TSLA - China's Global Leadership Is Slowly Slipping
Summary
- The debate about globalization will be interesting as companies increasingly seek alternatives to China and return to more domestic suppliers to solve their global supply chain glitches.
- The EV earthquake from Tesla’s price cuts is still reverberating, and it will be interesting to see if domestic EV sales will be stimulated by lower prices.
- Retail sales declined by a shocking 1.1% in December, and November’s retail sales were revised lower to a 1% decline (from -0.6% previously reported), so 2022 ended on a very weak note and December marked the biggest monthly drop in the year.
- Treasury yields declined substantially in the wake of the December retail sales report. As a result, there is growing optimism that inflation will continue to decline, and the Fed may stop raising interest rates after its February 1stmeeting.
The debate about globalization (at Davos and elsewhere) will be interesting as companies increasingly return to more domestic suppliers to solve their global supply chain glitches. Although local sources may be more expensive, supply chains are now less global than just a couple of years ago, due to safety and security concerns. Canada and Mexico have emerged as the biggest winners from supply chains moving away from China. The biggest winners in Asia are India, South Korea, Taiwan, Thailand, and Vietnam, which are all experiencing rising export growth as manufacturing centers seek alternatives to China.
Interestingly, the International Monetary Fund ((IMF)) warned that declining global trade could shrink global economic growth, but other than China and Russia, many other economies seem to be benefitting from new supply chains being diverted to India, Mexico, Taiwan, Thailand, Vietnam, and other countries.
Complicating matters further for China, its population actually declined in 2022 by 850,000 people to 1,411,750,000 (from 1,412.6 billion in 2021) as deaths outpaced births. This demographic problem is attributable to the after-effects of China’s one-child policy, imposed in 1980 and enforced for decades. It was replaced in 2016 by a two-child limit. China’s birth rate in 2022 was the lowest in seven decades.
India’s population now stands at 1.4066 billion and is expected to pass China this year. What’s more, China’s GDP grew by only 3% in 2022, the lowest in decades, while India’s GDP is forecasted to have grown 7% in 2022. India is now replacing China as a stronger Asian economy for the foreseeable future.
Also last week, U.S. Treasury Secretary Janet Yellen and Liu He, a senior Chinese economics official, met on Wednesday in Zurich. After a three-hour meeting, both parties said that it was “important for the functioning of the global economy to further enhance communications around macro-economic and financial issues.” Secretary Yellen added that she “looks forward to travelling to China” and welcoming her Chinese counterparts in the U.S. Secretary Yellen then headed off for a tour of Africa to strengthen U.S. influence there. Since China has invested heavily in Africa, I suspect that China wants to manage Yellen’s expectations. U.S. diplomatic ties with China were abruptly suspended after Nancy Pelosi visited Taiwan, but they are now being reestablished with the leadership change in the House. Ironically, the Biden Administration has been mostly following the Trump Administration’s trade policies with China.
The Wall Street Journal last week had a great article about how major Chinese infrastructure projects, like hydroelectric dams in Ecuador, Pakistan, and Uganda, are falling apart due to cracks in the concrete. Since most of these major projects are debt-financed, defaults are increasingly likely. As a result, China’s infrastructure projects in Africa, Latin America, and other countries are becoming increasingly scrutinized.
The EV “Earthquake” from Tesla’s Price Cuts Continues
The EV earthquake from Tesla’s ( TSLA ) price cuts is still reverberating, and it will be interesting to see if domestic EV sales will be stimulated by lower prices. Tesla effectively sent a “kill shot” out to the entire automotive industry with its EV price cuts, so it will be interesting to see how long Tesla will remain the EV leader. Interestingly, the #2 leader in U.S. sales, namely Ford ( F ), has collaborated with VW ( VWAGY ) in Europe to make EVs based on VW’s electric “MEB” platform that utilizes VW-sourced batteries for Ford’s Cologne plant in Germany. Ford and VW formed an alliance in 2020 to join forces on EVs, self-driving technology, and commercial vehicles. However, Ford and VW recently stopped their joint work on driverless cars after the closure of the Argo AI business. Although Ford will build VW’s next delivery van, a pickup truck, and a future electric van, Ford is open to other collaborations, including with VW.
By the way, my family finally got our Audi e-tron back after five months’ hiatus due to two bad battery cells. Although the e-tron was running well, we sold it due to fears that other battery cells may soon fail and the vehicle would be grounded again. I also noticed that due to Tesla’s price cuts, both Audi and Porsche dealers were eager to sell us their new EVs. They seemed to suddenly have sufficient inventory.
The next interesting development in the EV world pertains to Tesla’s massive giga presses, which it has installed in its new factories in Austin, Texas and Berlin, Germany. Essentially, the EVs from these factories have fewer body panels and so should be more reliable. The real question is: Do these massive giga presses make manufacturing cheaper? Virtually all major automakers make their vehicle bodies with robots that weld and glue body panels together, so I am not sure Tesla’s giga presses are an advantage.
I should add that stock prices for Ford, Toyota ( TM ), and VW Group all declined in the wake of Tesla’s price cuts, but are now near-term buys, since they are all profitable and represent serious competitors for Tesla.
The Wall Street Journal reported last week that EV sales in 2022 surged to approximately 11.02 million vehicles, led by China with 6.798 million, Europe with 2.245 million, the U.S. with 1.098 million, and other markets with 879,000. China is the clear leader, but the U.S. will dominate pickup trucks and other truck designs, like Tesla’s Cybertruck that appears to be designed for an Apocalypse. Ford currently has the lead on pickups with the F-150 Lightning, while VW has the lead on vans with the ID. Buzz. Porsche is expected to sell many Macan EVs in 2024, when it makes its top-selling SUV electric. Hyundai Motor ( HYMLF , HYMTF ) is currently 3 rd in U.S. EV sales and is expected to sell lots of SUV EVs, due to its joint venture with Kia.
