manages the Zero Emission Vehicle program, which has been adopted by 10 other states as well. Those who exceed the program's standards, such as Tesla, are given credits. Credits per vehicle vary depending on the car's drivetrain and the electric range. These credits can be sold to manufacturers who are slow to go green and need to achieve compliance. Fiat Chrysler, General Motors (GM), and Honda have purchased credits to avoid heavy fines while packing their fleet with gas-guzzling automobiles. However, Tesla's income from the sale of credits is expected to decline and disappear completely in the next few years. It depends on two things: the changing rules in the jurisdictions and how fast other automakers move to zero emission. Trends in the jurisdictions indicate that some requirements will become less stringent, which is bad news for Tesla as companies are expected to be able to more easily comply on their own without purchasing credits. But if requirements become more rigorous, Tesla may continue to make a significant amount of money selling credits. There is a lack of transparency around zero-emission vehicle credits, which makes it difficult to predict how Tesla will be affected quarter to quarter. If regulatory credits disappear, many profitable quarters would have been negative for Tesla. Essentially, Tesla seems to be losing money selling cars and making money selling credits. How much it is losing no one really knows because the company doesn't disclose overhead and production costs. The company's plans for the future do not necessarily instill confidence either as Musk stresses that Tesla vehicles will become more affordable, which will cut Tesla's profit margin that he already claims is around 1 percent. Musk continues to claim that Tesla will grow so fast that the loss from credit sales will not be noticed, but so far there doesn't seem to be any evidence to back up his claim.7 Critical Thinking Questions 1. How does Tesla profit from regulatory credits? 2. Why is Tesla's income from the sale of credits expected to decline? 3. What will happen to Tesla if regulatory credits disappear?
manages the Zero Emission Vehicle program, which has been adopted by 10 other states as well. Those who exceed the program's standards, such as Tesla, are given credits. Credits per vehicle vary depending on the car's drivetrain and the electric range. These credits can be sold to manufacturers who are slow to go green and need to achieve compliance. Fiat Chrysler, General Motors (GM), and Honda have purchased credits to avoid heavy fines while packing their fleet with gas-guzzling automobiles. However, Tesla's income from the sale of credits is expected to decline and disappear completely in the next few years. It depends on two things: the changing rules in the jurisdictions and how fast other automakers move to zero emission. Trends in the jurisdictions indicate that some requirements will become less stringent, which is bad news for Tesla as companies are expected to be able to more easily comply on their own without purchasing credits. But if requirements become more rigorous, Tesla may continue to make a significant amount of money selling credits. There is a lack of transparency around zero-emission vehicle credits, which makes it difficult to predict how Tesla will be affected quarter to quarter. If regulatory credits disappear, many profitable quarters would have been negative for Tesla. Essentially, Tesla seems to be losing money selling cars and making money selling credits. How much it is losing no one really knows because the company doesn't disclose overhead and production costs. The company's plans for the future do not necessarily instill confidence either as Musk stresses that Tesla vehicles will become more affordable, which will cut Tesla's profit margin that he already claims is around 1 percent. Musk continues to claim that Tesla will grow so fast that the loss from credit sales will not be noticed, but so far there doesn't seem to be any evidence to back up his claim.7 Critical Thinking Questions 1. How does Tesla profit from regulatory credits? 2. Why is Tesla's income from the sale of credits expected to decline? 3. What will happen to Tesla if regulatory credits disappear?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:How Regulation Credits Are Saving Tesla's Earnings
Tesla, an all-electric vehicle and energy generation products company, is widely admired for its industry-altering innovation built around
its core vision of moving the world toward sustainable energy. Though Tesla got its start with electric vehicles (EVS) in 2003, the
company has branched out to create a variety of renewable energy technologies from solar roof tiles to clean energy storage. Today,
Tesla is one of the most valuable car makers in the United States.
Tesla has become a household name not only in the United States but also around the world. With more recognition and awareness from consumers
and investors comes more scrutiny, however. All eyes have focused on Tesla due to its recent financial success as the company had its first profitable
year a decade after it was publicly listed. Critics have been quick to point out a potential flaw in the company's financial structure, which comes in the
form of regulatory credits. In one year alone, Tesla made $1.6 billion by selling its excess regulatory credits to other car manufacturers. When
compared with Tesla's other financial information, this gives the indication that the company isn't as profitable as founder Elon Musk implies.
Tesla's substantial revenue from regulatory credits comes directly from other companies trying to comply with state regulations, federal standards,
and the European Union's requirements that automakers sell a certain percentage of zero-emission automobiles. The California Air Resources Board
manages the Zero Emission Vehicle program, which has been adopted by 10 other states as well. Those who exceed the program's standards, such
as Tesla, are given credits. Credits per vehicle vary depending on the car's drivetrain and the electric range. These credits can be sold to
manufacturers who are slow to go green and need to achieve compliance. Fiat Chrysler, General Motors (GM), and Honda have purchased credits to
avoid heavy fines while packing their fleet with gas-guzzling automobiles.
However, Tesla's income from the sale of credits is expected to decline and disappear completely in the next few years. It depends on two things: the
changing rules in the jurisdictions and how fast other automakers move to zero emission. Trends in the jurisdictions indicate that some requirements
will become less stringent, which is bad news for Tesla as companies are expected to be able to more easily comply on their own without purchasing
credits. But if requirements become more rigorous, Tesla may continue to make a significant amount of money selling credits. There is a lack of
transparency around zero-emission vehicle credits, which makes it difficult to predict how Tesla will be affected quarter to quarter.
If regulatory credits disappear, many profitable quarters would have been negative for Tesla. Essentially, Tesla seems to be losing money selling cars
and making money selling credits. How much it is losing no one really knows because the company doesn't disclose overhead and production costs.
The company's plans for the future do not necessarily instill confidence either as Musk stresses that Tesla vehicles will become more affordable,
which will cut Tesla's profit margin that he already claims is around 1 percent. Musk continues to claim that Tesla will grow so fast that the loss from
credit sales will not be noticed, but so far there doesn't seem to be any evidence to back up his claim.7
Critical Thinking Questions
1. How does Tesla profit from regulatory credits?
2. Why is Tesla's income from the sale of credits expected to decline?
3. What will happen to Tesla if regulatory credits disappear?
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