it you know, becomes harder to add
Speaker 5: all this stuff up and average price it out and
Speaker 5: break them up into the transactions. Because it's probably not
Speaker 5: a million shares of Apple for one fidelity account. It
Speaker 5: could be you know, ten different portfolios that are buying
Speaker 5: Apple and it has to be broken up into you know,
Speaker 5: ten little clumps. And there are a couple of other issues,
Speaker 5: but those are the big ones.
Speaker 1: So given all that, why is a SEC doing this
Speaker 1: is simply because from a technological perspective, they can, well.
Speaker 5: The SEC can do a lot of things, but increasingly
Speaker 5: people are suing the SEC, so there they can't do
Speaker 5: anything they want. I think the issue here revolves around
Speaker 5: the Robinhood issue back in January of twenty twenty one,
Speaker 5: where they got a margin call to come up with
Speaker 5: three billion dollars to cover all the memestock buying. And
Speaker 5: so there's an old saying in the back office that
Speaker 5: nothing good ever happens between trading and settlement date. So
Speaker 5: the challenge there is that if for whatever reason, XYZ
Speaker 5: broker goes bankrupt, you know, you know on one day,
Speaker 5: the shorter the settlement period is, the more likely that
Speaker 5: those transactions get paid for and they don't have to
Speaker 5: be funded by you know, the industry, because right now
Speaker 5: what happens is all these transactions washed through the DTCC.
Speaker 5: The DTCC, the depository trust guarantees settlements. So if God forbid,
Speaker 5: a broker goes down, you know, the other side of
Speaker 5: the isn't broken. But to do that they have to
Speaker 5: take margin from virtually the whole industry. And so if
Speaker 5: you shorten the settlement cycle, the risk of failure goes down,
Speaker 5: and so the amount of margin that you have to
Speaker 5: put up to guarantee those trades goes down, and so
Speaker 5: it just takes less risk, It takes risk out of
Speaker 5: the settlement system.
Speaker 6: So Larry, with that in mind, how long are we
Speaker 6: going to know? At what point when we know if
Speaker 6: T plus one is working or the difficulties are cropping up,
Speaker 6: when are we going to know that?
Speaker 5: Well, it depends on who we is, the brokers and
Speaker 5: the custodians and the folks involved that the transactions will
Speaker 5: know pretty quickly, you know. The problem is that data
Speaker 5: to the rest of the public probably won't be known
Speaker 5: for a while. And where we expect to see problems
Speaker 5: occur would be in the fail numbers. So if if, if,
Speaker 5: if I have to, if I'm a European, if I
Speaker 5: go back up, I'm Aberdeen, and I have to pay
Speaker 5: for Apple and the US and my payment doesn't come
Speaker 5: in two things Leiter happen. One is that I'll have
Speaker 5: to borrow cash from my bank, in which case we
Speaker 5: may never know about it because it's it'll just be
Speaker 5: wind up being a loan from X y Z bank
Speaker 5: to Aberdeen. Or two, the securities will fail and then
Speaker 5: the fail numbers come out on a delayed basis, so
Speaker 5: we won't know what the fails wind up going up
Speaker 5: for a couple of weeks. And so that's where and
Speaker 5: so and the third issue is that if all hell
Speaker 5: breaks loose and we have a real problem, that'll be
Speaker 5: known in the back offices before anything. And the question is,
Speaker 5: you know what kind of transparency will we get out
Speaker 5: of it. Maybe we'll know some stuff from the Federal
Speaker 5: Reserve if things go drastically awry, or the d DCC,
Speaker 5: your CEFMA. But they're going to have to They're gonna
Speaker 5: have to publish that information. It's not like something that
Speaker 5: we could see on a screen on the Bloomberg screen, right,
Speaker 5: A lot of that stuff is fairly private data.
Speaker 1: All right, Larry, We're gonna to leave it there. Great stuff.
Speaker 1: Larry tab head of market Structure Bloomberg Intelligence. He is
Speaker 1: on top of He is the leading voice in the
Speaker 1: marketplace a back all these markets actually work. This is Bloomberg.
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Speaker 2: Just say Alexa, play Bloomberg eleven thirty Alex.
Speaker 1: This is how it was described to buy. Our next
Speaker 1: guest to me the first time I met him. The
Speaker 1: biggest company you never heard of?
Speaker 4: For me?
