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The biggest catalyst on the horizon for TSLA is actually the mainstream buy-in of major automakers into EVs. There are two reasons why this is actually bad for

The biggest catalyst on the horizon for TSLA is actually the mainstream buy-in of major automakers into EVs. There are two reasons why this is actually bad for TSLA: 1. Tesla Motors makes money on regulatory credits that conventional automakers must purchase in order to offset their ICE vehicle production. That's actually Tesla's only source of profit. Unfortunately for Tesla Motors, those regulatory credits aren't going to be in such high demand in a world where major automakers each produce hundreds of thousands of electric vehicles. 2. Tesla Motors doesn't currently compete on things like build quality and fit/finish, because the major factor determining whether you want to buy a Tesla is whether you want to buy an electric car. However, the time will come when you can get a mainstream electric car with the interior of an Audi, or the reliability of a Toyota, or the utility of a Ford truck. That competitive environment would be a wind shift for Tesla's business, not to mention the amount of pressure that other automakers will put on Tesla's autonomous driving features in court and with regulators.

worker767424 6y ago
> regulatory credits Why is it that all of Musk's companies rely on government support in some significant way?
- xyzzyz 6y ago
  > government support I wouldn’t exactly call tax credits “government support”. They are, no doubt, very beneficial to Tesla, and other recipients of these tax credits. They aren’t support though: it’s the rest of the companies that are more burdened by the taxes.
- sawjet 6y ago
  the government wanted to buy something and they have the means to sell it to them. How is that reliance on government support?
- akmiller 6y ago
  I suggest you don't look at the oil companies and traditional auto manufacturers if you think this is just an Elon Musk thing!
- ar_lan 6y ago
  Tax credits aren't really government support (it's not like the government is paying them anything). It's more akin to a discount, if anything - we support the work you do so we won't penalize you further with taxes, because your work can provide a net good.
  - xkjkls 6y ago
    If you can sell your tax credits, they are equivalent.
    - perl4ever 6y ago
      It's a question of how you frame it, but that doesn't mean all ways are equally valid in every context. A pound of apples and a pound of lead may amount to the same thing for a counterweight, but that doesn't mean they are equally good for a pie.
- valuearb 6y ago
  Hmm, Zip2? PayPal? OpenAI? Neurallink? Oh, you mean Tesla and SpaceX. SpaceX got a commercial contract from NASA to greatly reduce NASAs costs of delivering cargo to the ISS, and fully delivered, saving NASA billions. SpaceX would not have been able to build Falcon 9 without it, or likely survive. Then NASA gave SpaceX and Boeing contracts to fly crew members to the ISS, and SpaceX delivered well ahead of Boeing, and for billions less. Finally NASA has given SpaceX small contracts to gain access to new SpaceX technologies such as in-orbit refueling, which would save NASA tens of billions if it was ever allowed to use it. And we provide tax credits to zero emission vehicles to make up for allowing ICE engines to omit CO2 indiscriminately. A better solution would be a limited market in carbon emissions, but most of the coal state politicians would lose their jobs if that passed.
11thEarlOfMar 6y ago
Agreed. The eTron overtook the Model 3 in Norway in 2020: https://www.reuters.com/article/autos-electric-norway/electric-cars-rise-to-record-54-market-share-in-norway-in-2020-idINKBN29A0ZL https://www.reuters.com/article/autos-electric-norway/electr... I'd note that in terms of market share for BEVs vs. ICE globally, the pie is still very large for BEVs. There is room for multiple winners.
Alex3917 6y ago
> That's actually Tesla's only source of profit. So do they get hit 2x then, if not only will they stop getting the credits but the other automakers will start getting the subsidies that Tesla will no longer be getting? Right now it seems like Teslas are also artificially cheap, since they can't be repaired affordably or in any reasonable timeframe.
- totalZero 6y ago
  There are a few different programs but I will focus specifically on ZEV credits. Basically, automakers that don't make a certain number of EVs relative to total sales must buy credits from automakers who produce a surplus of EVs. Right now, the conventional automakers buy hundreds of millions of dollars' worth of ZEV credits from Tesla every quarter. However, they won't need to buy those credits if they produce a large number of their own EVs. https://www.caranddriver.com/news/a32346670/other-automakers-paid-tesla-record-354-million/ https://www.caranddriver.com/news/a32346670/other-automakers...
readams 6y ago
The interior quality is the main thing in my mind that Tesla it's missing. My model 3 performance drives like nothing else and requires no maintenance. But I still miss how much nicer inside my previous Audi was. At that price point I'd like to get a lot more.
- akmiller 6y ago
  I actually prefer the interior of my Tesla's to any care I've ever owned. Combined with the technology and software, I haven't seen any car that competes. It is still absolutely amazing to me how much code goes into traditional ICE cars and they still can't create a coherent, usable, interface. I will say that Ford has drastically improved in the last few years (I own a fairly new Explorer ST) but much of what they've done you can clearly see is copying what Tesla has done. Even still it is miles away from what Tesla has done.
  - allthecybers 6y ago
    The minimal Tesla M3/Y interior is one of the highlights to me. But the only way it works is the integration of software and tech with regular OTA updates. Other car interiors from Kia or Toyota seem far too busy. I know it is a matter of taste, but the minimalism is appealing. The Ford Mach-E or VW ID take on the EV cockpit is fine too, but feels much less futuristic. I think the Tesla aesthetic is driving other automakers to improve the in car experience and incorporate more intuitive software and screens.
    - readams 6y ago
      It's not about the minimalism. It's a design aesthetic and I don't really have any issues with that. But the quality of the materials, the fit and finish, the subtle design touches are all missing. It feels like the interior for an inexpensive car. The model S interior is also not great and very very dated. The software for Tesla remains a highlight and a big reason why it would be hard to move to say an e-tron. But better competition is coming and I hope it pushes Tesla to do better.
