Tesla Makes Money On Model S: $35K Per Car Selling ZEV Credits?

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2013 Tesla Model S

2013 Tesla Model S

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Tomorrow at 5 pm Eastern, Tesla will hold what may be its most eagerly awaited conference call to date.

The Silicon Valley startup automaker will discuss its first-quarter financial results--which will give the first clue to its financial viability as an operating automaker.

But Tesla Motors [NSDQ:TSLA] will have raked in revenue not only from selling electric cars, but also by selling those cars' zero-emission vehicle credits to other automakers.

Tesla sold "more than 4,750" Model S electric sport sedans last quarter, the company said on April 1 (no, it wasn't an April Fool's joke), and another 2,650 last year.

Selling credits since 2009

Now, as the Los Angeles Times reports, we learn that one analyst estimates Tesla could take in as much as $35,000 more from each Model S by selling its ZEV credits.

This is hardly new; the company has been doing so at least since 2009, when it sold ZEV credits to Honda and one other unnamed automaker.

Thilo Koslowski, an auto-industry analyst at Gartner Group, told the LA Times that the company might take in as much as $250 million this year from selling the credits.

Tesla communications manager Shanna Hendriks declined to comment on the article, noting tomorrow's earnings call. (SEC regulations discourage companies from commenting close to release of important financial information, including earnings.)

How much per car?

The math's a bit unclear, since if Tesla sells 20,000 Model S cars this year, that would work out to $12,500 per car.

Nonetheless, as the article notes, Tesla's ability to garner additional revenue beyond the sales price of its cars "highlights just how far California regulators have gone to promote the electric car."

More properly, that should be "promote zero-emission vehicles," since hydrogen fuel-cell vehicles also qualify for the same credits.

ZEV rules ---> compliance cars

California's ZEV sales requirement has produced the phenomenon of so-called compliance cars, which will be built and sold by five automakers in just enough volume to keep themselves within the law and avoid fines.

Those cars are the Chevrolet Spark EV, Fiat 500e, Ford Focus Electric, Honda Fit EV, and Toyota RAV4 EV.

On balance, most of them are quite good electric cars.

And they give those companies experience with developing all-electric vehicles that they'll need in the latter half of this decade, as carmakers must start to sell higher volumes of plug-in cars to meet increasingly stringent national fuel efficiency standards.

2013 Fiat 500e electric car, Los Angeles drive event, April 2013

2013 Fiat 500e electric car, Los Angeles drive event, April 2013

Enlarge Photo

Losing money on electrics

But to the degree that it's cheaper for an automaker to buy ZEV credits from Tesla than to sell more of its own electric cars at a loss, they may well do so as a matter of financial expediency.

Chrysler-Fiat CEO Sergio Marchionne, for instance, has famously and repeatedly griped that his company will lose $10,000 on every electric Fiat 500 it must sell in the state.

His vehicle engineers, meanwhile, are remarkably proud of the 2013 Fiat 500e--which we found to be surprising good--and its marketers speak vaguely of plans to roll it out beyond California.


ZEV Credits still a sideshow

Tomorrow evening, financial analysts will be poring over Tesla's financials to tease out information on how much money the company really makes on its core business: building and selling electric cars.

Certainly California's ZEV regulations give Tesla a financial boost.

Years from now, we may be able to look back and decide whether that incremental revenue was crucial to Tesla's fate (whatever it turns out to be) and its first-quarter profit.

Over the long term, analysts expect the value of ZEV credits to vary, but say it will likely fall over the long term as the cost of building plug-in electric cars continues to fall.

But let's be clear about one thing.

Over the long term, if Tesla Motors can't design, develop, build, and sell electric cars in sufficient volumes to make enough profit to fund its future operations, then all the ZEV credits in the world are irrelevant.

Which isn't to say, mind you, that they don't look very attractive to Tesla's CFO on the eve of its first quarter operating as a profitable automaker.


