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Is Tesla’s Business Model At Risk From Republican Repeal Of EV Tax Credit? — Forbes Rebuttal

Forbes ran an article on Sunday about how Tesla sales would be at risk if Trump and Ryan chose to attack the Federal EV Tax Credit. The article attempts to conjure images of Tesla past, of a company on the brink of disaster, leaning heavily on the US federal government as its only support amidst troubling times.

Forbes ran an article on Sunday about how Tesla sales would be at risk if Trump and Ryan chose to attack the federal EV tax credit (Plug-In Electric Drive Vehicle Credit). The article attempts to conjure images of Tesla past, of a company on the brink of disaster, leaning heavily on the US federal government as its only support amidst troubling times.

Having said that, I am admittedly coming into writing a rebuttal with a favorable perspective on Tesla. I am a Tesla Model S owner and a TSLA investor. Though, I have been following and writing about Tesla long before buying my way into the Tesla ecosystem. Both were acquired because I have a strong belief in the company, what it stands for and where it is going in the future, taking humanity along for the ride.

With the stage set and introductions over, it’s time to pull the cover off the juicy article sent off to slaughter by Forbes journalist David Kiley so we can dissect it, exposing the serious flaws and logical disconnects within.

TL;DR

The article dives right into the key points it seeks to communicate in bloated paragraphs stubbed awkwardly into a narrow column which I’ve summarized below. Feel free to dive into it yourself here.

  • Tesla is still expected to post a loss in Q4 ’16 earnings call on Feb 22nd at 2:30pm.
  • Draws a linkage between gas prices and EV sales.
  • Notes that the base price of Model 3 is ~$28,000 after federal rebate or easily $40,000 without it.
  • Paul Ryan is an outspoken critic of the federal EV tax credit.
  • SolarCity may be sapping capital from Tesla’s coffers.

All of the points above were laid out in negative light but it turns out he saved the zinger for the close:

“Tesla CEO Elon Musk had better start rooting for a spike in oil prices to generate good old consumer demand for alternative energy.”

Where is Tesla Today?

Phew. That was a mouthful. Before examining each point, it’s worth stepping back to look at the state Tesla is in today. Tesla has built an empire powered by lithium-ion batteries that power both the popular Model S sedan as well as the Model X SUV. Sales for Tesla vehicles have roughly doubled year on year since first introducing the Roadster, and are forecast to almost triple in 2017, then double again in 2018 as the Model 3 production ramp up kicks in.

It is worth noting that the average purchase price for a Tesla today is in excess of $90,000 — a price point at which buyers must have disposable income and are not looking at the savings from not buying gasoline or even a healthy $7,500 tax credit as make or break points for a purchase.

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Model 3 at Reveal Event. Photo by Kyle Field | CleanTechnica.

Supporting and complementing the Tesla Model 3 is the Tesla Gigafactory, which, when complete, will be the largest battery factory in the world, producing more batteries than the rest of the world did when it was first dreamed up. In addition to the batteries powering Tesla vehicles, the Gigafactory also churns out the optimized “2170” battery that Tesla designed to optimize battery density and cooling in its products.

These 2170 batteries are also the not-so-secret ingredient in Tesla’s storage products, which it sells under the Tesla Energy banner. The Powerwall is an energy storage unit for residential applications, and the Powerpack is a pallet footprint tower designed for larger applications, like the recent installation at the Southern California Edison–run Mira Loma Substation in Southern California, which hosts 80 megawatt-hours (MWh) worth of batteries and serves as a peaker unit without the nasty emissions.

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Tesla Energy Installation at the SCE Mira Loma Substation. Photo by Tesla.

All this power has to come from somewhere, so Tesla recently bid for and acquired the largest residential solar installer, SolarCity. Before the deal was even finalized, Elon held one of his signature events to announce a revolutionary new roof tile with integrated solar cells, making solar not only function well, but also look good.

These products are all made available to the public via the web or from its world-class stores that have transformed the legacy auto dealer experience into a welcoming, positive experience, even though there have been struggles (growing pains) delivering consistent and timely service for some Tesla owners.

All that is to say — Tesla is not your grandma’s automotive company. It is a battery company that packages them up in high-end cars and stationary storage products with future plans to charge them all from solar panels that it also happens to manufacturer, sell, and install. The ecosystem Tesla has worked to create is like none the world has seen before, and is enjoying healthy demand in all business units at present.

Tesla Pricing

The author of the Forbes article has an obvious bias — though, it’s not clear if it is a bias against EVs or just Tesla. He puts everyone on blast in this piece, noting that the federal EV tax credit is expected to expire in 2018 when Tesla hits 200,000 US sales. With Tesla having likely already exceeded 100,000 sales in the US and the steep production ramp for Model 3 kicking off in the next few months, this is likely accurate.

