Tesla Used Cars: Rocky Mountain High?

| About: Tesla Motors (TSLA)

Summary

Where have all the CPOs gone?

Isellcars has some intriguing intelligence: a Denver Model S auction may be in the works.

Why Denver? Because Colorado. And why Colorado? It's all about tax credits.

Congratulations, Colorado: Your tax credits favor the wealthiest, and cause more coal to be burned.

We travel from Colorado to Georgia and Denmark for a final word about incentives.

Something odd is going on with Tesla (NASDAQ:TSLA) CPOs (certified pre-owned vehicles).

Typically, there are scores of CPOs for sale. And, with the recent refresh, one might expect the CPO supply to climb as some Model S owners trade in their original version for the updated design.

For the past several months, though, Tesla's CPO supply has dwindled to almost nothing while hundreds of new inventory cars (INV) have been listed for sale.

Ladies, introducing Mr. Right.

You can track the numbers at Tesla's pre-owned web site, but it's far easier to use the marvelous, privately-created EV-CPO Consolidator (let's call it the Consolidator).

The Consolidator is the creation of a TMC Forum member calling himself Hank Lloyd Right. Mr. Right's Consolidator includes the same listings on Tesla's site, but presents them in a far more usable way.

On the Consolidator, one can see all inventory and CPO listings from the U.S., Canada, and Europe, and can order and organize them based on a number of data fields (city, price, features, etc.). One can also track historical data as cars are sold or otherwise removed from Tesla's site.

The Consolidator is clear, informative, and an altogether great piece of work. Congratulations, Mr. Right (who, I should mention, is a very happy Model S owner.)

But where are the CPO's of yesteryear?

As I'm submitting this piece for publication, the Consolidator lists, in the U.S., 411 inventory cars but only 2 CPOs.

In Canada, there is but one CPO alongside 55 inventory cars. Only in Europe is there an appreciable number of CPOs - 31 (compared with 138 inventory cars).

I would expect the relative balance to be exactly the reverse. Given Tesla's "production-constrained" story, there should be only a sprinkling of inventory cars but plenty of CPOs.

Indeed, right now, Tesla should be marketing and selling CPOs as quickly as it can. Why? Because Tesla can expect an increasing number of used cars coming its way as 2016 progresses:

  • the Model S refresh will likely generate hundreds of trade-ins; and
  • the return window just opened on Tesla's resale value guarantee program (it began exactly 36 months ago), which will add to Tesla's used car stock.

So, with apologies to François Villon, we ask, "Mais sont les CPOs d'antan?

Consolidator creator Mr. Right is as puzzled as I am about the vanishing CPOs. Here's a note he posted last week:

Just be aware that right now, Tesla is only listing about FOUR actual CPO/used cars on their site, and as such, on EV-CPO. The rest are new "Inventory" cars which are loaners or demo cars or just unsold new inventory with minimal miles.

When the site launched last year, there were hundreds of CPO cars available each month with lots of variety/selection of different models and options. The rumor is that now that the Model 3 reveal and the Model S facelift is over, there should be a flood of held-back CPO cars to be listed "sometime soon." Nobody (except for Tesla) knows if or when that will happen.

Here are some plausible explanations...

It could be that Tesla's Service Centers have been too overwhelmed preparing Model X deliveries and tending to Model X repairs, all the while attempting to squeeze in Model S service orders (some Model S owners report lengthy waits for routine maintenance appointments).

Perhaps there simply hasn't been enough time left in the day, even the overtime day, to get to used cars that need the extensive attention required to give them "Tesla Certified" status.

There are, of course, other possibilities. Earlier this year, some Tesla owners reported receiving, as service loaners, high-mileage vehicles rather than newer cars. Perhaps Tesla continues to push the CPOs into its loaner pool.

Also, judging by listings on eBay, Autotrader, cars.com, and Texas direct, it's possible that, to reduce carrying costs such as depreciation, storage, and maintenance (keeping those batteries charged to guard against "vampire drain"), Tesla moves trade-ins to used car dealers.

None of these possibilities, however, seems to adequately explain the almost complete disappearance of CPOs from the market.

Another layer of intrigue: at least one CPO buyer reports having made a selection from a list furnished to him by his Tesla "Pre-Owned Advisor." The list included 33 cars in the Southeast part of the U.S.; most were relatively high-mileage 60 kWh models, but a there were a few 85 kWh cars as well.

Assuming this back channel is open to others, a determined CPO shopper may be able to look at cars available in his or her region. But this is obviously a peculiar, indirect way to go about selling CPO stock.

So, perhaps something else is afoot.

Isellcars has his ear to the ground.

