The Economy’s Weekly Recap

12/29/23 - 1/5/24

Raymond Lin

This Week’s Prominent Events

Tesla is Overtaken

• The Chinese car company BYD has beat Tesla at its own game. In Q4 of 2023, BYD sold 526,000 EVs while Tesla only sold 484,500. While Tesla still sold more in total in 2023 as a whole, BYD’s success highlights its extreme competitiveness and the potential of Chinese automakers dominating the global EV market. 

• A large contributor to this success of BYD is China’s focus on EVs. China has adopted targets of 20% of new cars in China being new energy vehicles like EVs by 2025 and plans to continue advancing the figure in the future. Additionally, China has beaten those targets, with the former minister of China’s Ministry of Industry and IT saying that 50% of new cars being new energy vehicles will come by 2025 or 2026. 

• Beyond EV adoption accelerating quickly in China, China’s cheap labor, subsidies, and infrastructure have also helped BYD overtake Tesla in vehicles sold. BYD’s origin as a battery producer and its continuous production of in-house batteries has also created a competitive advantage that has enabled them to succeed.

A TikTok Partnership

• Peloton, an exercise equipment and fitness media company, can be seen as peaking during the pandemic. When it was still the pandemic, we were all locked in doors, bored, and willing to better our lives. As a result, Peloton experienced immense growth and interest in it, sending their amount of equipment sold, number of subscriptions, and stock price up. 

• However, as life has returned to normal and gyms have reopened, Peloton has struggled to recover its past success. It lost 65,000 app subscribers last quarter and also lost nearly $160 million. As a result, Peloton has rebranded to focus on the experience of subscribers with fitness content to pair the exercise equipment.

• One way Peloton has gone about achieving this is through a partnership with TikTok where a fitness hub on TikTok will feature Peloton content and collaborations. Upon this news, Peloton’s stock rose 15%. 

• Peloton’s VP of marketing has said that “This is really about taking the instructors and the content we have and kind of dimensionalizing it to a broader audience on TikTok.“, which could be a serious strategy considering the immense user base of TikTok. 

Automotive Success

• Despite the rate hikes and inflation of 2023, automotive companies performed well and grew significantly in the US, with some examples being…

  • New US car sales rising 12.4% to reach 15.5 million vehicles this year

  • General Motors selling 14% more cars, selling 2.6 million cars and remaining as the top car company in the US

  • Toyota’s US sales increasing 7% 

  • Ford’s US sales climbing 7.1%

• Much of this growth has been due to pent-up demand as troubled supply chains led to decreased car production in prior years. In 2023, however, many of these kinks were worked out and increased supply allowed for lower prices for customers and more sales. 

• However, this strong growth in 2023 is unlikely to continue in 2024. Weakening EV growth and high interest rates are likely to impede US car sales in 2024 and severely temper growth. Additionally, higher wage costs from the UAW strikes and new contracts may lead to lower profits.

• Already, companies have had to adjust plans to match reality. Ford, which had planned to be producing 600,000 EVs by the end of 2024, has begun to actually lower production of some of its EV models. Similarly, GM gave up on its target of 400,000 EVs produced in 2024 and has delayed EV production. 

Starting the Year Off Right

• Despite the, hopefully, enjoyable Christmas and New Years we’ve all had, it seems some people are starting the year by jumping into the thick of things as, according to people familiar with the matter, semiconductor design software maker Synopsys plans to acquire structural analysis software maker Ansys for $35 billion in the coming weeks. 

• This deal could allow Synopsys to offer new solutions for simulation and analysis, improving Synopsys’ software and helping its customers. 

• This deal would be one of the largest acquisitions this year, both in terms of 2024 and the last 12 months, and could provide an optimistic start to 2024 after the low deal flow year that was 2023. 

Oil Acquisition 

• Following in the steps of Chevron and ExxonMobil, oil producer APA has announced it is acquiring Callon Petroleum in a $4.5 billion all stock deal. The all stock nature means that cash will not be used in the transaction, allowing for a less impacted balance sheet. 

• The merger will result in a company that produces over 500,000 barrels of oil a day. The merger is also expected to lead to cost savings, which is estimated to be over $150 million annually. 

• The deal serves as another example of the consolidation occurring in the fossil field industry as scale has become prioritized for its ability to, in the words of APA CEO John J. Christmann IV, realize significant overhead and cost-of-capital synergies”.

Future Events

US Jobs Report

• December’ jobs report paints a nice picture of the soft landing that the US Federal Reserve has been trying to achieve for over a year. 216,000 jobs were added and the unemployment rate was 3.7%, both of which are better than the expectations of 170,000 jobs added and unemployment of 3.8%. Furthermore, average earnings rose 0.4% monthly and 4.1% year over year. 

• While this occupational data shows that the labor market and economy is doing fine, it unfortunately also suggests that the Federal Reserve is unlikely to cut interest rates soon. 

• After all, with strong demand for labor and wage growth, interest rate cuts could help spur demand and possibly higher inflation. As a result, it seems that the Federal Reserve will continue to keep interest rates at their current level well into early 2024. 

The Red Sea Crisis Continues

• Weeks after the Yemen based Houthis rebels began attacking commercial shipping in the red sea, which 12% of global trade has to travel through to reach the Suez Canal, more than $200 billion of trade has had to be redirected.

• This means that cargo ships must travel different and longer paths to reach their destination, adding weeks to shipping times and increasing costs significantly. For example, ships traveling from Asia to Europe are likely to see an extra $1 million in fuel costs, and pricier insurance stemming from the danger posed by Houthis also increases costs.

• However, this increase in shipping costs is not projected to impact consumers or inflation much not only because inflation, across the board, is being kept down by interest rate hikes but also because the upped shipping costs now are still lower than during Covid related disruptions. 

• When using the Shanghai Containerized Freight Index, which measures rates for export container transport from Shanghai, the current rise is only 25% of the SCFI’s peak during 2022. 

China De-risking

• For the last few years, the US and China have been locked in economic competition and, sometimes, outright combat. One way this has manifested is in the removal of China and Chinese companies in the supply chains of US companies, also known as de-risking.

• By removing Chinese influence and choosing friendlier countries to source from or produce in, ideally, the US can try to separate from China and remain prosperous. 

• While perhaps strategically sound, supply chains are often opaque and companies don’t comprehend the suppliers and manufacturers used in production. This means that the recent drastic China de-risking in the US may not have had its desired effect, only increasing the length and cost of supply chains rather than the diversity of suppliers. In effect, the US has not been able to stem China’s influence on its production while only increasing the costs of production, although it should be noted that the new countries being invested into can grow and start supplying domestic operations.

• Until then though, the US is stuck in an almost fake form of de-risking where the risk still remains and the benefits, economically speaking that is, have not manifested yet. 

Weekly Question

How many vehicles did BYD sell in 2023?

• A: 900.000

• B: 1,300,000

• C: 3,000,000

• D: 2,000,000

Answer: C. BYD sold 3 million vehicles in 2023, with 1.6 million EVs and 1.4 million hybrids. This 3 million vehicles sold is a 62% increase over 2022, and BYD has also tripled its profit.