  - 6y ago
akmiller 6y ago
1. I'd like to see your source for this. As far as ICE companies competing, most of what we've seen so far is fairly limited and there is good reason for this. Their whole profit model is built on the dealership model and serious investment into electric cars is going to, essentially, nullify that model of doing business. Moving to electric cars is not just an incremental changes for current large automobile companies but an entire paradigm shift in how they do business.
- ra7 6y ago
  The source is Tesla's balance sheet. If you remove the credits, they're losing money. But of course, they're spending a lot for things like building factories and scaling up.
  - dragontamer 6y ago
    > they're spending a lot for things like building factories Building factories is CapEx. CapEx does NOT affect profits, only cash flow. Factories indirectly hurt profits through depreciation. But its a very round-about way of doing things. The important thing is that profits / loss is a forward looking statement implicitly.
    - andrewmcwatters 6y ago
      > CapEx does NOT affect profits Yeah, yeah, and paying a mortgage doesn't affect my savings rate.
      - dragontamer 6y ago
        What? "Savings rate" is defined as monthly disposable income. Your mortgage absolutely lowers your savings rate. Your mortgage would also affect your cash flow. If we're talking about profit/loss, the interest-portion of your mortgage absolutely affects your profit/loss. Only the principle portion of your mortgage statement is "free" from a profit/loss perspective. Which it is: you can always leverage the principle into a HELOC or other financial instrument if you need emergency cash.
tempsy 6y ago
My problem with Tesla's business model is that the service model doesn't seem to scale well. Because there's no decentralized dealership network, you are beholden to the nearest service center, which could be hours away from you or be so in demand that the next available service appointment is weeks away. Yes, they also have mobile service, but that is also spotty depending on where you live and is only appropriate for minor issues. The service center growth is really slow compared to number of sales...something like only 10% a year when they are now trying to add almost 1M cars/year to the road. Combined with spotty quality of new cars and aging vehicles approaching 5-10+ years old that will need more frequent maintenance the quality of service has rapidly deteriorated in real time. I don't see how they fix or address that at all without serious investment in building new service centers or changing the service model to allow 3rd party repairs.
- vkou 6y ago
  > or changing the service model to allow 3rd party repairs. I honestly don't understand how the technologist crowd, with its ties to hacker culture, open source, etc, is not at the forefront of a backlash against this model. Third party repair is critical at keeping the manufacturers honest. This might not matter for a disposable $60 kitchen appliance, but is critical for a $60,000 car.
  - tempsy 6y ago
    Tesla probably overcharges for out of warranty maintenance and repairs and wants to keep that margin for themselves. Also other trade secrets related to their service biz that they want to stay secret. But this means they either need to build 10x the SCs over the next decade or risk losing customers over time as people get fed up with maintenence issues.
ra7 6y ago
Tesla's build and interior quality is crap. A $40k Mercedes C-Class has better interior than a $100k Model S. But what Tesla does well is the UX. While I'm not a huge fan of fully touch controls for essentials like AC, wipers and so on, the software feels really polished including their navigation, mobile integration, OTA software updates to improve them. It feels like software coming out of a Silicon Valley software company as opposed to clunky stuff you are used to seeing in cars. Until other manufacturers catch up with this aspect, it's hard to compete with Tesla because the full experience is superior.
- xkjkls 6y ago
  How many people actually buy cars for the UX? I think reliability and build quality are going to be far more valuable for most consumers, and the big automakers still have Tesla beat in spades there.
bryanlarsen 6y ago
> 1. Tesla Motors makes money on regulatory credits that conventional automakers must purchase in order to offset their ICE vehicle production. That's actually Tesla's only source of profit. Unfortunately for Tesla Motors, those regulatory credits aren't going to be in such high demand in a world where major automakers each produce hundreds of thousands of electric vehicles. Tesla has a 20% gross margin, which is significantly better than most competitors. So they make lots of profit per car, lots more than they make from regulatory credits. On a free cash flow basis, Tesla is profitable. On a GAAP basis, Tesla is profitable. If you remove all non-recurring revenue & expenses, Tesla is profitable. Removing non-recurring revenue (aka regulatory credits) from their income statement is a useful exercise when trying to predict their future revenue. But if you do, you also should be removing non-recurring expenses too (mostly Musk's stock grant).
- xkjkls 6y ago
  > On a free cash flow basis, Tesla is profitable. Free cash flow is not profit though, nor should it be considered equivalent. > Removing non-recurring revenue (aka regulatory credits) from their income statement is a useful exercise when trying to predict their future revenue. But if you do, you also should be removing non-recurring expenses too (mostly Musk's stock grant). Dilution still matters if you think about the value of the company. If you think the stock is going to go up, Musk's stock grant is going to be a part of that dilution.
- altarius 6y ago
  How is Tesla's gross margin different from e.g. BMW or Daimler? A quick googling showed gross profit margins around 20% around 2015-2017, it was even around 24% in 2007 for Daimler. Maybe there's some accounting subtlety I am missing here (or is "gross margin" != "gross profit margin"?).
dmode 6y ago
Your second point resonates with me. After 5 years of ownership, I just got tired of looking at the same interior. Sold my Tesla and got a Volvo plug-in hyrbid and much happier now.
voisin 6y ago
Do you know how much they make off #1? How much are they losing if not for these credits?
- xkjkls 6y ago
  Over the most recently posted 12 month period they have posted financials for, Tesla booked $1.05 bn in regulatory credits, which would take their $368 mn net profit to a ($681) mn net loss. https://www.thestreet.com/tesla/articles/could-tesla-be-profitable-without-regulatory-credits https://www.thestreet.com/tesla/articles/could-tesla-be-prof...

