What California's $34 Million Subsidy Means for Tesla's Future

It's been called everything from "The Next Great American Car Company" to an "Obama subsidized bubble." Yes, Tesla Motors (NASDAQ: TSLA  ) can be as polarizing a topic as Tim Tebow or hydraulic fracking. Generally, there's no arguing these are high quality machines. But what is polarizing about this company is how much government assistance was needed to get where it is today. California recently rekindled this debate by giving Tesla a $34.7 million tax break for new equipment to boost production, as reported by SFGate. 

It's true. Tesla has received a lot of help from Uncle Sam. But if you think that its business model is 100% contingent on big government hand-outs, maybe you've misunderstood the role these subsidies are playing. 

Tesla's benefit from government subsidies
First, let's delve into how much government financial assistance Tesla receives. It comes in many different ways, but the big three are:

  1. Government-backed loans
  2. Federal and state tax credits to buyers
  3. Zero-emission credits

In January 2010, Tesla received a $465 million government guaranteed loan courtesy of the Advanced Technology Vehicle Manufacturing program. This allowed the company -- incorporated in 2003 -- to finally be able to build out facilities to produce batteries and electric engines on a mass scale.

In addition, if it weren't for this grant, it's unlikely Tesla would have IPOed at $1 billion in June 2010. The IPO scored the company $226 million -- about double annual revenue at the time.

Manufacturing in place, Tesla needs consumers, and price can be an issue for many. In October, TrueCar.com reported that the average new car price is $30,798, but Tesla's Model S will cost you nearly twice that. To offset the cost, the federal government will give you a $7,500 credit for this purchase, and some states -- like West Virginia -- will even match the Fed's credit. This makes for a more favorable consumer market and has undoubtedly played a role in Tesla's high demand.

But perhaps the most controversial benefit is Tesla's practice of selling zero-emission vehicle credits to other car companies.

In California, every car manufacturer is required to produce a percentage of zero-emission vehicles and each vehicle receives a certain number of credits based on its capabilities. These credits must add up to a certain number (contingent on overall company sales) or the company faces a penalty for non-compliance. Since 100% of Tesla's vehicles are zero-emission, and each earns 7 credits -- the highest number possible -- Tesla is loaded with ZEV credits.

With credits in abundance, it can sell this surplus to other companies who aren't making the grade -- kind of like how sometimes in Monopoly you sell the "get out of jail free card" when you already have the other one. The sale of these credits ballooned from just $2.7 million in 2011 to a whopping $40.5 million in 2012. And so far this year the company has earned a massive $130 million and earned the company its first profit.

Put all these factors together. Thanks to a government loan, this company was able to build needed infrastructure and have an extremely successful IPO. These capital gains allowed vehicle production on a mass scale. Customers can get the cars at a discount thanks to federal and state tax credits. But all these things still haven't made Tesla profitable. Selling ZEV credits has pushed profits into the black for now. It's undeniable that this company is benefiting from favorable politics.

But is Tesla a "loser" incapable of ever succeeding on its own? 

Favorable politics are fueling ambition
To answer this question, let's shift our discussion to what Tesla is up to. With only one vehicle -- the Model S -- currently in production, it's easy to think this is a one-trick-pony. But Tesla is seizing these government-assisted opportunities to build out a major business plan.

With manufacturing facilities now in place, Tesla is working on two new vehicles to add to its lineup, currently called the Model X and Generation III. The Model X promises to be an SUV and the Generation III a more affordably priced family sedan. This grows Tesla's customer base from the relative small sports car niche to almost anyone.

But don't think the Model S isn't popular because its consumer base is smaller than the two coming vehicles'. The Model S is uber popular. Deliveries have swelled from just 2,650 in 2012, to a projected 21,500 worldwide this year. Production has ramped up to 550 cars per week attempting to meet demand, but there's still quite a waiting list to get these cars.

