Better if Tesla feels right at home in China.
Should the American taxpayer be required to subsidize an industry that could not survive on its own?
Following news that President Trump’s draft budget repeals the $7,500-per-vehicle federal tax credit for electric cars, Tesla’s share price took more than a 7% dip.
Electric vehicles are the only kind Tesla makes, and it receives other subsidies as well. At the state level, it receives carbon credits, which it can sell to companies that don’t exclusively sell electric cars. These credits have the effect of raising the price that consumers pay for non-electric cars. So the middle class Deplorable in his Ford Explorer has been subsidizing the much richer guy in his Tesla.
Additionally, several states offer rebates to buyers of electric cars. To the extent that state taxes are deductible from federal taxes, Americans in other states are subsidizing the “green” state cars. This is not even to mention the various subsidies states and municipalities offer to induce green companies to build plants in their area, which also ultimately get passed via the state tax pass-through.
While other carmakers, such as General Motors, also benefit from taxpayer subsidies, Tesla is unique in that it could not survive if taxpayer support were pulled. Its “SG&A [selling, general and administrative expense] per revenue is higher than that of other car manufacturers and just about wipes out gross profits even before R&D [research and development] is taken into account.”
Tesla is also unique in that its cars are priced for the very wealthy, with base price for its Model S of about $75,000.00. It’s been working on its cheaper Model 3, but is having serious production problems, not nearly meeting its production schedule. In fact, things are so bad at its Fremont, California factory that the “newly installed Kuka robots designed to speed up production are still being operated by hand.” This isn’t good optics for a company that puts itself forward as a leader in robotics.
Also not good optics was the recent announcement of Tesla’s negotiators to open a plant in Shanghai’s free trade zone. Why not instead enlarge and improve the Fremont plant that seems to be having production problems? Elon Musk says that Tesla will avoid Chinese import tariffs if it makes cars in China for the Chinese market. Problem is that China deems cars made in Shanghai’s free-trade zone to be foreign made, thus incurring a 25% import tariff if it sells the cars in the rest of China. So they really wouldn’t save on import duties after all. By the way, compare China’s 25% tariff to our 2.5%, and you’ll see that Trump is right when he says China doesn’t play fair on trade.
Musk also says Tesla will save on shipping costs if it makes cars in China for the Chinese market. For a $100,000+ car, however, these are minimal, and Chinese-made Volvo, Buick, and Cadillac branded cars are routinely shipped to the U.S. While I don’t object to this kind of global trade, it stings a little when a company that’s already received $5 billion in subsidies deserts the American worker.
Tesla isn’t the only electric carmaker sucking at the federal government’s teat. General Motors, which makes both electric and gas cars, issued a statement saying, “Tax credits are an important customer benefit that can help accelerate the acceptance of electric vehicles. Because General Motors believes in an all-electric future, we will work with Congress to explore ways to maintain this incentive.”
Here’s the problem, though. If GM “believes in” all-electric cars, GM should bear the risk of making them rather than asking taxpayers to do so. The same goes for Elon Musk and his investors who have been realizing huge profits on their Tesla shares or, more precisely, Elon Musk’s dreams. “Tesla is absurdly overvalued if based on the past, but that’s irrelevant,” tweeted Musk. “A stock price represents risk-adjusted future cash flows.”
That is, Musk and his investors will bet on a green fairy tale future if someone else bears the risk of failure.
The Danes, of all people, have decided that the risk isn’t worth taking. Upon announcing that Denmark will revoke the exemption enjoyed by electric vehicles from the 180% import tax it imposes on standard imported vehicles, sales of ECVs (electrically chargeable vehicles) dropped 60.5%. The new tax set-up “completely killed the market,” said the head of the Danish Electric Car Alliance. “Price really matters.”
Well, yes, it does. And if an industry doesn’t have a survival strategy for coping in a post-subsidy environment, perhaps it shouldn’t exist. The alternative is a perpetuation of the sort of crony-capitalism that President Trump promised to abolish.
Let’s remember that Musk made a big deal about quitting Trump’s business council. Hope the door didn’t hit him on the way out.
One last thing. It goes without saying that the Chinese will rip off Tesla’s technology. But if Tesla is such a dog, maybe we don’t mind.
Elon Musk at Tesla Factory in Fremont, CA in 2011 (Maurizio Pesce/Flickr-Creative Commons)