Posts tagged ‘Elon Musk’

Fixing Tesla

I promised I would not post any more Tesla for a while, and to some extent I am keeping that promise -- no updates here on the SEC investigation or the 420 tweet.  But since I have been critical of Tesla in the past, I thought I would acknowledge that there are good things in Tesla that could and should be saved.  The problem is that Tesla is saddled with a bunch of problems that are NOT going to be solved by going private.  In fact, going private could only make things worse -- given that Tesla already has too much debt and its debt is rated barely above junk bonds, piling on more debt just to save Elon Musk from short sellers is not a good plan.  Here is what I would suggest:

  1. Find the right role for Elon Musk.  Musk HAS to be part of the company, without him its stock would go to about zero tomorrow.  But right now he is CEO, effective head of media relations, factory manager, and chief engineer.  Get him out of day to day management (and off Twitter) and hire real operating people who know what they are doing
  2. Get rid of the dealerships.  Tesla tried to do something different, which is own all the dealerships rather than franchise them out.  This is fine if one has some sort of vision for doing sales and service differently, but Tesla really doesn't.  It does the same things as other car dealerships but just slower since it has not been able to build out capacity fast enough.  And this decision has cost them a tons of growth capital they desperately need, because they have had to build out dealerships most car companies get for "free" because the capital for the dealerships is provided by third-party entrepreneurs.  Also, the third-party entrepreneurs bring other things to the table, for example many of them tend to have experience in the car sales business and a high profile in their local markets with government and media.
  3. If possible, find a partner for the charging network.  All traditional car companies get their fueling networks for free because the network is already built out by the oil companies.  Tesla is building its own, and again this is sucking up a lot of capital.  It is also dangerous, because Tesla has chosen to pursue a charging standard that may not become the industry standard (this is already happening in Europe) and Tesla risks being stuck with the betamax network.  Tesla should see if it can shift this to a third party, perhaps even in joint venture with other EV companies.
  4. Do an equity raise.  To my mind, it is absolute madness Tesla did not do this earlier in the year.   Their stock was trading at $350 and at a $50+ billion valuation at the same time they were burning cash cash at a rate of $3 billion or so a year.  Musk says he can skate through without more capital but he has said this before and it was not true.  Given the enthusiasm for his stock, there is just no reason to run cash poor when there are millions of Tesla fanboys just waiting to throw money at the company.  Even a $5 billion raise would have been only 10% dilution.  Musk says he wants to burn the shorts but ask any Tesla short out there what they would most fear, and I think they would all say an equity capital raise.  $3-5 billion would get Tesla at least through 2019 no matter how bad the cash burn remained and give the company space to solve its operational problems.
  5. Get someone who knows how to build cars building the cars.  I have written about this before -- it is always hard when you are trying to be a disruptor of an industry to decide what to disrupt and what industry knowledge to incorporate.  In retrospect, Musk's plan to ignore how cars are built and do it a different way is not working.  Not only are the cost issues and throughput issues, but there are growing reports of real quality issues in model 3's.  This has to be fixed ASAP.
  6. Bring some sanity to the long-term product roadmap.  This may be a bit cynical, but Tesla seems to introduce a new product every time Musk needs to divert the public's attention, his equivalent of yelling "Squirrel!"  There is the semi, a pickup truck, a roadster and probably something else I have forgotten about.  Even the model 3 lineup is confusing, with no one really knowing what Tesla is going to focus on, and whether the promised $35,000 model 3 will ever actually be built.  This confusion doesn't work well with investors at all, but Tesla has been able to make it work with customers, increasing the buzz around the company because no one ever seems to know what it will do next.  But once real competitors start coming out from GM, Volvo, Jaguar, BMW and others, this is not going to work.  Customers that are currently captive to Tesla will have other options.    Let's start with the semi.  The demo was a beautiful product, but frankly there is no way Tesla is going to have the time or the money to actually produce this thing.   Someone like Volvo is going to beat them to the punch.   They need to find a JV partner who can actually build it.

Update:  If I had a #7, it would be: Invent a time machine and go back and undo the corrupt SolarCity buyout, in which Tesla bailed out Musk's friends and family and promptly proceeded to essentially shut down the company.  Tesla shareholders got nothing from the purchase except a lot of debt.

 

The Good Intentions Generation

This seems to be a generation in which good intentions are enough.  Actually, I am not sure this is exactly right, let me try again.  This seems to be a generation in which the signaling of good intentions is enough.


Socialism will work because we have good intentions for it.  Trade wars will work because we have good intentions.  Tesla is valuable because it has good intentions.

Democratic socialism supporters don't even know what socialism is.  Trump supporters don't understand squat about economics but just feel that Trump genuinely wants to help them.  Tesla bulls don't even try to look at a balance sheet but just really, really love the idea of Elon Musk being a real-life but progressive Tony Stark.  Not sure where I am going with this, but just frustrated this morning trying to talk policy in a world of virtue-signalling.  In the last few elections I have been presented with discouraging but predictable choices.  Now I am presented with a choice between two parties that have both lost their minds.

I Spend a Lot Of Time Here Skewering Goofy Technologies, But... I Love This One

As a train enthusiast, I have to admit this sings to me.  I give them double points for being honest that their technology is not yet economic

The wind doesn't always blow, the sun doesn't always shine. So utilities are in search of ways to store surplus energy when they've got it, so they can distribute it later, when it's needed.

The most "duh" approach to energy storage is very big batteries like the ones Elon Musk peddles, which are poised to become a lot cheaper in the next five years. Pumped hydroelectric facilities are another option. Or you can move compressed air around underground caves. But none of these options has emerged as the best way to fix the grid.

Then there's rail energy storage, which is about to get its grand debut. In April, the Bureau of Land Management approved an ARES—that's Advanced Rail Energy Storage—project, conceived by a Santa Barbara-based energy startup called, well, ARES. By 2019, ARES operations head Francesca Cava says, the facility will occupy 106 acres in the excellently-named town of Pahrump, Nevada. By running a train up and down a hill, ARES can help utilities add to and subtract from the grid as needed.

