Tesla's net profit comes from selling regulatory credits, not cars | Hacker News Reader

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

cnn.com

44 pointspseudolus65 comments

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.

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.

"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.

Nobody pays for real work. The media gets paid for clicks.

I recently watched the great BBC adaptation of Hitchhikers’ Guide to the Galaxy [0] and was reminded of the Golgafrinchan Ark Fleet Ship B/A/C [1]. I feel like we are all now on Ark B and we are witnessing articles and tweets and whatnot from people who are oblivious to the reason why we were shot into space first.

[0] https://en.wikipedia.org/wiki/The_Hitchhiker%27s_Guide_to_th... Especially funny as they never show the question that results in the answer to life, the universe, and everything.

[1] https://hitchhikers.fandom.com/wiki/Golgafrinchan_Ark_Fleet_...

You may already be aware, but just in case ...

The BBC adaptation you watched was the third format - before that there were the books, and before that was the radio show, where Douglas Adams wrote the script often on the same day as the voice actors were due to record it.

The radio show precedes the books and, personally, I feel is better. If you want a written version, books of the scripts are available, and well worth getting if you're a fan. Not just for the scripts themselves, but also for the extra info before each episode which provides backstory.

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.

> 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.

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.

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.

EVs seem lot less complex than ICE vehicles. What is the point of having advanced gearshift when a simple controller can achieve similar things?

In other words. Their advanced tools are made for a different type of motor.

You still have to build suspensions, door mechanics, interior, AC, sensors, and a lot more stuff at scale. Legacy auto builders are really good at that by now. Yes, their knowledge on ICE design won't matter that much in the foreseeable future, but there's a lot of precision engineering and large-scale manufacturing to be done still to sell dozens of millions of cars (in thousands of varieties) every year.

Car makers don't make that stuff. Bosch, Denso, Magna and Continental make that stuff.

Observing how traditional auto makers handle the transition to electric cars indicates that this is not an easy step. VW was the first big automaker to introduce a pure electric platform at the end of 2020. Most other auto makers so far have only electrified existing ICE designs.

The Bolt has a specialized platform.

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.

It’s good for consumers because most of that advanced tech would not exist otherwise.

By the way, Tesla has stopped patenting their tech long ago and freely share it with the industry. Their moat is the actual execution, production lines, charging infrastructure and quality of the products, not patents.

it's good for consumers because the it allows electric cars to exist, and consumers want electric cars. Ford or GM has the resources to make electric cars and mostly doesn't, so the regulatory system forces them to give those resources to somebody who will. that's good for consumers.

and of course, what's good for the planet is good for consumers because we have to live here. but the "pro-consumer" argument always seems to ignore that.

Tesla's progress is painting a target on themselves. Just about ever stock owner in any other car brand is asking the CEO/Board things like "How are we going to compete with Tesla?" and "How quickly can we electrify our product line?"

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

Regulations are part of the market.

Agreed, however there is a world of difference in business plans when one depends on selling product to make a profit while the other depends on regulations.

All business plans depend on regulations.

Some business plans accommodate regulation as a fact of life, some are crafted to exist only under the wing of very specific regulations. But I accept that some people color with such a broad brush that those seem like the same thing.

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

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?

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.

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.

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.

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.

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?

By building less new factories?

Currently they are constructing a factory in Berlin and another in Austin TX.

Tesla sold about a half of a million cars last year. Nissan sells about 3 times that figure in the US alone. Toyota sells about 18 times that figure globally. Without being too presumptive, it certainly seems like Tesla is not going to imminently stop building factories.

And they are still expanding the Shanghai factory, which just started building Model Ys. Indeed, Tesla is not going to stop building factories, but also for that costs are going down as are the costs for the individual cars. When the revenue due to the certificates goes down, there are many financial knobs to turn to insure Tesla stays barely profitable. And of course in times of expansion, you would only aim for minimal profits and rather invest any margin achieved.

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.

You know, the funny thing is that the externality comes from the gasoline, not the car itself.

And indeed there are discussions to create a CO2 tax on gasoline. You can say that's more fair than a price on the car itself, as then it punishes frequent drivers more than people who drive less. In general though, your individual CO2 production doesn't matter that much, instead the population's emissions matter. And on a population level, you can create statistics about how many km each bought car will drive on average, and base the different car prices on that. Whether you want to punish frequent drivers or everyone who buys an ICE car is a political/social discussion. In general, a tax on gasoline is not helpful in getting people to switch if there is no EV car around they can switch to. In Germany, gasoline is already extremely heavily taxed, and still people drive a lot. Even in the current stage, where there are few EV cars compared to ICE cars, economics of scale still favour ICE cars, so there is still an effect in favour of EV cars. Maybe that's what such measures counteract?

You may not be thinking it through all the way. Every in-house EV that a company like GM produces can be considered as absorbing one regulatory credit that GM would otherwise have to buy in the open market (eg, from Tesla). The competing car makers won't have to buy Tesla's regulatory credits, even if their EVs are no more profitable than those of Tesla.

That's what I meant. Tesla is not the only company that can build EV cars. Eventually they have to compete.

They have non traditional approaches to some things, and in that regard they might be able to build EV cars more cheaply than competitors, and it probably also helps that they have lots of experience now, but eventually the fact that the cars are electric won't be the killer feature any more.

Well I certainly agree with this. Earlier you said that credits are always going to be a part of the market, and that's just not gonna be the case when all of Tesla's regulatory credit buyers make their own cars (and thus their own credits). To qualify that a bit, you may have the credits but you won't have credit trading.

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.

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.

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.

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?

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.

$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.

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?

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...

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.

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

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_...

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?

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.

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.

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.

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.

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.

They also work to raise the lower countries’ population consumption levels, so ecology is just economy in the West, more spending in the East, but still exponential growth of our footprint.

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.

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.

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.

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