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Comment by xoxoy | Hacker News Reader

the whistleblower Marty Tripp alleged that as Tesla ramped up Model 3 production their battery production facility was creating hundreds of millions in wasted battery product.

Scrap inventory has a severely depreciated value - the emails that have surfaced suggest they may have tried to hide it under “Work in Progress” where they could value it fully.

If they actually wrote down $100M+ in battery inventory that would be a massive shock - no investor is considering that level of scrap in valuing the company right now.

If they have a secret subsidiary they could sell it to this entity at some bloated price without anyone knowing.

This company then becomes some highly indebted entity that will probably eventually go bankrupt but save Tesla’s valuation.

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Writing down $100M+ in battery inventory would be a big hit, especially with their profit margins being thin, but I wouldn't consider it a big shock. At $20000 per pack, $100M+ in battery inventory is 5000+ cars, which is less than a percent of total production so far. Having a significant number of defects early in the production process is common.

Ultimately, it's up to them how to value it, within reason and the law, just like it's up to them when to sell emissions credits.

That is a reasonable concern from an accountant point of view. But time and time again Elon has shown that he isn't operating with the normal MBA CEO mindset. He is operating as an engineer, and all that matters in the engineering world is that if you can successfully build the technology and factories to remake these packs at a low cost, your total costs will be significantly lower than your competition. It doesn't take an MBA to understand the implications of that.

if this is indeed a Tesla subsidiary, it’s accounting fraud

How could it possibly be?

Tesla had $100M+ of scrap inventory they pretended was still good and then somehow created a subsidiary out of thin air and "sold" the scrap to it?

I don't understand where the $100M the subsidiary paid materialised from. How is any of this possible.

What's preventing others from having secret fake subsidiaries and printing money out of nowhere?

Funding such a fraud could make sense for holders of large amounts of Tesla stock.

Spend $100 million to prop up billions.

Note that I'm commenting in the abstract, not commenting in support of fraud as an explanation. I have no information or opinion about this battery recycling company.

I mean it’s hardly a secret if it’s on the cover of WSJ.

The question is who funded this company and what transactions have they made with Tesla?

but obviously no one will tell you those two things.

How about M invests $100M in company B, he writes them a cheque, company B purchase waste from company C for $100M, by cheque. Company C loan M the money, by cheque, or give him it.

M isn't out any money. B has a lot of waste to process, batteries maybe. C has $100M extra on their balance sheet. There'd be some wastage: capital gains taxes, ancillary costs.

Does that kind of thing work?

All corporate accounting has some amount of bending the rules. Conferences and team meetings at high end resorts which are not counted as compensation for example. The rules exist because of people like the Enron bean counters who spent their time and energy scamming the system rather than actually building something.

It is fine if you don't like Elon or how he runs his company, but it is absurd to suggest that this is a shell company and not an actual effort to improve recycling technology.

Such rule bending didn't end well for Wirecard.

Why is it absurd when it’s run by the former Tesla CTO? I mean it couldn’t be less clear what the relationship between this company and Tesla is.

Did Tesla fund this company? Or Elon? What transactions have taken place between Tesla and this co?

> It doesn't take an MBA to understand the implications of that.

And that is perhaps the greatest advantage of all that Tesla has over many other companies, especially in the car industry, but generally (excluding only Amazon and parts of Apple/Google): Tesla is not run by beancounters with a next-quarterly only mindset, but by someone with a long-term vision and a general engineering focus with deep pockets.

Not many companies these days go for extensive, ground-breaking, costly R&D that Tesla does, and those that do rarely go to the length of Tesla/SpaceX. For most companies that level of investment would flatten their stock value, shareholders would be angry... but Elon Musk (and similarly Jeff Bezos) are impressive personalities that manage to keep the beancounter hawks at bay.

> costly R&D

huh? you realize that Tesla spends less than $300M a quarter in R&D when companies they now dwarf like Ford and GM consistently spend more than $1B each?

in fact Tesla’s R&D spend has noticeably shrunk since last year, which is another head scratcher considering how many projects they claim to be working on, including a “full rewrite of FSD”

> less than $300M a quarter in R&D when companies they now dwarf like Ford and GM consistently spend more than $1B each?

I don't think the two of you have points in contention. That is to say, I think it is accurate to say that Ford and GM _spend_ more on R&D but Tesla _executes_ more on R&D. In fact, I would say that very discontinuity forms much of the basis for Tesla's very (some would say irrationally) high P/E ratio!

