$TSLA, FCAU, GM
- Bernstein analyst Max Warburton says that while there may be some tepid interest in Tesla’s assets, it’s unlikely a European carmaker would buy the company.
- “What assets are attractive? Tesla no longer has genuinely differentiated tech. The production plant is sub-par. The Gigafactory is probably not essential,” he says
For years, Tesla (NASDAQ:TSLA) has taken in revenue by selling credits to other carmakers that needed to offset sales of polluting vehicles to US consumers. These sorts of transactions have largely been shrouded in secrecy until now.
General Motors (NYSE:GM). and Fiat Chrysler (NYSE:FCAU) disclosed to the state of Delaware earlier this year that they reached agreements to buy federal greenhouse gas credits from Tesla. While the filings are short on details, they had been reported previously. They also represent the 1st acknowledgments from carmakers that they are turning to Tesla for help to comply with intensifying US environmental regulations.
The deal with GM will come as a surprise to those who thought years of sales of plug-in hybrid Chevrolet Volts and all-electric Chevy Bolts would leave the largest US automaker in the clear with regard to regulatory compliance. But while sales of those models have put GM in a position where it does not need extra credits today, demand for its battery-powered vehicles are dwarfed by its big gasoline powered trucks and SUVs. And the company wants to bank the credits for future years when emissions rules get tougher.
A Tesla spokesman did not immediately respond for our request for comment.
GM’s agreement to buy greenhouse gas credits was dated 25 February and reported to Delaware the following day. A GM spokesman, said the company is buying the credits as insurance against “future regulatory uncertainties.”
Fiat Chrysler disclosed agreements to buy credits from Tesla that were reached in Y’s 2016, 2018 and earlier this year, in 4 separate filings. A spokesman for the Italian-American automaker, said US standards are getting stricter at a pace that “far exceeds” the level of consumer demand for electric cars that is required for compliance.
“Until demand catches up with regulatory requirements, and there is regulatory relief, we will use credits as appropriate,” he said.
Tesla has generated almost $2-B in revenue from selling regulatory credits since Y 2010. Its home state of California has a mandate that requires carmakers to sell Zero-emission vehicles, or ZEVs, in proportion to their share of the state’s auto market, which is the largest in the country.
If manufacturers do not sell enough non-polluting vehicles, they have to purchase credits from competitors like Tesla to make up the difference. A similar credit system is administered at the federal level by the EPA and National Highway Traffic Safety Administration.
GM’s credit purchases illustrate how challenging the US fuel efficiency requirements are getting, even for automakers that are adding more zero-emission vehicles to their lineup.
In March, GM’s CEO Mary Barra announced the company would spend $300 -M and add 400 workers at its plant north of Detroit where the Chevy Bolt is built to add production of another fully electric model.
While all automakers complied with US rules in model year Y 2017, most large manufacturers cashed in credits to get there, the EPA said in a March report.
Of all the credits held by the industry at end of the Y 2017 model year, more than 90% are set to expire at the end of Y 2021 if not used, according to the agency.
While Tesla’s sales of regulatory credits have been limited to the US and California, it also has opportunities ahead to generate revenue from Europe, which is implementing tougher emissions regulations. In April, Fiat Chrysler said it will pool its fleet with Tesla’s to comply with European Union standards.
During a call with prospective investors in Tesla’s offerings of new equity and convertible bonds last month, CFO Zachary Kirkhorn said credit sales will be a more meaningful part of Tesla’s business in the coming years.
In addition to reporting $216-M in Q-1 revenue from the sale of regulatory credits, the carmaker disclosed in an April filing that it had booked $140-M in deferred revenue related to credit sales.
It’s unclear from the SEC filing whether that revenue relates to the US agreements that Tesla reached with GM and Fiat Chrysler, or the EU deal with Fiat Chrysler. Tesla has not reported deferred revenue of credits in past Quarterly or annual financial filings.
HeffX-LTN’s overall technical outlook for Tesla is Very Bearish across the board, there is no support for the fledgling EV maker in here an a mountain of overhead resistance and debt.