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Comments (16)
  1. So presumably, other automakers buy ZEV credits to avoid fines. So the value of ZEV credits are probably connected to the size of the fines.

    Here's the question, do the ZEV fines really amount to more than $35,000 per vehicle???? If not, why not just pay the fine.

  2. The penalty for not getting enough ZEV credits is $5K per credit, so that would be the maximum value of the credits.

    Apparently "the number of credits a respective ZEV may generate, this varies according to how quickly the vehicle’s battery recharges and its total range. A Nissan Leaf or Ford Focus Electric will garner 3 credits under the CARB rules, and a Tesla Model S is worth 7". So it would appear a model S really is worth a maximum of $35K in ZEV credits.

  3. That explains it. Thanks so much for the detailed explanation.

  4. Great job John. Thanks.

  5. Is there a reason why manufacturers can benefit from ZEV and not the actual car owner?

  6. Randy, I'm just guessing, but it costs the OEMs billions to develop and sell the vehicles. Since they spnend that money, not consumers, per se, at least not directly, perhaps that's the reason. But again, just a guess.

  7. Wonder where the $35K number comes from. The last time Tesla was accused on being mainly dependent on those credits (2 years ago)the number used was $5K. With most carmakers covered by compliance cars these days I doubt the value has increased since. Also Tesla is not the only one benefiting, Nissan and presumably GM (if Volt qualifies) have the same benefits.

    About "the math is unclear": only cars sold in California and 12 other states with similar mandates count for ZEV credits, so apparently the people behind this creative math exercise figure some 7100 Model S' will be sold in these states this year.

  8. "But let's be clear about one thing.

    "Over the long term, if Tesla Motors can't design, develop, build, and sell electric cars in sufficient volumes to make enough profit to fund its future operations, then all the ZEV credits in the world are irrelevant."

    Yes, John. I would agree. But... in the context of the article, was it really necessary? Yes, most people admit that Tesla will always face an uphill struggle to survive, at least in the early days, but I guess I just don't see the relevance here, specifically. Is someone claiming this guarantees viability?

    I think it's a minor point, but also one which seems out of place with the rest of the interesting article. Yes, obviously, selling the vehicles is more important to survival.

  9. @Robok2: I put that sentence in partly to counter far too many comments I see in financial media and investor sites that suggest Tesla's ZEV credits gave it a financial edge over every other carmaker.

    While that may be true in the short term, over the long term the company has to compete the old-fashione way: It has to make top-quality cars that customers want to buy more than they those from competitors.

    That's what I wanted to underscore.

  10. @ John Voelcker: Thanks for clearing that up because my first hunch was that this was just your way of working your "this questionable start up is not going to make it" mantra into yet another story that doesn't do anything to underscore that notion.

  11. Thanks, John, for explaining. Just a minor quibble, anyway, and yes, some pro-Tesla people are a bit over the top, just as the anti-Tesla crowd is, too (although I'll still take the pro-Tesla crowd, of course).

    Occasional skepticism of Tesla Motors is fine, of course, just not needed in contexts where the focus is really elsewhere. But again, no problem at all.

  12. Thanks for the explanation. I too found the sentence quite jarring and disconnected.

  13. That number ($35k) doesn't make sense. Combined with $10k credit from federal government and CA, an auto maker can easily make a "compliance" car that sells for a loss less than $45k per car.

  14. Considering the general confusion the author might have added some context about the intricacies of the ZEV mandate...

    The way I understand it an average 80 mile EV will garner a carmaker 3 ZEV credits avoiding $15K in fines. So doing a compliance car saves the manufacturer money as long as total losses per unit don't exceed $15K.

    Of course if ZEV credits can be bought for less from firms with credits to spare like Nissan and Tesla than the acceptable loss on compliance cars is also less.

  15. For $15k, I think any major automaker can come up with a "compliance" car that lose less than that amount...

  16. I own a 100% electric Nissan LEAF - anybody want to buy my ZEV credits...going once, going twice.

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