I don’t buy the efficiency argument.

Either they are publicly exaggerating the scope of the projects they are working on (eg the “million mile” battery and “full rewrite of FSD”), severely underpaying engineers and understaffed, or something else.

If you read this book it will make sense https://en.m.wikipedia.org/wiki/The_Innovator%27s_Dilemma

If you have ever worked at a large company, the inefficiencies are explicitly obvious, built into the culture and structure of the company.

Starting from 0, valuing employee opinion, and removing red tape saves countless employee hours and makes good people stay.

Tesla has focus, they know pretty much exactly the future they want and they know what projects to push. FSD and batteries are the major things they need to improve on.

Other companies might consider exoskeleton a R&D thing, Tesla just handles that as part of their Cybertruck development cost.

The same goes for a lot of their developments.

What matters is how fast and how often new technology goes into your next product. If you look at the Cybertruck, how many innovative stuff there is, I really don't care how much R&D they have, I'm just impressed with how many innovations they bring to market with each iteration of their cars.

> I don’t buy the efficiency argument.

John DeLorean achieved his original initial career arc by resurrecting the Pontiac brand. Technically speaking, there wasn't a terrible amount of innovation there -- the idea was using existing products in a new way by putting a bigger engine into a smaller frame and marketing it in a sexy manner. But it took off like wildfire. He invented the idea of a muscle car.

So, as sibling comments say, you may not buy the efficiency argument, but will you buy the focus argument? Tesla made a name out of doubling down on the future instead of the past. They were first to market with a vehicle so iconic it become eponymous with the sector itself. They built a global supercharger network to challenge the whole idea of a gasoline vehicle being the norm. Personal feelings regarding the antics of their founder (and horrible mismanagement/mistreatment of ICs inside the company) aside, I have a lot of respect for the innovations that their product culture has achieved.

R&D includes both "creating new battery recycling capabilities from scratch" and "redesigning the the rear brake lights to be a deeper shade of red to match the recent coloring trends".

Only one of these has long term impacts but they are both "R&D"

And what revolutions come out of Ford, GM and everyone else for all that money?

The only ones doing real new work that is available to buy instead of investing ludicrous amounts of money shaving half grams of fleet CO2 from doomed ICEs and ungodly amounts of lobbying are Toyota with their Prius, BMW with the i3, i8 and whatever is slated for 2021 and VW with their modular platform (and all three are still not even close to catching up to Tesla). The rest are dealing, at best, with toy projects, greenwashing, that will not have any major impact. After all, SUVs have fat margins while most electric projects are cash burners.

With respect, if you leave out the sophisticated games Tesla plays with finance and PR you're missing a big part of what has made the company effective.

In order to qualify for the S&P 500, Tesla needed a cumulative four quarter profit. Q1 and Q2 2019 were "take out the trash" quarters, with $702 million and $408 million in losses respectively, for a cumulative loss of $1.11 billion.

In the four quarters since that time, Tesla has posted profits of $143, $105, $16 and $104 million, for a combined profit of $368 million. The previous two quarters were heavily juiced with credit sales to shore them up to be a slight profit.

This fits the criteria for S&P 500 inclusion, and also solidifies the notion that Tesla can be profitable - it's just taking losses like Amazon, investing in the future.

A company that purely focuses on engineering and ignores the short term would have instead sold credits as they came in, and not structured expenses and income to achieve the result that they did. If Tesla had instead posted 6 losses in a row of ~$125 million they'd be materially worse off, both from an investor perception perspective and by not qualifying for the S&P 500.

There's absolutely nothing wrong with playing these games. The "shorts" point them out to denigrate the company, but I don't think that makes sense. The fact that Musk has such tight control over the company is a major competitive advantage. The CEO of VW could not have done the same thing.

In that case, why would the "unprecedentedly brilliant engineer-ceo" Musk not develop battery recycling technology as a division within Tesla, solely reaping the rewards of cheaper battery packs?

How is that legal? (Besides the boring answer of the fundamental corruption in the concept of the corporation.) I can't outsource all my debts to a zero-net-worth friend who then declares bankruptcy.

it’s not

"How is that legal?" is never really a relevant question when it comes to Tesla or Elon Musk.

Would it change the fact they will still be 100x times overvalued?

the valuation could go in a second if there’s a hint of running low on liquidity - or that either assets appear bloated or liabilities understated

also it’s the clearest sign of accounting fraud...but apparently the SEC doesn’t care to investigate that anymore.

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