It's a wonderfully simple idea, a 19th century solution for a 21st century problem, with some help from the abundant natural resource that is gravity. When the local utility's got surplus electricity, it powers up the electric motors that drag 9,600 tons of rock- and concrete-filled railcars up a 2,000-foot hill. When it's got a deficit, 9,600 tons of railcar rumble down, and those motors generate electricity via regenerative braking—the same way your Prius does. Effectively, all the energy used to move the train up the hill is stored, and recouped when it comes back down.

 

My End Game Prediction for @Tesla ($TSLA) if They Really Do Go Private at $420

Readers know I am in the campground business.   Years ago there was a trend towards building super-luxury campgrounds for as much as $30,000 a camp site.  I never understood how anyone could get a return from this.  Finally I had a guy from a large campground and RV park REIT tell me, "You know how you make money on a $30,000 a site campground?  You wait for it to go bankrupt and buy it for $5,000 a site."

This is what I think the end game for Tesla may be.  I just don't think there is enough available capital in the world, and enough operational focus in Elon Musk, to see their way through to bootstrapping an entirely new worldwide automotive firm, including new dealerships, manufacturing plants, charging networks, etc.  Remember, Tesla does not just need capital for R&D and manufacturing, they also need it for the whole sales / service / fueling network.  Kia, for example, can grow with less capital because it can get independent business people to invest in the service and dealer networks and rely on existing gas stations for the fueling network.  Tesla must build all of this from scratch because of choices they made early in their development.

Even without an LBO, I think they were going to fail at this (despite having some good products) and others disagree with me.  But given the amount of debt that an LBO at $420 might take, and the subsequent rejection of the largest public capital markets, I don't think there is any way Tesla could head off a failure.  People who want to lionize Elon Musk forget that SolarCity was headed for exactly this same kind of cash crunch, only to be bailed out by a crony insider transaction with Tesla (much to the detriment of Tesla shareholders).

Right now, GM, Ford, Daimler .. pretty much any of the auto majors, would do well by buying Tesla.  It would help them with an instant presence in the BEV market and it would help Tesla by solving some of the sales and service investment and manufacturing operations problems they have.  But Tesla is just too damn expensive.  Right now the company is worth more than either GM or Ford.

I see the future after at $420 LBO as a failure in 24 months followed by a purchase by an auto major thereafter.

Elon Musk Combines the Social Media Maturity of Donald Trump With the Business Ethics of Elizabeth Holmes

Frequent readers will know that I have expressed both admiration and skepticism for Elon Musk's various business ventures.   SpaceX is cool.  I am extremely skeptical of the hyperloop, which looks like the technological equivalent of the emperor's new clothes.  I thought Tesla's acquisition of nearly-bankrupt SolarCity was corrupt insider self-dealing.  I think the initial Tesla cars were terrific products but that Musk's management is likely to kill the company.

Lately, I have tried to avoid discussing Tesla and Musk much because I don't want to turn this into a dedicated blog on those two subjects.  Also, with all the press (positive and negative) that it gets, another article on Tesla is about as necessary as another article on Stormy Daniels.  I even resisted the urge to comment on Musk's childish need to insert himself into the Thai cave rescue story and his subsequent rant on Twitter petulantly calling one member of the rescue team a pedophile because he did not use Musk's submarine.  Lol, a submarine for a rescue where one passage was so narrow a diver wearing tanks could not even squeeze through.

My will to avoid Musk and Tesla on this blog collapsed the other day when Musk personally called the employer of one of Tesla's harshest (and I would add most intelligent) critics pseudonymed Montana Skeptic, and threatened to sue the critic and get him fired unless he shut down his criticism.  He succeeded, as Montana Skeptic was forced to shut down and issue this statement:

Yesterday, July 23, I decided to cease writing about Tesla (TSLA) here at Seeking Alpha web site. I also deactivated my Twitter account, where I was @MontanaSkeptic1. Here is what prompted those decisions.

Yesterday afternoon, the principal of the family office in which I am employed received a communication from someone purporting to be Elon Musk. Doubtful that Elon Musk could actually be attempting to contact him, my employer asked one of my colleagues to investigate and respond.

My colleague then spoke by phone with Elon Musk (it was indeed him). Mr. Musk complained to my colleague about my writing at Seeking Alpha and on Twitter. Mr. Musk said if I continued to write, he would engage counsel and sue me.

My colleague then spoke with me about the phone call. We both agreed that Mr. Musk’s phone call and threatened lawsuit were actions that would tend to involve our employer in matters in which he has had no part. To avoid such a consequence, I offered to immediately cease writing at Seeking Alpha and to deactivate my Twitter account.

How did Mr. Musk learn my identity, and that of my employer? It appears to me his information came thanks to the doxing efforts of some of his followers on Twitter.

Neither Mr. Musk nor Tesla has ever attempted, at any time, to contact me. Instead, Mr. Musk determined to go directly to my employer.

I do not know what Mr. Musk’s precise complaints are about me. I do not believe he has any valid legal claim, and I would have no trepidation in defending myself vigorously were he to bring such a claim. My response to his threats were simply to protect my employer and preserve my employment.

And so, you might say, Elon Musk has won this round. He has silenced a critic. But he has many, many critics, and he cannot silence them all, and the truth will out.

Folks who have read the book "Bad Blood" about Theranos will recognize this behavior immediately.  Musk took advantage of the work of some of his fanboys who bravely doxxed Montana Skeptic and allowed Musk to determine his true identity.   Musk is certainly a child (emphasis on "child") of his age, preferring to force critics to shut up rather than respond to them in a reasoned manner.  And by the way, where the hell is his board of directors?  Just like at Uber, it is time for the grown-ups to come in and take over the visionary but flawed company started by their founder.