Speaker 1: Love that My man was I this is a fifty
Speaker 1: billion this is Arthur J. Gallagher and Company. It's an
Speaker 1: insurance company. I don't anything about insurance, and maybe that
Speaker 1: has some something to do with it. But it's fifty
Speaker 1: four billion dollars in market cap. I mean, it's up
Speaker 1: ten percent this year of the stock, up twenty three
Speaker 1: percent over the trailing twelve months. It just up into
Speaker 1: the right every year. Why haven't I paid it more
Speaker 1: attention to this one? But thank you.
Speaker 6: It's like a family business.
Speaker 4: I know.
Speaker 1: Great grandfather Pac Allagher joins this year, great grandson of
Speaker 1: the founder. He's the chief executive officer of Gallagher Insurance.
Speaker 1: Pat talk to us about your company. You're based on Chicago.
Speaker 1: Talk to us about a typical customer of yours and
Speaker 1: a typical piece of business you do for your customers.
Speaker 1: What are you guys really focusing on these days?
Speaker 4: Well, first of all, pall we're not an insurance company,
Speaker 4: so we don't take risks. We're insurance programs.
Speaker 1: So much rights.
Speaker 4: And it was my grandfather start of the company, not
Speaker 4: my great grandfather. But anyway, every single day we get
Speaker 4: up and we talk to customers about what the things
Speaker 4: are that they are facing them that could cause real
Speaker 4: disaster in their business. So this can be a business
Speaker 4: as large as any of the largest companies in America
Speaker 4: with professional risk management staff, all the way down to
Speaker 4: the smallest of companies that you know in neighborhood, and
Speaker 4: each of these businesses faces all kinds of complex risk
Speaker 4: that's becoming more complex as we sit here. We never
Speaker 4: ever thought of cyber ten years ago. Cyber is a
Speaker 4: huge risk. Everybody's concerned about it. I tell our production
Speaker 4: for us, if you're talking to the largest company in America,
Speaker 4: or you're talking to someone who owns nothing more than
Speaker 4: a sundry shop, they've got to be concerned about this.
Speaker 4: And now you add AI to that, and so you
Speaker 4: see the world everywhere. On top of that, of course,
Speaker 4: you've got climate change and weather related issues that are
Speaker 4: happening across the world, which is one of the reasons
Speaker 4: why you see such a difficult time, for instance, getting
Speaker 4: homeowners insurance in places like southern southern Florida. The point
Speaker 4: is that every single company, every single organization out there,
Speaker 4: faces these risks. What do they do with them. Insurance
Speaker 4: plays one role. The other part of a broker's role
Speaker 4: is to say, there's some things that aren't ensurable, Now,
Speaker 4: how do we deal with that? What are the things
Speaker 4: we do to help you control that. So we look
Speaker 4: at a full spectrum of risk for a client and say,
Speaker 4: these are the things that we can do to help
Speaker 4: you deal with that as you go forward, and that
Speaker 4: is incredibly valuable. We have a survey that we're just
Speaker 4: finalizing the details on now. We talked to about one
Speaker 4: thousand business owners across America and it's interesting to me
Speaker 4: because it really is a finger on the pulse. They're
Speaker 4: very concerned about weather related issues. Oh yeah, weather has
Speaker 4: all of a sudden gone from something that's important on
Speaker 4: the coasts to something that's important everywhere. I mean, I
Speaker 4: grew up in the Midwest. We never had tornadoes in
Speaker 4: the fall. Now that's normal. So just unfortunately a week
Speaker 4: ago in Iowa there was a terrible school So people
Speaker 4: are worried about that. They're worried about tech.
Speaker 6: So how many how many? So what kind of customers
Speaker 6: come to you and you say and they're like I
Speaker 6: can't get coverage on this, or like I need coverage
Speaker 6: on this, but I can't get it, or how has
Speaker 6: that conversation evolved just in the last five years.
Speaker 4: Oh, it's huge, So let's let's first of all, a
Speaker 4: big part of what we do is help people take
Speaker 4: their own risk. So that can take the form of
Speaker 4: a large client creating a self insured platform where we
Speaker 4: ensure excess of large deductibles. It can also go on
Speaker 4: all the way to the middle market where groups band
Speaker 4: together to form captive insurance companies. So the first the
Speaker 4: first line of defense, of course, is to look at
Speaker 4: all this and say what's insurable. Okay, you've got plants
Speaker 4: in Iowa, You've got plants in Naples, Florida. How's that
Speaker 4: going to shake out? What's that going to look like. Secondly,
Speaker 4: you've got workers. You have to ensure the worker's compensation.
Speaker 4: Those types of things you check off the list first.
