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Why legacy car brands, IT giants are rushing to make electric cars

This article originally published at http://www.arirang.co.kr/News/News_View.asp?nseq=274827 on April 1, 2021.


Can Hyundai, Kia, Volkswagen, GM make better electric cars than Tesla? Last year, sales of electric cars surged 44.6% despite the general downturn of car sales in the global market. In early 2021, a number of automobile giants announced plans to go fully electric within the next ten years. Can they beat the likes of Tesla and offer innovative rides for consumers?

 

Show Notes

 

SO: Last year sales of electric cars surged 44.6 despite the general downturn of car sales in the global market and that trend looks set to accelerate in early 2021. A number of automobile giants including Volkswagen, General Motors and Volvo announced plans to go fully electric within the next 10 years but can they beat the likes of Tesla and offer innovative rides for their customers?

 

For insights on this we turn to Tony Nash, CEO and founder of Complete Intelligence based in Houston, Texas and Jason Salvucci, national manager of the Overseas Military Sales Group based in Seoul but currently in Okinawa. Well, a very warm welcome to you both and well Tony good to see you again.

 

I think it’s our first time connecting this year but well we’ve seen we’ve heard some very exciting news coming from these automakers and the likes of Volkswagen and General Motors. They’re going all electric they’re really moving away from this at the main business that they’ve been building over the decades based on combustion engines.

 

What’s led them to take this risk and do you think it’s the right move?

 

TN: I think, it’s a move that they have to make. Whether or not it’s a move that they want to make. I don’t think there’s really a lot of debate there but I think their equity market valuation they have to catch up well.

 

I don’t know that they will but they’ll try to catch up with say Tesla or something within terms of the equity market valuation but the customer perception they’re actually making viable EVs that they want is really critically important especially with younger customers. But from a balancing perspective at least in the US for example there are emission standards and the more electric vehicles they produce that also allows them produced to produce other larger vehicles SUVs and other high polluting vehicles. So as long as on an average basis they keep it down to the emission standards.

 

They can produce EVs to allow them to produce say the SUVs that other say consumers want. So, it’s both perception and equity market valuation as well as balancing out the regulatory aspects.

 

SO: So, they’re wearing the different sort of costs and risks here. Well, Jason, what’s your thoughts on this? I mean the world’s biggest legacy automakers scrapping their combustion engines. Do you think they’re making the right move?

 

JS: You know, I kind of got to agree with Tony that this is electric is the future. I mean, they have no choice. It’s not just the standards. Electric cars are easier to maintain. They’re quieter. They’re cleaner. They’re more efficient. I mean, the power is better it’s the way everything’s going. I mean, we don’t really have much choice in the matter. While it may not be 100 electric tomorrow. We’re getting there.

 

The big manufacturers if they want to, they want to play with you know companies like Tesla, they have no choice. That’s where the future is.

 

SO: And the force Tony, Tesla is without a doubt the world’s most iconic electric car company but do you think it’s leading the global market is going to last with all these other competitors now coming into the market these giant auto businesses? And are these car makers catching up quickly enough in terms of battery technology and other key technologies?

 

TN: Well obviously, they have a lead but will they be able to keep it as the real question. I think they may be able to keep it for a few years but I’m not sure that they can keep it say over the medium to long term.

 

So, Tesla has a lead but that gap is closing. And with technology they can use external, say sources to either acquire or develop the battery technology that they need to compete with Tesla. So, I think really at the end of the day it comes down to: can you produce a quality vehicle? Can it perform like consumers want and does it drive like consumers want?

 

So, the novelty of an EV is wearing off. And as it goes broad-based that first user advantage or first user interest wears off. And the broad market really just wants a functional car that is electric. And so, you have the segmentation and other things but I think Tesla is going to have a tougher job going forward to keep the lead that it’s got.

 

SO: Well, Jason is it as straightforward as one might think for these giant automakers to transition into all EV?

 

I mean, what are the major differences that traditional car makers are going to have to adapt to and really face as they transition into all electric?

 

JS: Well, the manufacturing process for one, you know, the number of components in a combustion engine vehicle, compared to an electric car, it’s night and day. I mean it goes beyond the manufacture of the vehicle. It’s the maintenance of the vehicle it’s really everything.

 

The shell may look the same but when you transition to, you know even a mild hybrid to a all-electric vehicle. It’s completely different. Not only will the way the cars are sold have to change but also because how the customers buy the cars. How they maintain. How they operate the cars everything changes. It’s not as simple as just shifting from one to the other.

 

So, I think that the manufacturers have quite a task ahead of them. They are really playing catch up, if they want to grow in this and be industry leaders as they have been for years like Volkswagen, Toyota, Ford. They were industry leaders for years and they’ve surrendered that position to a startup company like Tesla.