Seeking Alpha member Isellcars (who really does sell cars, and is highly knowledgeable about the used car business) offers a captivating clue.

He has learned that Tesla recently approached the Denver office of Manheim Consulting, the world's foremost used car consulting and auction firm, with a proposal that Manheim assist Tesla in selling a substantial number of used cars.

Tesla "big shots" reportedly toured Manheim's Denver facility to discuss the auction plan. However, Tesla has not yet settled on either the specific date or the number of cars to be auctioned.

I'm confident that Isellcars has accurately reported what he heard. But when he relayed it, I was . . . what's that word? Skeptical. Yes, I was a bit skeptical that the account he heard was reliable.

Why did I have doubts? Because typically an auction would not achieve nearly as high a price for a used car as a CPO sale. Indeed, one might imagine that Teslas especially would fare poorly at an auction:

  • Tesla parts can be purchased only from Tesla;
  • a Tesla's body damage can be repaired only by a select few shops;
  • and it would require an intrepid buyer to adopt a used battery that is out of warranty.

Sure, the CPO refurbishing process is expensive (I've seen per-car average cost estimates ranging between $3,000 and $5,000). And, sure, the recent Model S facelift may quickly drop resale values on the cars with the original design. But still, an auction?

Colorado: not just cannabis, but tax credits

Then it hit me. Any old auction would not make sense, but an auction in Denver, well, that's another matter.

You see, in Colorado, unlike in any other jurisdiction in the world, the purchase of a used plug-in vehicle qualifies for a tax credit of up to $6,000. And, it qualifies for the credit regardless of how old the car is or how many miles it has.

The only requirement is that the used vehicle come from elsewhere and, upon its purchase, be registered and titled in Colorado.

The credit is available to both buyers and lessees. It remains in effect through 2021, though in the final two years the formula changes a bit.

Does the legislative formula have Tesla's fingerprints?

The legislation's formula for calculating the tax credit is heavily tilted toward pure EVs. In other words, it is heavily tilted toward Teslas, and only Teslas.

As an example, a used Model S with a 60 kWh battery selling for only $10,000 would qualify for the full $6,000 credit. A 60 kWh Tesla selling for $20,000 would qualify for the full $6,000 credit all the way through 2021.

By contrast, a plug-in Toyota Prius with a 4.4 kWh battery selling for $10,000 would result in a tax credit of only $440. That would drop to $330 in 2019 and $220 in 2020. To capture the full $6,000 credit, the used Prius would need to sell for $136,000.

I'm not saying Tesla helped design the legislation and lobbied for it. I'm only saying that Tesla itself could hardly have written the legislation to be more favorable to Tesla.

The rich get richer; hybrids go to the back of the line; more coal gets burned.

Its obvious that under this legislation, the lion's share of the tax credits will be awarded to Tesla buyers (of both new and used Teslas).

Here's the operative language for "Category 1" cars (EVs or hybrids) the creates this effect:

(NYSE:I) WITH RESPECT TO THE TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2013, BUT PRIOR TO JANUARY 1, 2019, THE ACTUAL COST INCURRED BY THE TAXPAYER DURING THE TAX YEAR FOR PURCHASING OR LEASING A CATEGORY 1 MOTOR VEHICLE MULTIPLIED BY THE BATTERY CAPACITY OF THE MOTOR VEHICLE AND DIVIDED BY ONE HUNDRED;

(II) WITH RESPECT TO THE TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2019, BUT PRIOR TO JANUARY 1, 2020, SEVENTY-FIVE PERCENT OF THE CALCULATION SPECIFIED IN SUBPARAGRAPH OF THIS PARAGRAPH (NYSE:A);

(NASDAQ:III) WITH RESPECT TO THE TAX YEARS COMMENCING ON OR AFTER JANUARY 1, 2020, BUT PRIOR TO JANUARY 1, 2021, FIFTY PERCENT OF THE CALCULATION SPECIFIED IN SUBPARAGRAPH OF THIS PARAGRAPH ;

How many Colorado legislators would you guess understood this formula, or its implications, when they voted on the measure?

Were they aware that, even though plug-in hybrids may well be a far more efficacious "green" solution than pure EVs, they were tilting the field in favor of the EVs and against the hybrids?

Were they aware they awarded the maximum tax credit to those likeliest to be the wealthiest car buyers?

Were they were aware they were encouraging more electricity consumption in a state that generates 60% of its electricity from coal?

Oh, well, it's the virtue-signaling that counts.

Buckle up, Colorado. This might hurt.

Who pays for all this? Why, the Colorado taxpayers of course. And, how much did Colorado elected officials, after their sober deliberations, allocate for this special interest subsidy? The annual sum of $5.9 million.

