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Friday
Apr072017

Tesla and the Money Men

By Christopher A. Sawyer

Model S followed the Roadster, making Tesla a real car company.If it hasn’t happened by the time you read this, Tesla’s stock price son will reach $300 per share. That’s an amazing number for a relatively low volume car company that continues to lose money. The latest uptick in price came when the company announced it had sold more than 25,000 vehicles in the first quarter of the year, beating analysts’ forecasts. Of that number, approximately 13,450 were the handsome but aging Model S sedan and the remainder the Model X SUV with its troublesome “falcon” rear doors. This gives the upstart electric vehicle maker a market capitalization greater than that of the Ford Motor Company.

Ford’s stocks price, on the other hand, dropped to $11.66 as it announced lower first quarter earnings per share, and a drop in pretax profit. As demand for cars drops and competition heats up between mainstream automakers, pricing power declines for automakers, which puts a squeeze on profitability. Despite the fact that F-Series pickup sales were up 10% compared to last year, and posted a $2,500 increase in average transaction price in March alone, it wasn’t enough. Fleet sales dropped 17% compared to a year ago when these sales were highly inflated, and make up 33% of Ford’s total sales, 13% more than GM.

So what are we missing here? For one thing, Tesla is not bothered by oil prices, gasoline prices or changes in Corporate Average Fuel Economy requirements. It’s also a relatively low volume producer. (Ford sold 205,000 F-Series trucks in the first quarter and 81,330 in March.) Some market analysts have compared the company to Amazon, which lost money for years before emerging as the 900-lb. gorilla in the retail space, and expect Tesla to do the same. For that reason, among others, Wall Street treats it like a tech stock, expecting it to be the Apple of the new era auto industry. Like Apple, it will produce premium products combining a high level of functionality and style in innovative packages high volume makers can’t match. Or at least that’s the hope as Tesla prepares to ramp up production of the Model 3, a vehicle that is a 3 Series-size sedan in a market increasingly enamored with crossovers. The Model Y, a small crossover that shares its platform with the Model 3, is a couple of years away from production.

Powerwall 2 is just the start of Tesla's move into the energy recovery and distribution business.The “Tesla is the next Amazon” types also see the company as more than a car company with high-volume battery production, charging stations, and solar cells in its portfolio. Like Amazon, which started out as a bookseller, Tesla, will move from a car company to an integrated energy provider that leverages these items to provide energy solutions to a broad marketplace. As it builds toward this goal, it will continue to lose money until hitting a tipping point that makes it an unstoppable force that drives others from the market due to its sheer size and scope. Not only will it provide the solar shingles that power your home and home EV charging station, it will provide the batteries for its own vehicles as well as others. It is a scenario that suggests Tesla also will be capable of providing the EV platform on which others will build their electric vehicles.

Central to this expectation is the idea that the car industry will transform into an EV-centric business where individual vehicle ownership is replaced in large part by ride sharing modules that are fully autonomous. Much of this speculation is based on the expectation that Millennials will continue to eschew car ownership, and move to larger cities where ride sharing and public transportation are readily available. With stricter in-city pollution regulations, driven by a graduated taxation scheme based on a vehicle’s CO2 output, as well as other legislation aimed at reducing congestion, the current vehicle ownership model will collapse, taking a number of established automakers with it. Also, this reduction in personal transportation will dovetail nicely with centralized charging stations that eliminate the need for charging ports — and parking spots — capable of meeting the needs of apartment and high-rise dwellers. In addition to providing the building blocks and services necessary to make this happen, Tesla also would provide the charging stations, solar roof panels and some of the vehicles used by those who live in the suburbs and commute into the city. It’s a neat little package.

In many ways, it’s almost too neat. Especially when you consider that many of the people painting this scenario are the same ones who told us young people don’t like cars, don’t want to own cars, and prefer city living to life in the suburbs. However, studies conducted by the car companies and third parties tell a different story. As Toyota’s marketing chief put it on the launch of the 2014 Corolla: “This next generation is three to five years behind where it should be in terms of both vehicle and home ownership. The recession has kept them out of the workforce, and student loan debt has forced them to put off a number of purchases.” To put the latter into perspective, the average graduate of the Class of 2016 is carrying $37,172 in debt. Total student loan debt is $1.31 trillion spread out among 44.2 million borrowers, bringing the average to $29,638 per borrower. And the average transaction price for new vehicles? It rose to $34,352 in February according to KB&B, a jump of $757 driven by an increase in SUV sales.

The Model X and its troublesome "falcon" doors.A debt load like this is enough to postpone high-ticket purchases like cars and homes, and this equation will not start to balance until recent graduates are able to find consistent high-wage employment. And while it is not unusual for recent grads to gravitate toward cities, studies conducted by realty companies show this changes when marriage and family come into view. At this point, these city dwellers want to move to the suburbs where ride sharing is replaced by multiple car ownership. Some may still desire an electric vehicle at this point, but it will require pricing on par with their internal combustion counterparts.

Some last thoughts. A 2016 study in the American Chemical Society’s Chemistry of Materials journal shows that the compounds used in lithium-ion batteries are toxic to Shewanella oneidensis, a common soil-dwelling bacteria that helps cycle metals in the environment. Kill it off, and you pretty much kill off the soil’s ability to grow foodstuffs. Also, despite what Tesla’s Elon Musk might like to think, a wholesale switch from internal combustion to electric power won’t “save” the planet. Even the EPA under President Obama had to admit that, if the entire industrialized world reduced its CO2 emission 100%, it would — assuming the worst case regarding CO2 and its warming effect — reduce the global temperature by just 0.278 degrees C. And in a world where water is becoming a concern, the May/June 2011 issue of MIT’s Technology Review magazine (pp. 28-29) shows that electricity production uses 19 gallons of water/100,000 BTUs of energy, and produces more than 200 grams of CO2 equivalent/1,000 BTUs. In comparison, the numbers for other current or proposed transportation fuels are as follows:

    •    Diesel: ~1 gal /100,000 BTU — 100g/1,000 BTU
    •    Gasoline: 1.5-2.5 gal /100,000 BTU — 100 g/1,000 BTU
    •    Compressed natural gas: ~1.25 gal/100,000 BTU — ~75 g/1,000 BTU
    •    Oil sand gasoline: ~4-9 gal/100,000 BTU — ~110 g/1,000 BTU
    •    Non-irrigated corn ethanol: ~2.5-5.5 gal/100,000 BTU — <75 g/1,000 BTU
    •    Non-irrigated sugarcane ethanol: 13-41 gal/100,000 BTU — 25 g/1,000 BTU
    •    Switchgrass ethanol: ~2.5-12.5 gal/100,000 BTU — ~10 g/1,000 BTU
    •    Irrigated corn ethanol E85: 20-993 gal/100,000 BTU — <75 g/1,000 BTU
    •    Hydrogen from natural gas: <7 gal/100,000 BTU — ~115 g/1,000 BTU

Electric vehicles have a place in the automotive universe, but one much closer to internal combustion vehicles than their supporters are willing to admit. And Tesla’s market capitalization? It doesn’t hold water.

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