 

SO: Right and there was some news this week that Volkswagen might be changing its name in the US to Voltswagen. So, really goes to show. It’s not as easy or straightforward as simply changing the name and probably…

 

JS: That’s an April fool’s joke by the way. Yeah, it was April fool’s joke. I fell for it too. Voltswagen is their April fool’s joke.

 

SO: It was a bit too early for April fool’s day but well thankfully yes, they’re retaining the Volkswagen brand. And well Tony, internet companies like Apple and Google and apparently Xiaomi now and Huawei. They’re working on electric vehicles as well and it’s clearly not going to be such an easy ride. So, what’s really in it for them? And what kind of innovations do you think they’re going to bring to the market as tech companies?

 

TN: Well, that’s a great question. Jason brought up a great point about the business models and as you move into the more software-based business models that EVs are you move into a different ability. In a different way for consumers to pay for things. And you know, I think it’s possible for kind of that big expense of a car that a consumer would buy instead of it being financed. It could be a service fee that’s put over a period of time. I don’t really know what that model looks like but these software companies are companies that really balance out especially Apple. A hard asset like a phone plus monthly recurring software fees.

 

And so, these guys will come into the market. Understanding the risk associated with making hardware and balancing that out with software fees. Whereas automakers traditional automakers at least are accustomed to one big transaction that gets financed by a third party. So, it’s a fundamental change in the business model.

 

SO: And Jason, now South Korean car makers, Hyundai and Kia. They currently set fourth place in the global EV markets and of course Kia having unveiled its EB6 this week. And Honda continuing to expand this EB lineup, of course.

 

So, how competitive are these South Korean car makers products? And do you think they’re really going to have to step up the game? Now as market leaders global market leaders Volkswagen GM they’re going out all electric?

 

JS: I’ve been in South Korea 20 years and the way cars have improved in the last 20 years is phenomenal. When I first got to South Korea. Korean cars were far behind but now the fit, the finish, the quality is amazing.

 

I think the larger auto manufacturers are going to get a run for their money by the likes of Hyundai and Kia when it comes to electric vehicles. I really do.

 

SO: So, what kind of… I suppose, what kind of advantages or what kind of features do you think they offer Jason that might really help them really engage in the competition especially as all these car makers go electric?

 

JS: It seems to me the… not just the quality but the design of the Korean cars is a little more exciting than some of the other manufacturers. That’s what I’ve noticed over the last couple of years, is that they’re good-looking cars and they’re reliable. And the price points are, well, I mean they’ve significantly come up in cost in the last 20 years, that’s for sure but they’re nice. And I see a future of like a subscription type of service for electric cars because you know the United States every three years to 39 months. Americans are trading their vehicle up trading in one car for another car. And we have a traditional dealer manufacturer, dealer model that we have to require our customers to go through a subscription service in the future.

 

It is definitely, in the makes for electric cars because you’ll trade out of them much more frequently.

 

SO: So, it’s not just the hardware but also the software that’s going to bring about a lot of changes in how we consume electric vehicles, as well. And of course, everyone cares about the design too. And well Tony, it seems that EVs really are the future but it looks like for now the stock market is quite confused about the prospects they’ve been fluctuating. They’ve been declining over the last few weeks. And of course there was a boost on Wednesday after the Biden administration announced its plans to really ramp up green vehicles and infrastructure but what do you make of these market fluctuations? And how does Complete Intelligence really project the demand or market for electric vehicles in the near future?

 

TN: Sure, obviously there’s a healthy market ahead. I think the equity market fluctuations over the last few weeks are really just, that its markets searching for the right price. And there are so many different variables with bond prices. And currencies. And equity markets that are going into the calculations around the stock market prices for these companies but I do think that those companies that will not only crack the battery technology. And the value proposition for the market but also the business model, as Jason mentioned. Those companies are the ones that the equity analysts. And the investors will really want to follow.

 

So, Tesla is a high visibility leader, early leader in electric cars. And I think they’ll remain a leader but the volume of cars that they produce compared to say a Volkswagen on an annual basis is tiny. And so, the scale that a Volkswagen or a Hyundai or somebody can bring to this market can overwhelm almost an artisan car maker like a Tesla.

 

That’s I don’t mean that as an insult to Tesla at all they’ve done some amazing groundbreaking work but they just don’t have the scale that a Volkswagen or Hyundai has.

 

SO: Well, the likes of Volkswagen and Volvo. They’re going all electric Jason but Hyundai seems to be putting its eggs in multiple baskets. It’s been betting on hydrogen cars as well. Which right now are considered a bit less economical. And there’s also a lack of supportive infrastructure in most parts of the world.

 

Do you think this investment is going to pay off for the company?

