Commercial Awareness Update – W/C 12th July 2020

The round-up of the stories that a budding Student Lawyer should be aware of this week. Sign up here to get these updates in your inbox every week.

Tesla dethrones Toyota

Article by Shreya Dristi (2nd yr law student at Durham University) 

Tesla has dethroned Toyota as the most valuable carmaker with its present market value being almost $4bn more than Toyota’s current stock market value. Tesla’s value had already surpassed competitor carmakers including General Motors, Ford and Fiat Chrysler to become the most valuable carmaker in the US. By surpassing Toyota, Tesla has successfully become the most valuable carmaker in the word. On top of that, Tesla’s market value has defeated blue chip companies including the likes of Disney and Coca Cola. On the morning of the 1st July, Tesla reached market value of $209.47bn. Tesla’s share values skyrocketed in 2020 with its shares increasing fivefold and by 200% in the past year, culminating in shares reaching $1,134 on Wednesday morning.

Even though Tesla is seen as more valuable, it does not mean that it is actually worth more than Toyota. These developments are shocking to some analysts as Tesla has barely made a profit with it only producing 500,000 vehicles this year. In 2019, Toyota sold 11 million vehicles while Tesla sold only 300,000 showing that Toyota sold around 30 times more cars than Tesla and achieved revenues which were more than 10 time higher.

The pandemic has taken a toll on Toyota’s shares which have decreased more than 12% since early February because it was forced to close showrooms and factories globally. In May, Toyota forewarned that the company’s operating profits may fall by 80% and explained that the decline in vehicle sales will probably be “bigger than during the Lehman Crisis”. While Elon Musk’s tweet about Tesla’s shares being too high may have cut almost 14 bn off Tesla’s value, Tesla has done considerably well in recovering these losses as the tweet did not do much to stop Tesla’s staggering growth. The overall demand in vehicles may have fallen as seen with car sales possibly declining by 15% this year, however the demand in electrical vehicles sustains a steady rise as propelled by regulations in Europe and China.

Tesla’s drastic rise indicates an increase in confidence in Tesla as investors are beginning to see the positive future which lies ahead for electric vehicles. Tesla’s booming value is likely attributed to its growth potential and its provision of transportation running on sustainable energy which is likely to be in high demand in the future. On the other hand, investors value Toyota for the stable, predictable nature of its business and its ability to produce favourable outcomes year in and year out. These developments are yet another example of the general shift in the market as investors begin to realise the value of sustainability in the future.

The Central Bank’s Conundrum

Article by Andrew Dewey (Second Year LLB student at Reading University)

The Central Bank is the main national bank which monitors the economy of a country and in England, it is facing a dilemma.

Due to the coronavirus pandemic, the housing and retail markets have ground to a halt and in turn, consumers in the UK have had no choice but to saving their money – known as ‘involuntary saving’. The Bank of England has recently revealed that deposits in savings accounts are at their highest since records began in 1997.

Whilst an increase in saving would seem attractive to an individual, this is a problem for the Central Bank and the economy. This is because it is not known whether the increase in savings is a promising potential for a large increase in consumer spending post lockdown –triggering a quicker economic recovery, or whether it for the purpose of ‘precautionary saving’ in preparation for a second peak of the virus – which limits consumer spending and increases unemployment. Therefore, the Central Bank is left with the dilemma of how much stimulus is required to fuel a positive economic recovery. The need to solve this dilemma becomes more pressing as lockdown measures appear to be lifted across the country.

If the Central Bank stimulates the economy too much, and there is an increase in consumer spending, there will be a risk of inflation. An increase in inflation would require a rise in interest rate which would increase the cost of borrowing and slow the resurrection of the housing market.  On the other hand, if there is too little stimulus, there will not be enough money circulating the economy to trigger the ‘V’ shaped recovery that the Government is hoping for.

Drawing comparisons with international economies, it appears that consumer spending has risen quickly post-lockdown. For example, French spending on consumer goods had risen by 36.6% in May. In Germany, retail spending has risen to levels that exceed pre-lockdown levels. World leading economists have predicted that these numbers will continue to rise across Europe once the tourism industry is fully unlocked. When considering these figures from a UK perspective, perhaps less stimulus is required. Since the opening of the hospitality sector on Saturday 4^th July has already seen an increase in spending, predictions can be made that UK citizens will be spending in a similar way to other European citizens and thus the Central Bank should avoid too much stimulus to prevent a rise in inflation.

Covid-19: Virgin Atlantic & AirAsia

Article by Francis Louis (First Year LLB student at a London university)

With the pandemic taking place, a core business of the Virgin’s empire took a hit. Earlier this year, the UK government rejected a request of a $500 million aid to Virgin Atlantic. With that, the airline has been trying to secure $1 billion in funding to ensure that it stays afloat for the year. Hence, Sir Richard Branson’s Virgin Group has committed itself to channel $200 million to the airline. Together with that, the group is on the verge to secure $1 billion in funding through various means. Firstly, the airline is expected to receive $300 million in funding from Elliot Management Group. Secondly, $500 million will be raised by selling the shares of Virgin Galactic. Lastly, the airline is expecting $200 million worth of deferment and waiver from Delta Airline and Virgin Group. Furthermore, the group through concession and reorganization of credit card holdbacks could bring about another $310 million. Thus, it is expected that Virgin Atlantic will be able to survive through the pandemic.

AirAsia is a Malaysian low-cost airline that has repeatedly won the award by Skytrax as the world’s best low-cost carrier. The airline is reportedly facing a financial loss whereby its liability exceeds its asset by approximately $430 million. Its external auditor Ernst & Young (EY) released an unqualified opinion which flags concern about the possibility of the airline to survive, taking into account its unhealthy financial position together with the fact that the airline has been grounded for a few months. However, AirAsia’s CEO Tony Fernandez remained confident that the airline will survive as he implies that the airline has managed to attract external funding worth $225 million. Nevertheless, analysts from UOB Bank opined that the airline would require $450 million for the airline to stay afloat this year. Needless to say, the airline has seen a surge in their sales as travels restriction are slowly being lifted off. On 24th June, the airline registered 41,00 seats sold in a day. If this trend continues, the airline could possibly survive through this pandemic.