If you have a chance, you really should look at at least some of Montana Skeptic's work.  He was fact-based and analytical -- this is not some wild crazy social media guy going off on biased rants.  I would take Musk's action as a ringing endorsement of Montana Skeptic's analysis, most of which you can find here but require a Seeking Alpha membership.  However, if you have time to listen, the Quoth the Raven podcast has two good episodes with Montana Skeptic on Telsa (#23 and #28).

By the way, Elon.  If you wish, you may contact my employer here.

The Dangers of Trying To Reinvent An Industry, And A Few Notes on Tesla

I am often critical of Elon Musk and Tesla, and will be again later in this post, but I wanted to start by sympathizing with Tesla's plight.  As you may know, Tesla set out not only to produce a leading electric car (which it did) but also to reinvent automobile manufacturing (which it is struggling to do).  One of the hard parts about reinventing an industry is being correct as to what parts to throw out and what parts to keep.  Musk, I think, didn't want to be captive to a lot of traditional auto industry thinking, something anyone who has spent any time at GM would sympathize with.  But it turns out that in addition to all the obsolete assumptions and not-invented-here syndrome and resistance to change and static culture in the industry, there is also a lot of valuable accumulated knowledge about how to build a reliable car efficiently.  In Tesla's attempt to disrupt the industry by throwing out all the former, it may have ignored too much of the latter, and now it is having a really hard time ramping up reliable, quality production.  Musk even recently admitted it may have gone overboard on factory automation.

I don't agree with all the conclusions, but I thought this was an interesting article on Tesla vs. Toyota production practices and the industry lessons Tesla may have been too quick to ignore.  One quote I liked, “Machines are good for repetitive things… but they can’t improve their own efficiency or the quality of their work.”  I sympathize with Musk on this one.  You CAN"T upend an industry by copying everything it does -- you have to go off in a different direction, at least on some things.  It may be that Musk eschewed the wrong bits of industry practice, but this is an understandable mistake.

What is not understandable is Musk's lack of transparency, his self-dealing, his wild and unfulfilled promises, and his unprofessional behavior.  Some notes:

  • A few months ago, at the Tesla truck launch, I wrote:

But Tesla needs to stay hot. California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket. Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year. So out came Musk yesterday to yell SQUIRREL!

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3. The factory appears to be in disarray and out of production and inventory space. They can't produce enough batteries yet for the cars they are already making. So what does Musk do? Announce two entirely new vehicle platforms for tiny niche markets.

I saw the truck launch as a cynical ploy to distract from Tesla's operating problems and perhaps to get a bit of financing in the form of customer deposits (a growing percentage of Tesla's available cash is from customer advance deposits).  There was no way it could do anyting with this truck, given its operating problems and lack of capital.  It seems that I was on target, because not even 6 months later Tesla has tired of pretending the truck is going anywhere.  After Telsa did not even mention the semi in their earnings conference call, Musk said in answer to a question:

I actually don't know how many reservations we have for the Semi. About 2,000? Okay. I mean, we haven't really tried to sell the Semi. It's not like there's like an ongoing sales effort, so sales – orders for Semi are like opportunistic, really companies approaching us. Yeah, it's not something we really think about much.

  • Elon Musk proved himself on the same conference call to be a spoiled brat who has spent too much of his time having people kiss his feet and compare him to Tony Stark.

One week ago, Elon Musk entered the history books for his unprecedented, petulant handling of "boring, boneheaded" questions from two sellside analysts, who merely wanted more details about the company chronic cash/rollout issues.  And no phrase captures Musk's descent better than "These questions are so dry. They're killing me."  That's what Musk told RBC analyst Joseph Spak in response to a question about Model 3 reservations.

My older readers will know that my dad was President of Exxon from the early 70's (a few weeks before the Arab oil embargo) until the late 1980's.  In that job he never had to do analyst calls, but he did about 15 annual shareholders meetings.  I don't know how they run today but in those days any shareholder with a question or a rant could line up and fire away.  Every person with a legitimate beef, every vocal person who hated oil companies and were pissed off about oil prices, every conspiracy theorist convinced Exxon was secretly formulating chemtrail material or whatever, and every outright crazy would buy one share of stock and show up to have their moment on stage.  My dad probably fantasized about how awesome it would be to just get asked dry financial questions about cash flow.  And through all the nuts and crazy questions and outright accusations that he was the most evil person on the planet, dad kept his cool and never once lost it.

If you asked him about it, he likely would not have talked about it.  Dad -- who grew up dirt poor with polio in rural Depression Iowa -- was from that  generation that really did not talk about their personal adversity much and certainly did not compete for victim status.  He probably would just have joked that the loonies at the shareholder meeting were nothing compared to Congress.  My favorite story was that Scoop Jackson once called him to testify in the Senate twice in 6 months or so.  The first time, just before the embargo, he was trying to save the Alaska pipeline project and Jackson accused Exxon of being greedy and trying to produce more oil than was needed.  The second time was just after the embargo, and Jackson accused Exxon of being greedy and hiding oil offshore in tankers to make sure the world had less oil than it needed.

Through all of this, the only time I ever saw him really mad was when Johnny Carson made a joke about killing the president of Exxon (he asked his audience to raise their hands if they thought they would actually get convicted for killing the president of Exxon) and over the next several days our family received hundreds of death threats.  These had to be treated fairly credibly at the time because terrorists were frequently attacking, kidnapping, and bombing oil company executives and their families.  We had friends whose housekeeper's hand was blown off by a letter bomb, and I was not able to travel outside of the country for many years for fear of kidnapping.  (For Firefly fans, if you remember the scene of Mal always cutting his apples because he feared bombs in them from a old war experience, you might recognize how, to this day, I still open packages slowly and carefully.

This is a long way of saying that Elon Musk needs to grow the hell up.