 

JS: I think the future is multi-faceted. I don’t necessarily see the entire replacement of the combustion engine, anytime soon. I mean, they’ll definitely be hybrid vehicles, will be mild hybrid plug-in hybrids. There’ll be some hydrogen fuel cell vehicles. I think that there’s multiple avenues that manufacturers will have in the future.

 

So, that we can kind of have something for everybody. I don’t know that the investment in the infrastructure for hydrogen pays off because right now extracting the hydrogen requires fossil fuels. That’s a bit of a problem until they can crack the hydrogen extraction of via solar or something like. That it’s a bit of an… it’s not there yet. I don’t think.

 

SO: And Tony, before we go now there’s a massive EV market in China. And recently, Huawei technologies. They’ve come out and said they’re going to invest billions into that market.

 

How do you see the prospects and do you see China sort of leading the global market in terms of EVs just with the massive number of consumers they have?

 

TN: Sure, I think, Yes. I think China’s challenge is moving their vehicles beyond China and beyond Asia. There’s so much intense competition from Korea, Japan, the US, Germany and so on and so forth, that I think their challenge will be taking an electric domestic, electric vehicle market that will be massive. And moving that into other countries whether it’s safety standards or features or business models.

 

I think, there is something especially with technology that is specific to China that is very difficult to move beyond Asia. And so, if there is a Chinese EV maker, who can move beyond China and beyond Asia. I think they’ll do very very well.

 

SO: See, well, this is all we have time for today but that was Tony Nash, CEO and founder of Complete Intelligence and Jason Salvici, national manager of the Overseas Military Sales Group.

 

Thank you both so much for your insights today. And to our viewers, as always, thank you for watching.

 

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What negative oil prices mean for the COVID-19 economy

 

There was a worldwide shock when U.S. ended with negative oil prices for May contracts. It dropped to minus 38 dollars a barrel this week, crashing into negative territory for the first time in history.

 

While demand has dried up as the COVID-19 pandemic paralyzes economies and keeps people at home,… excess supply is in limbo not helped by an intense price war between Russia and Saudi Arabia.

 

What do these ultra-low oil prices mean for producers and what does it tell us about the world economy as it grapples with the coronavirus?

 

Today, we’re joined by Dr. Graham Ong-Webb who joins us from Singapore’s Nanyang University and Tony Nash, CEO and Founder of Complete Intelligence.

Arirang interview on negative oil prices

 

Show Transcript

AN: We start an in-depth discussion with experts from around the world. There was a worldwide shock when US oil contracts for May dropped to minus $38 a barrel this week, crashing into negative territory for the first time in history. While demand has dried up, has the COVID-19 pandemic paralyzes economies and keeps people at home? Excess supply is in limbo, not helped by an intense price war between Russia and Saudi Arabia. What do these ultra low oil prices mean for producers?And what does it tell us about the world’s economy as it grapples with the Corona virus? Today, we’re joined by Dr. Gray Ong WebB, who joins us from Singapore’s Nanyang Technological University. And Tony Nash, CEO and founder of Complete Intelligence.

 

AN: My first question to you, Dr. Ong-Webb. First, what caused the US oil prices this week to fall to such historically low levels?

 

OW: Well, we’ve seen the slashing of oil prices all around West Texas and intermediate and global crude oil have plummeted because of the severe price for it occurred over the weekend, particularly led by Saudi Arabia that sought to slash oil prices by about four to seven dollars a barrel. And this price war was triggered by the implosion of the OPEC Plus Alliance a week before between, in terms of the breakdown in the orchestration between Russia and OPEC led by Saudi Arabia trying to come to an agreement about the cut in production. As you know, previously there was no agreement to cut production by 7 million barrels.

 

OW: But of course, the Russians withdrew from this discussion with the concern that this would be using a lot of space to U.S. shale oil companies to occupy the gap. So Saudi Arabia went onto this price war, which then triggered a cascade into negative territory, which was, as you mentioned, unprecedented in history. But really, I think this is the story about the collapse in oil prices is a confluence of a lot of factors that you can discuss today. This is a very interesting industry, as you know, because of the way the oil sector is set up.

 

AN: Right. In Russia and Saudi Arabia, they did come to an agreement eventually. But people are saying that the OPEC’s decision to cut oil production came much too late. And while, Mr. Nash, all eyes are now on the futures contracts for June, but that really hasn’t been much cause for optimism has that admit this pandemic can as for calls for a swift economic recovery get thinner and thinner. Actually, some analysts are saying that oil prices for JUne, they could actually fall to minus a $100 per barrel. What’s your take on this?

 

TN: No, I think it really all depends on how soon economies get back to work. We have a couple of states here in the US, Georgia and Tennessee, that have said that they’ll get back on line very soon, possibly by next week. So if other states follow them, I think you’ll start to see demand pulled and crude oil pulled along with that demand if it gets started. If it gets pushed back in the president’s daily briefing, he just said today that they may consider, you know, pushing some of these social distancing and other requirements further into the summer if the state level economies stay as locked up as they’ve been.

