What California's $34 Million Subsidy Means for Tesla's Future


It's been called everything from "The Next Great American Car Company" to an "Obama subsidized bubble." Yes, Tesla Motors can be as polarizing a topic as Tim Tebow or hydraulic fracking. Generally, there's no arguing these are high quality machines. But what is polarizing about this company is how much government assistance was needed to get where it is today. California recently rekindled this debate by giving Tesla a $34.7 million tax break for new equipment to boost production, as reported by SFGate.

It's true. Tesla has received a lot of help from Uncle Sam. But if you think that its business model is 100% contingent on big government hand-outs, maybe you've misunderstood the role these subsidies are playing.

Tesla's benefit from government subsidies
First, let's delve into how much government financial assistance Tesla receives. It comes in many different ways, but the big three are:

  1. Government-backed loans

  2. Federal and state tax credits to buyers

  3. Zero-emission credits

In January 2010, Tesla received a $465 million government guaranteed loan courtesy of the Advanced Technology Vehicle Manufacturing program. This allowed the company -- incorporated in 2003 -- to finally be able to build out facilities to produce batteries and electric engines on a mass scale.

In addition, if it weren't for this grant, it's unlikely Tesla would have IPOed at $1 billion in June 2010. The IPO scored the company $226 million -- about double annual revenue at the time.

Manufacturing in place, Tesla needs consumers, and price can be an issue for many. In October, TrueCar.com reported that the average new car price is $30,798, but Tesla's Model S will cost you nearly twice that. To offset the cost, the federal government will give you a $7,500 credit for this purchase, and some states -- like West Virginia -- will even match the Fed's credit. This makes for a more favorable consumer market and has undoubtedly played a role in Tesla's high demand.

But perhaps the most controversial benefit is Tesla's practice of selling zero-emission vehicle credits to other car companies.

In California, every car manufacturer is required to produce a percentage of zero-emission vehicles and each vehicle receives a certain number of credits based on its capabilities. These credits must add up to a certain number (contingent on overall company sales) or the company faces a penalty for non-compliance. Since 100% of Tesla's vehicles are zero-emission, and each earns 7 credits -- the highest number possible -- Tesla is loaded with ZEV credits.

With credits in abundance, it can sell this surplus to other companies who aren't making the grade -- kind of like how sometimes in Monopoly you sell the "get out of jail free card" when you already have the other one. The sale of these credits ballooned from just $2.7 million in 2011 to a whopping $40.5 million in 2012. And so far this year the company has earned a massive $130 million and earned the company its first profit.

Put all these factors together. Thanks to a government loan, this company was able to build needed infrastructure and have an extremely successful IPO. These capital gains allowed vehicle production on a mass scale. Customers can get the cars at a discount thanks to federal and state tax credits. But all these things still haven't made Tesla profitable. Selling ZEV credits has pushed profits into the black for now. It's undeniable that this company is benefiting from favorable politics.

But is Tesla a "loser" incapable of ever succeeding on its own?

Favorable politics are fueling ambition
To answer this question, let's shift our discussion to what Tesla is up to. With only one vehicle -- the Model S -- currently in production, it's easy to think this is a one-trick-pony. But Tesla is seizing these government-assisted opportunities to build out a major business plan.

With manufacturing facilities now in place, Tesla is working on two new vehicles to add to its lineup, currently called the Model X and Generation III. The Model X promises to be an SUV and the Generation III a more affordably priced family sedan. This grows Tesla's customer base from the relative small sports car niche to almost anyone.

But don't think the Model S isn't popular because its consumer base is smaller than the two coming vehicles'. The Model S is uber popular. Deliveries have swelled from just 2,650 in 2012, to a projected 21,500 worldwide this year. Production has ramped up to 550 cars per week attempting to meet demand, but there's still quite a waiting list to get these cars.

CEO Elon Musk admitted in a conference call that the no. 1 factor holding back production is Tesla's batteries. The company just can't make enough fast enough. To relieve this pressure, it recently entered into a manufacturing agreement with Panasonic .

However, the Panasonic deal is not the long-term solution. Tesla is actively looking to build its own battery plant. This move not only allows vehicle production to increase and keeps battery profits in-house, it also diversifies Tesla's business. Other car companies are actually willing to pay for Tesla's batteries. For example, Toyota has started using them in its RAV4 EV. Therefore, a battery plant can turn Tesla into more than just a car company, since demand for its battery products already exists.

Perhaps one of the biggest deterrents to buying an electric vehicle in the first place is the road trip dilemma. Where do you recharge when driving long distances? Tesla is solving this problem by rolling out charging stations. There are currently 45 stations in North America, but by 2015 you could theoretically travel anywhere in the US with these stations, all completely free to Tesla owners.

Projected SuperCharging stations 2015. Source: www.teslamotors.com/supercharger

Of course, these charging stations aren't built for free. This rollout is eating away at Tesla's bottom line, but long-term these stations will strengthen the business model. Not only will this network encourage more people to buy a Tesla, but these stations will produce more power than what is necessary for charging cars. This excess production can be sold back to the power grid, further diversifying Tesla's revenue with a steady source.

Putting the two pieces together
Typically, young businesses have two paths to growth. They can go into major debt and go big. Or they can start small and build slowly on successes. But Tesla has turbo-charged its growth with financial support from political policies. Without the government's help, Tesla would not be where it is. It would have had to take a slower growth plan. But since these opportunities do exist, it has capitalized upon them to lay the foundation for a major contender long-term.

But this story is quickly entering a new era. Musk emphasizes Tesla's ability to win on its own, and is weaning the company off of government assistance. In May, Tesla paid back its $465 million ATVM loan 9 years early, becoming the first car company to do so. Additionally last quarter, sales of ZEV credits dropped to just $10.4 million -- down 80% quarter-over-quarter. In the coming quarter, Musk hopes there's no need to sell any.

The way I see it, Tesla is not a company on government life support. Rather, it's a solid company with an ambitious leader that's taking advantage of a favorable electric car political environment to build out one of the biggest game-changers of our lifetime. Nearly in place, this government aided foundation will allow Tesla to keep cruising stimulus-free for years to come.

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The article What California's $34 Million Subsidy Means for Tesla's Future originally appeared on Fool.com.

Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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