worker767424 6y ago

> regulatory credits Why is it that all of Musk's companies rely on government support in some significant way?

xyzzyz 6y ago
> government support I wouldn’t exactly call tax credits “government support”. They are, no doubt, very beneficial to Tesla, and other recipients of these tax credits. They aren’t support though: it’s the rest of the companies that are more burdened by the taxes.
sawjet 6y ago
the government wanted to buy something and they have the means to sell it to them. How is that reliance on government support?
akmiller 6y ago
I suggest you don't look at the oil companies and traditional auto manufacturers if you think this is just an Elon Musk thing!
ar_lan 6y ago
Tax credits aren't really government support (it's not like the government is paying them anything). It's more akin to a discount, if anything - we support the work you do so we won't penalize you further with taxes, because your work can provide a net good.
- xkjkls 6y ago
  If you can sell your tax credits, they are equivalent.
  - perl4ever 6y ago
    It's a question of how you frame it, but that doesn't mean all ways are equally valid in every context. A pound of apples and a pound of lead may amount to the same thing for a counterweight, but that doesn't mean they are equally good for a pie.
valuearb 6y ago
Hmm, Zip2? PayPal? OpenAI? Neurallink? Oh, you mean Tesla and SpaceX. SpaceX got a commercial contract from NASA to greatly reduce NASAs costs of delivering cargo to the ISS, and fully delivered, saving NASA billions. SpaceX would not have been able to build Falcon 9 without it, or likely survive. Then NASA gave SpaceX and Boeing contracts to fly crew members to the ISS, and SpaceX delivered well ahead of Boeing, and for billions less. Finally NASA has given SpaceX small contracts to gain access to new SpaceX technologies such as in-orbit refueling, which would save NASA tens of billions if it was ever allowed to use it. And we provide tax credits to zero emission vehicles to make up for allowing ICE engines to omit CO2 indiscriminately. A better solution would be a limited market in carbon emissions, but most of the coal state politicians would lose their jobs if that passed.