 

TN: I think it yeah, it could be pretty terrible for crude oil and it could be pretty terrible for most commodities. So, again, it really all depends on how quickly the countries around the world get back to work. And it really depends on the local governments as well as the national governments making those decisions to put people back to work. What’s interesting here in the states is we’ve started to see people protest in cities across the country to get back to work. And so there is a couple of restaurants here in Houston, a couple of businesses around the country that are insisting that they stay open. A restaurant here in Houston will start sitting people this Friday night.

 

AN: And the businesses may want to go back to normal. But, well, it looks like demand might not pick up quickly, I mean. But then this also isn’t just a U.S. problem as you mentioned. Brent crude has been faring better than U.S. shale for sure, but it’s also taking a hit amid a supply glut lessened by the price for that Dr. Webb just mentioned between Russia and Saudi Arabia. And when in this situation when demand has plunged as much as 30 percent globally and as much as 70 percent in countries like India could Brent also flip negative do you think, Mr. Nash?

 

TN: Now, look, the reason that Brent that WTI went negative was it’s a function of the exchange that it trades on and on the NYMEX exchange, they let those prices go negative because of, partly because of physical delivery of crude oil. But WTI also traded on the ICE exchange where Brent is traded. And the ICE exchange didn’t let WTI go negative. They let it go to zero. So I think the worst case we’ll see for Brent is a zero price simply because the exchange won’t let the price go below zero or they haven’t let it go below zero. So if ICE, if the Inter Intercontinental Exchange stands in the way of seeing negative Brent prices, then you just won’t see negative Brent prices and they’ll stop trading.

 

AN: So you think that there might be some kinds of intervention going on there? Dr. Ong-Webb, well, OPEC is due to start cutting supply by 9.7 million barrels per day, and that would be reducing about 10 percent of global supply from May 1st. That is a historic cut. But do you think that’s enough?

 

OW: I can clearly, the answer is no. Whether you are your own oil expert or whether you’re an observer of markets and how the global economic machinery is moving, or in this case has seized, it’s come to a grinding to a halt. Well, the answer is, as I mentioned, no. I mean, we know for the month of April we’re seeing a reduction in terms of demand by about a factor of three to the agreed all production cuts by the cartels by 9.7 million barrels. Also we’re looking at 30 million barrels less consumed in April. So clearly that’s an indication that first, we have a cuts, if you like, not enough. And there will have to be, whether we like it or not, all cuts along the way, simply because in allusion to his point about storage capacity, which is an important factor in the price equation of oil, is that there’s just no way to put oil anymore. I mean, tankers are filled to the brim. I mean, 60 percent of storage capacity globally is being filled up by the end of April, I think, by the beginning of May, there’ll be just simply nowhere else to put the oil. And so, there will have to be a slash in production. But this is just an easy thing to say because of the complexities of the way in which oil is produced, the infrastructure behind oil. We can’t simply just turn off the taps. And the oil production companies know this, that if fields are closed, they’re just simply difficult to reopen and we’re unlikely to resume them and achieve the prior optimalities in production. I mean, you can get back to those production capacities again. So a lot of push and pull factors at play here.

 

AN: So really the last major oil export. There is an incredible amount of pressure. And Dr. Ong-Webb, the oil crisis in the mid 1980s actually preceded the fall of the Soviet Union or made the pace rapid. If global oil prices remain around the $20 threshold, then which economies are going to be in hot water?

 

OW: Well, it all depends, right? So in the case of I mean, maybe Tony could speak to this more than I could about what’s happening in the US. On the reports I’m reading, I think thirty US dollars a barrel would help keep things afloat, literally. $30 a barrel or below, this will lead to more job cuts, especially to minor players in the oil industry are going to fall and lots of medium-sized and small producers in the US. Even in a place like in the Gulf states, where large margins are required because of the government’s subsidies and whatnot. I think quite a few golf econ might also. That it all depends. But clearly, despite the pursuit of more production efficiencies, especially the kind of efficiency we saw come out from all the previous oil slump in 2014, there is this complete collapse in demand and there’s no way of getting around that. And companies are going to fall. Jobs are going to be lost. And we just have to find a way to do to stave this off.

 

AN: And Mr. Nash, while hundreds of companies in the US, all companies are going to be very hardly hit by this decline in consumer demand, and also this is going to affect thousands and thousands of jobs. How do you think this is going to affect the pace of recovery of the US economy from this pandemic recession?

 

TN: Yeah, again, I think since this is a global government shutdown, really the pace is completely affected by the rate at which governments release these curves. I think if they don’t release the curves, if they don’t allow people to go to work, I think it becomes more and more difficult to have a quick recovery, even remotely quick recovery.