Speaker 4: Then you come back and say, these things either shouldn't
Speaker 4: be or can't be insured. And there, Alexis really is
Speaker 4: really the point of differentiation, because that's where we bring
Speaker 4: an expert in to your point. If you ask anybody
Speaker 4: out in the marketplace, not everything's insurable. Who's going to
Speaker 4: help me? If you happen to be a builder. That's
Speaker 4: a different answer than if you happen to be a school,
Speaker 4: school district or university. So you have to have people
Speaker 4: that talk that language, and that is really what differentiates us.
Speaker 4: It's not just about quoting insurance.
Speaker 1: And you're a global business. Talk to us about the
Speaker 1: business here in the US versus maybe some of the
Speaker 1: other bigger markets outside the US.
Speaker 4: So we are global business. We like to say that
Speaker 4: any account of any size, located anywhere in the world,
Speaker 4: we can do and we can be helpful too. If
Speaker 4: you look at the United States, though, we have a
Speaker 4: very interesting business here in that it's incredibly fragmented right now.
Speaker 4: We have thirty thousand competitors. Those aren't people, those are firms.
Speaker 4: So in your local community, you know, you drive by
Speaker 4: main Street and you'll see Jones Insurance that's a competitor
Speaker 4: of ours. So it goes from those thirty thousand in
Speaker 4: business insurance, the top one hundred went all the way
Speaker 4: down to thirty five million, thirty six million in revenue.
Speaker 4: We did about ten billion last year and the other
Speaker 4: twenty nine nine hundred are smaller than that. So it's
Speaker 4: just incredibly fragmented business with professionals of all sizes and
Speaker 4: sorts around the country. That we have a very strong
Speaker 4: platform of acquisitions and we bring those people in, we
Speaker 4: don't want them to leave us. We feel that one
Speaker 4: plus one can equal five. Paul, you're in your community,
Speaker 4: you know your people. You're very good at insurance. But
Speaker 4: when we bring our capabilities in, when we bring our
Speaker 4: data and analytics. Now that big account in town, that
Speaker 4: large contractor the large university that you knew you had
Speaker 4: to stay away from, let's go get it together. And
Speaker 4: if that energizes you, you'll be a great fit for
Speaker 4: our acquisition team.
Speaker 1: You're going to sell insurance, No, but it's people I
Speaker 1: know that so insurance do fair very well. And you
Speaker 1: spend a lot of time on the golf course too,
Speaker 1: which I don't figure out that business.
Speaker 4: Oh ok, yeah, we are recruiting Paul.
Speaker 1: By the way, I think exactly what is a typical
Speaker 1: acquisition for you guys. Is there a typical size you
Speaker 1: like or is there a typical revenue.
Speaker 4: Number you like? Well, we're not afraid to do large deals,
Speaker 4: and in the last ten years we've done a number
Speaker 4: that have reached that billion mark and we're very proud
Speaker 4: of that. But really if you go back to my
Speaker 4: comment about size of the availability in the United States,
Speaker 4: and this is mirrored globally. Most of the people who
Speaker 4: are out there that are private are smaller. And by
Speaker 4: that I mean our average acquisition size is probably somewhere
Speaker 4: around ten million in revenue. Okay, it's probably owned by
Speaker 4: two or three entrepreneurs, may have started at their dining
Speaker 4: room table, or their parents may have started it. They've
Speaker 4: grown the business to a great size for them in
Speaker 4: their local community. To your point, Paul, they make a
Speaker 4: very good living, and yet at the same time, if
Speaker 4: they want to stay in touch with what's happening in
Speaker 4: the future, AI, cyber data analytics, et cetera, they need
Speaker 4: a partner. And that's what we bring. And again back
Speaker 4: to the point that we don't synergize out costs and
Speaker 4: say come in here, get rid of everybody. We just
Speaker 4: want your book of business. We want to take that
Speaker 4: platform and really expand it.
Speaker 1: That thirty seconds left, Pat, just how's your year been
Speaker 1: so far?
Speaker 2: Years?
Speaker 4: Looking great? Thank you very much. The last five years
Speaker 4: have been terrific, and we look at the future and
Speaker 4: we're just getting started.
Speaker 1: All right, sounds good to me. The insurance business is
Speaker 1: a good business. They all tell me that, but I
Speaker 1: just don't understand it.
Speaker 3: To be honest, I buy a lot of it. Yeah,
Speaker 3: I was gonna say, we buy a lot of it.
Speaker 3: This is very true.
