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Al Jacobs invites you to take a look at his most recent book, Roadway to Prosperity, which embodies the heart of his nearly half-century in the investment business.  You'll find a wealth of information there.




In the beginning, Man created the wheel and the coach.  And the coach was without propulsion.  And the ingenuity of Man moved upon the scene and said, Let there be electric propulsion: and there was electric propulsion.  The electric vehicle market as it currently operates is best explained through an inspection of one vibrant company: Tesla Motors, Inc.  We shall take a close look at it to see why it ticks … or possibly unwinds.

 Although the very first electric vehicle dates back to the 1828 small-scale model car powered by an electric motor invented by Hungarian Ányos Jedlik, the first such successful vehicles did not appear until development of improved storage batteries in the 1880s.  By the turn of the century, automobiles powered by steam, electricity and gasoline vied with one another, as a prosperous America took to the roads.  During those years electric vehicles enjoyed an advantage over their competitors.  They didn’t require long start-up times as did the steamers; they started more easily than their hand-cranked internal combustion cousins; and with most good roads confined to towns and cities, a limited range did not seriously inhibit their use.

In the 1920s things changed.  America’s system of highways connecting cities brought with it a need for longer-range vehicles.  Charles Kettering’s 1912 invention of the electric starter eliminated the need for the hand crank.  And finally, Henry Ford’s mass production of inexpensive internal combustion vehicles, together with the discovery of massive crude oil deposits, thereby reducing the price of gasoline, made the gas-powered auto the way to go for the average consumer.  By 1935 electric vehicles had all but disappeared.  Note that during the 20th Century, motorists generally chose their vehicles in a rational fashion: what best served their needs most effectively and economically.  We shall now tune into the 21st Century to see the methods used by an ever-more-controlling government, as it foists its dictates onto the general public.

Headquartered in Palo Alto, California, Tesla Motors, Inc. incorporated in 2003.  With modest initial funding, its co-founders, electrical engineer Martin Eberhard and computer scientist Marc Tarpenning, began organizing and fundraising.  They were joined in 2004 by investor and entrepreneur Elon Musk, who from the onset became Board Chairman and controlling investor.

The firm’s first vehicle, the Tesla Roadster, with base price of $109,000, appeared on the market in 2008.  It used lithium ion batteries and won several awards for its appearance and performance.  In 2012 the company began production of its Tesla Model S sedan, with retail deliveries to customers by June of that year, at a starting price in excess of $70,000.  Since the company’s creation, Tesla consistently received enthusiastic approval from many quarters.  Without a doubt, Tesla displays all the signs of a well-run public corporation.  Its impressively performing stock is widely held.

Generalities aside, for a clear picture numbers must be viewed.  With the arrival of Elon Musk, who personally invested $70 million in the company, vigorous solicitation of investors took center stage.  Through January 2009, with only 147 cars actually sold and delivered, Tesla raised $187 million.  The following June the federal government stepped in to approve $465 million in low-interest loans from the Department of Energy.  The following August the company announced it had achieved “corporate profitability,” reporting $1million in net revenue during the prior month on the sale and delivery of 109 of its second generation Roadsters.  Amidst what became lauded as encouraging sales reports, on January 29, 2010, Tesla announced its intention to file an IPO, to be underwritten by several major underwriters; on June 29, 2010, the IPO raised $226 million.  It became the first American car maker to go public in more than a half-century.  Despite miniscule vehicle sales and questionable corporate profits, Tesla Motors became a major corporate presence.

On May 15, 2013, through its underwriter Goldman, Sachs & Co., Tesla announced what amounted to a secondary public offering.  The aggregate gross proceeds of the offerings constituted a placement designed to raise approximately $830 million.  The result: an unqualified success; over $1 billion generated.  And exactly one week later Tesla Motors delivered to the Department of Energy the sum of $451.8 million, as payment in full of its government-guaranteed loan.  With an August 7, 2013, report of better-than-expected second quarter earnings, investors pushed the stock up 14 percent to $153 per share in after-hours trading.  Chief Executive Musk proudly announced second-quarter profits of $26 million.  Tesla Motors had become the darling of Wall Street.

