One of the most prominent criticisms of Tesla is the idea that the company relies heavily on government subsidies, incentives, and other forms of support. This is a common bearish argument, since it stands to reason that those incentives will eventually be phased out. Once that happens, Tesla is doomed, according to the bears.
But Tesla doesn’t actually receive much direct support from the government.
Show me the money
At Tesla’s annual shareholder meeting last week, the company pointed out how little it has received from state and federal governments over the years. The vast majority of Tesla’s funding has come from growing revenue and external capital raises from investors.
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By far the most prominent instance was the Department of Energy (DOE) loan that Tesla received way back in 2010 as part of the government’s Advanced Technology Vehicle Manufacturing program, which was enacted during the Bush administration in 2008. Tesla repaid the loan nine years early in 2013, including a prepayment penalty.
Tesla used funds from a 2013 capital raise to pay back the loan, so essentially the company refinanced the loan with public investors. Elon Musk has framed this decision as a moral one, since he’d rather have Tesla investors support the company instead of taxpayers. Additionally, it was a loan, not a grant.
To be clear, the chart does not include indirect forms of support that do benefit Tesla. There are two notable sources of indirect government support.
ZEV’s not dead
First, Tesla earns zero-emission vehicle (ZEV) credits in states that have adopted California’s emissions regulations standards, and then sells those credits to other OEMs who are either unwilling or unable to meet the requirements on their own. Over the past four quarters, Tesla has generated a total of $118 million from ZEV credit sales, or about 2.8% of total GAAP revenue. This percentage is even lower if you use Tesla’s non-GAAP revenue.
Within California (which is just one of many states where Tesla sells ZEV credits), Tesla sold over 1,500 ZEV credits between Oct. 1, 2014 and Sept. 30, 2015, according to California Air Resources Board, or CARB. CARB doesn’t break out specific company transfers, but Toyota was the largest overall purchaser of ZEV credits in California for that time frame, with Tesla being the largest overall seller by nearly a factor of two.
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But the important thing here is that ZEV credit revenue comes from other OEMs, and not any government entity. Tesla’s ability to earn ZEV credit revenue is a function of how seriously these OEMs take tightening emissions regulations, since if they were able or willing to meet the requirements on their own, they wouldn’t need to purchase ZEV credits from Tesla.
While it appreciates the extra cash, Tesla doesn’t need it and its business is not predicated on these credits, which is why the company excludes ZEV credit revenue from its non-GAAP metrics.
The other prominent incentive in the U.S. is the federal tax incentive of up to $7,500. But that incentive is not specific to Tesla, and is available to all OEMs (subject to volume limits). It’s a categorical incentive designed to support the burgeoning market for a wide range of alternative fuel vehicles, including traditional hybrids. Toyota hit its limit for the Prius many years ago, for instance. Tesla is expected to hit its limit in early 2018.
The incentive absolutely helps stimulate demand for EVs at large, which does help Tesla sell more vehicles. But again, Tesla does not receive this money directly — it goes to the consumer. Various countries around the world, as well as certain states in the U.S., may also have EV incentives.
It’s also worth noting that Tesla does not attempt to capture any of these incentives in the form of price increases. The company prices its products based on its gross margin target of 20% to 25%, which then helps cover operating expenses. Tesla vehicle prices are standardized worldwide (subject to foreign currency fluctuations), and the company does not increase the price in regions where incentives are present.
Relying on government support is yet another flawed bear argument.