11thEarlOfMar 6y ago

Agreed. The eTron overtook the Model 3 in Norway in 2020: https://www.reuters.com/article/autos-electric-norway/electric-cars-rise-to-record-54-market-share-in-norway-in-2020-idINKBN29A0ZL https://www.reuters.com/article/autos-electric-norway/electr... I'd note that in terms of market share for BEVs vs. ICE globally, the pie is still very large for BEVs. There is room for multiple winners.

Alex3917 6y ago

> That's actually Tesla's only source of profit. So do they get hit 2x then, if not only will they stop getting the credits but the other automakers will start getting the subsidies that Tesla will no longer be getting? Right now it seems like Teslas are also artificially cheap, since they can't be repaired affordably or in any reasonable timeframe.

totalZero 6y ago
There are a few different programs but I will focus specifically on ZEV credits. Basically, automakers that don't make a certain number of EVs relative to total sales must buy credits from automakers who produce a surplus of EVs. Right now, the conventional automakers buy hundreds of millions of dollars' worth of ZEV credits from Tesla every quarter. However, they won't need to buy those credits if they produce a large number of their own EVs. https://www.caranddriver.com/news/a32346670/other-automakers-paid-tesla-record-354-million/ https://www.caranddriver.com/news/a32346670/other-automakers...

readams 6y ago

The interior quality is the main thing in my mind that Tesla it's missing. My model 3 performance drives like nothing else and requires no maintenance. But I still miss how much nicer inside my previous Audi was. At that price point I'd like to get a lot more.

akmiller 6y ago
I actually prefer the interior of my Tesla's to any care I've ever owned. Combined with the technology and software, I haven't seen any car that competes. It is still absolutely amazing to me how much code goes into traditional ICE cars and they still can't create a coherent, usable, interface. I will say that Ford has drastically improved in the last few years (I own a fairly new Explorer ST) but much of what they've done you can clearly see is copying what Tesla has done. Even still it is miles away from what Tesla has done.
- allthecybers 6y ago
  The minimal Tesla M3/Y interior is one of the highlights to me. But the only way it works is the integration of software and tech with regular OTA updates. Other car interiors from Kia or Toyota seem far too busy. I know it is a matter of taste, but the minimalism is appealing. The Ford Mach-E or VW ID take on the EV cockpit is fine too, but feels much less futuristic. I think the Tesla aesthetic is driving other automakers to improve the in car experience and incorporate more intuitive software and screens.
  - readams 6y ago
    It's not about the minimalism. It's a design aesthetic and I don't really have any issues with that. But the quality of the materials, the fit and finish, the subtle design touches are all missing. It feels like the interior for an inexpensive car. The model S interior is also not great and very very dated. The software for Tesla remains a highlight and a big reason why it would be hard to move to say an e-tron. But better competition is coming and I hope it pushes Tesla to do better.
- 6y ago

akmiller 6y ago

1. I'd like to see your source for this. As far as ICE companies competing, most of what we've seen so far is fairly limited and there is good reason for this. Their whole profit model is built on the dealership model and serious investment into electric cars is going to, essentially, nullify that model of doing business. Moving to electric cars is not just an incremental changes for current large automobile companies but an entire paradigm shift in how they do business.

ra7 6y ago
The source is Tesla's balance sheet. If you remove the credits, they're losing money. But of course, they're spending a lot for things like building factories and scaling up.
- dragontamer 6y ago
  > they're spending a lot for things like building factories Building factories is CapEx. CapEx does NOT affect profits, only cash flow. Factories indirectly hurt profits through depreciation. But its a very round-about way of doing things. The important thing is that profits / loss is a forward looking statement implicitly.
  - andrewmcwatters 6y ago
    > CapEx does NOT affect profits Yeah, yeah, and paying a mortgage doesn't affect my savings rate.
    - dragontamer 6y ago
      What? "Savings rate" is defined as monthly disposable income. Your mortgage absolutely lowers your savings rate. Your mortgage would also affect your cash flow. If we're talking about profit/loss, the interest-portion of your mortgage absolutely affects your profit/loss. Only the principle portion of your mortgage statement is "free" from a profit/loss perspective. Which it is: you can always leverage the principle into a HELOC or other financial instrument if you need emergency cash.

