Tesla Subsidies In Danger: The Trend Is Not Its Friend

|
About: Tesla, Inc. (TSLA)
by: Technology Equity Strategies
Summary

Tesla investors are underestimating the regulatory risk faced by the company in the form of potential removal of subsidies for Tesla cars.

The beginnings of backlash toward Tesla’s massive subsidies are evident in Georgia, California and even Norway.

The value of the subsidies afforded per Tesla car sold is over $22,000 per car in the U.S., and as much as $48,000 per car in California.

Emissions saved by EVs are immaterial. Fuel consumed just by private jet travel alone is nearly 50 times greater than the amount saved from all EVs combined.

As the regulatory imbalance corrects, Tesla sales will likely suffer.

The link between EV subsidies and EV sales has been well established. California and Norway, which have the highest EV subsidies, have inordinately high penetration of EVs and are the core of Tesla's (NASDAQ:TSLA) current market. Indeed, sales in California and Norway represent as much as half of Tesla sales in many periods.

Thus, in trying to understand the potential trend of future Tesla sales, we must keep a close eye on the trend in subsidies. Lately, there are signs that the trend may not be Tesla's friend. Indeed, from Norway to Georgia to California, Tesla may be feeling the cold breeze of a shift in politics, a shift that could be toxic for the high end EV market, and for Tesla specifically.

The Georgia legislature has passed a law eliminating its $5,000 subsidy for BEVs, and it is expected that Governor Nathan Deal will imminently sign it into law. After living with the most generous subsidy in the country, Georgia politicians have now observed that the subsidy was expensive, inefficient and unfair. "One of the arguments I've heard in the Capitol was we were giving these tax credit to rich folks and taking it away from farmers in south Georgia," said Don Francis, executive director of Clean Cities Georgia.

More worrisome, in its home state of California, Tesla is getting similar pressure, occasioned by the growing perception that affluent buyers of a $100,000 car should not be given a subsidy from the taxpayer. Republican California State Senator Ted Gaines has proposed eliminating the $2,500 rebate on electric cars that cost more than $40,000. This would eliminate the rebate for Tesla buyers while preserving it for lower cost auto manufactures who make cars sold at less than the $40,000 price point.

"It's hard for the average Californian to understand why someone buying a $100,000 car should get a rebate," Sen. Gaines said in a public statement. "That's the same question I posed to myself, and it was hard to justify."

Moreover, there are signs that even Tesla's reliable best friend, the California Air Resource Board ("CARB") may be developing a softer spot in its heart for plug-in hybrids, and may start to focus on electric miles driven, relaxing its devotion to the cosmic purity of the BEV drivetrain.

Dan Sperling, a CARB member and director of the Institute of Transportation Studies at the University of California-Davis, said during a recent CARB hearing that he's sympathetic to the e-miles argument. He said he would rather have two plug-in hybrids on the road than one all-electric vehicle.

"I'm willing to make a bet with you," Sperling told CARB Chairman Mary Nichols. "If we provided a more flexible approach, we are likely to get far more e-miles in 2030 than we would with pure EVs. I really don't believe by 2030 we're going to be able to get a really large market penetration with pure EVs."

Norway provides large subsidies in the form of exemption from the steep levies that Norway imposes on gas cars, among other incentives like dedicated parking spots and access to bus lanes. However, the largest subsidies are limited to the first 50,000 autos, and it is widely understood that Tesla's excellent showing in Norway in the first quarter is partly due to the expectation Norway will hit the 50,000 cap, before subsidies phase out. While it's widely expected that Norway will provide some kind of extension, the amount and structure of the extension is uncertain.

Recently, the media has observed that "now some Norwegians are wondering if providing huge incentives for a car bought by high net worth individuals is really in keeping with the spirit of the carrots the government is dangling in front of consumers to lure them toward greener modes of personal motorized transportation."

In addition, citizens of Norway have been complaining about clogged bus lanes since EVs (as with HOV lanes in California) get special access to those lanes.

How much are all these subsidies worth anyway?