The fact that Tesla has continued to grow sales figures year over year so consistently highlights very clearly just how de-segmented EV sales are from gasoline prices, which continue to ride an unstable commodity roller coaster over the last few years.

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Where’s Waldo? Spot the guy in a Tesla jacket. Photo by Kyle Field | CleanTechnica.

The Model 3 has a base price of $35,000, which puts it just above the average sales price of a new car in the US — which in recent years has hovered around the $32,000 mark. With the federal tax credit, the Model 3 comes in at just $27,500, and even lower in states that offer their own EV purchase incentives, such as California and Colorado.

Ironically, the only competition in the affordable, 200+ mile EV class is the Chevy Bolt, which has only been talked about as a $30,000 vehicle. Unfortunately, this is after the massive federal rebate, with the real base price of the vehicle sitting at $37,500 — higher than the Model 3.

They are two very different cars, and importantly, the Bolt is already selling like hotcakes while the Model 3 is still a few months off, but the starkly different approach in how the two companies talked about the price point shows that Tesla is already planning for the federal incentive to die out and has taken steps to prepare its customers accordingly. Beyond that, Tesla is also working to scale up battery production to keep costs down and profits up, enjoying the highest margins in the industry.

One Cell to Rule Them All

EVs are typically loss leaders, built to comply with zero-emission vehicle (ZEV) mandates that require automakers to sell a certain percentage of zero or low emission vehicles each year. As such, they are not able to take advantage of economies of scale, which leaves EVs out to dry when it comes to profitability, with most selling at a loss. FCA CEO Sergio Marchionne famously begged customers not to buy the Fiat 500e because he supposedly lost $14,000 on each one.

Conversely, Tesla has been planning for this transition all along. When the Gigafactory was first proposed, even Tesla advocates thought Elon had fallen off the crazy train. A five-BILLION-dollar battery factory? Bigger than any other building on earth in volume? It would fit 50 billion hamsters? And then it happened. Nevada, construction, drone flyovers, invading reporters, more cells added, an official launch event, and now it’s pumping out battery cells.

The Gigafactory is the backbone of the company and highlights just how much of an edge on the competition Tesla has as a result of its keenly accurate foresight (or maybe Tesla just got really lucky with the back-of-the-napkin math Elon is so fond of). As highlighted above, Tesla makes batteries for cars and stationary storage at the Gigafactory, meaning it gets twice the volume benefits on battery pricing, not to mention they are all produced in house via an exclusive partnership with Panasonic.

tesla

Back in April, Tesla shared publicly that pack costs were already $190/kWh (the best on the market) and will only continue to drop as the Gigafactory continues to scale up. On top of this, a recent industry expert shared that battery prices were falling faster than they had previously expected and were on a trend to drop below the critical $100/kWh mark by 2020, even calling that number conservative. $100/kWh is the rough line in the sand at which the new tech of battery-powered EVs reach price parity with legacy internal combustion vehicles. (Though, at $2/gallon of gasoline, McKinsey has put the breakthrough price at $150/kWh.)

With all signs pointing to Tesla being on track to reach serious scale in 2017, with Model 3 production ramping up and battery prices on track to beat out internal combustion vehicles (and then some), it is clear that Tesla is on track to ditch the historical trend of quarterly losses and finally start heading into the black. Don’t hold your breath though, as almost every financial expert out there agrees that the inflection point won’t be crossed in the February 22nd earnings call.

Why does this matter? Looking at each of these steps in the rearview mirror makes the journey seem obvious, but at the time, each and every step the company took was a bold, earth-shattering, headline-making, talk-about-it-at-the-water-cooler moment. These bold actions stacked one on top of the other and supported by robust sales in all units illustrate just how accurate the original Tesla Master Plan was.

In Summary

It’s doubtful that anyone who reads CleanTechnica would advocate eliminating the EV tax credit as it is still a lucrative incentive for buyers looking to drive electric, but when all the cards are laid out on the table, it is clear that if it were to be cancelled, Tesla would come out on the winning end of the deal and it would, in fact, be the legacy auto manufacturers who would suffer the most as they seek to bring their first non-compliance EVs to market.

The unfortunate Forbes piece served to expose the obvious bias of the outlet while undermining what little credibility it may have had with readers. Increasingly, the citizens of the world are paying attention not only to Tesla and the inspiring words and actions of CEO Elon Musk, but to the broader landscape of energy consumption in the world as we slowly break our addiction to fossil fuels.

teslaPhoto by Kyle Field | CleanTechnica

 
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Written By

I'm a tech geek passionately in search of actionable ways to reduce the negative impact my life has on the planet, save money and reduce stress. Live intentionally, make conscious decisions, love more, act responsibly, play. The more you know, the less you need. As an activist investor, Kyle owns long term holdings in Tesla, Lightning eMotors, Arcimoto, and SolarEdge.

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