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The Tesla Paradox

by WSJ Editorial Board | The Wall Street Journal | 02-15-2015

Elon Musk isn’t known for modesty, and this week the Tesla Motors CEO laid out his ambition to grow 50% a year and deliver a stock valuation in 10 years of $700 billion—the current valuation of Apple, the world’s most valuable company. So why does Tesla, which is already valued at about $27 billion, still need so much taxpayer welfare?

Mr. Musk this week played down a $108 million loss in Tesla’s fiscal fourth quarter, which he attributed to one-time manufacturing inefficiencies, a strong dollar and lower than expected deliveries. Tesla said delivering some “cars was physically impossible due to a combination of customers being on vacation, severe winter weather and shipping problems (with actual ships).” Tesla shares fell 4.66% Thursday on the news.

The world loves an optimist, and fast-growing start-ups often lose money as they focus on capital investment. What makes Tesla different is that the bottom line would have been much worse without $86 million in profits from the sale of government emissions credits. A Barclays analyst told the Journal that the fourth-quarter results were “heavily supported” by the credits.

Because it produces only electric cars, Tesla receives excess “credits” for complying with federal fuel-efficiency standards and state zero-emission vehicle (ZEV) mandates, notably in California. Tesla can then hawk its surplus credits to auto makers that fail to meet the government rules. Last year Tesla made a roughly $150 million killing from selling ZEV credits. That’s up from $130 million in 2013, $32 million in 2012, and $3 million in 2011. All told in 2014 Tesla sold about $216 million in credits, equal to about 7% of its auto sales.

Those government subsidies come on top of a $7,500 federal tax credit for each electric car sale and state rebates. Nevada and California have also bestowed upward of $1.5 billion in tax breaks on Tesla.

A Tesla earnings report last year predicted that revenue from credits would “remain low in the future relative to our automotive sales” though it would “pursue opportunities to monetize ZEV credits.” Such opportunities will abound as California’s ZEV and federal fuel-efficiency mandates grow more stringent. More states are also adopting electric-car mandates.

Capitalism needs visionaries, but its reputation suffers when companies worth billions soak middle-class taxpayers for profits. Turn off the taxpayer tap, Mr. Musk. It would earn you more friends for the long haul.


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