Speaker 1: Yeah, I thought a lot of Pat Gallagher. He's the
Speaker 1: chief executive officer of Gallagher Insurance. Joining Slive here on
Speaker 1: a Bloomberg Interactive Brokers studio. Again, this is a large
Speaker 1: insurance brokerage firm, so I have to make sure I
Speaker 1: get that correct. Matt Palosol always on top of me
Speaker 1: about that. But I'm just looking at the revenue. Ten
Speaker 1: billion dollars of revenue, so it's just really extraordinary.
Speaker 2: You're listening to the Bloomberg Intelligence podcast. Catch us live
Speaker 2: weekdays at ten am Eastern on fo card playing Android
Speaker 2: outo with the Bloomberg Business app. Listen on demand wherever
Speaker 2: you get your podcasts, or watch us live on YouTube.
Speaker 1: All right, let's check in with guy. He's pretty good
Speaker 1: on tech Space, He's okay, he's not bad. On Rock
Speaker 1: run our senior technology anelsts for Bloomberg Intelligence. On Rock,
Speaker 1: I was kind of paraphrasing what I think you're gonna
Speaker 1: say about this report that you know their iPhone shipments
Speaker 1: are up at gajillion percent here in the latest period.
Speaker 1: But talk to us about this data coming out of China.
Speaker 1: How reliable is it and how predictive is it? And
Speaker 1: if it's up fifty percent in the latest period, why
Speaker 1: isn't Apple stock up a lot more today?
Speaker 3: Yes, that's a very good question, Paul, And again I
Speaker 3: have nothing against the people who collect this data and
Speaker 3: figure it out, but this is the way I looked
Speaker 3: at it. In jan and Feb this data was down
Speaker 3: I think minus thirty five minus forty percent or so,
Speaker 3: and then when Apple reported their quarter, they said, you
Speaker 3: know what, mainland China, our iPhone revenue grew. So there
Speaker 3: is not that direct correlation between the two numbers. And
Speaker 3: it could be because there are times when Apple you know,
Speaker 3: sells phone, but it's stuck in the inventory channel in between.
Speaker 3: Then they put out a sale and then gets cleared up.
Speaker 3: So it's a question of timing not so much. But
Speaker 3: the big thing for us is that there is there
Speaker 3: was a downdraft of negative news coming out of China.
Speaker 3: It's turned positive two months in a row, so that's
Speaker 3: a good news. Seems more like a cyclical issue to me.
Speaker 3: Than a structural problem people giving away Apple phones not
Speaker 3: buying it, So that's not the case. So that's a
Speaker 3: good news. So I think, you know, from an overall
Speaker 3: point of sentiment point of view, I think this is
Speaker 3: good news for Apple that China, which in our view
Speaker 3: is the most important market for them over the next
Speaker 3: three to five years, and we are not going to
Speaker 3: see you know, let's say eurobar declining share. I think
Speaker 3: it's it's going to be okay over the next few years,
Speaker 3: even if it goes ups and down. So that's really
Speaker 3: the big takeaway for us. DAR.
Speaker 6: So can I call this a nothing burger? No, that's
Speaker 6: not true because I say that because you didn't hear it.
Speaker 6: But Paul was guessing you would call this data a
Speaker 6: nothing burger. But you're being too polite about it.
Speaker 3: I think done a wrong So sentiment vice think about it.
Speaker 3: The only thing that we've been hearing for almost a
Speaker 3: year now that people don't want to buy iPhones in China,
Speaker 3: it's because of the government and nationalism and so many
Speaker 3: all things. And I think this one tells us that's
Speaker 3: not the case. People are strapped for cash and if
Speaker 3: they get a good deal on a phone, they'll buy it.
Speaker 3: So what do I expect. I expect Apple to go
Speaker 3: out and do more promotional activities over the next few
Speaker 3: months to try and sell more products into the market. Now,
Speaker 3: not every market is different. Apple's not known to give
Speaker 3: a lot of discounts globally, but if that's what they
Speaker 3: have to do in China, that's what.
Speaker 5: They have to do, all right, fair enough.
Speaker 6: But let's go to the discounts though for a second.
Speaker 6: So even if we don't say, take this data as gold,
Speaker 6: but just directionally, Apple and discounts tend not to go together,
Speaker 6: at least in my mind. What do you make of that?
Speaker 3: Yeah, I think this is a new thing for Apple,
Speaker 3: and again they're probably grinding their teeth and not liking it.
Speaker 3: But you know what, they have the rest of the
Speaker 3: world to make up for it. In the US, for example,
Speaker 3: people are liking to buy the higher end model, the
Speaker 3: pro model. That helps margins, that helps the adage selling price.