And how many $6,000 subsidies will $5.9 million dollars pay for? A grand total of 983 cars, which is about how much was awarded in tax credits during 2014.

If Tesla actually intends to have Manheim conduct an auction of used cars in Denver, then Colorado had better brace itself for a budget-busting blow. If Manheim sells only 500 used Tesla cars, it will cost taxpayers $3 million.

With $373 million in cuts to other programs already being proposed, that could get interesting.

If the money needs to come from the kindergarten programs, then that's simply the trade-off we need to make for cleaner air.

If Tesla's used car blitz upends Colorado's budget in 2016, imagine what happens in 2018, 2019, and 2020 when the Model 3 hits the market. Colorado buyers will get $13,500 in federal and state tax credits.

The legislation puts no aggregate cap on the annual tax credits. Let's hope Colorado has some money set aside to cover the lost tax revenues, because it's already straining to pay for its underfunded pensions.

But it's all okay; Tesla benefits.

Conducting the auction in Denver comes at the expense of the environment and the taxpayers, but it still would be a shrewd move for Tesla. So, I suppose, Tesla shareholders can be pleased about that.

By focusing first on Colorado in selling its used car supply, Tesla not only would capture the extra revenues resulting from the extraordinary $6,000 tax credit, but also could help maintain a floor under its RVG pricing.

Moreover, it's possible that Tesla can designate the cars entrusted to Manheim as CPOs. If that were to happen, the auction proceeds could be significantly higher.

Before moving on, let's pause to remind ourselves that the information from Isellcars is hearsay. Good hearsay, yes, but hearsay. A major undertaking to sell used Teslas in Denver may never come to pass.

But if it does, you heard it here first.

Colorado Update: The reader comment that pulls it all together.

I'm updating this article on the morning of April 29 to "promote" this comment from Seeking Alpha member CoverDrive, who takes what we've observed and makes sense of it in a coherent and compelling way:

I don't know that readers understand the significance of these Teslas going to auction. The auto auction is where dealers dump cars that they don't want to have on their used car lot. They are bought up by independent used car sellers who buy them at prices below wholesale. And if you were an independent, how eager would you be to buy a Tesla? What if a door handle doesn't present? What if the touch screen is flakey? Can you repair it? Can you even buy parts? Are you going to plug it in every night that it sits on your lot?

With all of the discussion about how good the Model S resale value is, this auction (and I assume others like it) will have a measurable impact on that trend. The way I see it, the CPO experiment has not yielded dividends. Tesla has decided to re-purpose some of them as loaners and auction the rest to cut their losses.

And yes, the Colorado incentives will improve the auction prices. But I have to believe that Colorado used market can only absorb a finite number of them.

And now, back to our original article...

Yes, incentives really do matter.

Colorado is a crucial reminder of the critical importance to Tesla of subsidies.

Another such reminder is Denmark. Look what happened after Denmark announced last October that its sales tax exemption for EVs would expire at the end of 2015:

Georgia sales data tell a similar story once it ended its $5,000 tax credit.

Yes, Tesla investors, those incentives matter. Without the incentives, without the ZEV credits and other subsidies, Tesla simply would not exist. If you don't believe that, you're simply not being realistic.

Even Elon Musk doesn't deny that the incentives are crucial. Instead, he insists that internal combustion vehicles get incentives as well. (I think his argument relies on gross exaggerations and distortions, but that's a whole 'nother story.)

Incentives matter. Keep that in mind when reflecting on what's likely to happen as the $7,500 federal income tax credit starts to phase out just as the Model 3 arrives in volume.

Not for nothing are Colorado's legislative chambers (and those of California, and Connecticut, and the U.S. Congress) crawling with Tesla lobbyists.

Caro Senhor Santos, you were right, we were wrong.

Now, let's return to those delivery numbers from Denmark for just a moment. Notice that the total number of deliveries since October 2015 is 1,810.

I guess Tesla didn't sell all 2,500 of those Model S cars that it registered in Denmark last November, did it? Do some people around here, perhaps, owe Paulo Santos an apology?

A Note About My Contributors

I am grateful to Isellcars for his indispensable contribution to this article.

I am also appreciative of the valuable contributions of Bonaire and investor.gator of Seeking Alpha and temagami and n0m0renancy at the Yahoo Tesla message board.

As always, they are not responsible for my mistakes, nor do they necessarily join in all points of my analysis.

Image: Tesla's Silverthorne CO Supercharger station, powered by coal

Disclosure: I am/we are short TSLA VIA LONG-DATED PUTS.

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.