 

TN: I don’t want to unnecessarily paint a doomsday scenario, but the longer we stay at home, the longer we don’t allow planes to fly in the sky, ocean vessels to move, we don’t have demand in food markets, demand in other markets, it really damages every industry. It’s not just crude oil. I think that the key thing that we have to keep in mind here is that U.S. crude companies appear to be more damaged simply because they’re more transparent.

 

TN: Most of the oil and gas companies globally are state-owned, so they’re national oil companies. So there really isn’t the visibility to their performance and their expenses that you get with U.S. energy companies. So make no mistake, those companies are hurting just as bad. And when you look at companies like Saudi Arabia, Iran, so on and so forth, those guys have to be making $60 a barrel or more in order to pay off their bills every month to run their governments.

 

TN: So while we talk about, say, fracking cost it 20, 30, 40 dollars a barrel, when you look at the fiscal position of many of these Gulf states and even Russia, Russia’s very expensive to operate, until they’re making $60 a barrel or more, they’re actually losing money. So these guys can not afford to play this game very long. And I think they played their card at the wrong time because there’s a global demand problem at the same time that they’re trying to fight this war. So really, they’re hurting the U.S., but they’re really hurting themselves just as bad or worse.

 

AN: Exactly. And that’s very clear that the historically low oil prices will affect all global players. But it seems that Saudi Arabia and Russia, they all vying for this all supremacy, and Dr. Ong-Webb, just before you go, if that’s the case, do you think it’s worth? And over the coming months, who do you think has the biggest chance of emerging victorious?

 

OW: Well, it’s really hard to say. I think I agree with Tony that I think there are no winners in this game. And that’s that’s a problem we are facing today. We’re in the new normal. A lot of the previous assumptions or principles that govern competition, economic and political competition, are actually hurting us instead, because a lot of things that we have to do today are counterintuitive. And we are in an unchartered territory. Countries like Saudi Arabia and Russia are simply just following their political strategic instincts, if you like, which have served them well in the past, perhaps, but not anymore today.

 

OW: And so I think they’re not only going to hurt themselves. They’re going to have a further contribute to the further negative impact on the global economy. Clearly, there will be some winners out of this. If you’re in a storage business, I suppose especially oil tankers, I think its glory days for you right now, maybe momentarily. And of course, you’re energy hungry, oil importer perhaps, some have savings there. But then again, because of the collapse in demand, I mean, not much had either. Until the national economies and the global economy starts to move again and people are moving around naturally and buying things, buying services, I think all of us are going to continue to be hurt.

 

AN: So really, oil prices are really dependent on demand and we’re not seeing much of that and it looks like it won’t be coming back in in the near future.

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World economy, industries changing amid COVID-19

 

The world faces an unprecedented economic crisis as shops and businesses, factories and entire communities have been put under lockdown due to the coronavirus pandemic. Governments are doing their best to cushion the blow and keep their economies intact, but many people say things won’t be going back to normal… even when this pandemic is over. According to them we are in a “new normal.” To see how economies and industries across the world are already shifting to this new reality, we connect with Dr. Larry Samuelson, Professor of Economics at Yale University, Tony NASH, CEO and Founder of Complete Intelligence, and Dr. Graham Ong-Webb who joins us from Singapore’s Nanyang University.

 

Interview Notes

 

AN: My first question to Dr. Samuelson, which industries do you think will struggle to recover after this pandemic and even despite the huge sums of money being poured into them right now to try and keep them afloat?

 

LS: The huge sums of money are designed to get the industries through this initial period when much of the world is locked down and firms’ whole industries have no obvious or no steady source of revenue. Once we are past that, hopefully we see some opening of economies soon, we still have a recession on our hands. And at that point I would say that consumer confidence is the key thing to monitor it’s difficult to recover that under an ordinary recession. Now we’re gonna have to recover that in the midst of still dealing with the coronavirus.

 

We won’t have the virus behind us until we have a vaccine, which looks like it’s perhaps a year off and so we’re gonna have to try to reopen our economies where people are still worrying about the virus. So now we can ask about industries the ones that will fare best are those that people can reasonably, safely interact with. We expect retail some education to fare better than say mass sporting events and confine travel in that respect.

 

Can also look at which industries represent activities, purchase is that people ordinarily do that they have deferred and which are discretionary. The deferred ones we might expect to come back fairly quickly. As a frivolous example think of all the haircuts people are going to need when they come out of lockdown. Things like automobile purchases durables home maintenance might be in the same category. More discretionary items like travel are going to take a longer time to come back.

