Tesla Loses More Money, ZEV Credit Revenue Stream

Edward Niedermeyer
by Edward Niedermeyer
tesla loses more money zev credit revenue stream

Earlier this week, Tesla reported a $38.5m Q2 net loss, up from its $29.5m in the first quarter of the year. The good news was that revenue rose by about $8m over Q1, to $28.45m, but development and selling/general expenses rose countering the higher receipts. Other good news came on the Model S front, as Tesla claims that body and powertrain development is complete for the forthcoming sedan. But with the company losing about $5 per share (currently valued at $19.70 each), there’s more bad news coming. In a piece at Wired Autopia, Tesla’s former PR boss Darryl Siry points out that a key revenue stream for Tesla is being closed.

Siry explains

The ZEV [Zero Emissions Vehicle] credit is the basic mechanism of the Zero Emissions Vehicle Program. The mandate required automakers selling more than 60,000 cars in California annually to build a certain number of zero emissions vehicles. Automakers who haven’t met the mandate have been allowed to purchase credits from manufacturers who produced more ZEVs than the mandate required.

The auto industry complained that the original mandate was impossible to achieve and over the years has successfully argued to have it weakened. Another change allowed automakers to meet the mandate in part by producing hybrids and ultra-efficient gasoline vehicles called partial zero-emissions vehicles. But even under the relaxed guidelines, as of 2008 several automakers found themselves needing credits.

There was only one place to get them: Tesla Motors.

Last year Tesla sold over $8m in ZEV credits, and as Siry points outIn a recent meeting a Tesla finance vice president told analysts they could assume every Tesla Model S sold would generate approximately $5,000 in ZEV credit profit, according to one person who was present at the meeting. Morgan Stanley underwriters cited the same figure in their presentation to potential investors during the recent Tesla IPO roadshow.The problem is that with more EVs about to hit the market, the party is ending. Not only will EVs like the Leaf increase the supply of ZEV credits, but EVs from Ford and GM will reduce demand. And that spells bad news for the EV market that Tesla had enjoyed a monopoly on.

In a finite market, when all sellers have the same commodity, the marginal cost is zero, and supply greatly outstrips demand, the price of the commodity in theory converges to zero. In practice, as long as there are some buyers, the price will be something other than zero but is certain to crash from current levels, undercutting the potential subsidy to electric vehicle startups.

The Model S, which Tesla tells analysts will have an average selling price of about $75,000, targets a very different market than the $32,000 Leaf or the $41,000 Volt. (All prices are before the $7,500 federal EV tax credit.) Yet the Leaf and the ZEV credits it will produce may be the biggest threat to the viability of the Model S.

Tesla has tried to minimize the role of ZEV credits to analysts, but $5,000 of pure profit per car represents a full 26 percent of the projected gross margins on the Model S and more than 50 percent of the projected bottom line, according to targets presented by the company during the IPO roadshow. As the market value of the ZEV credit plummets, Tesla will need to make up that margin through price increases and putting additional pressure on aggressive volume goals.

Tesla’s response: bash the Leaf for not having thermal management. And as satisfying as that strategy is, it’s no replacement for 5k profit per car. Meanwhile, with Audi and Mercedes targeting Tesla’s core business and VW stealing Tesla’s secrets by way of its ousted founder Martin Eberhard, it has got to feel like the walls are closing in at Tesla headquarters.

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  • APaGttH APaGttH on Aug 07, 2010

    $75K for the average model S? Holy ass crackers, the Volt at $41K is an absolute giveaway then and the business model appears far more sound than the smoke and mirrors that is Tesla. Which is really stunning considering the business model for the Volt is smoke and mirrors. But damn, Tesla is taking it to a whole new level! $75K?!? $67K gets me a hybrid Cayenne today, 380 HP, 0 to 60 in 6.0 seconds, and 40 mile range on full electric at speeds up to 97 MPH. Last time I checked, $7,000 buys an awful lot of unleaded gasoline, and there is a Porsche dealer, well, everywhere, for service. Oh, and free maintenance. Oh, and a warranty from a company that will be around. Oh ya, and despite it being one of Porsche's deadly sins, it is still a mother fuckin' hybrid Porsche, that will get the granola girls very hot.

  • Daanii2 Daanii2 on Aug 07, 2010

    I saw the picture for this post and just had to comment on the ridiculous ritual it shows. Do car designers realize how silly it looks? To peel off the covering of a new design a bit at a time, never revealing the whole thing? I can see how this strip tease started. Why it persists, though, I cannot see.

  • Master Baiter "...but the driver must be ready to step in and take control. The system is authorized for use during the day but at speeds lower than 40 mph..."Translation: It's basically useless, and likely more stressful than piloting the car ones's self.
  • Alan My friend has a Toyota Kluger (made in 'murica). A Highlander. These things are based on a Camry platform. I have driven the Kluger we had at work and I find them quite boring even for a SUV. An appliance. I hope this will deliver some driving pleasure. I found the Camry a better boring vehicle.
  • Alan Most Lexii look good to reasonable.....................until you see the front ends with their awkward grilles. It actually would look normal on a GWM, LDV or any other Chinese vehicle.
  • Tassos These last months, every day seems to be another great, consequential piece of news for Tesla, who does not just DOMINATE, it OWNS the US and FREE WORLD BEV market.It is the ONLY (repeat ONLY) maker that builds its huge best sellers at a PROFIT, ie, SUSTAINABLY. FOrd EV is bleeding 3 billion in losses. GM hides theirs, and I bet they are even HIGHER. VW has spent a huge no of billions and its ID series has been an UTTER FAILURE.Toyota, already 12 years too late, is yet to try. I doubt they will succeed to dethrone TESLA.
  • Tassos Again: I never took VOlvo seriously in the last 20 or so years.Chinese Volvo-Geely has a dizzying number of models, I have lost count how many,YET its sales and market share in the US has always been DISMAL these last 20 years.It ranges from a pathetic 0.5% to 0.8% of the US market.For comparison, Toyota has 15% and GM has even more. Tesla has almost 10 TIMES VOlvo's share, with a PITTANCE of really TWO Models, the 3 and the Y, as the S and the X hardly sell any copies any more.So why do we keep reading articles about Stupid VOlvo?Because they have the best PR department of any maker.