The last few days have been immensely entertaining for me as Elon Musk, the CEO of Tesla Motors (NASDAQ:TSLA), excoriated New York Times writer John Broder for deviating from Tesla's carefully scripted and surreptitiously monitored Winter Wonderland Tour for their flagship Model S Performance Edition. Despite Mr. Musk's shrill accusations of dishonesty verging on deliberate sabotage, Mr. Broder's tragic tale of woe struck me as a classic example of the kinds of things that can go wrong when human beings are given inaccurate information by smart control systems and make poor decisions based on that flawed information.
Tesla builds three versions of the Model S, a five passenger electric sedan with impressive performance and fair weather flat road ("FWFR") range of 160 miles with a 40 kWh battery pack, 230 miles with a 60 kWh battery pack and 300 miles with an 85 kWh battery pack. Their basic customer sales pitch is that the Model S Performance Edition with an immense battery satisfies the needs of most drivers and even accommodates road trips with minimal fuss, muss, bother and delay.
While I'm delighted to leave arguments about the Winter Wonderland Tour and the Model S Performance Edition's technical attributes to other writers who like parsing tempests in teapots, I find it fascinating that fawning Tesla acolytes in the mainstream and financial media can't see or won't discuss the absurdity of Tesla's value proposition as it shamelessly promotes waste as a treatment for range anxiety.
Let's run through the numbers together.
According to the US Department of Transportation the average American drives 13,500 miles per year (16,500 miles for men and 10,000 miles for women). There's no reason to believe Tesla owners with big battery packs will drive more than Tesla owners with small packs, or for that matter that they'll drive more than the average American. They'll just feel warmer, fuzzier and more secure knowing they have loads of spare battery capacity if they should need it. That security, however, comes at a very steep cost.
Tesla's basic 40 kWh battery pack costs the consumer about $20,000. When you deduct $7,500 in Federal Tax Credits, depreciate the battery pack over an eight year service life and add $0.10 a kWh for electricity, the baseline cost of avoided gasoline consumption is $4.81 per gallon for a consumer who drives 13,500 miles a year and would presumably drive a CAFE compliant new car that gets 34.2 mpg if he couldn't drive a Tesla.
If you add a $10,000 increment for a 60 kWh battery pack to treat mild range anxiety, the cost of avoided gasoline consumption jumps to $7.98 per gallon.
If you add a $20,000 increment for an 85 kWh battery pack to treat severe range anxiety, the cost of avoided gasoline consumption skyrockets to $11.15 per gallon.
Capital costs of that magnitude can only appeal to three classes of customers:
- The mathematically challenged who can't calculate their costs;
- The philosophically committed who won't question their assumptions; and
- The cynical opportunists who will pay a premium price for HOV lane access.
I'm certain that a niche market for electric cars does exist among people who think image is everything and cost is no object. I'm not convinced that the niche is a wellspring of demand, as opposed to a puddle, or that government support for plug-in cars will long endure. Major automakers like Toyota (NYSE:TM) and Daimler (OTCPK:DDAIF) are throwing their R&D muscle behind fuel cells while outsourcing plug-ins to sub-contractors. Following an epidemic of high profile failures in the lithium-ion battery sector, the DOE has acknowledged that batteries need to be five times better before battery dominant electric drive can be cost-effective while President Obama recently argued that batteries need to be ten times better.
The fundamental problem with long-range electric vehicles is that batteries are wonderful efficiency devices but they're terribly inefficient fuel tank substitutes. To help clarify the energy policy issues and societal impacts, the following list offers a brief hierarchy of some of the things a nation could accomplish with a 10-megawatt supply of advanced batteries.
- Saving 3,000,000 gallons of diesel a year with 300 series hybrid Class 8 tractors;
- Saving 2,000,000 gallons of diesel a year with 20 battery-powered locomotives;
- Saving 1,120,000 gallons of gasoline a year with 7,000 Prius class HEVs;
- Saving 800,000 gallons of gasoline a year with 20,000 medium micro-hybrids;
- Saving 187,500 gallons of gasoline a year with 625 subsidized Volt class PHEVs;
- Saving 160,000 gallons of gasoline a year with 400 subsidized Leaf class EVs;
- Saving 100,000 gallons of gasoline a year with 250 subsidized Model S40s;
- Saving 66,800 gallons of gasoline a year with 167 subsidized Model S60s; and
- Saving 47,200 gallons of gasoline a year with 118 subsidized Model S85s.
Readers who argue that what feels good for the one must be good for the many invariably assume I have a visceral hatred for electric cars. The reality is I couldn't care less how an individual chooses to get from Point A to Point B as long as he pays for his choice from his own wallet. My primary concern is sensible investing. My secondary concern is sensible energy policy to encourage choices that benefit society and discourage choices that don't.
No reasonable man can look at the universe of possible uses for 10-MW of batteries and contend that the Model S is a sensible product for consumers or that sound energy policy should favor its production, sale and use. The Model S is the worst kind of waste - waste masquerading as environmental and social responsibility.
At yesterday's close Tesla had a market capitalization of $4.4 billion. In a December 2012 research report JPMorgan's analyst predicted that Tesla's Q4 loss would be $86.2 million and its December 31st balance sheet would reflect $106.4 million in cash, $293.9 million in current assets, $291 million in current liabilities and $120.5 million in stockholders equity.
Based on those numbers, Tesla's net working capital was a mere $3 million a month and a half ago and its remaining stockholders equity was about a third of its 2012 loss. These balances are simply not adequate to sustain a company that plans to manufacture and sell 20,000 cars a year. At $4 a share, Tesla would be an interesting speculative stock. At prices approaching $40 a share it's a sucker's bet with limited upside and unlimited risk.
A friend of mine recently quipped, "I felt a sudden disturbance in the Force, as if a million unborn electric vehicles suddenly cried out in pain and then were silent after the State of the Union address last night." Support from the auto industry is fading fast. Politicians are backing away from electric drive like scared crawfish. The mainstream media is beginning to understand the costs and performance limitations and customers are beginning to share their personal horror stories. Meanwhile, the Iron Man is sounding more like Richard Nixon with each passing day as he monitors legions of potential enemies and launches shrill and vitriolic PR campaigns against writers who speak the inconvenient truth with clarity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I am a former director of Axion Power International (OTCQB:AXPW), a developer of advanced lead-carbon batteries for rail, trucking, automotive and stationary applications, and have a substantial long position in its common stock.