Interestingly, Germany’s EV sales surged in December, since the government price incentive of 6,000 euros dropped to 4,500 euros in 2023, so analysts expect EV sales to temporarily stall now. However, Tesla’s recent price cuts and growing inventories may stimulate EV sales. Otherwise, the EV glut will continue to grow and an industry shakeout of unprofitable players, like Lucid ( LCID ) and Rivian ( RIVN ), may ensue.
The Latest U.S. Economic Indicators Point to a Possible Recession
The Commerce Department on Wednesday announced that retail sales declined by a shocking 1.1% in December, and November’s retail sales were revised lower to a 1% decline (from -0.6% previously reported), so 2022 ended on a very weak note and December marked the biggest monthly drop in the year.
Sales at bars & restaurants, which were strong in November, dropped 0.9% in December. Also notable is that vehicle sales declined 1.2% in December, while sales at gas stations declined 4.6% due to lower fuel prices. The only minuscule pocket of strength was that building materials sales rose 0.3% in December. Core retail sales, excluding auto sales, gasoline, building materials, and food services, declined 0.7% in December and -0.2% in November. So essentially, there are no longer any significant pockets of strength in the retail sales report, so the Fed succeeded in its destruction of demand in U.S. consumer spending.
Speaking of the Fed, on Wednesday the Fed released its Beige Book survey in preparation for its upcoming Federal Open Market Committee ((FOMC)) meeting next week. Six of the 12 Fed districts reported no change or a slight declines in economic activity, while five Fed districts reported slight-to-modest growth and one Fed district reported a significant decline in economic activity.
Ironically, the Beige Book survey said that most Fed districts benefited from a slight increase in consumer spending during the holidays, despite dismal retail sales in November and December! This is one of the problems with the data the Fed receives, since it is partly anecdotal and clearly a bit behind the latest economic data. I should add that the Beige Book’s economic data is incorporated through January 9 th .
Fortunately, unlike the Beige Book survey, the bond market responds instantly to economic data. As far as the Treasury bond market is concerned, bad news is good news, since Treasury yields declined substantially in the wake of the December retail sales report. As a result, there is growing optimism that inflation will continue to decline, and the Fed may stop raising interest rates after its February 1 st meeting.
The other reason that Treasury yields are falling is that the Labor Department on Wednesday announced that its Producer Price Index ((PPI)) declined 0.5% in December, due to a 7.9% decline in wholesale energy prices. Wholesale gasoline prices declined a whopping 13.4% in December, while food prices declined 1.2%. The PPI was substantially below economists’ consensus estimate of a 0.1% decrease. Excluding food, energy, and trade margins, the core PPI rose 0.1% in December, in line with economists’ consensus estimates. Interestingly, the wholesale price of goods declined 1.6% in December, while final demand in services rose 0.1%. In the past 12 months, the PPI and core PPI rose 6.2% and 4.6%, respectively.
The Labor Department reported on Thursday that weekly unemployment claims in the latest week declined to 190,000, down from 205,000 in the previous week. Continuing unemployment claims in the latest week rose slightly to 1.647 million in the latest week, up from a revised 1.63 million in the previous week. Weekly jobless claims continue to run below economists’ consensus expectations and are now at the lowest level since September. It will be interesting to see if the layoffs announced by Microsoft ( MSFT ) and other companies significantly impact the jobless claims data in the upcoming weeks.
The Commerce Department announced that housing starts in December declined by 1.4% to an annual pace of 1.382 million and have declined 21.8% compared to a year ago. Interestingly, single-family home starts rose 11.3% in December to an annual pace of 909,000, while multi-family home starts declined 18.9% to an annual pace of 463,000. This is the highest single-family home starts have been since last August, so there may be some life in the housing market now that mortgage rates are following bond yields lower. I should add that December building permits also declined 1.6% to an annual pace of 1.33 million and have declined 29.9% in the past year. In the wake of the poor retail sales report and housing starts data, the Atlanta Fed reduced its estimate for fourth-quarter GDP growth to a +3.5% annual pace.
The National Association of Realtors announced on Friday that existing home sales plunged 17.8% in 2022 to 5.03 million units, the lowest level since 2014. In December, existing home sales declined 1.5% to a 4.02 annual pace and are running 34% lower than a year ago. December’s monthly sales were the slowest in over 12 years (since November 2010). Clearly, the Fed has pricked the housing bubble, and it will be interesting to see if lower mortgage rates can start to stimulate existing home sales.
Finally, due to the federal government’s $31.4 trillion debt ceiling, the Treasury Department is now taking extraordinary measures to keep the U.S. government operating through June. Obviously, the federal government’s debt ceiling is going to be a political football that will be endlessly debated, so one side can try to embarrass the other side. In the end, the debt ceiling will likely be raised, so, as investors, we should not worry unless it adversely impacts Treasury bond yields.
Navellier & Associates Inc. owns Ford Motor Co. ((F)), Volkswagen Ag. ((VWAGY)), Microsoft ((MSFT)) and Toyota Motor Corp. ((TM)) in managed accounts, and a few accounts own Tesla ((TSLA)) per client request in managed accounts. We do not own Rivian ((RIVN)) or Lucid Group ((LCID)). Louis Navellier and his family own Ford Motor Co. ((F)) and Volkswagen Ag. ((VWAGY)) via a Navellier managed account. He does not own Tesla ((TSLA)), Rivian ((RIVN)), Toyota Motor Corp. ((TM)), Microsoft ((MSFT)), or Lucid Group ((LCID)) personally .
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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China's Global Leadership Is Slowly Slipping