The end of the quarter marked the achievement of Tesla’s production goal for its Model-3. By all reports, it represented a herculean effort That involved setting up a tent and makeshift assembly line. Given the level of effort to achieve the 5000 per week production goal, it is reasonable to ask whether it can sustain that level of output and whether Tesla can finally make a profit and lower its large debt load? Most financial analysts still rate it in bubble territory.
Elon Musk has demonstrated that the Tesla roadster is an exciting and fun to drive. That along with generous subsidies and mandates has breathed life into the future of electric vehicles. Forecasts going out as far as 2040 show EVs capturing a growing percentage of the light duty market globally. Bloomberg New Energy Finance projects that EVs will represent over 50% of new light duty vehicle sales in 2040. Such long range forecasts are based on a lot of assumptions, many of which may be questionable.
These forecasts are driven primarily by two factors—the constantly repeated dread of climate change and a belief that EV costs can be reduced to be competitive with internal combustion vehicles.
While assertions of a climate apocalypse continue to be made, it continues to be always moved to decades in the future. Last week, Pat Michaels of the CATO Institute did a 30 year look back on Jim Hansen’s dramatic predictions of doom at a Senate hearing in 1988—a very hot summer—in a hearing room with the air conditioning turned off and the windows raised. Pat Michaels reminded readers that Hansen’s testimony described three scenarios—business as usual, emissions continue to rise at the same rate as 1988, and constant emissions beginning in 2000. These scenarios led him to predict that by 2018 the world would warm between 1degree C on the high side to a few tenths of a degree on the low side. As Michaels points out, Hansen’s third scenario result of a few tenths of a degree C proved correct but not because we achieved constant emissions beginning in 2000.
With rapidly rising temperatures and increased hurricanes, droughts, and tornados being illusions and not actual happenings, it is fair to ask how long the world will continue to act as if the illusions are the reality? The answer is not another 30 years. EU nations that were the foundation of agreements starting with Kyoto are gradually backing away from their commitments as the pain of their cost increases.
The second driver is the ability of EV costs to be truly competitive with internal combustion engine vehicles. That depends on achieving still lower battery costs and greater range between recharging. Currently, the price difference between a Chevy Bolt or Nissan Leaf and the gasoline vehicle of equivalent size is about $10,000. While the Tesla Model 3 is advertised at around $30,000, the cost with features most of us want run the cost up to $50,000. In addition, there is the range penalty from temperature extremes. It helps to explain why almost 52% of EV sales last year took place in California.
Overcoming the cost and range limits of the current generation lithium-ion batteries is not on the immediate horizon. Toyota and several other auto manufacturers are working on solid state battery technology but assessments indicate that developers have not mastered how to mass produce them to last as long as buyers expect. Gong from the lab to the market can take 5 to 10 years and Menahem Anderman, the president of Total Battery Consulting recently said, “Solid-state batteries for automotive technology are still in the research stage with no timeline for commercialization.”
When the Elon Musk Tesla hype wears thin will Tesla be a viable manufacturer or will it go the way of DeLorean Motors? One analyst was quite pointed on this, “Tesla’s persistent cash burn has been a major investor controversy … In fact, Tesla may be the largest public company in history to have never generated either positive annual cash flow or positive annual profit,” As other manufacturers get deeper into the California market, Tesla’s ability to generate and sell zero emission credits—a major source of revenue—will decline. The same is true if the Trump Administration lowers CAFÉ mileage standards as appears likely.
Over the next few years, Tesla has over $1 billion in debt coming due while also having to contend with interest payments on the junk bonds it issued last year. In this time frame, we are likely to learn whether Elon Musk is the visionary who changed the future for light duty vehicles or just another huckster who managed to create a bubble like the great tulip bubble of 1637.