Tesla's net profit comes from selling regulatory credits, not cars

https://www.cnn.com/2021/01/31/investing/tesla-profitability/index.html

by pseudolus • 5 years ago

44 61 5 years ago

pseudolus• 5 years ago

If the net result is an overall decrease in emissions and spurs other manufacturers to move to electric vehicles then I'd chalk it up as a win, especially as the credits appear to be only temporary.

michaelt• 5 years ago

Is it?

I mean, if I brought an EV to prevent 5 tonnes of carbon emissions per year, but the EV manufacturer engages in carbon credit trading and sells a coal-fired power plant the right to emit 5 tonnes of carbon emissions per year, I might as well just buy a gasoline car because the same amount of pollution ends up in the atmosphere either way.

totalZero5• 5 years ago

The credits are temporary insofar as other automakers are starting to make their own EVs. How is Tesla going to make a profit when nobody needs to buy its ZEV credits?

guepe• 5 years ago

By building less new factories?

est313• 5 years ago

The competing car makers sell their EV cars at a loss as well. Credits will always remain a component of the EV car market, and that's good because otherwise the externality wouldn't be priced in.

sunstone• 5 years ago

Tesla is obviously in a strong growth phase and companies in such a phase, unless they are strictly software based, do not show profits because they are investing a lot of capital in their growth. For example Tesla's cost to make a model 3 is estimated to be around $28k which they sell for an average of $45k (as a guess, certainly more than $40k). It doesn't make sense to apportion Tesla's cost of new factories onto the "cost of production" of its cars. This is all finance 101.

prepend2• 5 years ago

Twist: that was always Tesla’s plan. The beauty of cap and trade is that it puts a price on a negative externality and then let’s the market work to fix it.

Funny that CNN poses this as a secret as it’s always been in Tesla’s quarterly filings and not a secret at all. When companies have to pay to not have electric cars, it spurs innovation in companies to develop electric cars.

zpeti• 5 years ago

Literally every "tesla short" or anti tesla website/media property has been going on about this for years in every article.

Thanks CNN for the clickbait title.

bob33212• 5 years ago

"Covid Variant has Scientists Worried!", "Big Moves in BITCOIN", It has got to be sad to be a journalist trying to do real work and your company is just pushing out garbage like this.

sliken2• 5 years ago

Well, wouldn't it be irresponsible to do otherwise?

Tesla's stated mission it to accelerate the adoption of electric cars. So basically every $ they get should be put into R&D making the cars better and increasing the volume of cars they can produce. So basically they should keep the profits around zero and pour all profits into R&D or expansion.

cecilpl2• 5 years ago

The $1.6 billion in regulatory credits it received last year far outweighed Tesla's net income of $721 million -- meaning Tesla would have otherwise posted a net loss in 2020.

Perhaps a better way of ending the sentence is "Tesla would have otherwise invested less in future R&D, so as not to post a loss". Whether to spend all the money you make is a business decision. See Amazon turning tiny profits for over a decade as a great example of why income doesn't matter to a growth stock.

HenryBemis• 5 years ago

That is a nice strategy. They bring in a lot of revenue selling these 'credits', and by the time everyone else wakes up to the fact and starting doing 'electric', they will be far ahead in R&D, quality, experimentation, etc.

They become the front runners for this industry.

spacemanmatt4• 5 years ago

I think that depends on an assumption that existing auto makers cannot repurpose and retool their empires to produce EVs. Tesla is far behind them from that perspective.

hehehaha• 5 years ago

How’s that good for consumers? They get stuck with Tesla exercising market power and in some instances dictating implementations. As much as I find Tesla innovative, I don’t want them dictating EV infrastructure.

spacemanmatt4• 5 years ago

'member when HN was pro-capitalist and would have savaged a company for banking on regulations rather than the market?

orange_tee• 5 years ago

Regulations are part of the market.

tontonius2• 5 years ago

It's okay to hate the game, without hating the player.

tontonius2• 5 years ago

Automotive gross margin excluding regulatory credits: 20.7% (ir.tesla.com)

totalZero5• 5 years ago

Not so fast. They reported an operating margin of 5.4% last quarter. You can't really ignore opex for a car company...

https://tesla-cdn.thron.com/static/1LRLZK_2020_Q4_Quarterly_...

spodek• 5 years ago

A dirty secret about ICE cars: they benefit from huge subsidies and the public paying its externalities too.

