Elon Musk’s Tesla is too big to fail for California

HOLMAN W. JENKINS, JR
July 24, 2017
The Australian

Even as Wall Street bulls tout Tesla’s stock, almost a conspiracy of silence has surrounded the most interesting questions. One of these concerns what happens when 300,000 customers who deposited $US1000 ($1265) each for the forthcoming Tesla Model 3 learn that the $US7500 federal tax credit will expire before they can get their hands on it.

Now we know. Tesla may not be too big to fail as far as the federal government is concerned, but it certainly is too big to fail as far as California politicians are concerned.

As enthusiast site, GreenCarReports.com, says frankly of AB 1184, a bill recently passed by the state Assembly and awaiting Senate action: “CA bill would make up for federal electric-car incentives as they expire.” 

Yep, the law clearly is designed to help an electric-vehicle manufacturer about to exhaust the federal credit, a category that includes only Tesla. (The credit starts phasing out with the 200,000th car sold.) The bill specifies a car that gets at least 200 miles ($320km) per charge — as the new Tesla Model 3, at 215 miles, just does. 

The proposed law is suspiciously friendly toward a luxury brand going up against Mercedes and BMW. It aims to bridge the price gap between an electric vehicle and a comparable petrol-powered car. For a high-end car, the rebate could be $US10,000, $US20,000 or even $US30,000. In a state that accounts for half of all electric-vehicle sales, this sum would be determined by politically appointed air-quality regulators. 

Of all the emails that make me chuckle, the best are those from Tesla owners who say taxpayer rebates don’t matter. They’d buy the car anyway. Apparently they think Tesla founder Elon Musk is leaving money on the table in dealings with them. If his customers would buy without the $US7500 federal rebate, he’d be a fool not to raise the price by $US7500 and capture the value of the tax credit for Tesla.

He’s no fool. All state-sponsored benefits end up in Tesla prices. They go straight to Mr Musk’s bottom line.

A company like Tesla could only happen in California — or maybe Vladimir Putin’s Russia.

Let’s see, then: Representative Henry Waxman and state Treasurer Bill Lockyer strongarmed Toyota into providing Tesla its giant local factory on the cheap. Hardly a year passes without Mr Lockyer or his successor signing off on fresh tax favours. These include $US174m in sales-tax suspensions for Tesla’s equipment purchases via a state agency pretending to be the purchaser. 

Tesla has banked tens of millions from California’s existing green-car rebates, and hundreds of millions in state zero-emissions credits. When Nevada outbid California for a battery plant in 2014, the Sacramento Bee instructed the faithful: “That shouldn’t happen again.” Expect local Democrats to dig deep when Mr Musk goes shopping for his promised truck plant later this year. In desperation, EV promoters point out that these sums don’t come close to the $US550 billion in annual subsidies the oil industry allegedly receives. This figure, which comes from the International Energy Agency, mostly consists of the implicit value of cheap oil products that countries like Iran and Venezuela dump on their domestic citizens.

Yes, these subsidies are abominable, but they are at the expense of the oil industry. They are also at the expense of energy users in the rest of the world. The price of petrol to the rest of us would be lower, making electric cars less attractive, if these handouts were stopped.

The bill AB 1184 must still pass the California Senate. It still needs funding through the state cap-and-trade program, thereby shifting its cost to other energy users. Governor Jerry Brown still needs to sign the bill — Mr Brown who recently decided his swan song will be a global climate conference in San Francisco in September 2018, where he can be expected to tout California’s green-car leadership. Perhaps not accidentally, the bill would take effect the same month, landing just as Tesla might be facing its Waterloo over the federal credit’s disappearance for Model 3 customers.

But here’s where we must eat a little crow. Seven years ago, we cautioned against the idea that Mr Musk’s California “political allies-of-the-moment represent some kind of commitment to the company’s long-term success”.

We were obviously wrong. California Democrats have so lashed themselves to Tesla, there’s no amount of taxpayer money they won’t spend to keep it afloat.

No, the company isn’t a bankruptcy risk as long as investors keep supplying fresh capital to let it make and sell cars at a loss. But Tesla has always been, in large measure, a public policy bet. The shares have been on a shaky ride lately amid Mr Musk’s Model 3 Hail Mary. AB 1184 may be just the signal investors need that California’s deep pockets are behind the company — at least until they’re not.