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Would the U.S. Government Ever Let Tesla Motors Fail?

By Evan Niu, CFA - Mar 25, 2016 at 9:00AM

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Traditional rivals might have a pretty big advantage over Tesla: The government won't let them fail.

Tesla service center. Image source: Tesla.

With the U.S. auto market recently setting a fresh record in annual new car sales, and Tesla Motors (TSLA 1.24%) likewise setting its own quarterly delivery record, this might be a strange time to ask whether or not the U.S. government would ever let Tesla fail.

But it's an important question that is potentially relevant to the electric upstart's long-term future.

A trip down memory lane
I'm sure many investors have tried to forget the Great Recession, even though some of its effects are still felt nearly a decade later, but the time period did present some interesting takeaways about the broader auto industry. Case in point, the auto industry proved that it did qualify as "too big to fail" with two of the Big Three, General Motors (GM 1.35%) and Chrysler, receiving bailouts.

Without a doubt, the industry's collapse would have had unspeakable ripple effects on the broader economy, which was fragile enough at the time. If the government hadn't intervened, there would have been massive job losses at the OEM level, the dealer level, and countless suppliers. By definition, bailouts are chock-full of moral hazard. The real question would be how the companies changed their ways.

Critics of the bailouts will point to the fact that the OEMs simply went back to churning out gas-guzzling trucks and SUVs. Although this is natural considering the sheer profitability of that market segment, combined with the fact that those are the types of cars that Americans demand, especially in an environment of low gas prices.

From a corporate finance perspective, GM is much leaner after jettisoning massive legacy costs that were a major factor in its high fixed-cost base. GM is now solidly profitable on a smaller revenue base.

General Motors financial results

 

2005 

2015 

Total Revenue

$192.6 billion

$152.4 billion

Total Costs and Expenses

$209.5 billion

$147.5 billion

Operating Income (Loss)

($16.9 billion)

$4.9 billion

Data source: SEC filings.

What a difference a decade can make.

Tesla is not too big to fail
Again, none of this is necessarily relevant right now with the market at all-time highs, but if things go sideways, you have to wonder if the larger OEMs would enjoy the significant advantage of government assistance during a downturn.

Tesla did receive a loan from the Department of Energy in 2010, which it paid off nine years early in 2013. But a loan of less than $500 million is quite different than a $50 billion government-assisted Chapter 11 bankruptcy restructuring.

Tesla employees at the Fremont factory. Image source: Tesla.

It should be pretty clear that as of right now, Tesla certainly would not qualify as "too big to fail." At the end of 2015, the company had just over 13,000 full-time employees. GM has 215,000 hourly and salaried employees combined, which is a lot less than the 335,000 workers it had a decade ago. Tesla's head count would include all retail sales and service employees, which wouldn't be included in General Motors' head count due to the dealer model.

Additionally, considering Tesla's smaller volume levels (approximately 51,000 vehicles produced last year), its supplier network is also vastly smaller. Tesla currently has about 350 suppliers, most of which wouldn't rely on Tesla for a meaningful portion of sales compared to the larger OEMs.

If there were another major downturn and the incumbent OEMs were theoretically brought to their knees, history suggests that the U.S. government would at least consider lending another helping hand due to said ripple effects. Tesla's ripple effects pale in comparison.

It's hard to fathom Tesla reaching unit volumes sufficient enough to warrant government assistance in the event of a major downturn. Even the 500,000 annual target by 2020 is but a fraction of the 9.8 million vehicles that General Motors sold in 2015.

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