 

 

AN: So what you’re saying is that recovery will really depend on consumer sentiment and it looks like the sort of high-touch industries where you know and where it involves travel or social contacts those are going to be a bit slower to recover? Well Dr. Webb the, European Union they’ve agreed on a 500 billion dollar stimulus plan to protect workers businesses and their Nations in light of this pandemic but they haven’t been able to agree on issuing debt to raise long-term financing for the region what do you
make of this still is it really enough for the region?

 

OW: Well it appears to be clearly insufficient for for the requirements of what stands to be a 19 trillion dollar economy. We think about the European Union. 27 countries as a collective this is second largest economy you know in PPP terms after China. And so you know the amount of – a billion dollars pales in comparison to what other national economies are injecting in terms of stimulus packages to stave off the risk of a severe economic crippling, mass layoffs and so forth.

 

So I think the ECB was right to to campaign for about 1.5 trillion dollars and clearly we’ve ended up with 500 billion dollars and that’s not going to be near enough to what the region needs. But nevertheless, yes, there is this big issue in the backdrop of who’s gonna finance or finance all of this. And this is clearly a follow-on discussion from the one we had last week about the global debt crisis right. So no basic were looking at trade-offs here, which trade-off are we willing to live with, the one where we deal with or crisis now in terms of mass unemployment, crippling economies, whether we deal with a lengthy debt crisis down the road, you know, sort of alleviating the pain today.

 

So I think this is an ongoing discussion but clearly the $500 package is a compromise, a severe one. Southern European states have compromised themselves. They’d rather get something rather than nothing. But clearly it’s insufficient in terms of what’s already percolating in terms of small and medium enterprises folding up as we speak, people losing their jobs because of the slump in demand are all around for range of services and inability for those services to to actually meet consumer needs because of the of the lockdown.

 

 

AN: So it looks like there may be more coming out of the EU as this pandemic progresses and the economies continue to be hurt. Well Dr. Nash, here in East Asia China has actually restarted its economy factories are back online and lockdowns on cities even Wuhan they’ve been east. But with the rest of the world they closed for business. Many say that China is actually in for a second supply shock. What’s your your take on this?

 

TN: Sure. Our biggest worry about China, well, we have a number of them but we’re actually worried about the fall in manufacturing. The industrial production collapse in China that we see coming starting in, say, April and then going into third quarter should be unfortunately pretty damaging to China’s economy. We expect to see deflation starting in April, May in China. It’s not like 10 or 20 percent. It’s kind of half a percent, but still once you start to dip your toe into deflation, it can be pretty dangerous, so starting and then stopping.

 

The thing that we have to remember with all of these economies is that these are government-mandated shutdowns of the economies. These are not market failures. And so the EU issues 500 billion dollars and euros for a fiscal plan. It’s not the small companies, even the large companies’ fault that this is happening. So the governments have and will continue to push money into the economy because they know that this is their fault. It’s their responsibility. The companies aren’t failing. It’s the government that’s failed the companies by not having a plan and not having the resources in place to manage this.

 

 

AN: So that’s no need for such huge pessimism, I suppose. So you think that as long as the government’s take the right actions and the full might I mean that the second supply shock or another sort of sort of impact might not be as big. Well Dr. Samuelson some say that China could employ what some call it a trap diplomacy either by seizing other country’s assets or forgiving that to boost its soft power if it does employ this kind of tactic then could we see the world order actually change?

 

LS: We have to remember that the question of debt-trap diplomacy was here well before the pandemic. Critics of China have been concerned about this for some time. I don’t have a good idea. It’s very hard to say whether the pandemic is going to exacerbate. The concerns people have about debt-trap diplomacy, it might if it puts other countries that China is dealing with in a particularly adverse position. But it might not. It’s having an effect on China. That may make things more difficult for them.

 

I think more important is to remember that when we talk about debt trap diplomacy, we tend to think of international trade of economic relations between countries as a competitive or an antagonistic activity, where the most important thing to keep in mind is that international trade is at its heart a cooperative activity. We engage in it because countries on both sides gain from international trade.

 

As China invests in other countries, as it deals in other countries, it acquires some influence in those countries and some people are worried about that. That’s where the term debt trap diplomacy comes from. But it also becomes linked to those countries and has an interest in those countries and that creates a force going the other way. I think on balance it’s important to remember that there are some real gains to our world economy.

 

Some risk, some supply chain risks, that we have seen. Some political risks that some people worry about. But on that I think there are real gains from having the International economy linked together. We see these gains in terms of our economic well-being. I think we see these gains in terms of our political well-being as well. Countries, as they trade, as they deal with one another, tend to have common interests that in the long run are good for all of us.

 

 

AN: Well, so we really need to see more cooperation and continuous trade between nations especially in times of economic crises. Well Dr. Ron Webb, how do you expect this tug of war between the US and China to play out during this pandemic, especially as their bilateral relations worsen because of the COVID-19 pandemic?