It's staggering. If the subsidies are allocated across all 17,300 cars sold by Tesla in the U.S., subsidies of $22,000 per car were paid in various forms for each U.S. car that Tesla sold in 2014. If ZEV credits are allocated just to Tesla's California cars, then total subsidies amount to a whopping $48,000 per car, which is basically half the price of the $100,000 Model S sedan.

The major financial subsidies consist of:

  1. ZEV and other regulatory credits, which are sold by Tesla;
  2. A Federal tax credit to car buyers of $7,500;
  3. In California, a cash rebate to car buyers of $2,500;
  4. In California, a fourth subsidy, access to HOV lanes. This is a critical incentive, which plainly has great value, and must be quantified, even though it's difficult to value with certainty.

In 2014, Tesla sold ZEV and other credits and netted a total of $216 million in cash. (Source: Tesla 10-K). That number alone works out to $12,000 per car sold in the U.S. But of course, the ZEV credits are primarily earned in California. Allocating those credits solely to the 6,110 Teslas sold in the Golden State works out to breathtaking $35,000 per car.

Now, let's look at the rebates and tax credits. In 2014, U.S. customers bought 17,300 cars, resulting in Federal tax credits of $130 million. For the 6,110 cars sold in California, the rebate was an additional $16.5 million.

I have taken the liberty to value the HOV lane access for Tesla in California at $3,000 per car. In the Bay Area and Los Angeles, that's a major deal-maker for the Tesla affluent drivers. Many drivers would in a heartbeat pay more than this (certainly I would). Based on the 20 or so people I have spoken to about their EV or hybrid selection, it is described as a primary motivator, more than the California rebate.

The following sets forth a calculation of the value of the subsidies:

2014 credit sales (From Tesla 10-K)

$216,000,000

US car sales (units)

17,300

Federal tax credit per car

7,500

Total Federal tax credit

$129,750,000

California cars sold

6,110

California rebate per car

2,500

California aggregate Rebate.

$15,275,000

Subtotal subsidy, all U.S. cars

$361,025,000

   

HOV lane value per car (TES estimate)

$3,000

California cars

6,110

Assumed value of HOV access

$18,330,000

   

Total subsidy value, all U.S. cars

$379,355,000

   

Value of subsidy per US car

$21,928

   

Value of Credits sold per California car

$35,351.88

Federal and California Rebates per Calif car

$10,000.00

Assumed HOV value

$3,000.00

Total Subsidy per California car

48,351.88

   

ASP per car $100,000

100,000.00

Subsidy as a percent

of ASP paid

0.48

Calculated in this manner, Tesla's sales in California were incentivized by subsidies that amount to about 48% of the price of the car. To some, it may seem that our society has been turned into a giant money piñata, where Tesla hits it with a giant bat and money spills out.

It has been argued that the ZEV credits aren't really a cost to society because they are paid by competitors, not directly by taxpayers or drivers. This silly argument is the policy equivalent of a perpetual motion machine.

In essence, the State of California is using its enforcement power to charge an exorbitant access fee to companies who seek to do business in the state. But instead of collecting that tariff itself, it has assigned the collection right to businesses, allowing those businesses to set up their own toll road. If access to the California consumer is going to be auctioned and sold, then at least the proceeds should go to the public coffers, not to clever companies who exploit the system.

These subsidies are an expensive and demonstrably inefficient use of scarce public resources. It is inevitable that the public will start to question whether it is fair and appropriate for Tesla and its customers to get subsidies that amount to as much as $48,000 per California car, all to effectively buy muscle cars for millionaires. The magnitude of the subsidies are indefensible.

Like Benjamin Graham's stock market, political bodies migrate over time from being a voting machine to a weighing machine. Political bodies just take longer because the corrective mechanism is the electorate coming to its senses and exerting political pressure, as opposed to smart institutional investors setting the price of a security. Once weighed by the voting public, and then passing their views to the California legislature and CARB, these subsidies are going to come down.

No doubt Tesla will put up a major fight through back channels, as it pays its lobbyists such as Platinum Advisors and California Strategies (the sixth and 10th largest-billing lobbying firms in Sacramento during the 2013-14 legislative session).

For all this money, the benefit of all EVS in lower emissions is dwarfed by the massive emissions from private jet travel.

