Wednesday, June 30, 2010

Tesla Motors: The Risky Fendi Bag of the Highways

 The article was also linked to by WSJ and Daily Finance Columnist James Altucher. The Kirk Report members-only section linked to it, too.

Tesla Motors (TSLA) IPO'ed today and rose 40%, underscoring investor enthusiasm for popular perceived "green" investments, underwriting ineptitude, or both. Congratulations to the lottery winners here, and best of luck because you will need it. Here is why:

(1) Tesla's product/s are/will be status symbols because they are transportation solutions that are inferior to existing, low-risk, well-known solutions. Here's my back-of-the-envelope calculation over an expected 200k mi life (and, no, if it does not work on the envelope, it won't work in Excel either). Tesla hopes that its "mass market" (20k units/year; 250-300 mile range) will sell for $50k. However, according to public information, the current battery pack needs to be replaced at 100k miles at a cost of $36k as it loses 30% of the range at 50k (and, presumably, 51% at 100k). Tesla reports subsidized (PG&E night charge) electricity cost of $0.01 per mile (per wikipedia). A 200k mile life of a Tesla would then cost $50k car + $36k battery pack + $2k power = $88k. A new VW Jetta Diesel is $23k, and gets 40 mpg. Over a 200k mi lifetime, that would be 5,000 gallons, at $3/gal, is $15k. So the Jetta cost would be $38k. Diesel would have to be $13/gal for the Tesla to break even. (As a side note, diesel at $13/gal would mean that a bunker with food and a shotgun would be the best use of money). I am making a number of simplifying assumptions here, including similar maintenance and insurance costs, and residual values. If I had to guess, Congress will make regular car owners subsidize the insurance of electrical car owners.

So the conclusion here is that because of its costs and limited range, the "mass market" Tesla will likely be a 2nd or a 3rd vehicle in for a well-to-do suburban household.

(2) The ecological benefit of electric cars is substantially overstated. First, most of the US electricity comes from fossil fuels (coal and natural gas), and, second, battery metals present problems both at the sourcing and at the recycling ends. So just relocating the tailpipe from the car to the power plant and the cyanide leaching ponds of the mines does not make electrical cars zero-emissions, despite them being advertised as such.

(3) The company has manufactured a little over 1,000 cars thus far, and the bodies are actually made by Lotus. This means that the production know-how is very low. On top Tesla plans to make the cars in a high-cost location (the old NUMMI plant in Fremont, CA). The location was unionized prior to the shutdown by Toyota and MTLQQ (aka "Old GM"). It is also highly visible politically, with Nancy Pelosi and Barbara Boxer hovering over the area. So you can imagine the pressure to have "good paying, union, green jobs"= tax payer and shareholder money spent for political favors. Also, Tesla does not even have the production machinery yet.

(4) Tesla is heavily subsidized by the taxpayer. The expected effective price of their "mass market" model is $50k after a $7.5k tax credit. Tesla also has a loan facility from the taxpayer via the Department of Energy. Just remember: good business ideas do not need subsidies. Apple's app store does not need them to thrive, nor do Biore strips, nor do tube socks, nor does the halal skewer vendor down at the corner.

(5) Tesla's CEO's personal financial problems are well-known. But here is what worries me: "We are a Silicon Valley company. Closer to an Apple or Google than to a GM or Ford in the way we operate the company"-- Mr. Musk said in a very recent public statement. I have some news for you. You are in the car business. This is a cyclical business that depends heavily on financing availability (for mass-market products). The scalability of your business is much lower. The likelihood that you will have to deal with a unionized, politically powerful, inflexible expensive workforce is high. 2 of the 3 US car companies are bankrupt, and the 3rd barely made it.

(6) Tesla is losing money hand-over-fist, but you probably knew that already. It will also have a period of no production as it gets ready for the "mass market" car.

(7) Last, but not least, Tesla means "adze" (a woodworking tool) in Serbian, Nikola Tesla's native language. Nice attempt to honor one of the most important inventors in history but it is also bringing a decidedly low-tech connotation to this aspirational company.

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