 

OW: Well, you know the future is contingent clearly. But I think in terms of the current trajectory, it looks like this tug of war, this ongoing bilateral trade war between these two economic juggernauts, will continue unabated I mean from the recent news reports of President Trump’s speeches and his articulations on the issue, it’s quite clear that the US administration is doubling down on its protectionist measures against not only China but also even the European Union and also Mexico.

 

So I think the COVID-19 challenge which is having an impact of across various domains including economics and technology and so forth will continue without much foreseeable change. I think this effects you know the global economy. It has been even pre COVID, but I think it’s not helping the situation whatsoever in the current climate.

 

 

AN: Right. So, we expect these technological sort of competition and the sort of trade disputes that we’ve seen in the past, they’re not just going to stop short because of this pandemic that’s going on. They’re going to continue. Nevertheless, well just before we go,  Mr. Nash, some say that there could be a rebound in the latter half of the year. When do you think the worst of this pandemic
will be over on the economy?

 

TN: Yeah, I think it really depends. I think it depends on a country’s ability to issue a fiscal stimulus. I think it depends on the concentration of manufacturing of those economies, and I think it depends on let’s say workforce flexibility. So, with those, I think China is not in a great position. I think China is going to have a very rough year ahead. The official data may not report it, but we envision a very rough year ahead for China.

 

We think Europe will have a rough third and fourth quarter. Of course, late in the fourth quarter, we see Europe starting to come out of this. But both of those are constrained because they don’t have a U.S. dollar basis to issue fiscal stimulus. Their companies have U.S. dollar debt and their countries are having to borrow US dollars into their Treasuries in order to keep trade and other things going. So they have real problems.

 

The US has already issued 2.2 trillion fiscal stimuli plus a lot more from the Fed. And so, the US has had the ability to stimulate the economy. It hasn’t really had traction yet. But of the three kinds of general regions, what we’re seeing is the US, although they’re all very difficult situations on a relative basis, we see the US doing much, much better because of the US’s ability to issue fiscal stimulus and to play monetary policy with the US dollar. So the US dollar is a huge asset for the US.

 

The large millennial bracket is a huge asset for the US. It’s a workforce that’s actually contributing to the overall dependency ratio and then the ability for US companies to pull their manufacturing back to North America, this is not absolute it doesn’t mean a hundred percent, but some manufacturing will certainly be diverted to Mexico for a number of reasons, and we see that taking catching pace in, say, q3 and q4. And that allows the US to do more value-added activities through the course of recovery.

 

AN: Right. Well, each region is going to have its own challenges and an unprecedented pandemic really does bring unprecedented complexities when it comes to recovery. Well I’m afraid that’s all we have time for today it’s been a very great discussion.

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[Global Insight] Why are stocks, oil prices continuing to crash?

 

Arirang News notes:

 

Oil prices have fallen sharply for four consecutive weeks now. Slumping by more than 60 percent since the turn of 2020. As the coronavirus pandemic continues to severely disrupt business, travel and daily life, demand for crude has been plunging, and major producers like Russia and Saudi Arabia haven’t helped the situation by launching an intense price war.

 

This is stirring even more volatility in global stock markets as the world economy reels from the coronavirus pandemic. It’s a time of uncertainty but to provide us with a better sense of what might lie ahead, we’re joined by Dr. Kang Wu, Head of Analytics, Asia at S&P Global Platts, and Tony Nash, CEO and Founder of Complete Intelligence.

 

Let’s first talk about the losses seen on Wall Street on Monday. Dr. Wu, starting with you: U.S. stocks ended in the red, after a two trillion dollar coronavirus support package failed to pass the Senate for the second time. And stocks have been extremely volatile in recent weeks despite the Federal Reserve having cut its interest rates twice this month and rolling out other never-seen-before measures. Why have these moves failed to reassure investors and are you expecting markets to fall even further?

 

This is a very volatile time and overall the demand globally on commodities and on the economy is very weak. So it’s a panicking situation for many economies. It really is up to the individual governments to stimulate the economy and global organizations. I do see that the current downward pressure on the economy and the commodity market will continue until we have a solution. However, the government of the US and other countries and the Fed could help the situation.

 

 

Oil prices have also been getting battered day after day, due to lower demand and this oil price war between Saudi Arabia and Russia. Mr. Nash, Moscow started it by refusing to agree to cut its oil production. It’s a dangerous game of chicken so what are they aiming to gain from this brinkmanship?

 

I think they’re just aiming for more say in the trajectory for crude. This is really a capacity game. Russia doesn’t have the additional capacity available really to go to up against Saudi Arabia. Saudi Arabia has a lot of capacity available. So if Saudi Arabia wants, they can continue producing more volume. The problem is neither government can afford to produce at these rates. They need crude prices about $20 higher than they are right now. So we don’t see this as viable for either government for much longer.

