November 29, 2024
Impact of US elections on trade and North American relations:
Trump threatens China, Mexico, and Canada with new tariffs (BBC): Donald Trump announced plans to impose a 25% tariff on all goods coming from M
exico and Canada starting on January 20, 2025. He cited the move as a measure to force these countries to crack down on illegal immigration and drug smuggling into the U.S. The proposed executive order would take effect on day one of his presidency. However, Trump’s tariff plan could raise prices, affect his own trade deal with Mexico and Canada (ABC), by significantly raising prices for US consumers on essentials like cars, clothes, and oil. Additionally, it risks undermining the USMCA trade agreement, negotiated during Trump’s first term, which came into effect in 2020 after intense negotiations.
Vertaeon view: Three scenarios can emerge
(i) The impact: Tariffs could be a temporary measure (or a simple means of leverage) to be implemented until a new negotiated agreement comes in place, one that would likely benefit the US interests in the manufacturing sector. While intended to protect US interests, tariffs can have price/profit impact for US consumers and manufacturers in the short-mid term.
(ii) The winners: From an export perspective, ASEAN countries are emerging as winners, especially for assembly and packaging, in the meantime (Image on right).
(iii) Retaliatory tariffs: Mexican President Claudia Sheinbaum warned of potential retaliatory tariffs(Time) if Trump enacts his proposed 25% import duties on Mexican goods. While Sheinbaum expressed openness to discussions, she pointed out that drug issues are primarily a U.S. domestic problem. In our view, Mexico, much like Canada, would have extensive loss in a trade war since the U.S. is their largest trading partner. Price impact would be felt in the sectors that rely on production there, including automotive and industrials.
Semiconductor industry: Continued Incentives & Taiwan Reliance
South Korea eyes $10 billion in support for chipmakers in 2025 (Business Mirror): South Korea plans to allocate $10 billion to bolster its domestic chipmaking industry, aiming to stay competitive in the global semiconductor race.
Intel awarded $7.9 billion from the CHIPS Act ahead of Trump’s second term (Business Insider): Despite previous criticism of the CHIPS Act, Donald Trump has suggested he prefers using tariffs to incentivize domestic semiconductor production. Intel received $7.9 billion from the Act to support U.S. chip manufacturing.
TSMC’s Phoenix chip factories likely won’t erase the US’s reliance on Taiwan (Business Insider): TSMC’s U.S. facilities are not expected to produce its most advanced chips, leaving Taiwan as the primary hub for cutting-edge semiconductor technology. Taiwan’s strategic importance in the global semiconductor supply chain remains intact.
Climate Risks
Unexplained heat-wave ‘hotspots’ are popping up across the globe(State Of The Planet): The year 2023 was Earth’s hottest on record, with temperatures 2.12°F above the 20th-century average, surpassing the previous record set in 2016. The 10 hottest years have all occurred in the past decade, with the hottest summer on record in 2023 driving global concerns.
China’s EV boom set to push gasoline demand off a cliff (Bloomberg): Electric vehicle (EV) and hybrid sales in China now account for more than half of retail passenger vehicle sales. This shift is expected to sharply reduce demand for gasoline, signaling a transformative impact on the global oil market.
Vertaeon View: Despite the efforts toward electrification, the global demand (and production) of oil and other fossil fuels are still increasing and areexpected to continue to in the foreseeable future as long as known oil reserves are readily exploitable, even if it’s for electricity creation.
Sustainability Risks:
Volkswagen sells plant in China’s Xinjiang region after years of forced labor allegations (Forbes): Volkswagen and its Chinese joint venture partner sold their assembly plant in the Xinjiang region following years of accusations about forced labor practices. The buyer is a Shanghai government-owned firm, Shanghai Motor Vehicle Inspection Center (SMVIC). VW cited “economic reasons,” and that the move is part of a strategic realignment, and did not mention concerns about forced labor and human rights. In February U.S. customs officials blocked the import (VOA News) of thousands of Porsche, Bentley and Audi-made cars, as they contained an electronic component made in China that violated forced labor laws. All three luxury brands are subsidiaries of the Volkswagen Group.
Vertaeon View: Even with UFLPA and other regulations have set directives to curtail goods made using forced labor starting in July 2022, there are delays in corporate action and this raises the question on whether compliance enforcement is needed in implementing specific sustainability measures, especially in the Governance area.
