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.
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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