tesla, the tram manufacturer, has created a myth in the midst of global gloom and doom as the Wuhan virus rages. Riding the momentum of reaching 500,000 units per year, its stock price rocketed 723% for the year, pushing its P/E ratio to 1,446 times the depths of the clouds; that is, its market capitalization is equivalent to 1,446 years of earnings combined, based on the stock price! For the viral impact, its California plant had a hold-up; the key to meeting production targets is the Shanghai super plant, which comes on line in early 2020 and quickly contributes more than one-third of production. If Tesla is a myth, it is a myth concocted by both the U.S. and Chinese governments.
Turning a loss into a profit with U.S. energy efficiency policies
What makes this a myth? Toyota, the industry leader for 75 years, produces more than 10 million vehicles a year, 20 times the number of Tesla, which was founded in 2003. Toyota’s price-to-earnings ratio is only 15 times that of Tesla, and its total market capitalization is $215.7 billion, less than one-third that of Tesla. If investors were not convinced that Tesla was a miracle, why would they push its stock price out of outer space?
Tesla has been losing money for 15 or six years, and only a year or so ago did it make money, otherwise there would be no P/E ratio to speak of. The competition to produce cars is fierce. This is not a particularly profitable business, as investors have said about Toyota. Tesla’s profits do not come from its superior production technology, but thanks to the government. In the third quarter of last year, its net profit was $331 million, but $397 million of that was earned by selling “energy efficiency and environmental protection quotas” (regulatory credits). Tesla would have lost money if it hadn’t had quotas to sell and relied on car sales alone. The quotas that make Tesla rich come from the visible hand of the government.
In the 1970s, the Organization of Petroleum Exporting Countries (OPEC) restricted oil exports to create an energy crisis. In order to save energy, the U.S. federal government enacted legislation requiring automakers to gradually improve the energy efficiency of their vehicles. One way is to require manufacturers to meet the “Corporate Average Fuel Economy” (CAFE) since 1975, to encourage the production of fuel-efficient vehicles. Companies that produce large engines and fuel-consuming cars that do not meet the target can buy quotas from companies that produce finer cars to make up for their shortfalls. The target was raised year by year, and by the time Obama left office, CAFE required cars to travel an average of 54.5 miles per gallon of gasoline. Tesla only produces zero fuel consumption trams, without the “original sin” of producing cars with internal combustion engines; each car produced has a quota to sell, and starting the production line is like starting a machine to print silver paper.
Energy-saving quotas are not the only way for Tesla to make money. More than a dozen “advanced” states, led by California, have tailored another way for Tesla to make money: these states require automakers to supply a certain percentage of “zero emission vehicles” (Zero Emission Vehicle –(ZEV); companies that don’t meet the standard can also buy allowances. Although power generation emits carbon dioxide, the tram on the road can be “zero emissions”, ZEV by granting Tesla the opportunity to make a fortune.
Oil glut is unpredictable, myth is at stake
Tesla certainly enjoys the “energy saving and environmental protection quota” distributed by the federal and state governments, and is favored by the Chinese government to grant a 50-year land grant of 860,000 square meters in the Shanghai Free Trade Zone for RMB 970 million in 2018, and then provide RMB 4 billion in credit at preferential interest rates to build the plant. One of the conditions is that sales must reach RMB 2.32 billion from 2023 onwards. The domestic Model Y was sold at a 30% price cut to RMB 340,000 as soon as it went on sale, apparently to meet the conditions of low cost land grant and preferential credit. It is said to have sold 100,000 units on the first day of sale, the momentum can not be described as amazing. This can not be a threat to BYD and other domestic trams?
Tesla’s Musk undoubtedly unique vision to eat “energy-saving environmental protection quota” first bite of soup, but also does not carry the internal combustion engine traditional car “original sin” of Apple Computer has already been a big appetite for quota, to share a piece of the pie. Furthermore, after the shale oil revolution, there is now a surplus of oil instead of a shortage; energy-saving CAFE targets will sooner or later face challenges. Who can guarantee that Tesla will not be repaired by the monopoly law like Alibaba and Musk will be “interviewed” like Jack Ma once the mass production is done?
The water can carry the boat and can overturn it. The tangible hand of the government has concocted the Tesla myth, when it can burst its mythical bubble at any time.
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