November 22, 2024
Trade Risks:
Chip powerhouse Taiwan calls for an economic partnership deal with EU (Reuters): Taiwan President Lai Ching-te has urged the European Union to formalize an economic partnership agreement to strengthen cooperation in key areas such as semiconductors and artificial intelligence. Speaking at the Taiwan-EU Investment Forum, Lai emphasized the mutual benefits of building resilient and secure supply chains while countering the rise of authoritarianism. The EU views Taiwan as a valuable partner under its European Chips Act, which seeks to boost semiconductor production within Europe. While the EU has deepened its engagement with Taiwan in recent years, including investments like Taiwan Semiconductor Manufacturing Co.’s new chip plant in Dresden, Germany, no formal commitment to a trade agreement was made during the forum. This proposal aligns with Taiwan’s broader strategy of fostering trade relationships amidst its diplomatic challenges.
Financial Risks:
Ford retracts in Europe with layoffs and lower EV production (The Verge): Ford announced plans to cut 4,000 jobs in Europe and scale back production of its Explorer and Capri electric vehicles (EVs), citing weakening global EV demand and challenges from reduced government subsidies. The job reductions, primarily in Germany and the UK, amount to 14% of Ford’s European workforce and continue a broader trend of downsizing, with over 35% of its European staff already reduced in recent years. Ford’s EV strategy, including its goal to electrify its European lineup by 2030, has faced hurdles such as intensified competition from Chinese automakers and declining EV sales in Germany, compounded by the withdrawal of subsidies. CEO Jim Farley highlighted the need for stronger policy support to enhance EV adoption and competitiveness.
Vertaeon View: This could be the signal of lower than anticipated EV growth demand not only for Ford but for all of the other traditional ICE car manufacturers. This in turn is likely to put pressure on the 2035 ICE sell ban, not only in Europe but also in some States in the US looking at mirroring this EV mandate.
Sweden’s Northvolt files for bankruptcy, in blow to Europe’s EV ambitions (Reuters): Northvolt, a Swedish electric vehicle battery maker once seen as a key player in reducing Europe’s reliance on Chinese battery producers, has filed for Chapter 11 bankruptcy protection in the United States. The company, struggling with $5.8 billion in debt, cited liquidity challenges and production issues as key factors. Operations will continue during the restructuring, supported by $245 million in financing, including a $100 million loan from Swedish truck maker Scania, Northvolt’s largest customer.
Vertaeon View: Multiple issues even with large funding in billions- poor cashflow, financial stress, quality issues, lower demand for EVs etc. Note that it is Chapter 11 filing in the US and the company plans to continue operating.
Macroeconomic Risks:
Trade war could leave Europe in recession with high inflation, ECB policymaker warns (Hellenic Shipping): Europe faces significant risks of inflation, recession, or stagflation if a new trade war emerges under Donald Trump’s tariff-heavy agenda, warns Cypriot central bank Governor Christodoulos Patsalides. Despite these concerns, the European Central Bank (ECB) plans to proceed with gradual, data-driven interest rate cuts, aiming to stabilize growth in the eurozone’s weak economy. Although inflation has fallen recently and is expected to reach the ECB’s 2% target by mid-2025, supply shocks and rising services prices remain potential threats, highlighting the fragile balance between economic recovery and trade tensions.
Vertaeon View: France and Germany, the historic pillars of the European Union, are also going through unprecedented political turmoils.
Industry Risks:
The corporate exodus from China is gaining momentum, study says (Fortune): Before Donald Trump’s tariff-focused agenda gained traction, companies had already begun relocating production out of China, with the percentage rising to 69% in 2024 from 55% in 2022, according to Bain & Company. While India was the most popular destination, a significant number of companies opted for reshoring or near-shoring operations closer to home, driven by factors like geopolitical tensions, rising costs, and incentives such as the Inflation Reduction Act and CHIPS Act. The diversification trend, compounded by pandemic-era supply-chain disruptions, signals a shift from reliance on Chinese manufacturing, which faces additional challenges from tariffs, real estate crises, and declining foreign investment.
