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The ‘Tesla-financial complex’

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This is an audio transcript of the FT News Briefing podcast episode: The ‘Tesla-financial complex’

Joanna S Kao
Good morning from the Financial Times. Today is Monday, December 6th, and this is your FT News Briefing.

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The corporate drama at Toshiba has a new development and European auto suppliers warn they’ll take a huge hit from a rapid transition to electric vehicles. And our global finance correspondent Robin Wigglesworth will tell us about the “Tesla-financial complex” and what it means for the market.

Robin Wigglesworth
Tesla can go up 20-30 per cent in the month, which is just unprecedented for a company of that size.

Joanna S Kao
I’m Joanna Kao, in for Marc Filippino, and here’s the news you need to start your day.

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Toshiba, if you recall, came out with a proposal last month to split itself into three separate companies. It was the latest effort by the industrial giant to rebuild its market value and to address pressure from activist investors. Now, a group of shareholders has told the FT that it will vote against that proposal. This group together holds more than 30 per cent of Toshiba stock, and it accuses the company of failing to fully pursue talks with private equity buyers. It also says it will ratchet up pressure on the board to revive discussions of a full buyout of the company. Some shareholders are even considering more immediate tactics, including an emergency vote to purge the board.

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The European Union plans to ban combustion engine cars by 2035. That means in less than 15 years, carmakers won’t be able to sell vehicles powered by fossil fuels. But today, a group of EU auto suppliers issued a warning that this policy could lead to hundreds of thousands of job losses. Here’s our Frankfurt correspondent Joe Miller.

Joe Miller
Well, it’s one of the first real large-scale cries of anguish from the supplier industry in Europe for a long time, or at least for the last few years, they’ve basically been jostling for pole position these companies and the automakers in terms of their commitments to the energy transition to clean technologies, particularly electric cars. But as we’re getting to the sharp end of this transition and as the EU is putting in this very, very hard deadline, essentially de facto banning combustion engine cars by 2035, we’re beginning to hear certain voices in the industry saying, hang on a minute, this is going far, far too fast for us.

Joanna S Kao
Joe, what do others in the industry say about this? Will the transition to emissions-free cars be as disruptive as the auto suppliers say it will be?

Joe Miller
It’s actually quite difficult to get a clean read on that. It depends on who you ask in the supply chain. It isn’t clear that there are that many companies who will completely go out of business because of this transition. Essentially, it’s only those that are really involved only in making certain parts that exist solely in combustion engines. And there are very few companies like that. Most companies are a little bit more diversified. And so it’s clear when you look at, say, the powertrain industry that there are many companies that will get through this a little bit bruised, but essentially unscathed. And then there are others a bit further down the supply chain that are already feeling the pinch and that they thought for a long time that there would be a more gradual transition. But what’s really happened is, firstly, there’s been a lot more interest in electric cars in Europe than the automakers in the supply chain anticipated, partially due to very generous subsidies in places like Germany. And the second thing that’s happened is that the big carmakers, particularly Volkswagen, which is Europe’s largest carmaker, has all but ruled out any other technologies. They’ve essentially said the costs of going into electric vehicles are high enough. We cannot split our research and development budget between electric and e-fuels and hydrogen. We’re going all in. And so the market has started to make a very, very clear choice that electric cars are the way forward. And that leaves a lot, a lot of suppliers who had hedged their bets a little bit and they suddenly realised, wow, we’ve got this almost immediate deadline in car terms. And we know there’s only one technology that will survive and this is really going to hurt us.

Joanna S Kao
Joe Miller is the FT’s Frankfurt correspondent.

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Tesla has become one of the most valuable companies in the world. This year, its market capitalisation surpassed $1tn. But perhaps more consequential than its size is the company’s influence on financial markets. That’s due in part to its enormous web of investment vehicles and a huge derivatives market. It’s something that our global finance correspondent Robin Wigglesworth calls the “Tesla-financial complex”. He joined us to talk more. Robin, can I ask about the Tesla options market alone? How big is it?