Speaker 3: So if they have to give a little bit up
Speaker 3: to gain market share in China, I think they should
Speaker 3: do it because you don't want to be branded as
Speaker 3: somebody a second player in China out there, which is
Speaker 3: you know, in our view, the most important market for
Speaker 3: growth for Apple. Otherwise what's going to happen is you're
Speaker 3: not going to see any growth in China. For that matter,
Speaker 3: their top line growth is not going to grow, and
Speaker 3: that's not good for the stock. Also, and ra' talk to.
Speaker 1: Us about India. What is it as a percentage of
Speaker 1: Apple's business today and what do you think it can
Speaker 1: be five, six, seven years from now.
Speaker 3: Yeah, so in our view, apples very small, less than
Speaker 3: five percent. In fact, when you we have done a
Speaker 3: lot of work on the number of shipments in India,
Speaker 3: Apple's market share is you know, less than five percent.
Speaker 3: But here's the kicker. Ninety five percent of the phones
Speaker 3: don't even qualify for to be in the Apples you
Speaker 3: could say ecosystem, which means they're under three hundred dollars.
Speaker 3: As the Indian economy grows, as the middle class becomes
Speaker 3: more affluent, I think Apple's going to be a winner
Speaker 3: over here. But think about it this way. When we
Speaker 3: look at the US with per capita income of let's
Speaker 3: say sixty five seventy thousand dollars, somewhere in that realm,
Speaker 3: China is around twelve and a half thousand dollars. India
Speaker 3: is about two thousand, twenty five hundred dollars. So when
Speaker 3: you look at these three ecosystems, I think I think
Speaker 3: when we look at that growth driver from five years onwards,
Speaker 3: that's where you know, India comes in and there's a
Speaker 3: massive market there for Apple. But that's not going to
Speaker 3: happen next year or the.
Speaker 6: Year after, right, that's sort of a structural change, et
Speaker 6: cetera in the market. I don't round what else are
Speaker 6: you working on right now?
Speaker 3: I think the biggest thing right now is what happens
Speaker 3: at WWDC and whether that's going to be enough to
Speaker 3: sustain this. You know, I would say optimism that we
Speaker 3: have seen in Apple for the first time, I would
Speaker 3: say in the last eighteen months, because we all knew
Speaker 3: China was a problem. We saw that in the numbers,
Speaker 3: sales numbers and not very strong. But AI has that
Speaker 3: outside potential to go out and spur the next sale
Speaker 3: off phones. Why because there is a massive amount over
Speaker 3: forty three percent of the phones our iPhone twelve and below,
Speaker 3: which is old phones with lower you know, you could
Speaker 3: say RAM, memory and other things. Now for if they
Speaker 3: go out and say I have really cool features coming
Speaker 3: into the phone, you got to go find a way
Speaker 3: to upgrade it. Now, if some he has a fourteen
Speaker 3: or a fifteen, they're most likely not going to upgrade it.
Speaker 3: But if you have something and I can iPhone ten,
Speaker 3: iPhone eleven, there may be a reason enough for you
Speaker 3: to upgrade it. So that really brings a new fresh
Speaker 3: you could say life and Apple, and that's really important.
Speaker 3: On June tenth, when they get this developer conference.
Speaker 1: All right, I'm sitting on an Apple iPhone eleven. When
Speaker 1: do I upgrade?
Speaker 3: You should update it in the winter when the sixteen
Speaker 3: comes out or whatever the name they give that phone,
Speaker 3: because it should have a faster processor, it should have
Speaker 3: a lot more memory. They'll just make things easier for you.
Speaker 3: You can watch your golf shows in a little bit
Speaker 3: easier way.
Speaker 2: Very good.
Speaker 1: Now, Tim Cook's sixty three, I'm gonna s whitch gears
Speaker 1: on you? Is there any push for this guy to
Speaker 1: put out a succession plan of note or things just
Speaker 1: going so well at Apple that nobody's pushing for that.
Speaker 3: See, Tim's done well. The Apple's done very well under Tim.