In analyzing the reasonableness of the subsidies, it is instructive to look at the size of the savings in emissions associated with the $380 million subsidy, and measure it against other sources of pollution or greenhouse gases.

In fact, let's look at the economics with a comparison to the emissions of the other favored travel outlet for Silicon Valley's fortunate sons, private jet travel.

Assuming an average ICE automobile travels 10,000 miles per year at 25 MPG, it burns about 400 gallons of gas. The auto of course employs emissions control technology like catalytic converters to reduce the pollution.

In contrast, a typical private jet gets 3 to 5 miles per gallon. Each year, private jets in the United States consume approximately 2.5 billion gallons of gas in moving executives and multi-millionaires around the country in opulent cabins. NetJets alone flies 300,000 hours per year.

Those 2.5 billion gallons burned by the affluent private fliers are the equivalent of the gas burned by five million ICE cars on the road. Five million! Based on the 125,000 BEV and PHEVs sold in the U.S. in 2014, the emissions from the affluent jet fliers are nearly 50 times as great as the emissions savings from all of these vehicles sold in 2014.

Indeed, the CEO of Tesla himself is partial to traveling on his own private jet, the opulent Dassault Breguet Mystere Falcon 900, and what a beautiful plane it is. Tesla shareholders happily fund the business portion of his flights.

At 268 gallons per hour, the Falcon burns as much Jet A fuel in a single hour as much as a lot of ICE autos consume in gasoline in an entire year. If we assume that this jet averages 10 hours per week of flight time, the Tesla CEO himself might burn 140,000 gallons of Jet A fuel per year, thus burning about the same amount of gas as 350 current version BMW 3 Series autos being driven 10,000 miles each. Indeed, a single Space X launch burns approximately 30,000 gallons of fuel.

It certainly makes you feel less guilty about sticking with your old BMW 328i, doesn't it?

In the end it comes down to politics: Just how long will the public accept these double standards at this cost to the taxpayer and driver? Will the public continue to embrace the taxpayer and "ordinary Joe" driver being required to transfer over $48,000 per Tesla auto in California to fund the purchase by the affluent of luxury autos? No doubt many of those EVs are used to shuttle those executives and multi-millionaires to the FOB Jet Centers in San Jose, Hayward and SFO where they can really have some fun and do some serious fossil fuel consumption, on their way to Vail or the Superbowl.

In the end, the credits and subsidies are a primarily political issue, driven by the court of public opinion. And even here in Silicon Valley, that opinion is beginning to change as phrases such as "Gulfstream Greenie" and "Learjet Liberal" join the local parlance.

We saw the beginning of an explosion of adverse press when 1,700 jets arrived at Davos last year transporting billionaires, who were coming together to decry climate change caused by greenhouse gases.

Some may find it unseemly to see the burning of so much fuel, as Tesla shrewdly maximizes its subsidies and recirculates a portion of the proceeds back through well placed lobbyists to in turn seek ever larger subsidies. And it all happens as the ordinary California driver in his increasingly efficient auto is made to pay up for (and feel down about) his internal combustion engine.

Alternative Proposal

Here's a proposal that is much more efficient and less onerous for the ordinary driver and the taxpayer:

We offer the jet flying executive and his affluent family a cheaper incentive. At the full cost of the taxpayer, we provide a special free travel "Green Card" that affords the holder unlimited free first class travel on all commercial jetliners, an immediate pass through airport security, and unlimited free lodging at the Four Seasons hotels worldwide for the executive and his family.

These affluent flyers would be guaranteed priority to obtain free first class seats even on overbooked flights. In exchange, they agree to cut down their use of those private jets by half. This card could be a far more cost efficient way to reward our wealthiest citizens and express our congratulations on their success, while reducing emissions in a more efficient and meaningful way.

As Judy Garland sang to us in The Wizard of Oz:

The wind began to switch, the house to pitch, and suddenly the hinges started to unhitch.

It's possible that this shift will deposit high-end EV sales in the middle of a ditch.

Disclosure: The author is short OUT OF THE MONEY CALLS IN TESLA, AND SHORT A SMALLER NUMBER OF OUT OF THE MONEY PUTS IN TESLA, AT RATIO OF 4 TO 1. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.