Our Double Standard on White Collar Fraud

Nobody really liked Jeff Skilling of Enron and he sits in jail for 20 years.  We think Elizabeth Holmes is attractive and cool so that despite the fact that she committed serial fraud in lying about her company's technology and financials (far more baldly and egregiously than Skilling) and actually put people at risk through faulty medical testing, she got only a slap on the wrist.

And then there is Elon Musk.

I am not sure how I got in the role of fact-checking Elon Musk, but given the company's stated results to date and announced operating plans and strategies, there is simply no way for the Tesla to be profitable and cash flow positive in Q3, barring some deus ex machina like a massive energy credit or California subsidy windfall.  It's possible I could go in there and shut down R&D and model 3 production and milk the Model S and X for cash and might make this be true, but that is certainly not their announced business plan.  On their current path Tesla has to continue to burn cash through the rest of this year.  I am not even sure that if you stated their gross margin the same way that other automakers state their numbers that even it would be positive right now -- there is an argument to be made they are still losing money at the margin on every car they produce**.  I would add that in this point of their ramp, if you want to see Tesla the huge success that is baked into its current stock valuation, you don't want Tesla to be cash flow positive in the third quarter, you want it continuing to invest.   Amazon rules the world because it deferred profitability for years in favor of growth.

Tesla pretty much never ever lives up to Musk's promises, at least for the dates he promises them.  That is probably OK with things like deliveries of new products -- people understand he is pushing technology and new products can be delayed and they forgive entrepreneurs for being -- shall we say -- overly enthusiastic about such things.   But on financial stuff like this his statements are bordering on fraud.  But he'll never get called on it, because we like him in a way we didn't like Skilling.

I will add that if Musk wants to get snippy about the media's guesses about his company's prospects, and thinks we are all getting it wrong, he could sure be a lot more transparent about Tesla's financials and plans.  Go watch an Exxon-Mobil analyst presentation and compare it to Musk's quarterly arm-waving.  Also, one final memo to Musk:  responding to your critics on Twitter emulating Trump's style is not recommended.  Though it might be interesting to compare the irrational populist wave behind Trump with the populist wave behind Tesla.  Though the two Venn diagrams of supporters probably do not overlap much, the whole relationship feels similar to me.

Disclosure:  I have been short TSLA in the past but right now have no position.  To be honest, I am going to let Musk urge his fanboys to pump the stock a bit further before I short again.  The fanboy effect makes TSLA a dangerous short, as TSLA stock holders will defy reality for far longer than will holders of say GE or XOM.

 

** gross margin at TSLA is interesting because TSLA has no dealer network, something I like them for.  GM discounts its cars to their dealers (10% or so?) but in turn they offload a bunch of selling and support costs to the dealers.  In their gross margin, TSLA banks in their gross margin the extra 10% from not having to discount their cars but in turn does not charge gross margin for a lot of the extra sales and support costs they have to take on -- instead they drop these costs into SG&A overhead. The situation with gross margin is even more complicated because Tesla not only has to build out and operate its own warranty service, sales, and delivery network to replace traditional dealers, it is also building out its own fueling service to replace gas stations.  Here is one guy who thinks Tesla gross margin is really negative.  I have zero idea who he is but for the last year his predictions about Tesla have been a lot more reliable than Musk's statements.

Why Tesla Agreed to Pay Elon Musk So Much

Tesla agreed to give Elon Musk what is potentially the richest executive compensation package ever.  I will give my (*gasp*) cynical reason why I think they did this.  I can show you in one chart (Tesla Model 3 production, from Bloomberg):

I would argue that Elon Musk is the only one in the world who can run a company with so many spectacular failures to meet commitments and still have investors and customers coming back and begging for more.  A relatively large percentage of Teslas get delivered with manufacturing defects and their customers sing their praises (even while circulating delivery defect checklists).  Tesla keeps publishing Model 3 production hockey sticks (apparently with a straight face) and consistently miss (each quarter pushing back the forecast one quarter) and investors line up to buy more stock.  Tesla runs one of the least transparent major public companies in this country (so much so that people like Bloomberg have to spend enormous efforts just to estimate what is going on there) and no one is fazed.  Competitors like Volvo and Volkswagon and Toyota and even GM have started to push their EV technology past Tesla and actually sell more EV's than does Tesla (with the gap widening) and investors still treat Tesla like it has a 10-year unassailable lead on competition.

All because Elon Musk can stand up at a venue like SXSW, wave his hands, spin big visions, and the stock goes up $3 billion the next day.   Exxon-Mobil has a long history of meeting promises, reveals its capital spending plans in great detail, but misses on earnings by a few cents and loses $40 billion in market cap.  GE lost over half its market value when investors got uncomfortable with their lack of transparency and their failures to meet commitments.   Not so at Tesla, in large part because Elon Musk is PT Barnum reincarnated, or given the SpaceX business, he is Delos D. Harriman made real.

Disclosure:  I don't currently have any position in TSLA but over the last 2 years I have sold short when it reaches around $350 (e.g. after Elon Musk speaks) and buy to cover around $305 (e.g. when actual operational or financial data is released).  Sort of the mirror image of BTFD.

A Failure of Skepticism and Common Sense: Elon Musk's Skepticism Dampening Field

I continue to marvel at the nearly 100% positive press Elon Musk gets for his Hyperloop project.  For those who do not know, that is his concept for a high speed transportation system that can achieve high speeds in part because it is in a vacuum sealed tube.  Here is an update on the project and a picture of a prototype below:

So here is the story so far:  We know that the main barrier to high speed rail projects is that they are astonishingly expensive to build and maintain given the high cost of the right-of-way acquisition and building track to the very high standards necessary to support safe high speeds.   See for example California high speed rail, which is following some sort of crazed Moore's law where the cost estimate doubles every 18 months.