Speaker 3: I have no way of predicting what he's going to leave,
Speaker 3: but I really I mean, in my view, if you
Speaker 3: were to somehow ring fence the China business. Apple alone
Speaker 3: is a company that I think, you know, can do
Speaker 3: can do good by itself. It doesn't really need a
Speaker 3: massive charismatic leader in order to you know, come up
Speaker 3: with that. This is a company with a global brand,
Speaker 3: the products people love, people trust the products, and the
Speaker 3: install base is very loyal. I mean, we think somewhere
Speaker 3: in the mid nineties people can keep the phones. They
Speaker 3: don't go out and change into a new ecosystem. I
Speaker 3: think this is a phenomenal business. But you know, you
Speaker 3: do need certain innovation, but not to the level you
Speaker 3: need in other technology companies now.
Speaker 6: But I wonder if you just need a really good
Speaker 6: China ambassador within that company.
Speaker 3: Yeah, I mean Tim's has been. Tim has been an
Speaker 3: amazing China ambassador. If you go back, even the days
Speaker 3: when we had China Tarraff wars, Apple really you know,
Speaker 3: skated unhurt from there. Now. The only issue we have
Speaker 3: been having in the last two three years is supply
Speaker 3: chain problems in China because of COVID. Then after that
Speaker 3: the consumers slow down and then a little bit negative
Speaker 3: you know, you could say fights between the US and
Speaker 3: China and that has had an impact on Apple. But
Speaker 3: you know, in our view, if there is there is
Speaker 3: the way to ring fact that I would say risk.
Speaker 3: You know, Apple, Apple is a good company to look.
Speaker 1: At all right, Honro, thanks so much for joining us
Speaker 1: on a rock run a senior technology anaels Bloomberg Intelligence.
Speaker 1: Just looking at the FA function for Apple revenue, the
Speaker 1: forecast for their September twenty fourth or fiscal twenty four
Speaker 1: year three hundred and eighty seven billion dollars of revenue,
Speaker 1: net income, one hundred and one billion dollars in free
Speaker 1: cash flow of one hundred and four billion dollars.
Speaker 3: Look a lot of money.
Speaker 6: That's like they make a lot of money.
Speaker 2: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 6: We also take a view of Bloomberg ne EF. It's
Speaker 6: Bloomberg New Energy Finance. They're a research center within Bloomberg
Speaker 6: that covers commodities, power, transport, industry, buildings, AG sectors, technology,
Speaker 6: sustainable issues, all to help businesses and companies kind of
Speaker 6: learn how they can transition as we move to net
Speaker 6: zero at some point. And today we're going to take
Speaker 6: a look at offshore wind here in the US. It's
Speaker 6: been a real nightmare, particularly here on the East Coast.
Speaker 6: In some ways it makes sense, big ocean, lots of wind.
Speaker 6: Stick a turbine in there, boom you have renewable power.
Speaker 6: The issue, though, is many of the issue has been
Speaker 6: in pricing. The contracts that were signed didn't account for
Speaker 6: the massive amount of inflation that we've seen in the
Speaker 6: last couple of years, and a lot of projects have
Speaker 6: then been canceled. So the question really is what happens now,
Speaker 6: particularly as inflation comes down. Oliver metcalf is head of
Speaker 6: Wind research at BNF and he joins US now in
Speaker 6: the Interactive Brokers studio. Ali, thanks for joining me, appreciate
Speaker 6: thanks for having me on. So I just sort of
Speaker 6: set up with the problem was where are we now
Speaker 6: with that?
Speaker 7: Well, it's been a difficult last twelve months for the
Speaker 7: US off your wind industry. We saw around nine gigawatts
Speaker 7: of off take contracts, so contracts for the generation of
Speaker 7: these projects get canceled. That's around a third of the
Speaker 7: contracts that were signed in total for the US off
Speaker 7: your Wind pipeline. You mentioned there it was because the
Speaker 7: high inflation, high interest rates have really hit the technology
Speaker 7: as well. So it's a really capitally intensive technology and
Speaker 7: so a higher cost of financing hits off your Wind
Speaker 7: especially hard compared with other technologies. We're beginning to see
Speaker 7: a bit of a turning of the fortunes. So we're
Speaker 7: seeing the first couple of commercial scale off your wind
Speaker 7: projects start to come online in the US. One has
Speaker 7: already come online off the coast of New York, and
Speaker 7: one that will feed Parento Massachusetts is under construction at
Speaker 7: the moment. So some good stories beginning. And we're also
Speaker 7: seeing states willing to adjust this obvioslete mechanisms to account
Speaker 7: for some of the pain that projects have been feeling recently.
Speaker 7: So offer developers more protection in the contracts they off take,
Speaker 7: contracts they're offering, and just simply higher prices that these
Speaker 7: these developers need to make their return.
