Neo-EV automaker Tesla is the toast of the town this week. The company released news that they have achieved their first quarterly profit ever, and as a result the stock price soared $20 to $72.30/share in after-hours trading. Yesterday, notoriously fickle magazine Consumer Reports gave the Model S a score of 99 out of 100. Deliveries and sales are up, loans are being repaid early, and shareholders are happy. Does all this mean that Elon’s automotive gamble has paid off? Not by a long shot.
American automotive manufacturing history is littered with now defunct companies that lasted a lot longer than Tesla’s paltry 10 years. While the EV maker my be crowing that they are now achieving mainstream success and safe from sudden collapse, Studebaker, AMC, De Soto, International Harvester, Packard, and Nash among others would beg to differ.
All these once proud manufacturers would no-doubt remind Elon that building cars is a game only successfully played at scale. While the freshly released news that Tesla is now selling their Model S at a rate of more than 20,000/yr is indeed welcomed warmly by investors, it is literally paltry when compared to a mainline brand. Toyota sells more than 20,000 Camrys a month. Tesla isn’t even selling half of what floundering Mitsubishi sells per year. Without selling at scale, Tesla cannot build at scale – despite entering into tech-sharing deals with Mercedes and Toyota. Without building at scale, the company will never be able to reduce costs to a point that allow it compete head to head with the established players.
Then there’s the problem of where that first quarterly profit came from. A major chunk of the EV manufacturer’s revenue came from selling environmental credits the company earns in California. The company raked in $68 million (and 12% of total revenues) from selling such credits, and when you see that quarterly profit was only $15 million (GAAP profit: $11 million) you begin to realize the scope of the problem. Unfortunately Tesla themselves admit that this business of selling credits is contracting and expects that by the end of this year already the contribution of selling green credits to the bottom line will just about disappear. In the recent shareholder letter Musk said, “We expect this to decline significantly in future quarters, as ZEV credits will only apply to about 1/6 of worldwide deliveries, versus roughly half of US deliveries, and the price per credit has declined.”
The problems do not end there either. Ongoing dealer lawsuits, rising taxes on EVs, a looming battle with unions, an unknowable resell market, no new product appearing until 2017, and the fact that EVs are still unfit for a good portion of American driving habits. This is not to say that Tesla is doomed, far from it in fact. They are doing exceptionally well and for the short-term seem safe. Elon has been jetting around signing technology-sharing deals with major OEMs like Toyota and Mercedes, and has been cutting ribbons for charging stations at a breakneck pace. Tesla has also certainly passed the public goodwill test. Many are now bullish on the automaker’s chances for survival.
This quarterly profit is surely a good sign, and a welcome for the automaker. If they can repeat this performance next quarter it will be seen as proof that Tesla has arrived and will take its place among the major American automakers. Good luck to them, but I’m sure that James Packard and the Studebaker brothers would have a few well-chosen words to share with Mr. Musk right now.