November 15, 2024
Trade Risks:
Impact of US elections on trade and Mexico investments (Ion Analytics): President-elect Donald Trump’s proposed 25% tariffs on Mexican imports could heavily impact European automakers like Volkswagen and Stellantis, which rely on Mexico for U.S. vehicle and parts production. Stellantis’ Mexican plants produce high-margin vehicles like Ram pickups and Jeep Compass SUVs, while VW’s Puebla factory, the largest in Mexico, supplies 65% of its U.S. sales. These tariffs threaten profitability and could force costly supply chain shifts. Meanwhile, European luxury brands like Mercedes-Benz and BMW may mitigate impacts by increasing U.S. production, though the current industry downturn complicates such investments.
Mexico Signals It Could Hit Back With Tariffs at U.S (New York Times): Mexico signaled it may impose retaliatory tariffs if threats of steep tariffs on Mexican exports are followed through, raising fears of a trade war. Economy Minister Marcelo Ebrard warned of countermeasures, highlighting Mexico’s dependence on U.S. trade, which accounts for 80% of its exports, and the intertwined economies of both nations, particularly in agriculture and automotive sectors. Mexico’s President Claudia Sheinbaum emphasized negotiation over escalation, aiming to engage Trump’s team before his inauguration. This mirrors tensions from Trump’s first term, when tariffs triggered retaliatory measures that disrupted billions in trade between the countries.
US blocks TSMC chip exports, but Apple’s chips face a different threat (Apple Insider): The U.S. has ordered TSMC to halt AI chip exports to China due to Huawei-related sanctions, impacting TSMC’s Sales and forcing production adjustments. However, Apple remains largely unaffected since its chips are primarily produced in Taiwan. Compounding the issue, Taiwan prohibits TSMC from manufacturing 2-nanometer chips outside its borders, ensuring its most advanced chip production stays domestic. While TSMC plans to produce cutting-edge chips in the U.S. by 2030, current Taiwanese Laws require overseas facilities to remain a generation behind. This creates challenges for Apple’s U.S.-based chip production, limiting access to TSMC’s latest manufacturing technologies.
Climate Risks:
Europe Floods – Heavy rains lash Spain after deadly floods (Al Jazeera):
Spain is grappling with heavy rains just weeks after deadly floods killed over 200
people, prompting school closures, evacuations, and red weather alerts in regions like Malaga and Catalonia. The October floods devastated the Valencia region, causing massive damage and sparking criticism over inadequate warning systems. Experts link the worsening conditions to climate change, noting that a warming Mediterranean intensifies rainfall, while critics urge faster policy action to address the growing risks.
Image Ref: https://www.dailymail.co.uk/news/article-14081615
China – Solar farm investment (Electrek): China has launched the world’s largest offshore solar farm near Dongying City, Shandong Province, with its first units now connected to the grid. Spanning 1,223 hectares, the 1-gigawatt project is expected to power 2.67 million homes annually, cutting carbon emissions by 1.34 million tons. Developed by CHN Energy, it uses advanced offshore cable technology and integrates solar power with fish farming, highlighting China’s leadership in renewable energy innovation.
Financial Risks:
German Council of Economic Experts cuts forecasts for 2024 and 2025 (Reuters): Germany’s economy continues to face significant challenges, with the German Council of Economic Experts lowering growth forecasts for 2024 and 2025, citing structural and cyclical headwinds. The economy is now expected to contract by 0.1% in 2024 and grow by just 0.4% in 2025, down from earlier projections. Persistent manufacturing weakness, sluggish overseas demand, labor shortages, and intense competition have left Germany lagging behind other advanced economies, highlighting deeper structural issues.
Macroeconomic Risks:
Inflation Picks Up to 2.6%, but Door Stays
Open to Fed Rate Cut (WSJ): Inflation in October rose 2.6% year-over-year, with core inflation at 3.3%, matchingforecasts and signaling a bumpy cooling trend. This modest increase, driven by factors like used car prices and airline fares, is unlikely to deter the Federal Reserve from cutting interest rates in December.
China Nears Record $1 Trillion Trade Surplus as Trump Returns (Bloomberg):
China’s trade surplus is on track to hit a record high this year, nearing $1 trillion, as exports continue to outpace imports. This surge, fueled by weak domestic demand and rising exports from Chinese companies, increases the likelihood of higher U.S. import tariffs under President-elect Donald Trump, who has proposed tariffs as high as 60% on Chinese goods. The surplus reached $785 billion in the first 10 months of the year, a 16% increase from last year.