 

 

Dr. Wu, you were in charge of research in global energy markets in Riyadh. What do you think MPS’s strategy is. Can either country afford this war and who do you think will blink first?

 

I agree that there is an issue with the physical budget for Saudi Arabia and similarly there is the issue of the budget for Russia. However, in terms of how long we can sustain the current low prices also depends on how they are fiscally and the reserves they have.

 

Saudi Arabia oil is very important. Crown Prince has been trying to very hard to diversify the economy of Saudi Arabia. So currently the overall oil market is in turmoil in a way that they have very few strategies to pursue. One is to preserve the prices and the other one is to preserve the market share or drive out competitors. So it seemed that after three and a half years of trying the price defense, now they are turning to another strategy to drive out the competition in the oil market.

 

 

Dr. Wu: With the impact of COVID-19 on markets and economies around the world, what dangers lurk around the corner if this oil price war rages on for a prolonged period of time? Is it a potential nail in the coffin for many oil companies who were already struggling to turn a profit when oil was 40 dollars a barrel, let alone 20 dollars?

 

Many companies, many players will get hurt. Other OPEC producers and exporters, smaller ones other than Russia, which is an OPEC and a Saudi Arabia, they will get hurt, and globally, US shale oil producers and Canadian heavy oil sands project operators, if the low oil price continues. Once you know that the global oil storage is running to the limit, then there’s no choice. Some have to give up. Some have to reduce production. And that will start from the high oil producers around the world.

 

 

Mr. Nash: Some say the motivation behind this price war is to hurt U.S. shale gas producers? Do you agree and will it work? Can the US Shale industry complex survive a prolonged stretch with oil basically being given away? How should the U.S. government react to this?

 

In 2015, we saw OPEC really take that aggressive stance against shale producers. I think it failed because US authorities tried to, and very effectively, extended credit to shale producers. I think this time that those same or even more aggressive instruments will be put in place to defend shale producers.

 

That’s not to say everyone is going to be healthy. That’s not to say there won’t be consolidation in shale. It’s also not to say there won’t be kind of closed downs in places that are really expensive like Colorado and other places to produce. But I think in general, the aim is to ensure that the volume of shale production in the US stays relatively consistent and that the US can continue to be a net producer of crude and I think that’s really what the US is focused on.

 

So I see this as a Saudi-Russia issue, and perhaps a Saudi-Iran issue as much as it is a kind of Saudi-Russia-Shale issue.

 

 

As an aftermath of this, what do you think the long-term impact would be on oil markets on all companies across the world?

 

Crude companies have to become much more efficient. There’s a lot of automation, there’s a lot of other things that can happen within oil companies. There’s a difference between national oil companies and independent oil companies. so the national oil companies are typically pretty inefficient, and they’ll probably stay that way. The independent oil companies, really the private sector ones, will have to get even more competitive, which there’s plenty of room for them to get competitive and I think they’ll be the healthier ones in the long run.

 

 

Dr. Wu: OPEC’s current production cut deal expires at the end of the month. Do you see prices dropping even further after that? (and if so, how would it affect broader financial markets?)

 

Yes, I do. At the end of the month, I do not see that Russia and Saudi Arabia will come back to the negotiation table very soon. Eventually, they might. But not in a very short time. So April is probably a pretty challenging month for the oil market as the demand continued to drop due to the pandemic of the Coronavirus and oil production. Not only the price formulas by Saudi Arabia, but physical supply of OPEC, particularly Saudi Arabia UAE will increase. That will put a lot of pressure on non-OPEC producers, which are more dominated by independent in North America. Of course also national oil companies as well. At the end of the day, the market needs to be balanced. So Asian players included can buy more oil but up to the limit of the storage, up to the limit of the current state of demand, which is very, very weak.

 

What do you think, Mr. Nash? Do you think there’ll be another oil cut, though?

 

It’s possible. What we’re seeing is we think the last half of April we’ll actually see prices return. We think toward the end of April, we’ll start to see prices back in the 40s. So things may get slightly worse in the short term, and anything is possible. But we know within the 40s, crude prices are depressed anyway. We’ve started to see Asia really come back online post-Corona and we’ll see that kind of move westward as well. So that consumption capacity as that comes back online, that will put pressure on prices.

 

The pressure between the Saudi government and the Russian government, their fiscal revenues, there will be serious pressure there. And you can bet there’s probably pressure from the US government on the Saudis and the Russians to resolve this. So I think that pressure will only intensify over the next two weeks. And we’ll see some resolution say mid-April or third week of April.

 

 

Thank you very much for joining the program today Dr. Kang Wu, Head of Analytics, Asia at S&P Global Platts, and Tony Nash, CEO and Founder of Complete Intelligence.