CEO Elon Musk admitted in a conference call that the no. 1 factor holding back production is Tesla's batteries. The company just can't make enough fast enough. To relieve this pressure, it recently entered into a manufacturing agreement with Panasonic (NASDAQOTH: PCRFY  ) .

However, the Panasonic deal is not the long-term solution. Tesla is actively looking to build its own battery plant. This move not only allows vehicle production to increase and keeps battery profits in-house, it also diversifies Tesla's business. Other car companies are actually willing to pay for Tesla's batteries. For example, Toyota (NYSE: TM  ) has started using them in its RAV4 EV. Therefore, a battery plant can turn Tesla into more than just a car company, since demand for its battery products already exists.

Perhaps one of the biggest deterrents to buying an electric vehicle in the first place is the road trip dilemma. Where do you recharge when driving long distances? Tesla is solving this problem by rolling out charging stations. There are currently 45 stations in North America, but by 2015 you could theoretically travel anywhere in the US with these stations, all completely free to Tesla owners.

Projected SuperCharging stations 2015. Source: www.teslamotors.com/supercharger

Of course, these charging stations aren't built for free. This rollout is eating away at Tesla's bottom line, but long-term these stations will strengthen the business model. Not only will this network encourage more people to buy a Tesla, but these stations will produce more power than what is necessary for charging cars. This excess production can be sold back to the power grid, further diversifying Tesla's revenue with a steady source.

Putting the two pieces together
Typically, young businesses have two paths to growth. They can go into major debt and go big. Or they can start small and build slowly on successes. But Tesla has turbo-charged its growth with financial support from political policies. Without the government's help, Tesla would not be where it is. It would have had to take a slower growth plan. But since these opportunities do exist, it has capitalized upon them to lay the foundation for a major contender long-term. 

But this story is quickly entering a new era. Musk emphasizes Tesla's ability to win on its own, and is weaning the company off of government assistance. In May, Tesla paid back its $465 million ATVM loan 9 years early, becoming the first car company to do so. Additionally last quarter, sales of ZEV credits dropped to just $10.4 million -- down 80% quarter-over-quarter. In the coming quarter, Musk hopes there's no need to sell any.

The way I see it, Tesla is not a company on government life support. Rather, it's a solid company with an ambitious leader that's taking advantage of a favorable electric car political environment to build out one of the biggest game-changers of our lifetime. Nearly in place, this government aided foundation will allow Tesla to keep cruising stimulus-free for years to come.

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Read/Post Comments (20) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 23, 2013, at 3:44 PM, Decoy0527 wrote:

    The accuracy of the "crusing stimulus-free for years to come" comment is going to result in more than a few replies. I don't think Tesla can survive without significant grants, loans, and credits for itself or the buyers of its products. Time will tell, but we do know that Elon knows how to play that game better than any other CEO alive. He still has to prove that he can run a profitable company.

  • Report this Comment On December 23, 2013, at 3:55 PM, thequast wrote:

    @Decoy0527

    Thanks for weighing in. I think you said it best when you said "time will tell." When I see the foundation that has been laid, it's really hard for me to imagine that this company doesn't become profitable from just it's goods and services sooner than later. But in the end my opinion is a futuristic one, and as with all things in the future I could be wrong. Either way thanks for reading,

  • Report this Comment On December 23, 2013, at 4:48 PM, freecacheflow wrote:

    Tesla's 'battery problem' isn't just supply. It is basic physics. They are tied to Lithium Ion which is inherently dangerous as it has 'free' lithium rather than lithium bound to some other metal (like iron). Lithium is a very dangerous substance on a planet that has lots of oxygen and water. When exposed (as we have seen in puncture collisions) it bursts into flames. When a fire department tries to put those flames out with water, you get LiOH +H2. When exposed to fire the H2 feeds the fire (as in the Seattle incident) These batteries are moving bombs waiting to be explode by any road hazard an unfortunate driver happens to hit (or be hit by). Just for the record, there are 0.0015% fuel related automobile fires per year. Tesla's fuel related automobile fires is 0.01%. 10 times worse the hydrocarbon based automobiles.