tempsy 6y ago

My problem with Tesla's business model is that the service model doesn't seem to scale well. Because there's no decentralized dealership network, you are beholden to the nearest service center, which could be hours away from you or be so in demand that the next available service appointment is weeks away. Yes, they also have mobile service, but that is also spotty depending on where you live and is only appropriate for minor issues. The service center growth is really slow compared to number of sales...something like only 10% a year when they are now trying to add almost 1M cars/year to the road. Combined with spotty quality of new cars and aging vehicles approaching 5-10+ years old that will need more frequent maintenance the quality of service has rapidly deteriorated in real time. I don't see how they fix or address that at all without serious investment in building new service centers or changing the service model to allow 3rd party repairs.

vkou 6y ago
> or changing the service model to allow 3rd party repairs. I honestly don't understand how the technologist crowd, with its ties to hacker culture, open source, etc, is not at the forefront of a backlash against this model. Third party repair is critical at keeping the manufacturers honest. This might not matter for a disposable $60 kitchen appliance, but is critical for a $60,000 car.
- tempsy 6y ago
  Tesla probably overcharges for out of warranty maintenance and repairs and wants to keep that margin for themselves. Also other trade secrets related to their service biz that they want to stay secret. But this means they either need to build 10x the SCs over the next decade or risk losing customers over time as people get fed up with maintenence issues.

ra7 6y ago

Tesla's build and interior quality is crap. A $40k Mercedes C-Class has better interior than a $100k Model S. But what Tesla does well is the UX. While I'm not a huge fan of fully touch controls for essentials like AC, wipers and so on, the software feels really polished including their navigation, mobile integration, OTA software updates to improve them. It feels like software coming out of a Silicon Valley software company as opposed to clunky stuff you are used to seeing in cars. Until other manufacturers catch up with this aspect, it's hard to compete with Tesla because the full experience is superior.

xkjkls 6y ago
How many people actually buy cars for the UX? I think reliability and build quality are going to be far more valuable for most consumers, and the big automakers still have Tesla beat in spades there.

bryanlarsen 6y ago

> 1. Tesla Motors makes money on regulatory credits that conventional automakers must purchase in order to offset their ICE vehicle production. That's actually Tesla's only source of profit. Unfortunately for Tesla Motors, those regulatory credits aren't going to be in such high demand in a world where major automakers each produce hundreds of thousands of electric vehicles. Tesla has a 20% gross margin, which is significantly better than most competitors. So they make lots of profit per car, lots more than they make from regulatory credits. On a free cash flow basis, Tesla is profitable. On a GAAP basis, Tesla is profitable. If you remove all non-recurring revenue & expenses, Tesla is profitable. Removing non-recurring revenue (aka regulatory credits) from their income statement is a useful exercise when trying to predict their future revenue. But if you do, you also should be removing non-recurring expenses too (mostly Musk's stock grant).

xkjkls 6y ago
> On a free cash flow basis, Tesla is profitable. Free cash flow is not profit though, nor should it be considered equivalent. > Removing non-recurring revenue (aka regulatory credits) from their income statement is a useful exercise when trying to predict their future revenue. But if you do, you also should be removing non-recurring expenses too (mostly Musk's stock grant). Dilution still matters if you think about the value of the company. If you think the stock is going to go up, Musk's stock grant is going to be a part of that dilution.
altarius 6y ago
How is Tesla's gross margin different from e.g. BMW or Daimler? A quick googling showed gross profit margins around 20% around 2015-2017, it was even around 24% in 2007 for Daimler. Maybe there's some accounting subtlety I am missing here (or is "gross margin" != "gross profit margin"?).

dmode 6y ago

Your second point resonates with me. After 5 years of ownership, I just got tired of looking at the same interior. Sold my Tesla and got a Volvo plug-in hyrbid and much happier now.

voisin 6y ago

Do you know how much they make off #1? How much are they losing if not for these credits?

xkjkls 6y ago
Over the most recently posted 12 month period they have posted financials for, Tesla booked $1.05 bn in regulatory credits, which would take their $368 mn net profit to a ($681) mn net loss. https://www.thestreet.com/tesla/articles/could-tesla-be-profitable-without-regulatory-credits https://www.thestreet.com/tesla/articles/could-tesla-be-prof...