Speaker 1: So talk to us about just wind research. How is
Speaker 1: wind I'm sorry, wind power? How is that from an
Speaker 1: efficiency perspective versus solar and versus other stuff that's out there.
Speaker 1: How competitors is wind.
Speaker 7: So you get kind of higher productivity from a wind
Speaker 7: turbine compared with a solar panel and that and that's
Speaker 7: even more productive offshore, and so offshore wind you have
Speaker 7: more consistent, more consistent wind speeds, stronger winds as well.
Speaker 7: So that means kind of if you imagine a wind
Speaker 7: turbine operating one hundred percent of the time, that's kind
Speaker 7: of the theoretical maximum. You can get between forty to
Speaker 7: sixty percent of that generation typically on a wind project.
Speaker 7: Now that sixty percent isn't too far off the kind
Speaker 7: of percentage we could see from a kind of conventional generator,
Speaker 7: a gas or a cold plant.
Speaker 6: Oh really, what about like nuclear? It's a nuclear a
Speaker 6: lot better than that.
Speaker 7: Nuclear is much harder to ramp up and down, and
Speaker 7: so they tend to operate completely as base loads. So
Speaker 7: you get really high what we call capacity factors for nuclear.
Speaker 7: So it's operating almost all the time if it's if
Speaker 7: it's part of the mix.
Speaker 6: So you mentioned so part of the issue is the
Speaker 6: off take contract. So basically, if I'm a developer, you know,
Speaker 6: Paul goes and says, okay, I'm gonna buy this win
Speaker 6: from you for this amount of time. He's going to
Speaker 6: pay me this, which gives me clarity on the how
Speaker 6: I can go and invest that money. But my costs
Speaker 6: go up and I'm kind of left naked at that point.
Speaker 6: How is that being resolved? You mentioned subsidies, but like
Speaker 6: what else? Because that gap is very unpredictable. And I
Speaker 6: remember talking to Siemens North America ahead about that and
Speaker 6: they're like, we took on all the commodity risk and
Speaker 6: they're trying to change that now because they're not commodity traders.
Speaker 3: But like, how do you do that?
Speaker 4: Well?
Speaker 7: Yeah, that is that unpredictability that hit developers especially hard.
Speaker 7: So in the previous contracts, there's ones I was talking
Speaker 7: about the got canceled. There was very little adjustment in
Speaker 7: the contract price to account for moving commodity prices to
Speaker 7: account for inflation. So that's the kind of thing that
Speaker 7: states are building into these contracts now to kind of
Speaker 7: better share the risk between a state which is buying
Speaker 7: the power and the developer that's building the project. So
Speaker 7: we're seeing kind of these prices getting index to CPI
Speaker 7: for example, to certain kind of producer price indexes and
Speaker 7: to certain commodity prices to make sometimes a one time
Speaker 7: adjustment from when you agree to that price to when
Speaker 7: you're actually securing finance, and sometimes you see that adjustments
Speaker 7: accounting for inflation right throughout the life.
Speaker 3: Of the project. That's interesting.
Speaker 7: That's the kind of structure we see in lots of
Speaker 7: other countries that have managed to build large scale off
Speaker 7: your wind projects globally, and so yeah, from the off
Speaker 7: your wind industry's perspective, it's good to see that happening
Speaker 7: in the US as well.
Speaker 1: Talk to us about you mentioned the project off the
Speaker 1: coast of New York. Talk to us about the economics.
Speaker 1: How much does it cost to build that thing? Hoop
Speaker 1: hate for it, and just the economics.
Speaker 7: So that is a project called South Fork. It was
Speaker 7: the kind of the first commercial scale offshore wind project
Speaker 7: in the US that was significantly more expensive than a
Speaker 7: project we expect to see getting installed today. That's partly
Speaker 7: because it was it was almost like a proof of concept.
Speaker 7: So up until then, there are only seven operational offshore
Speaker 7: wind turbines off the coast of the US so far.
Speaker 7: So this is the first kind of larger scale project
Speaker 7: for one of the newer projects you're probably looking between
Speaker 7: two point eight to three billion dollars for a one
Speaker 7: gigawap project, which is a really big off your wind firm,
Speaker 7: almost ten times the size of that early kind of
Speaker 7: commercial scale project that just came off the coast of
Speaker 7: New York. So these are a really sizeable infrastructure investments.