November 8, 2024
Trade Risks:
China plans to sue the EU at the World Trade Organization (WTO) over new tariffs imposed on Chinese electric vehicle (EV) companies like BYD, which now face levies as high as 35.3%. China’s commerce ministry claims the measures lack legal basis and violate WTO rules. The tariffs, aimed at addressing alleged subsidies, have raised concerns about retaliation, potentially impacting European automakers like Volkswagen and BMW, which rely heavily on the Chinese market. Despite the tensions, some Chinese EV makers continue to expand into Europe, underscoring the growing competition in the global EV industry.
Industry Risks:
This week’s auto industry news highlighted significant challenges for major automakers and a glimpse into a robotic future:
- Volkswagen reported a 42% drop in operating profit for Q3, its worst since the pandemic, and plans to close three German plants, laying off thousands of workers to cut costs.
- Stellantis, maker of Jeep and Chrysler, faced declining revenues while attempting to clear U.S. dealership inventories.
- Ford warned of full-year earnings hitting the low end of its guidance, as high costs and supplier issues loom.
- Elon Musk predicted humanoid robots could outnumber humans within 20 years, a vision Tesla aims to capitalize on, even as skepticism persists about his bold claims.
Vertaeon View: Macroeconomic conditions have brought about demand declines affecting auto sector performance significantly. However, technology progress, such as the one in automation and robotics, are continuing.
Toyota and BMW are the latest casualties in China’s evolving EV market (Business Insider): Foreign automakers like BMW, Toyota, and General Motors are rapidly losing market share in China to local competitors, largely due to their slower adoption of EVs. In August 2024, international brands saw a 27% drop in deliveries compared to the previous year, with BMW reporting a 42% plunge. Their market share shrank to 36.6%, a step decline from 48% a year ago and 80% a decade ago. Meanwhile, domestic brands surged ahead, with EVs making up 53.9% of total sales and 75.9% of deliveries among Chinese automakers being either pure electric or hybrid models, underscoring their dominance in the EV transition.
TSMC to close door on producing advanced AI chips for China from Monday (Financial Times): TSMC will halt production of advanced AI chips for Chinese clients starting Monday, in compliance with escalating U.S. export controls aimed at curbing China’s AI ambitions. The move, driven by U.S. pressure and an internal probe into how its chips ended up in a Huawei AI device, targets semiconductors at 7-nanometer nodes or smaller. This decision is expected to challenge the plans of Chinese tech giants like Alibaba and Baidu, who rely on TSMC for cutting-edge chips, while highlighting TSMC’s commitment to align with U.S. regulations amidst global geopolitical tensions.
Macroeconomic Risks:
Germany’s coalition government collapses as Chancellor Scholz fires his finance chief (NPR): German Chancellor Olaf Scholz dismisses Finance Minister Christian Lindner, triggering a chain of events that could lead to early elections in March 2025. Scholz criticized Lindner’s refusal to compromise on economic issues, particularly regarding efforts to address Germany’s budget deficit and revitalize the sluggish economy. This decision marks the collapse of Germany’s three-party coalition government, which has been plagued by internal divisions and challenges such as the war in Ukraine and the rise of far-right political movements.
German exports and industrial output fall more than expected (Reuters): Germany’s exports and industrial output declined more sharply than anticipated in September, with exports dropping by 1.7% and industrial output by 2.5%, highlighting significant challenges for the German economy. The trade surplus fell to €17 billion, down from €21.4 billion in August. Exports to the U.S. rose by 4.8%, but those to China and the EU dropped. Economists warn of a persistent industrial crisis, compounded by political uncertainty following the collapse of the ruling coalition and concerns over potential U.S. tariffs under Donald Trump’s presidency.
U.S. factory orders tumble in September, for the fourth drop in the past five months (Market Watch): U.S. factory orders fell 0.5% in September, marking the fourth decline in the past five months, as the manufacturing sector remains weak. The drop was largely driven by a decrease in civilian airplane orders, although orders excluding transportation rose 0.1%. Core capital-goods orders, a key indicator of factory activity, increased by 0.7%. The sector has faced ongoing struggles, with the Institute for Supply Management’s manufacturing PMI showing contraction for seven consecutive months. Despite the overall downturn, defense goods orders helped provide some support to the sector.
