The Big 3’s Potential Chinese Alliance – Surviving In The EV Industry

Published on

In his podcast addressing the markets today, Louis Navellier offered the following commentary.

If you wish to listen to this commentary, please click here.

Relief Rally

We have a pretty good tone right now on the market. There is definitely quarter-end window dressing going on. Stocks are exhibiting tremendous relative strength. There is buying pressure accumulation right now which is pretty impressive because a lot of investors might hold off until tomorrow’s FOMC statement.

I remain in the camp that the Fed should not increase key interest rates further due to the fact that owner’s equivalent rent in the Consumer Price Index (CPI) and wholesale service costs in the Producer Price Index (PPI) rose only 0.3% and 0.2%, respectively, in August.

The primary reason that the CPI and PPI rose in August was due to gasoline price increases of 10.5% and 20%, respectively. There is nothing that the Fed can do about high food or energy inflation, so I expect that the core rate of inflation will continue to moderate.

I think we will get a relief rally tomorrow after the FOMC statement.

Improving Earnings

Earnings are about to improve – they’re going to improve dramatically in the fourth, first, and second quarters. And a lot of that will be in the energy patch. The energy stocks will obviously beat because of higher energy costs right now. I feel pretty good because of the institutional buying pressure I’m seeing under the surface.

We still have inventory reports coming out from the American Petroleum Institute and from the Energy Information Administration. We’ll see what those reports are, but the world cannot have a disruption in energy right now because the supply-demand imbalance in the world is very fragile.

China & The Big 3 Alliance?

Meanwhile, the UAW has not received a counteroffer since September 14th, after rejecting GM’s proposed 20% pay increase and Stellantis’ proposed 21% pay increase over the next few years. As a result, UAW President Shawn Fain is planning on expanding the strike to include more manufacturing plants on Friday, September 22nd.

Due to the targeted UAW strike at three auto plants for Ford, GM and Jeep, I am now expecting the unemployment rate to rise to 4% and overall GDP growth to decelerate from the 4.9% annual pace estimated by the Atlanta Fed. The UAW strategy is supposedly designed to methodically cut the production of profitable vehicles while minimizing the impact on their strike fund.

The UAW is prepared to expand strike locations depending on how the bargaining progresses. UAW President Shawn Fain said “This strategy will keep the companies guessing. It will give our national negotiators maximum leverage and flexibility in bargaining. And if we need to go all out, we will. Everything is on the table.” Again, in my opinion, Mexico is going to be the big winner when the UAW strike is over.

President Biden called on the Big 3 to share more of their profits with the UAW. Specifically, Biden said “Auto companies have seen record profits, including in the last few years, because of the extraordinary skill and sacrifices of UAW workers. Those record profits have not been shared fairly, in my view, with those workers.”

It will be interesting how the Big 3 respond since they are not making money on the EVs that the Biden Administration is mandating. Something has to give, so I suspect that the Biden Administration just threw a big wrench into the negotiations and is making a long-term UAW strike much more likely.

The Wall Street Journal’s Editorial Board issued a scathing opinion piece entitled “A UAW Strike Made in Washington” with a subtitle “The underlying cause of the auto walkout is the Biden Administration’s forced electric-vehicle transition.” In addition to Mexico, which is making the Ford Mach-e and Chevrolet Equinox EVs, clearly, Tesla is also a winner in the EV wars.

The truth of the matter is until the Big 3 make money on EVs, the UAW is losing leverage, since the Biden Administration is forcing the Big 3 to make unprofitable vehicles. As a result, the UAW strike may be long and painful for everyone involved.

Long-term, China’s exports of EVs to Europe surged 112% in the first seven months of this year. Furthermore, Tesla is exporting many of its Model 3 EVs made in Shanghai with LFP batteries to China to continue to capture market share. Since LFP batteries are cheaper, China is capturing more energy level EV purchases. Right now, BYD and CATL in China dominate LFP battery manufacturing.

Furthermore, China is building double the battery plants they need for domestic EV production, so it is clear that China intends to dominate the EV business and currently has a massive price advantage.

So back to the Biden Administration’s EV goals. Already Ford and GM are making their most affordable EVs in Mexico. Furthermore, Stellantis has threatened to move its Ram pickup production to Mexico to remain competitive. Tesla is also planning on opening a manufacturing plant in Mexico.

So again, Mexico is currently the big winner from the EV transition in North America and China is the big international winner. The UAW strike is now expected to accelerate the transition to Mexico for EV manufacturing since the Big 3 are not making money on EVs.

Interestingly, by the time the new battery manufacturing plants are built that received money from the Inflation Protection Act, China’s new battery plants will be ready to “dump” LFP batteries to capture more market share. Since the primary beneficiaries of the new U.S. battery plants are China’s CATL via Ford and South Korea’s LG Energy Solutions via GM, ironically, the Inflation Protection Act is helping predominately non-U.S. companies.

Confused? We all are. All I can tell you is the EV glut is growing, so more price discounts are likely. Only Tesla is making money in EVs in America and of course, since Tesla is non-union, the Biden Administration continues to largely ignore Tesla.

If you want to see a preview of what may be happening in America in the upcoming years, we just have to look to Europe, where VW Group is in an epic battle with Tesla for EV market share. Although VW Group (includes Audi, Seat, Porsche and VW EVs) is winning so far this year, SAIC and Zhejiang Geely from China are now fast capturing EV market share in Europe.

SAIC makes EVs under the MG brand, while Zhejiang Geely makes widely acclaimed Polestar and Volvo vehicles. Interestingly, Zhejiang Geely is now being referred to as the Foxconn of EVs due to their quality brands. In other words, the China EV invasion is starting in Europe and is expected to quickly expand to America.

So if I were a UAW worker, I would want as much money as possible now, since I may not have a job in the upcoming years if the Biden Administration continues with its EV mandate. GM has apparently offered an immediate 10% pay increase, plus a 20% pay increase over the next four years, while the UAW is demanding 36% over the next four years. It will be interesting to see how the UAW negotiations commence, but profit sharing from the Big 3 may be the only long-term solution.

However, as China and Mexico increasingly dominate battery and EV production in North America, the Big 3 may soon have to make a Chinese alliance to stay competitive in EVs, just like VW Group recently paid $700 million for a 5% stake in China’s XPeng Motors.

Interestingly, instead of participating in a Republican primary debate on Wednesday, September 27th at the Ronald Reagan Presidential Library, candidate Donald Trump is planning a major speech to union workers in Detroit. In a recent interview with NBC’s Kristen Welker, Trump said that UAW leadership has failed its members. Furthermore, Trump warned U.S. workers jobs would move to China amidst the Biden Administration’s EV push.

Additionally, Trump said he was ”on the side of making our country great” in the UAW standoff, and called for car “choice” versus the EV mandate. Clearly, this speech will be very entertaining, and it will be interesting if many union workers attend this Trump rally.

Homebuilders are building more homes to meet demand since existing home sales are low because most homeowners do not want to give up their low fixed mortgages. The Commerce Department reported on Tuesday that housing starts declined 11.3% in August to an annual pace of 1.28 million, which is the lowest level since June 2020. However, building permits rose to an annual pace of 1.54 million, which is the highest pace in almost a year.

Coffee Beans: Postmaster

A man who was an “avid stamp collector” as a child has moved from Florida to Scotland with his wife to run the world’s oldest post office, which has been in continuous operation for 311 years. Source: Sky News. See the full story here.