Robin Wigglesworth
It’s mammoth. Its options is only one part of what I call the “Tesla-financial complex”, but it is the biggest part of it. So these are derivatives that give people the upside or downside exposure to the stock. The trading values averaged $241bn a day in recent weeks. That means that Tesla is bigger than Amazon and the rest of the S&P combined. And some days it’s been four or five times bigger if you consider size of the market and the swings in the price.

Joanna S Kao
That’s incredible. I mean, that has to affect the rest of the market. What does that mean for other stocks and what does that mean for investors who don’t hold any Tesla stocks?

Robin Wigglesworth
Well, so options are sort of funny beasts, right? They’re derivatives, and they can have clearly an impact on the individual stock. In theory, you know the price of a Tesla option should, it’s derived from the price of Tesla’s shares. But with those kind of trading volumes, you know, the tail starts wagging the dog. And because Tesla is such a big part of the US stock market now, it bleeds into the wider market as well, because if you lose or make a lot of money on Tesla options, that will affect everything else around it. It also means that Tesla is uniquely volatile for a company of that stock, so some companies, like an Apple, might gain five or six per cent a month and that’ll be a good month. But Tesla can go up 20-30 per cent in the month, which is just unprecedented for a company of that size. So it means that every fund manager that might have a big weighting towards Tesla, might be a huge Tesla fan, they’re going to crush the competition that month. And everybody who doesn’t like Tesla that much or might just be a little bit underweight, you know, have some Tesla stock, but not much in there is going to underperform. So it just means that what a lot of fund managers across America does, how well they do from any given month or year, kind of depends on what kind of holding they have in Tesla. Nothing else.

Joanna S Kao
So what does this mean for the market long term? With this kind of influence, could it capsize the whole market?

Robin Wigglesworth
I’ve seen people argue that Tesla might be systemic. So if Tesla drops a lot, then that’s going to hurt the stock market disproportionately, a lot of people are going to lose money. And if Tesla goes up a lot, they’ll drag more the stock market with it in the same way. But I don’t think it’s systemic in that it will cause a crisis. With the caveat that there are always things we don’t see, these are the hidden interlinkages and I’m always worried about what other picture am I missing? Which big investment fund, for example, might be heavily exposed towards Tesla? And if Tesla goes down the drain, then it goes with it. And that ripples on. So I don’t think we should worry too much about this. This is more of a curiosity at this stage, but it is a pretty incredible curiosity.

Joanna S Kao
Robin, do you think Elon Musk had this in mind, or did this all just come about by chance?

Robin Wigglesworth
I mean, there are people that are somewhat conspiratorial and think that a lot of this is intentional. I think he’s definitely found some of this. But whether it was his intention to create the “Tesla-financial complex”, I am somewhat sceptical of. His is a company and his is a personality that was uniquely suited for the social media age and collided with a once-a-century pandemic that led to a once-a-century economic stimulus and stock market boom and retail trading boom. And, above all, a retail trading move set around derivatives called options. And when all these factors got thrown together, you had Tesla becoming a trillion dollar company or what I think even fans would say is a fairly flimsy revenue base.

Joanna S Kao
That’s Robin Wigglesworth, our global finance correspondent.

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Before we go, Singapore is discovering the challenges of being a hub for cryptocurrency. Financial regulators in the Southeast Asian city state have suspended the local operations of a prominent digital currency exchange called Bitget. The exchange had been promoting something called Army Coin. It’s a crypto coin named after BTS Army, that’s the famously devoted fan base for the boy band BTS.

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The coin claim to provide lifetime financial support for BTS band members, although anyone can buy and sell it. The problem? The band’s agents said the band has nothing to do with it. The agent has threatened legal action. Another potential problem the owner and creator of Army Coin is unknown. However, what is known is that trading in this coin is really volatile. The FT found its value could swing between $1,000 and nearly $80,000 within minutes.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the…



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