November 1, 2024
Trade Risks:
For Taiwan’s crucial chip industry, both Trump and Harris bring risk (Al Jazeera): Taiwan’s semiconductor sector faces challenges from the ongoing US-China rivalry, with potential shifts depending on the outcome of the US presidential election. Both Vice President Kamala Harris and former President Donald Trump pose risks for Taiwan’s chip industry. Harris is expected to maintain a targeted approach to Chinese tariffs, aligning with Biden’s policies, which could benefit Taiwan’s high-tech industry. Trump, with his proposed tariffs and protectionist stance potentially hurting Taiwanese firms, especially in the context of trade with China. Taiwanese companies, like TSMC, are adapting to US restrictions, but uncertainty looms as they prepare for whichever direction US policy may take.
Vertaeon View: Policies can have a major impact for Taiwanese companies, with China as a major trading partner. Certain upstream and downstream supply chain steps are also located in China which can pose complexity to established manufacturing.
US approves $2 billion in arms sales to Taiwan including advanced missile defense systems (PBS): including the delivery of advanced surface-to-air missile defense systems for the first time. This decision has drawn strong criticism from China, which views Taiwan as part of its territory and claims the move threatens its sovereignty and regional stability. Taiwan’s presidential office expressed gratitude for the support, emphasizing that strengthening its defense is crucial for maintaining peace and stability in the region. The sale comes amid increased Chinese military activities around Taiwan, including recent war games.
Climate Risks:
Flooded streets and wild waves as typhoon hits Taiwan (Reuters): Typhoon Kong-rey, Taiwan’s largest storm in nearly 30 years, struck on October 31, 2024, with severe rain and winds, significantly impacting its semiconductor and electronics industries. Taiwan Semiconductor Manufacturing Co. (TSMC) reported no major operational damage, but supply chain disruptions, power outages affecting half a million households, and damaged infrastructure posed challenges. These effects may ripple across the global supply chain, increasing costs and potentially impacting long-term industry competitiveness.
Flash floods are a worsening scourge worldwide — here’s why (Nssi Noaa): Flash floods are increasingly frequent and severe, driven by climate change, urbanization, and land-use changes. Rising temperatures intensify rainfall, while deforestation and soil degradation limit the earth’s ability to absorb water, leading to increased runoff. To mitigate risks, sustainable land-use practices, improved flood management systems, and community-based preparedness are crucial for reducing the devastating impacts on lives, property, and ecosystems.
Industry Risks:
Volkswagen plans to close ‘at least’ 3 German plants and cut thousands of jobs (Euro News): Volkswagen plans to close at least three factories in Germany, lay off tens of thousands of employees, and downsize its remaining plants as part of a restructuring effort aimed at reducing costs and regaining competitiveness. This marks the first domestic factory closures in the company’s 87-year history, sparking significant opposition from labor unions, which warn of potential strikes in response. The closures are driven by growing competition, particularly from Chinese EV makers, and inefficiencies in its German operations, with labor and plant costs significantly higher than its competitors. VW is under pressure to implement sweeping changes to remain viable in a rapidly evolving global market.
Macroeconomic Risks:
China’s manufacturing activity expanded for the first time in six months in October (Reuters), with the National Bureau of Statistics purchasing managers’ index (PMI) rising to 50.1, signaling a shift toward growth. This follows recent stimulus measures, including increased fiscal support, aimed at boosting economic confidence. The non-manufacturing PMI also rose slightly, indicating a recovery in services and construction. Despite challenges like weak consumer confidence and a downturn in the property market, the government’s efforts are showing early positive effects. While industrial profits are still declining, there are signs of improved domestic demand.
GDP: The U.S. economy grew at an annualized rate of 2.8% in the third quarter, maintaining the initial estimate and showing strong momentum as the holiday season approached. Consumer spending, a critical driver accounting for over two-thirds of GDP, rose by 3.5%, slightly revised down from an earlier 3.7% estimate. Business investment saw an upward revision to 1.1%, while corporate profits dipped by 0.3% following a robust 3.6% gain in the prior quarter.