Speaker 6: Yeah, what part is the hardest? Because it seems to
Speaker 6: me that you know, moving the energy from offshore to
Speaker 6: the grid on land, like you kind of like build
Speaker 6: a transmission line for that, Like that seems really hard
Speaker 6: and dangerous. And then I also hear of the transmission
Speaker 6: plug shortages, so basically the thing you need to actually
Speaker 6: plug that wind into the grid, there's a shortage of that,
Speaker 6: and then you've got to build it. And there's all
Speaker 6: the raw material costs that come at actually building the turbine.
Speaker 6: Where's the biggest price increases?
Speaker 7: Well, I mean we saw a lot of price increases
Speaker 7: across the board over the last couple of years. Actually,
Speaker 7: when you look at a lot of commodity prices that
Speaker 7: are important for manufacturing of wind turbines, cables, that kind
Speaker 7: of thing, a lot of those raw material costs have
Speaker 7: come down. What we've seen is turbine prices have remained
Speaker 7: stubbornly high. Wind turbine makers were hit just as hard
Speaker 7: by rising costs, rising inflation, and many of them were
Speaker 7: having to deliver on contracts said signed at cheaper rates
Speaker 7: in this higher priced environment. So that means many of
Speaker 7: the kind of major wind turbine makers have suffered a
Speaker 7: lot over the last couple of years, and so they're
Speaker 7: maintaining higher prices to kind of have a bit of
Speaker 7: a buffer on their margin, trying to regain kind of
Speaker 7: stronger margins. But that means that developers are left paying
Speaker 7: higher prices for the turbines despite the fact that some
Speaker 7: of these input costs have started coming down.
Speaker 1: Who makes these big tribune things in the ocean, So.
Speaker 7: That's companies like Vestas Seamen's Energy. Ge is a big
Speaker 7: US player and so those I recently spun out. I
Speaker 7: mean so also it is one of the one of
Speaker 7: the companies that builds builds the project, so one of
Speaker 7: the biggest project developers globally. But there'll be the guys
Speaker 7: putting in the orders with your likes of Vestas Gemen.
Speaker 1: I mean, how do you build these things? I mean,
Speaker 1: how do you install them?
Speaker 3: Difficulty difficult. It's tough.
Speaker 1: Build them on land, ship them out there, then just
Speaker 1: plug them in the sand. I mean, how does this work?
Speaker 7: So most of what's getting built at the moment is
Speaker 7: bottom fixed off your wind. So you go out there,
Speaker 7: you build a foundation that's fixed to the seabed, and
Speaker 7: then you come out and you build the turbine on
Speaker 7: top of that. So you build up the tower and
Speaker 7: then component by component kind of build the big fan.
Speaker 3: You can see at the top, I know.
Speaker 6: And then also how do you then that question is
Speaker 6: like if something happens and it gets broken, like how
Speaker 6: do you fix it? Like what's it like when you
Speaker 6: go off shore? I mean, what happens when one of
Speaker 6: these things dies? Just like what's the shelf life of
Speaker 6: a turbine? And how do you recycle it?
Speaker 5: I don't, we haven't.
Speaker 3: We don't know that yet.
Speaker 7: Yeah, well, well going to your question on what happens
Speaker 7: when it goes wrong or how you construct it. You
Speaker 7: need really specialized vessels to build these things. So they
Speaker 7: call them jack up vessels. So their vessels that kind
Speaker 7: of have legs that they they extend down into the seabed.
Speaker 7: Jacks up the vessels, So it's sitting kind of above
Speaker 7: the water, so you've got a solid platform by which
Speaker 7: to install the components, or if something goes wrong, to
Speaker 7: send it out there, take off one of the components
Speaker 7: and replace it with a fixed one. But these are
Speaker 7: really specialized vessels. They cost a lot of money to build.
Speaker 7: Our estimates around three hundred to five hundred million dollars,
Speaker 7: and there's a shortage of these things globally at the
Speaker 7: moment to kind of specialized vessels to install the foundations
Speaker 7: and then and then the turbines. So if you're a developer,
Speaker 7: you're struggling to find those slots where you can secure vessels.
Speaker 7: And if something goes wrong on a recently installed project
Speaker 7: with one of these big, big new turbines, then you
Speaker 7: might struggle to get a vessel to come in and
Speaker 7: do that, do that replacement work.
Speaker 1: Oh cool, Yeah, I mean those engineer people, I don't
Speaker 1: understand them. They're different.
Speaker 6: I mean, it's amazing. Yeah, that's amazing, and we think
Speaker 6: it's all such an easy fix and it's most definitely not. Ali.
Speaker 6: Thanks a lot, Ali, Markalf he's joining us head of
Speaker 6: win research over at you know those super interesting Thank
Speaker 6: you so much.
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