In its latest report, I noticed Tesla didn’t specify how much of its sales were in the U.S. vs. international markets, so its precipitous drop in U.S. fourth-quarter sales (California registrations declined by 46.5% in the fourth quarter) was apparently masked by booming global business. For example, in December, Tesla sold 22,118 Model 3s in Europe, moving up to #3 in electric vehicle (EV) sales in Europe, but in the end, total sales are more important. To me, Tesla’s slumping U.S. sales the last two quarters – amid booming international sales – is a fascinating conundrum. In the meantime, Tesla’s Model Y production has commenced and should temporarily help to turn around its slumping U.S. sales in the upcoming quarters.
One big impediment is that Tesla’s Gigafactory outside of Reno failed to reduce battery costs sufficiently, which caused Tesla to switch to LG Chem batteries for its Chinese-made Model 3s. This effectively means that in the future, Tesla will have to compete with VW Group and other major manufacturers that are using LG Chem batteries. I should add that Tesla’s Shanghai plant will be closed for at least one to one-and-a-half weeks due to the coronavirus. There is no doubt that Tesla continues to win the electric car race, despite formidable competition from Audi, Jaguar, Porsche, VW, and others.
Interestingly, VW Group recently announced that it had to lay off workers and cut production at its Audi e-tron plant in Brussels, due to a shortage of key components. Automotive experts are blaming a battery shortage from LG Chem for the Audi e-tron production glitch. However, it is possible that VW Group also prioritized the much more profitable Porsche Taycan over the mass market Audi e-tron, which uses the same batteries. Another possibility is that LG Chem picked Tesla over VW Group, which would be a brilliant way to hinder a formidable competitor. In fact, Elon Musk mentioned on the Wednesday conference call that Tesla’s “major challenge is scaling up battery production” for both the Model 3 and Y. Musk added that “We have to scale battery production to crazy levels that people cannot fathom today,” saying that is “the real problem.” In the end, if Tesla has no battery advantage due to the failure of its Reno Gigafactory to sufficiently lower costs, I remain worried about Tesla’s long-term viability.
Looking forward, I cannot envision how Tesla can successfully compete long-term against lower cost manufacturers like Ford and VW Group. Ford’s Mexican-made Mach E is expected to be a big hit in 2021 and VW Group will be offering 25 electric vehicles by 2025 via its Audi, Porsche, and VW brands.
The U.S. Economic News Continues to be Positive
U.S. economic news was mostly positive last week. Although the Commerce Department announced that new home sales declined 0.4% last month, new home sales are running 23% higher in the past 12 months than a year ago as lower mortgage rates have helped boost sales. The inventory of homes for sale rose to a 5.7-month supply, but inventories remain near the lowest level in two decades, so builders are optimistic!
On Tuesday, the Commerce Department reported that durable goods orders surged 2.4% in December, due largely to a 90% surge in defense orders. This was a big surprise, since economists were expecting durable goods orders to decline 0.3% in December. Excluding defense orders, durable goods declined 2.5% in December. Also significant is that November durable goods orders were revised down to a 3.1% decline, from a 2.1% decline initially reported. Weak orders for commercial aircraft and vehicles continue to weigh down durable goods orders. Although the surge in defense orders is welcome, there is clearly a major problem in the manufacturing sector due to Boeing’s woes and a glut of vehicles for sale.
Also on Tuesday, the Conference Board reported that consumer confidence soared to a 5-month high of 131.6 in January, up from a revised 128.2 in December. The key consumer confidence components were “how consumers feel about the economy right now,” which rose to 175.3 (from 170.3 in December) and “how Americans view the next six months,” which rose to 102.5 (from 100 in the previous month). With a weak manufacturing sector, consumer confidence remains the key to growth in the upcoming months.
The Commerce Department announced on Wednesday that trade volume increased in December, although the trade deficit surged 8.5% to $68.3 billion, as tensions with China eased and imports soared. Specifically, imports rose 2.9% to $205.3 billion, while exports increased only 0.3% to $137 billion, so total trade grew from $336.1 billion to $342.3 billion in December. The only bad news is that a higher trade deficit means that economists will be cutting their estimates for fourth-quarter GDP growth.
Speaking of GDP, the Commerce Department announced on Thursday that its preliminary estimate for fourth-quarter GDP came in at a 2.1% annual pace. Consumer spending grew at a 1.8% annual pace, well below the 3.2% rate in the third quarter. Consumer spending remains the key GDP factor to watch.
As expected, the Federal Open Market Committee (FOMC) left key interest rates unchanged in their meeting last week. However, the FOMC statement said consumer spending was “moderate,” down from “strong” in its previous FOMC statement in December. The Fed also reiterated that business spending is weak, which it also said in its December FOMC statement. Interestingly, the Fed did not address the recent collapse in global interest rates, but the FOMC statement did say that it “will continue to monitor the implications of incoming information for the economic outlook, including global developments and muted inflation pressures.” Translated from Fedspeak, the Fed is worried about global GDP growth rates.
The Wall Street Journal on Thursday had a great article entitled, “The World Is the Dog, the Federal Reserve Is the Tail.” This article elaborated on how the Fed is watching global developments, like the coronavirus, more than ever before. There is no doubt that the coronavirus is hindering commerce, like air travel, and it may soon disrupt supply chains. However, I suspect that the Fed is watching the collapse of global interest rates and the weakness in key currencies that is causing capital flight to the U.S. In the end, the U.S. remains an oasis for foreign capital, which is why Treasury yields continue to plunge. Naturally, low interest rates remain incredibly bullish for stocks, especially dividend growth stocks!
Eurostat announced Friday that eurozone GDP growth slowed to a 1.2% annual pace in 2019, the slowest pace in six years. Mighty Germany only had 0.6% GDP growth due to a manufacturing slowdown which is expected to persist, as the European Automobile Manufacturers’ Association is forecasting a 2% drop in eurozone vehicle sales in 2020. Slowing worldwide vehicle sales (China’s sales fell two consecutive years), combined with a transition to electric vehicles, could further hinder eurozone manufacturing.
Navellier & Associates does not own Boeing, VW Group, Ford, or Tesla in managed accounts and or sub-advised mutual fund. Louis Navellier and his family do not own Boeing, VW Group, Ford, or Tesla in personal accounts.