So we are going to fix the cost problem by ... requiring that the "track" be a perfectly smooth sealed pressure vessel under vacuum that is hundreds of miles long?  What about this approach isn't likely an order of magnitude more expensive than rail?  The prototype above which allows only one way travel cost about a billion dollars per mile to build.  And with a lot less functionality, as current prototypes envision 10-20 person sleds, one step beyond even the worst airline middle seat in terms of likely claustrophobia, and less than half the capacity of a bus.  It would take 15-20 of these sleds just to move the passengers from a typical aircraft.   Not to mention the fact that there is no easy way to do switching and a return trip requires a second parallel track.  All to reach speeds perhaps 20% higher than air travel.

Sure, I can be wrong.  For example, if the hyperloop handled grades better than a train, that would reduce costs somewhat.   But why does no one seem to ask obvious questions like this?   It's like Musk exudes some sort of skepticism dampening field around him (look at Tesla:  the company is fraught with issues and the stock price was falling until Musk did one of his hand-waving presentation specials at SXSW and the stock goes back up 30 points).  But if you read carefully, most of the hyperloop progress in the article linked is for getting handouts from government (something Musk excels at) including money for scoping studies of lines that will never exist and money for new buildings and workshops.

 

 

SpaceX Landing Two Falcon Heavy Boosters Side by Side -- Gorgeous

Y'all know I have a certain distaste for Elon Musk's rent-seeking, but as I have written before there is nothing much cooler than several billionaires competing at space travel.   The video below is of today's apparently succesful Falcon Heavy launch, but while the launch is as cool as always, what was really new and beautiful was the near simultaneous side by side landing of the two booster rockets.   Booster landing starts around the 36:30 minute mark.

I will say that Musk's promotional abilities do remind me sometimes of DD Harriman.

Classic Government Economics: Subsidize Demand, Restrict Supply.

Name the field:  Housing, education, health care.  In most any industry you can name, the sum of the government's interventions tend to subsidize demand and restrict supply.  In health care for example, programs like Medicaid, Obamacare, Medicare, and others subsidize demand while physician licensing, long drug approvals and prescription requirements, certificates of need, etc restrict supply.

If you are wondering why, it turns out that most government regulatory processes are captured by current incumbents, who work to get the government to subsidize customers to buy their product or service while simultaneously having the government block upstart competitors, either foreign or domestic.  For example in housing, existing homeowners form a powerful lobby that limits housing supply through restrictive zoning while demanding that the government subsidize mortgage interest (as well as low-cost mortgage programs) and give special tax treatment to capital gains from homes.   The result in every industry is supply shortages and rising prices.

Yesterday, we saw another classic example.  Federal, state and local governments have spent billions of dollars over the last decades subsidizing solar panel installations in homes and businesses.  But now, they are also simultaneously restricting the supply of solar panels:

President Donald Trump is once again burnishing his protectionist bona fides by slapping imported solar cells and washing machines with 30% tariffs - his most significant action taking aim at the world's second-largest economy since he ordered an investigation into Chinese IP practices that could result in tariffs.

Acting on recommendations from US Trade Representative Robert Lighthizer, Trump imposed the sliding tariffs. Solar imports will face a 30% tarifffor the first year, then the tariff will decline to 15% by the fourth year.It also exempts the first 2.5 gigawatts of imported cells and modules, according to Bloomberg.

And... who would have guessed that Elon Musk would be on the receiving end of another government crony handout?  The patron saint of subsidy consumption will get yet another, as Tesla's solar city is currently building a large domestic panel manufacturing plant, an investment decision that makes little sense without tariff protection.

Elon Musk Made the Kessel Run in Less Than Twelve Parsecs

I had to laugh at the stories the other day on the battery backup system Elon Musk and Tesla made for the Australian Power grid:

Tesla has completed its 100 megawatt Powerpack battery backup system in South Australia within 100 days (easily), as Elon Musk had promised. That means the company essentially won the "bet," and won't be on the hook for the entire cost of the project, estimated at $50 million. More importantly, it means that some 30,000 homes in South Australia will have a power backup in case there's no breeze at the Hornsdale Wind Farm located about two hours from Adelaide.

A megawatt is a measure of energy production or transmission rate.  As such, it is a perfectly appropriate way to size the capacity of a power plant that is assumed to have a continuous supply of fuel.  However, it is an extremely odd way to size a battery.  A battery has a fixed energy storage capacity, which is generally measured in watt-hours (or some conversion thereof). For example a 10 Wh battery would provide 10 watts for an hour before running out, or 5 watts for 2 hours, etc.  It is not clear if this is just a typo, that they really mean 100MWh, or if 100 megawatts is the peak discharge rate and they are being silent on exactly how long this lasts (ie how long can those 30,000 homes be powered?)  I checked the first 10 sources in a Google search and not a single media outlet that routinely chastises climate skeptics for being anti-science seems to have questioned the oddball and nearly meaningless 100MW figure.

I was going to compare the number on energy storage here and show that you could actually generate electricity from gas, not just store it, for well less than this.  But it is sort of hard to make the calculation when they don't get the units right.

By the way, if this is required to make wind power work, will we start seeing wind advocates building in $50 million batteries when they present their economics?  Any bets?

Elon Musk Is The Master of Yelling "Squirrel"

It is hard not to be conflicted about Elon Musk.  On the good side, he is pursuing fabulous and exciting goals  - space travel, high speed transportation, cheap tunnels, ubiquitous electric cars.  Listening to Musk is like riding through Disney's various Tomorrowland visions.  As a consumer, I love him.

As a taxpayer, I am not so thrilled.  Many of his companies (SolarCity and Tesla in particular) seem designed primarily as magnets for government subsidies.

But it is his shareholders I really have to wonder about.  I can't remember anyone in my lifetime who was so good at serving his shareholders Spam and convincing them they were eating filet mignon from a Michelin three star restaurant.  He announces quarter after quarter of failed expectations and greater-than-expected losses and then stands on stage and spins out all new visions and his fan-boys bid the stock to new all-time highs -- in fact to market valuations higher than GM, Ford, Nissan, or Honda.  Tesla's debt priced in the last offering well above what it should have given its rating and risks.   I thought his purchase by Tesla of his near-bankrupt other company Solar City had no strategic logic and was borderline corrupt, but my brother-in-law who is arguably a more successful entrepreneur than I thought it was brilliant, an example of Musk playing chess when everyone else is playing checkers.

