☀️☕️ Toyota… putting the High in Hybrid

📝 Focus

• Toyota… putting the High in Hybrid

📊 In the Markets

• US labour cools; China’s municipal debt groans;

📖 MoneyFitt Explains

• 🎓 The Fed’s Dual Mandate

💸 Personal Finance Corner

• Stop Misunderstanding Taxes! All You Need to Know About Taxes in Singapore 2024

📝 Focus

Toyota… putting the High in Hybrid

In 2020, the year that Tesla overtook it as the world’s most valuable automaker, Toyota said that it planned on 100% battery electric vehicles (BEVs) in Europe, North America and China by 2030 and globally by 2035. Hybrid vehicles, like the groundbreaking Prius which Toyota first launched in 1997, would plug the gap till then. This was seen by many at the time as a sluggish, even backward-looking response from the world’s largest carmaker to the rise of EVs as led by Tesla and the likes of BYD, and even the EV plans of other “legacy” competitors like VW, Stellantis and even GM.

But this year, investors have driven Toyota’s shares up by over 34%, while Tesla's shares have slumped by 29%. Tesla is still some 70% bigger in terms of market capitalisation (share price X number of shares), but that’s narrowed from 5.5 times bigger in 2021. There are obviously massive differences between the two companies in terms of the number of cars made and sold, revenues, cash flows and profits (all backed by breathlessly excited Wall Street analyst forecasts), but strategically, the difference between the two firms is largely down to Tesla's concentration on a limited number of BEV models, a sharp contrast with Toyota's approach of offering cars across all price ranges with multiple technologies.

Toyota's view was that consumers would be reluctant to buy full battery electric cars given high prices, still-inadequate charging infrastructure and performance issues (including charging in very cold weather). Hybrids, combining battery and traditional internal combustion engine technology, are a much more affordable yet very fuel-efficient combination. Toyota’s much-criticised, gradual path to full EVs via hybrid vehicles has turned out to be very profitable. Its sales of hybrids, priced at a negligible premium to petrol-based equivalents, surged by almost a million units last year to reach 3.4 million, contributing to a record operating profit forecast of ¥4.9 trillion ($33 billion) for the fiscal year ending March 2024.   

..... ▷ Electric vehicles face challenges like high costs, limited charging infrastructure and performance issues, while hybrids offer a compelling alternative with a minimal price premium, fuel efficiency and convenience appeal to consumers, especially as concerns about range and charging persist. Plug-in hybrids offer an intermediate solution, balancing electric range with the flexibility of gasoline-powered travel, though their financial and environmental benefits may vary depending on usage patterns.

Electric Vehicle Types: A mini-Explainer

• Full Hybrids combine an internal combustion engine (ICE, usually petrol) with an electric motor, which assists during acceleration and deceleration, improving fuel efficiency. Hybrids do not need to be plugged in as they rely on regenerative braking to recharge the battery (a technology first used in electric vehicles from the 1890s!) Main benefits are improved fuel economy, reduced emissions and lower operating costs compared to traditional ICE vehicles.

• Plug-in Hybrid (PHEV) are similar to hybrids but with a larger and heavier battery that can be charged externally. PHEVs can operate in electric-only mode for a certain distance before switching to the ICE, offering flexibility by allowing both modes. Main benefits are the ability to drive on electric power alone (reducing emissions), longer electric-only range and the convenience of refuelling at regular petrol stations when needed.

• Battery Electric Vehicles (BEVs) run solely on electricity, with no ICE at all, with a large battery that must be charged from an external power source (charging station or home outlet), producing zero tailpipe emissions. Main benefits are zero emissions, quiet operation, lower operating costs (no petrol needed), and the potential use of renewable energy sources (currently not a given) for charging.

..... ▷ BEVs themselves don't emit tailpipe emissions, but the electricity used to charge them might well be generated by power plants that do pollute, such as coal-fired plants. The environmental benefit depends on the energy mix of the region. As grids transition to more renewable sources like solar and wind, the environmental impact of BEVs will decrease.

Meanwhile, current battery technology also has much to improve, so limiting the size of the batteries used in EVs can also have benefits. 

Extracting the raw materials for lithium-ion batteries can be environmentally damaging and energy-intensive. (There are also concerns about pollution and labour practices in some, if not most, mining locations.)

Plus, there are end-of-life concerns: Lithium-ion battery recycling is still a developing process,  and there are concerns about the environmental impact of disposing of used batteries improperly.

[MFM: Can Toyota catch up in EVs?; China car exports... not just EVs]

📊 In the Markets

The S&P 500 and Nasdaq closed lower on Friday after hitting record highs earlier, with chip stocks leading the decline. The Philadelphia Semiconductor Index (SOX) fell 4% from its intraday peak. Nvidia dropped 5.6%, and Broadcom sank 7% after disappointing forecasts. Marvell Technology plummeted 11.4% due to soft demand projections. 

While US job growth beat expectations in February, the unemployment rate rose to 3.9% from 3.7%, indicating softening labour market conditions. Wages increased moderately, but the jump in the unemployment rate suggests a decline in household employment. The mixed report, given the Fed’s Dual Mandate🎓, increases the likelihood of the Federal Reserve cutting interest rates in June, but markets were more comfortable locking in recent profits ahead of the weekend.

China's heavily indebted provinces and cities have been intensifying efforts to renegotiate debt payments, with liabilities of up to $13 trillion potentially holding back economic growth at a national level. The decade-long debt-fueled infrastructure boom generated strong growth, but local governments are now burdened with billions off-balance sheet debt in what’s known as Local Government Financing Vehicles (LGFVs). According to the FT, officials from Liaoning, Hebei and Tianjin have been engaging in debt discussions with state bankers on the sidelines of Beijing's "Two Sessions." To help address immediate dangers, Beijing has arranged for over Rmb1.4 trillion in refinancing bonds and pressured banks, particularly state-owned ones, to restructure debt, even if it means taking a bite out of their earnings, possibly for years to come. China’s National People’s Congress wraps up today.

📖 MoneyFitt Explains

🎓️ The Federal Reserve’s Dual Mandate

Like most leading central banks around the world, the US Federal Reserve is independent of the government, though "ultimately accountable to the public and the Congress." 

And like them, the Fed's role is to keep inflation under control (meaning around 2%) through all means necessary.

But unlike most independent central banks, the Fed has, since The Federal Reserve Act of 1977, a "Dual Mandate", meaning in addition to managing inflation, it also has to seek "maximum sustainable employment"... not meaning zero unemployment, but a level that is neither a boom nor a bust rate of (un)employment.

So technically, provided it satisfies these two mandates, The Fed doesn't care if the economy sinks into a recession or not, if there is a bull or bear market or if any particular politicians get elected or re-elected.