  • Report this Comment On December 23, 2013, at 5:46 PM, TheFiefdom wrote:

    freecacheflow - Your basic premise is flawed. Tesla is NOT tied to Li ion. At the moment that is the battery chemistry available. Other battery chemistries are being developed that promise both larger capacity and faster charging (including sulfur-based and molten air). I guarantee you that Elon Musk is keeping a very close eye on this research, and as soon as a viable alternative comes out that is cheaper and has a higher energy density, he will make the switch.

  • Report this Comment On December 23, 2013, at 6:36 PM, clutch1958 wrote:

    @Fiefdom-that's all well and good, HOWEVER-until those batteries come online, wouldn't it be wise to do what Musk refuses to do-reinforce the carrier for the battery pack so those punctures cannot happen?

  • Report this Comment On December 23, 2013, at 7:41 PM, hambone1969 wrote:

    Apparently this guy didn't read their last 10K. Right in it, on Page 60, Tesla flat out admits that without subsidies, California credits, and purchaser credits, the company would be doomed. RIGHT IN THE 10K. I read that, and stay away. Any change in GOVERNMENT funding or aid and they gone. Read it and beware.

  • Report this Comment On December 24, 2013, at 12:10 AM, Chishiki wrote:

    The credit reducing the price of the car is just wasted government money. If someone is willing to buy a $48,000 dollar car, then they will buy a $55,000.

  • Report this Comment On December 24, 2013, at 4:46 AM, gerard wrote:

    What I find most interesting with Tesla is the way the company is building control on EV market in its three most crucial sectors: the EV cars, their most costly parts (the cells), and lastly the refueling stations (neither Ford or GM control refueling). In all they aim at becoming those niches mass market leaders, not only in the US but elsewhere.

    Brilliant...

  • Report this Comment On December 24, 2013, at 6:07 AM, thequast wrote:

    @freecacheflow, @TheFiefdom, and @clutch1958

    Thanks for reading and commenting. As to the battery situation, hey I'm not an expert in chemistry or physics. Not even the "basic" physics mentioned. But, someone who is a physics expert is Elon Musk. Here's an interesting article about what makes Tesla's batteries different http://www.flightglobal.com/news/articles/elon-musk-boeing-7...

    Since I'm also not an expert in vehicle safety, I'm just going to go with the National Highway Traffic Safety Administration says, which is that Tesla is the safest car on the road.

    @hambone1969

    There are actually several parts of the 10k that discuss subsidies, but not on page 60. Perhaps you meant 10Q? It's unfortunate because I wanted to be able to give attention to the exact part you're referring to.

    However, I can say in a general sense that Tesla does acknowledge it's need for the subsidies up to this point, which I believe I was fairly clear in mentioning throughout the article. The question is will this always be the case?

    Let me give you an example from my life. A few years back I was in college with my young family in a rural area where I couldn't get a steady job because we were surrounded only farms. We lived off savings mostly. But then we qualified for the earned income tax credit. Had we not qualified, I don't think we could have finished college. We took the credit, finished college, and now with our schooling we don't need or qualify for the earned income credit anymore. It helped us get here, but it's not where we stayed.

    Tesla acknowledges current need, but it's moving away from it. Thanks hambone and have a merry Christmas.

    @Chishiki

    Unless they only have 48k to spend :) These credits definitely don't hurt Tesla's sales

    @gerard

    Very succint way of putting that. I think you've grasped the infrastructure that Tesla has in place. Excellent contribution

  • Report this Comment On December 24, 2013, at 6:14 AM, hewy wrote:

    tell me please how much money was given to GM, Chrysler and ford as government handouts (loans) and how much of that money has been paid back. All you can wright about is a mere 465 million loan to Tesla which has already been paid back

  • Report this Comment On December 24, 2013, at 8:03 AM, thequast wrote:

    @hewy

    Hey hewy thanks for reading. So true. I actually had another section of the article originally talking about how much money all of the players in auto industry took/take. Unfortunately I didn't feel it was central to this article's core subject, and with the article already running like, I cut it out before publishing. I agree with you. I feel like the argument that Tesla is inferior to its peers because it gets help from the government doesn't hold water. They all get gov help. Thanks and Merry Christmas

  • Report this Comment On December 26, 2013, at 5:42 PM, xetn wrote:

    "What California's $34 Million Subsidy Means for Tesla's Future"

    It means that California is stealing $34 Million from the taxpayers to keep a non-competitive company in business. The simple fact is if Tesla had an economically competitive product, they would not need a subsidy of credits or any government aid.