We'll ride a lot more public transit and bicycles when cars of all types pay their true costs.

Another dirty little secret about Tesla and Musk: they aren't helping the environment. Helping the environment means fewer cars and of those we can't get rid of, make them electric. Their strategy is more cars. That is, the tactic of electric is useful within a strategy of de-growth, but they have a strategy of growth. In fairness, they are a car company. A meaningful strategy to shrink the market would require changing the playing field, which would likely have to come from outside the field -- government or leadership at the level of Mandela or Dr. King.

laurent922• 5 years ago

Each time we help the environment by 5%, leaders let the population grow by 5% (often by immigration saying « We need it »).

Population and footprint are increasing just like it always has, and our efforts are just being used to squeeze a few more of us here.

rcMgD2BwE72F2• 5 years ago

Except countries don't share the same footprint per capital, at all. Simply compare the carbon footprint of a US inhabitant vs a Vietnamese.

We could be a handful of billions more on Earth and reduce the global footprint, so the size of the population not the issue but how we live (big house, big SUV, lots of meat, etc).

And of course, if the world's power continue to promote the American Way of Life as the way to go, all countries will look like the US and we'll destroy our habitat. But that's not a population problem but one of culture.

baq• 5 years ago

people want new cars.

there are two issues here:

1) they need cars: how to make cars less needed?

2) they buy cars: if they buy cars anyway, isn't it better if they buy electric?

first point is going to be very hard to solve, so might as well start with the second.

donatj• 5 years ago

The fetishism of biological locomotion is just a form of Luddism. Our backs are poorly designed. The amount of human suffering caused by damage to our backs is immeasurable. Promoting more of that is just cruel.

Pushing the environment to the detriment of human happiness and progress should never be a goal. There is a balance we can seek to not destroy our cradle while not hobbling ourselves.

The idea that we must abandon progress when we have basically endless untapped power is just a death cult.

PeterisP• 5 years ago

If we're talking about backs, then (given the very limited amount of literal back-breaking work carrying loads that are far too heavy for us, at least in the developed world) the main damage to our backs is caused by excessive sitting (for which our backs are poorly designed) - so if you're really going to use "damage to our backs" as an argumant with respect to cars vs "biological locomotion", this is an argument for more "biological locomotion" not less.

Dumblydorr• 5 years ago

It does though. They would not be eligible for credits if they didn't sell electric cars. And why would we discredit them for being out ahead of sound government policy, unlike other makers who lagged tremendously behind? That's somehow a negative, that they're working to solve an important issue quickly?

usrusr• 5 years ago

Yes it's just regulation working as intended. But it also means that once incumbent carmakers sell enough electrics to consume the bulk of their cross-subsidies themselves Tesla will eventually have to consider a new angle on the old "lose money on every sale but make it up in volume" joke. Sure, there are economies of scale to tap, but those tend to resemble log curves at best and given the massive number of identical cells per single car scale might be quite far into the flat already.

bryanlarsen5• 5 years ago

GAAP gross margin of 20.6%, so they make a lot of money per car, each marginal sale adds considerably to their bottom line, even without regulatory credits. It's the fixed expenses, like R&D and Elon's stock options that turn the profit per car into a near loss.

yardie• 5 years ago

Or in other words, "gas-guzzlers will continue to get more expensive as each one sold subsidizes a Tesla."

When I see the price velocity of what a F-150 or GMC 2500 costs compared to a decade ago the Cybertruck doesn't look like a bad deal at all.

tchalla• 5 years ago

If you are like me, who likes to look at the numbers for a quick fact check - you can look at the Q3 2020 report here [0] (Q4 doesn't show up yet). TSLA received automative regulatory credits of 397M while it's Net Income was 331M.