So last week Tesla announced a really bad third quarter.  They lost a lot more money than they said they would, and produced a lot fewer of their new Model 3 cars than they promised.  Their manufacturing operations are in disarray and they are burning cash like crazy, such that the billions of funding they just raised will get burned up in just a couple more months.

But Tesla needs to stay hot.  California is considering new vehicle subsidy laws that are hand-crafted to pour money mainly into Tesla's pocket.  Cash is burning fast, and Musk is going to have to go back to the capital markets again, likely before the end of the year.  So out came Musk yesterday to yell

Tesla's main current problem is that they cannot seem to get up to volume production of their main new offering, the Model 3.  The factory appears to be in disarray and out of production and inventory space.  They can't produce enough batteries yet for the cars they are already making.  So what does Musk do?  Announce two entirely new vehicle platforms for tiny niche markets.

A workhorse truck and a new super car are in the works for Tesla, after founder and CEO Elon Musk introduced his company's latest effort to widen the U.S. market for electric vehicles Thursday night. Musk called the Roadster "the fastest production car ever made, period."

Musk unveiled the Roadster toward the end of an event that was supposed to be all about Tesla's new Semi trucks. Taking a page from Apple and other tech companies in using showmanship to wow crowds, Musk surprised the crowd by announcing there was one more thing to add — and the new car rolled out of the truck's trailer.

After touting the utility and efficiency of what he called a game-changing truck, Musk welcomed the Roadster to cheers from those attending the event at the Hawthorne Municipal Airport near Los Angeles.

You have to hand it to Musk -- no other car company could get a good bump in their stock by displaying what essentially are two concept cars with infinitesimal revenue potential.  Expect Tesla to have a bond or stock offering out soon while everyone still has stars in their eyes from these new vehicles and before anyone can refocus on production and profitability issues.

 

Elon Musk as Orren Boyle

First, two disclosures

  1. I am short TSLA
  2. I love the Model S.  I would love to own one.

At some level, the quality of the product is irrelevant.  They key questions are:  Does TSLA really justify a $60 billion valuation and does TSLA really deserve billions of dollars in taxpayer subsidies.

As to the first question, I will leave it up to you to research.  This is a good case for the short position.   I still think the SolarCity purchase was an absurd business decision and borderline corrupt.  The problem with shorts, especially in emotionally driven near-religion stocks like TSLA, is how long you have to hold on before the crash comes.

As for the second question, a guy who goes by the moniker of Montana Skeptic over at Seeking Alpha has been looking in to some of the larger Tesla subsidies, and the picture is not pretty.  Here is his analysis of the subsidy of the SolarCity plant in New York (SolarCity, another Musk company, was bailed out of near-bankruptcy and bought by Musk's Tesla, a smelly deal that put me on the road to shorting the company).  He tells a long, interesting story but the tl:dr is:

  • In the fall of 2014, New York State awarded SolarCity a sumptuous subsidy package: free use of the enormous Riverbend factory and $750 million of taxpayer money to refurbish and equip the factory.
  • The "Essential Purposes" of the subsidy deal were to enable manufacture and sale of Silevo's Triex technology, and then develop "next generation technology improving on the Triex product."
  • Governor Andrew Cuomo praised the deal as a visionary accomplishment "of critical importance to the United States economic competitiveness and energy independence."
  • In return for the subsidies, SolarCity promised to spend $5 billion in New York State over a 10-year period and to create 4,900 New York State jobs.
  • After the deal was signed, SolarCity's promises were noiselessly scaled back.
  • A promise that 1,460 of the jobs be "high-tech" disappeared. A promise to hire at least 900 people within two years of the factory opening shrank to 500.
  • And, SolarCity's promise to hire 2,000 solar panel installers throughout the state quietly disappeared in December 2015. It appears SolarCity knew then - two months before Elon Musk and Lyndon Rive say they had their first merger discussions - that its solar panel business was failing.
  • While SolarCity's obligations were shrinking, the factory opening was delayed. And delayed. And delayed some more. The opening is now almost two and one-half years late, with no date yet announced.
  • Meanwhile, SolarCity has abandoned the Silevo technology and taken a huge write-off on its Silevo investment.

This is the sort of reporting you almost never see in the press.  All these subsidies for business development made on promises of jobs addition.  My experience is that the resulting promises are never kept.  Why does no one ever follow these things up?

Postscript:  I have a quibble with the article on cases for shorting TSLA.  This is one part:

Until recently, TSLA has been the recipient of substantial subsidies, fawning praise and a “fanboy” following. In other words, it has received large financial benefits from various governments which were not available to its automotive peers. It’s been judged by a non-critical press, and any problems with product quality and/or delays in timelines have been readily accepted by its hardcore supporters. All of this has combined to build the quixotic narrative which justifies the sky-high valuations outlined above.

Apple has benefited from this effect for years with no sign that its cult following is diminishing.  Just wait for Apple fanboys who lose there head over whatever Apple announces for its anniversary iPhone later this year.  Prediction:  Apple will add a number of new features already found on Android phones and the press will fawn over its inventiveness and leadership.

Weirdly Desperate Publicity Plea from Elon Musk?

I found this email to be simply bizarre.   If this is anything more than odd PR, I am not sure I understand it (the links are what they claim to be, rather than some sort of Phishing).  It clearly is a bot because no human would have actually read the article and thought that Elon Musk would really like me to better tie my article on his rent-seeking to his other PR.  Anyone know what is going on here?  I can't believe that Internet billionaire Elon Musk is paying Flip Hosting for some sort of crappy SEO work based on Google link-based page-rank schemes that are several years out of date.

