Government-Gamed Markets and Subsidies Give Tesla Another 'Profitable' Quarter

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Elon MuskAnother fiscal quarter has passed and if you consume most of the mainstream and/or pro-renewable energy media, it’s been another consecutive financial smashing success for luxury plug-in maker Tesla Automotive.

That is, if you don’t subtract the buyer’s federal tax credit for each vehicle, or the California emission credits sales scheme, or state tax credits and incentives, or subsidies for battery manufacturers. Also, it’s great for Tesla and CEO Elon Musk if you disregard Generally Accepted Accounting Principles.

If you can swallow all that government market distortion, taxpayer largess and books-cooking, Tesla’s Model S is finally taking off!

For almost three months – since its last quarterly earnings report – Tesla and its media sycophants have boasted how it paid back its $465 million Department of Energy loan nine years early(!!). The company was upheld as a rousing success after the high-profile Recovery Act failures such as Solyndra, Abound Solar, A123 Systems, and Fisker Automotive, among others. Celebratory rhetoric accompanied the announcement in May of Tesla’s first-ever quarterly profit, which was only accomplished thanks to California and federal environmental credits that totaled $85 million – 15 percent of revenues, according to a Bloomberg report.

Now, in the second quarter, Tesla has reported a profit of $26 million based on $405 million in revenue. Correspondingly its stock price has enjoyed a healthy boost this year, closing at over $153 yesterday. It was below $35 when 2013 started.

But once again Musk can thank government for gaming the market for Tesla to capitalize on. As Mother Jones reported, second quarter results included $51 million in zero-emission credits revenue, “without which it would not have been able to report a profit.”

As the Motley Fool’s Daniel Cawrey explained, 15.4 percent of all the big automobile companies’ sales in California must be zero-emission vehicles by the year 2025. So in this warped trading market created by government, the billionaire Musk – who also leads private travel company SpaceX – is able to sell the credits to larger automakers who don’t produce enough vehicles with low or no tailpipe emissions like Tesla does.

But that golden goose apparently can produce for only so long. In a May conference call Musk said those credits were likely to decline in the second quarter, and drop even more sharply after that – down to nothing in the fourth quarter this year.

Still, Tesla pulled off a “surprise profit” for the second quarter, which most analysts did not expect.

“The company attributed its strong performance to record deliveries of its Model S plug-in sedan and improved margins,” CNNMoney.com reported.

Musk is doing is best to maintain the momentum, keeping the company in the headlines, promoting innovations such as rapid battery swaps and the build-out of its “supercharging” network. For an automaker with only one non-traditional vehicle model that retails for $70,000 that obviously targets an elite market, it can be said that Tesla is doing okay compared to the failures of fellow Energy Dept. loan recipients Fisker and Vehicle Production Group, or the busts produced by bigger manufacturers like the Chevy Volt and Nissan Leaf. And unlike the Fisker Karma, which was famously panned by Consumer Reports, the Model S received raves from Car and Driver.

But outdoing those unimpressive performers is a far cry from actually achieving “success” or staking a claim to legitimate profitability. Musk, DOE and the media can fantasize all they want, but Tesla is still deeply dependent on public money and government mandates for its survival.

Looking under the “profitability” hood reveals the taxpayer-fueled engine. Sure, the extremely rich who buy the Model S probably don’t need the $7,500 federal tax credit and state-level breaks such as the $2,500 rebate for plug-ins in California, but they still take advantage of them and it certainly bumps sales. And tack on top of the feds the various state tax credits or rebates, which range from the small to the substantial.

Deeper down, as Mother Jones mentions, are also subsidies that went into the creation and development of Tesla’s electric car battery (which are usually unmentioned cost offsets that go into every EV, vastly reducing its cost for the consumer). In this case it’s Panasonic that produces the Model S power source, with great help from the Japanese government’s millions of dollars in backing.

After all that, Musk still needed a little gimmickry to paint a profitable picture for the second quarter, which Tesla didn’t try too hard to hide. The company delivered $26 million in net income if you disregard Generally Accepted Accounting Principles, but under GAAP Tesla lost $30.5 million. As Wired and Slate explained, Tesla “rolled out an innovative loan/purchase/buyback scheme that lets people basically lease the cars but with Tesla getting all the money up front via a financing arrangement with Wells Fargo or US Bank.” The revenue was all recorded in the second quarter, which is not allowed under GAAP.

Eventually dependence on market deformations and accounting gymnastics will not be enough, and that day may come sooner rather than later. For example, Automotive News reported earlier this week that California may reduce Tesla’s ability to take advantage of “bonus” emission credit sales it has been able to earn under a “fast-refueling” rule. Recently Tesla has boasted about its new initiative to establish stations for quick battery changes, which the company says can be accomplished in as little as 90 seconds – a development vital to be able to compete with traditional gas stations, and also to comply with certain California Air Resource Board standards.

Other than it being another device to obtain more emission credit revenue, it’s hard to see how a battery swap system gets Tesla a lot closer to making its vehicles more economical to use. A similar problem exists with Musk’s goal to deploy an extensive system of “superchargers” that re-power customers’ EVs faster than most chargers. According to PlugInCars.com, each supercharger costs between $100,000 and $175,000 to install, with each customer getting free use of them for the length of time they own a Tesla model. How that gets the company any closer to overall profitability, when it already depends on heavy subsidization to survive, is a mystery.

Sooner or later other peoples’ money will run out and Tesla cars will need to be produced that consumers will actually want to purchase on their own merits. As for the Dept. of Energy’s stimulus “success story,” Musk himself has credited the $465 million loan as an “accelerant,” not a need for survival. As NLPC has reported, the amount he borrowed that was underwritten by DOE was relatively inconsequential to the billionaire, as he has any number of financing options at his disposal.

It would be nice to see an electric car succeed on its own, but the numbers still don’t add up.

Paul Chesser is an associate fellow for the National Legal and Policy Center and publishes CarolinaPlottHound.com, an aggregator of North Carolina news.