Automotive Regulatory Credits
In connection with the production and delivery of our zero emission vehicles in global markets, we have earned and will continue to earn various tradable automotive regulatory credits. We have sold these credits, and will continue to sell future credits, to automotive companies and other regulated entities who can use the credits to comply with emission standards and other regulatory requirements. For example, under California’s Zero Emission Vehicle Regulation and those of states that have adopted California’s standard, vehicle manufacturers are required to earn or purchase credits, referred to as ZEV credits, for compliance with their annual regulatory requirements. These laws provide that automakers may bank or sell to other regulated parties their excess credits if they earn more credits than the minimum quantity required by those laws. We also earn other types of saleable regulatory credits in the United States and abroad, including greenhouse gas, fuel economy and clean fuels credits. Payments for regulatory credits are typically received at the point control transfers to the customer, or in accordance with payment terms customary to the business.
We recognize revenue on the sale of automotive regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive revenue in the consolidated statements of operations. Deferred revenue related to sales of automotive regulatory credits was $0 million and $140 million as of September 30, 2020 and December 31, 2019, respectively. Revenue recognized from the deferred revenue balance as of December 31, 2019 was $140 million for the nine months ended September 30, 2020.

[0] https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/0001...

dalbasal• 5 years ago

Maybe I'm high on dissident sugar from reading reddit this WE, but leaning into that...

Boomer media tropes are really grating me. "Dirty little secret?" You mean the most cited fact in any article interview presenting a bear case on Tesla? You mean governing policies that are intended adopted in order to have this exact effect?

tcskeptic• 5 years ago

This is really irritating: BREAKING — Tax incentives and business model working as intended to solve a problem!

I do wonder about this kind of article, are these genuine or is this the work of a competitor or short seller’s PR firm pushing a story?

wooger• 5 years ago

I always thought the longer term plan was to lead in battery manufacturing, and then diversify into other fields, plus sell batteries to other manufacturers.

pmiller2• 5 years ago

Guess what? Neither do car dealerships: https://yourautoadvocate.com/guides/how-do-car-dealerships-m...

A more accurate title for TFA would be "Tesla doesn't make money from car buyers," though. They do make money because they sell cars, just not so much from the people that buy them.

bryanlarsen5• 5 years ago

If you exclude both regulatory credits & Elon's stock options then Tesla is significantly profitable.

If you're cherry-picking revenue to exclude due to "reasons" then you have to be fair and cherry-pick similar expenses to also exclude. If so, Elon's stock option expenses should also be excluded.

- they're non-recurring. The company has to hit higher EBITDA and market cap goals for Elon to get another award, so at steady state Elon gets nothing.

- they don't impact cash. Elon gets stock, not cash, and he doesn't sell them so it doesn't even affect float.

bryanlarsen5• 5 years ago

An average internal combustion (ICE) vehicle emits 66 tons of carbon over it's life time. Estimates of the externalities caused by a ton of carbon vary, but $150 is a reasonably median estimate.

So we can also say that every ICE vehicle receives a $10,000 subsidy for being allowed to pollute without having to pay to clean up that pollution. What would GM's income statement look like if it had that $10,000 per vehicle on it?

rcMgD2BwE72F2• 5 years ago

I bet the $10,000/car number is mini, tiny, little compared to the actual cost of climate change (e.g $119 billions won't be enough to protect NYC from sea level rise https://www.nytimes.com/2020/01/17/nyregion/sea-wall-nyc.htm...). The global cost of climate change simply cannot be priced in $ when it isn't even sure mankind would survive +5°C.

bryanlarsen5• 5 years ago

$10K per car * 1 billion cars -> $10T. So more than the estimates of what it would cost to prevent climate change, but less than the estimates of what it would cost to mitigate it.

isn't even sure mankind would survive +5°C.

Humans live in Siberia and the Antarctic. The human species will survive. But whether civilization survives is a different question.

JoshTko• 5 years ago

This article, or at least the title, is silly. Profit is going to be tiny for any company during growth so profit from credits will seem to have outsize impact on profit. Tesla has industry leading gross margins at >20% so their profit will come predominantly from selling cars once fully at scale.

Tesla's net profit comes from selling regulatory credits, not cars

Related Stories