 

Elon Musk, America's #1 Crony Capitalist

This is from a couple of years ago, so the numbers will only be larger:

Los Angeles entrepreneur Elon Musk has built a multibillion-dollar fortune running companies that make electric cars, sell solar panels and launch rockets into space.

And he's built those companies with the help of billions in government subsidies.

Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX, together have benefited from an estimated $4.9 billion in government support, according to data compiled by The Times. The figure underscores a common theme running through his emerging empire: a public-private financing model underpinning long-shot start-ups.

"He definitely goes where there is government money," said Dan Dolev, an analyst at Jefferies Equity Research. "That's a great strategy, but the government will cut you off one day."

The figure compiled by The Times comprises a variety of government incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars.

Demand Curve? What Demand Curve?

Today's little slice of economic ignorance comes from tech site Engadget, a frequent contributor of such morsels.  Apparently California is considering new penalties on auto makers for not selling enough electric cars, penalties which by their structure will be fed right into the pocket of Tesla, already a gaping maw of government subsidy consumption:

Assemblywoman Autumn Burke tells the Associate Press that she's introducing a bill requiring that car manufacturers sell at least 15 percent zero-emissions free vehicles within a decade. Companies operating in the state already have to hit yearly emissions targets and get credits for sales, but this would require that they embrace electric or hydrogen fuel cell cars in a big way -- not just one or two novelty models. And if they don't sell enough eco-friendly cars, they'd have to either pay a fine to the state or pay rivals that meet the targets. Yes, they might inadvertently help the competition.

If the bill becomes law, it could light a fire under car makers that have so far been slow to adopt emissions-free tech. Only 3 percent of all California car sales are either electric or plug-in hybrids.

The underlying assumption, both by Ms. Burke as well as the article's author, seems to be that lack of electric car sales is entirely a supply-side problem -- low sales are because auto makers don't make enough of them.  While I have no doubt that there would be incrementally more sales if auto makers had a larger variety of models with different combinations of features, all of this seems to ignore the demand side.  Automakers, who are constantly locked in a death struggle over tiny increments of market share, and who already pay penalties for not selling as many electric cars as politicians would wish them to, have every incentive to sell as many as they can.  The issue strikes me as one of demand rather than supply - given current technology limits and costs, and despite large financial incentives from the government in the form of tax subsidies, most buyers have eschewed electric vehicles to date.  Neither Ms. Burke nor the author even pretend that this law will change this demand situation.

Which is why critics rightly argue that this is just another way to funnel other people's money into Elon Musk's pocket, without his actually having to sell any more cars.  Tesla already depends on payments from other auto makers for electric vehicle indulgences for much of its revenue, and this can only go up under this kind of law.

The Problem with Elon Musk

When first presented with the idea of the Hyperloop (a train running in vaccuum in an underground tube), I was extremely skeptical it made any sense.   Sure it might work (after all the London tube started out as a pneumatic system much like those that older ones of us remember sending receipts around department stores).   But did it make any economic sense.  Was it really likely that, if we can't afford rail lines above ground easily, we could afford to build thousands of miles of air-tight large-diameter tubes?  Honestly, it looked to me like any other silly idea on the cover of Popular Mechanics, right next to the titanium zeppelin the size of Connecticut that would someday be doing construction work.

So enter Elon Musk, who is very passionate about the idea, claims to be convinced it will work, and appears to be putting some money behind it.   With his support, the idea must immediately be treated as more credible, and it does indeed get a lot of press.  But here is the problem for me with Musk:  With him, the idea must also be treated as very probably another attempt by him to drain money out of the taxpayers' pockets into his.  Because that is what he does in so many of his enterprises.

Ultimate Proof Green Energy is About Cronyism, Not the Environment

Government green energy programs are supposedly about subsidizing new energy technologies to reduce their cost and increase their adoption rate.  But it appears to me that they are in fact merely about subsidizing favored companies.

Why?  Well consider this:

Over the last couple of years, trade remedy actions on clean energy products have intensified. In the wind industry, the Wind Tower Trade Coalition, an association of U.S. producers of wind towers, brought an AD/CVD complaint against imported wind towers in 2011. The U.S. Commerce Department started an investigation, and announced a preliminary decision in December 2012.

This decision found both subsidization and dumping in relation to Chinese imports and imposed an antidumping tariff of between 44.99% and 70.63%, as well as countervailing duties of 21.86%–34.81%. The Commerce Department also established a separate antidumping duty of 51.40%–58.49% on Vietnamese wind tower manufacturers.

In the solar industry, in October 2011, the Coalition for American Solar Manufacturing, a group of seven U.S. solar panel manufacturers led by Solar World Industries America, accused Chinese solar panel companies of dumping products in the United States. The Commerce Department opened an investigation in 2011 and announced the final ruling in 2012. The decision was to impose antidumping tariffs ranging from 24% to 36% on Chinese producers.

All of those actions are not only not consistent with reducing the cost of new energy technologies, they actually raise the cost of wind and solar.  The only benefit of these actions is to improve the bottom line of crony-connected green energy companies.  There is no reason to believe that this cronyism is not the real rational behind the whole program.   If government subsidizes consumer solar purchases 30% and then raises solar panel costs by 30%, they are not making the technology cheaper for consumers, but just finding an excuse to pour tax money into the pockets of a few folks like Elon Musk.

Electric Vehicle Welfare Queen

No, we are not talking today about Elon Musk (though the name fits) but about this electric car buyer profiled in the WSJ:

Bronson Beisel, 46, says he was looking last fall for an alternative to driving his gas-guzzling Ford Expedition sport utility around suburban Atlanta, when he saw a discounted lease offer for an all-electric Nissan Leaf. With $1,000 down, Mr. Beisel says he got a two-year lease for total out-of-pocket payments of $7,009, a deal that reflects a $7,500 federal tax credit.