  • Report this Comment On December 26, 2013, at 6:12 PM, nedcall wrote:

    The top political priority in the nation is to shrink the gap between rich and poor and to rebuild the middle class. So our politicians help create Tesla, a company that receives tax subsidies from all taxpayers, but primarily the middle class, in order to provide money to a very rich man so he can build cars that only other rich men can afford. To make it even better, those same taxpayers are providing a direct subsidy to the rich purchaser to lower the purchase price of the vehicle. Then the rich man gets to sell his tax credits so that other companies don't have to meet state requirements.

  • Report this Comment On December 26, 2013, at 7:11 PM, hewy wrote:

    The 34 million given to tesla is because its producing cars that reduce carbon emissions. Any company can claim these tax deductions if they are bringing renewables to the market, protecting the environment or reducing carbon emissions.

    As for the $7500 car subsidy for Tesla owners, i think you will find that all plug in electric vehicles recieve a subsidy the same as a Tesla. Example Nissan Leaf and Chevy Volt both of these cars also get the $7500 subsidy if you purchase one.

    As for zero emission credits, i can gain these credits if i put solar panels on my roof. Its not directed at Tesla but directed at reducing carbon emissions, so pointing the finger at Tesla is ridiculas, its all about reducing our carbon footprint.

    The argument should be about if you believe that green house gas emissions is causing the planet to heat up with the burning of fossil fuels or not. Lets stay on the topic and not bring a car company into the debate.

  • Report this Comment On December 26, 2013, at 8:47 PM, wjcoffman wrote:

    Ford received govt loans?

  • Report this Comment On December 27, 2013, at 7:24 AM, hewy wrote:

    Ford Motor Co., the only U.S. automaker not receiving emergency federal loans, will get $5.9 billion in government financing to speed work on cars with better fuel economy.

    Ford requested $5 billion initially. It is seeking a total of $11 billion in Energy Department loans by 2016

  • Report this Comment On December 27, 2013, at 9:54 AM, thequast wrote:

    @wjcoffman

    As hewy already mentioned, Ford wasn't bailed out like GM, but they did receive government-backed loans just like Tesla's $465 million loan. Here's a good article on it http://online.wsj.com/news/articles/SB1000142405274870358940...

    Thanks for reading

  • Report this Comment On December 27, 2013, at 11:15 AM, stevedb wrote:

    Can the electrification of the automobile industry, with the exception of specialty products, be sustained without the government teat?

    Signed: Lovehisdiesel

  • Report this Comment On December 27, 2013, at 4:36 PM, hewy wrote:

    Both GM and Tesla have said they are working towards a mass market car that can go 200 miles and cost $30 - $35k. However they also have said that the battery technology needs to advance significantly for them to be able to do this. Once they produce these mass market cars for that price i think they would not need the federal government $7,500 subsidy for people to be enticed into cleaner cars.

    There will always be zero emission credits until such time as renewable energy takes over from fossil fuel as our energy suppler.

  • Report this Comment On January 12, 2014, at 2:25 AM, missoulamike wrote:

    Sorry hewy, it's crony capitalism whether it's Tesla, GM or Chrysler. Ford is the only company not on the dole.

    So sometime in the future is an excuse for government to subsidise Tesla buyers who have to make a lot of money to afford one. That's progtard derp. If you want to feel good that you are helping to pay for hollywoods feel good right to drive a pc high end EV I can't take you seriously.

    DERPtastic

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