It’s now time to scrutinize nirvana.  Although Tesla is not without its detractors, it generally enjoys wide acclaim.  As a going enterprise with reported earnings, substantial net worth and purchasers of its products, there seems to be general agreement it will generate profit from the sale of electric vehicles.  The most telling evidence for this prognosis is that its common stock, now nearing the end of 2017 valued at about $300 per share, is nearly 20 times its 2010 IPO opening price.  If there are no other factors to consider, we might conclude our analysis here and now.  In so doing, we declare Tesla to represent the nation’s automotive future while marveling at the technological breakthrough which establishes the electric vehicle as our uncontested choice.  And in so doing, Man said, Let the factory bring forth the mobile device: and it was so.  And Man saw every thing that he had made, and, behold, it was very good

But before we so rejoice, let’s take a closer look at a few things we may have missed.  In this complex world, things are not always as they appear.  The company’s consistent absence of actual profits raise questions.   An explanation is required relating to “Zero Emission Vehicle Credits,” better known as ZEV credits.  These are credits – a legislative device – established by California law which can be sold by makers of electric vehicles to automakers, like General Motors, that do not make a high enough percentage of ZEVs to meet California standards.  The regulations are strict and operate in a way to limit an automaker’s ability to market vehicles in the state.  Prices of the credits are not disclosed, as the trading information is considered proprietary information among companies.

Tesla’s 2013 claim of $85 million in revenue was received from the sale of both California ZEV credits and U.S. corporate average fuel economy-related credits for the three months ended March 31.  Tesla then netted another $51 million in a similar fashion during the second quarter, ending June 30.  Without this revenue, the company would have continued to show the same sort of losses generated since its inception.  It can be reasonably argued the reported profits were pure illusion.

What is really required over the long haul for Tesla to succeed as a marketer of electric vehicles?  The answer is obvious.  It will be their ability to produce masses of their Model 3 vehicle to meet the demands of prospective purchasers at a price they will pay.  Let’s attach some numbers to this.  For one thing, many drivers must be able to travel distances of 200 miles or more in a single day, and do so with minimal inconvenience.  Hours-long charging of batteries is out of the question.   Secondly, the vehicle must be manufactured at a cost substantially less than the $40,000 price beyond which will drive most drivers out of the market.  Thus far Tesla cannot satisfy these requirements.  Though its lithium ion battery is an improvement over the older batteries, it’s not yet up to the job.  Until technology makes it possible to produce a high capacity electrical power source at an affordable price, the all-electric car will remain an unrealized dream.

To date Tesla – as a favored corporation – has performed spectacularly.  How a company which never produced a commercially viable vehicle, nor earned an actual profit, somehow propelled itself into the automotive forefront is a tribute to inspired promotion.  In particular, their utilization of both a compliant media and available government programs displays first rate adroitness.  Most certainly, government, with its granting of credits and preferences, is the key to that achievement, though the Trump administration seems to be ready to pull the rug out on that benefit.  Quite simply, non-emission vehicles may be removed from the list of other government-subsidized programs.  It’s true, of course, that quasi-governmental operations can drag on unprofitably for years, subject only to political considerations.  Two money-losing examples are Amtrak and the U. S. Postal Service, now both in their forty-sixth year.  An even more striking illustration was the British East India Company, chartered in 1600 and dissolved in 1874, which continued to percolate unprofitably, at the British taxpayer’s expense, during its final one-hundred years of existence.  Whether Tesla will remain a beneficiary of governmental favoritism is questionable.

Only time will tell whether Tesla will survive and prosper.  If, in fact, a suitable battery can be perfected before the company runs out of cash or ZEV credits, it might yet produce a saleable electric vehicle.  If, however, the political climate become unfavorable before viability can be achieved, I see nothing but insolvency in its future.  It will be a pity if that’s its ending, for what currently appears to hold promise for many as the vehicle of the future might then be branded by its detractors as the most sophisticated pump-and-dump scheme ever devised.




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