As a resident of Georgia, Mr. Beisel is also eligible for a $5,000 subsidy from the state government. Now, he says, his out-of-pocket costs for 24 months in the Leaf are just over $2,000. Factor in the $200 a month he reckons he isn't paying for gasoline to fill up his hulking SUV, and Mr. Beisel says "suddenly the car puts $2,000 in my pocket."

Yes, he pays for electricity to charge the Leaf's 24-kilowatt-hour battery—but not much. "In March, I spent $14.94 to charge the car" and a bit less than that in April, he says. He also got an electric car-charging station installed at his house for no upfront cost.

"It's like a two-year test drive, free," he says.

I hope you all enjoy Mr. Beisel's smug pride a driving a car using your money.

In my next post, I am going to dive deeper in the operating cost numbers here.  By the article, Mr. Beisel has cut his monthly fuel costs from $200 to $14.94, a savings of over 90%.  If these numbers are real, why the hell do we have to subsidize these cars?  Well, while it turns out that while the Leaf is a nice efficient vehicle, these numbers are way off.  Stay tuned.

Tesla Actually Strikes a Blow Against the Corporate State

Tesla Motors and Elon Musk, the folks who seem to perennially have their hands out for special government favors and taxpayer money, may have actually struck a small blow against the corporate state:

Tesla Motors Inc. says it’s won another round in its fight with established car dealers who want to stop the company from selling its electric luxury cars directly to consumers.

Tesla CEO Elon Musk says, via Twitter, that a New York judge has tossed out a suit brought by New York auto dealers who challenged Tesla’s direct sales model as a violation of the state’s franchise laws.

Mr. Musk spent Wednesday in Texas making the case for a legislative proposal to change the law to allow direct sales of electric vehicles by U.S.-based manufacturers.  Texas car dealers have opposed the measure, saying it would open the door for other car makers to sell electric cars direct to customers –  which could undermine the value of their franchises.

Government protections of middle men in the auto business (states generally do the same in the liquor business) are a classic example of crony capitalism.  Car dealers tend to have a lot of sway with politicians, not to mention with local media for who they are generally the largest advertisers, so they are able to engineer special privileges for themselves.  Congrats to Tesla for taking this on.

Matt Yglesias is Reinventing History

Matt Yglesias and I certainly do read history differently.  He writes recently in a Salon article:

The basic economic foundations of industrial capitalism as we've known them for the past 150 years or so have an activist state at their core. Building political institutions capable of doing these things properly is really difficult, and one of the main things that separates more prosperous places from less prosperous ones is that the more prosperous places have done a better job of building said institutions. There's also the minor matter of creating effective and non-corrupt law enforcement and judicial agencies that can protect people's property rights and enforce contracts.

The point is, it takes an awful lot of politics to get an advanced capitalist economy up and running and generating wealth. A lot of active political decisions need to be made to grow that pie. So why would you want to do all that? Presumably because pie is delicious. But if you build a bunch of political institutions with the intention of creating large quantities of pie, it's obviously important that people actually get their hands on some pie. In other words, you go through the trouble of creating advanced industrial capitalism because that's a good way to create a lot of goods and services. But the creation of goods and services would be pointless unless it served the larger cause of human welfare. Collecting taxes and giving stuff to people is every bit as much a part of advancing that cause as creating the set of institutions that allows for the wealth-creation in the first place.

This is counter-historical crap.  Unfortunately, my real job is taking all my time today so I can only give a few quick responses rather than the thorough beating this deserves

  1. Capitalism is not a "system."  It is an un-system.   It is an order that emerges from individuals exchanging goods and services to their mutual self-interest.  While it requires a rule of law, those rules can be exceedingly simple -- at their core they are "don't deal with other people via force or fraud."  Sure, case law can be complex - what happens to a land deed that has one boundary on a river when the river moves.  But I don't think this is what Matt is thinking of.  
  2. Yglesias is following the typical socialist-progressive line that our modern wealth creating capitalist economy was somehow created by the government.  I am sure this line works with the low information voter, but that does not make it any more true.  Industrial capitalism arose long before the government even acknowledged its existence.  The US economy was generating wealth - for everyone, rich and poor - long before politicians stuck an oar into the economic waters.  Go back even 85 years and you will not see anything in the "political economy" that would be recognizable to a modern progressive.  In other words, the wealth creation came first, and then the politics came second.
  3. Again we see this bizarre progressive notion that wealth creation is this thing apart, like a water well in the desert.  Income distribution in this model is a matter of keeping the piggy rich people from hogging all the water.  But in a free society, the economy and its gains are not separate from people, they are integral to the people.  Gains are not somehow independent variables, but are the results of individual gains by each person in the system.  People operate by mutual self-interest.  When I work for you, I get a paycheck, you get your products made -- we both gain.  Steve Jobs grew wealthy selling iPads, but simultaneously my iPad made me vastly better off.
  4. It is wrong to say that all distributions of wealth are arbitrary.  In a free society, there emerges a natural distribution of wealth based on people's exchange with each other.  And contrary to the progressive mythology, that system was floating all boats, not just the rich ones, long before the government gained the power to redistribute wealth.  Yglesias is right in saying that income distribution in a progressive political economy is arbitrary.  In fact, income in any government-managed economy is distributed arbitrarily to whoever can gain power.  I am always amazed at progressives who somehow have this vision that there will be some group of people with absolute power who wukk make sure there will be a flat and equitable income distribution.  When has that ever happened?  Name even a single socialist country where that has happened.
  5. What political decision has ever been made the grows the pie, except perhaps to keep the government's hands off pie creation?  When "political" decisions are made to grow the pie, what you actually get is bailouts of Goldman Sachs, wealth funneled to connected billionaires like Elon Musk, and Solyndra.  Politics don't create wealth, they are a boat anchor lashed to the wealth creators.  The only thing politicians can do productively is make the boat anchor lighter.