Tesla hopes truck will solve tax credit demise and stock slump

Tesla was forced to reveal that it was pushing back its Model 3 production targets by 3 months, into March 2018 – taking the sheen off of its 500-mile range electric truck unveiling. The new timetable will mean fewer Model 3 customers are able to take advantage of the $7,500 federal tax credit granted to Tesla on the sale of its first 200,000 thousand vehicles – significantly raising the price of the troubled car.

Tesla looks like it will hit the threshold in the first half of 2018, driven mainly by Model S & X sales (which it produced a combined total figure of 2,180 units a week throughout the previous quarter). To date, the company has sold some 132,303 cars, giving cause for most financial analysts to estimate the company will reach the limit by Q2/3 2018 – not long for the Model 3 production ramp to exploit the credit.

Luckily for Tesla, the tax credit doesn’t just evaporate, instead it is lowered to $3,750 for the following two quarters, before being lowered again to $1,875 for two quarters proceeding that. As such, the impact on pricing won’t be severe, but it comes as the incumbent automakers are all diving into the PEV market.

The production delay means more and more Model S and X customers will use up the production credit, before Model 3 customers get a chance to use it. The credit applies to all EVs, and so it would have helped the more price sensitive Model 3 to have the credit available, rather than used up by those luxury S and X sales.

Even ramping up Model 3 production to exploit the credit could be in vain, as Republicans drafted an amendment to scrap the credit outright with immediate effect, last week. However, if the amendment was passed, it would be those startups currently planning launches of new EVs that would be most significantly affected.

Tesla would survive, but such a move would do more harm to the newer players. For the likes of EV startups Faraday Future, Lucid and Nio, all of which received significant investments but have yet to bring a product to market, axing the credit would be much more painful – and Tesla’s pre-order strategy has helped it in this regard.

The tax credit is also strategically very important for the larger automakers. Selling EVs in California entitles an automaker to tax credits that can then be exchanged to sell more profitable SUVs in the state – which California opposes due to their higher carbon emissions.

Automakers like GM already sell EVs like the Bolt at a considerable loss, just to gain sufficient credits under the system. Losing the subsidy would mean consumers have to shell out more for the EVs or the likes of GM absorbing an even greater percentage of the cost of the vehicle, to encourage uptake.

When Riot last covered Tesla’s production problems, its share price had remained buoyant. However, since then its stock has slid from around $350 in early October to $305. The optimism that enabled investors to initially overlook the missed production targets seems to have waned, after a double whammy of bad news in mid-October – a rear-seat safety recall of 11,000 Model X SUVs, and the controversial firing of 500 staff at its factory.

Notably, the company’s position in the solar market has received little attention, at a time when its operations in that area are changing. When Tesla purchased SolarCity, for $2.6bn at the end of 2016, it became the largest installer of solar in the US, it has since given up significant ground to other players in the solar market.

In 2014, SolarCity was by some way the largest solar installer in the US, accounting for 34% of the total share of solar panels installed in the country. However, Tesla installed just 109MW of solar capacity in Q3 2017, down 36% on a year ago. Its rivals are catching up, with the likes of SunPower installing 70MW of residential solar and 91MW of commercial solar, Sunrun expected to deploy 88MW, and Vivint Solar 46MW.

When Tesla bought SolarCity, it believed it could dramatically cut the costs of what was a business that was then making a $250m quarterly loss, and whose debt had grown to $3.4bn. The strategy appears to of been to fire large chunks of SolarCity’s sales force and use Tesla’s dealerships and showrooms to also sell panels. At the time, this amounted to an unproven strategy in the residential solar market.

But besides the layoffs on the sales side, Tesla has also dismissed thousands of installers. Tesla said in a statement that it was deliberately scaling down its operation in the commercial and industrial solar-energy, which are low margin – to focus on residential, using its new Solar Roof tiling offering.

However, the July departure of Peter Rive, SolarCity’s CTO and cousin of Elon Musk, might have stalled momentum, as Rive has governed the project since its inception. Securing production for the roof also proved challenging, and in the end, Panasonic invested $250m and will also be helping run the manufacturing process of its Buffalo, New York facility – where the tile panels are being developed and manufactured.

The Solar Roof has now launched, however, it is currently limited to Tesla employees, not unlike the Model 3. Given Tesla’s poor track record of scaling production volumes of its products (within deadlines), it could take until deep into 2018 for the Solar Roof to become widely available. But just like the Model 3, Tesla has an extensive waiting list for the Roof.

The Q3 earnings also revealed some disappointing news on Tesla’s battery storage business. Energy Generation and storage had $317.5M in revenue and $237.3M in cost of goods sold. Of these, Tesla storage revenue was $44.5M but cost of goods was $59.2M, showing the Powerwall and Powerpack business had an abysmal gross margin of -34%.

Tesla is locked into agreements with it Gigafactory battery partner Panasonic, to sell set volumes of batteries as it ramps production. The easiest way to deliver these volumes has been to sell large battery storage systems, at a loss, severely damaging the margins in its energy storage business.

Which brings us to the new strong in Tesla’s bow – the new truck. With a claimed 500-mile range (804km), Tesla is pitching it at the 80% of truck routes that it says are less than 250-miles long. The truck will go into production in 2019, and Tesla has already been beaten to market by launches of electric trucks by Cummins, which announced a system earlier this year with a claimed range of 300 miles, and Daimler’s Freightliner.

For any of the major trucking fleets to take a risk on deploying its semi at scale, savings on fuel would have to offset a considerably higher upfront price. Tesla would have to prove a track record of reliability and high resale value, which is not an easy task. Demand for the electric truck could be assisted if cities begin to push for more air emission regulations.

At the launch event, a supercar emerged from the back of the truck, to the surprise of those in attendance. The Roadster will have a range of 1,000km, costing $200,000 and be available from 2020 – Musk promised the it would be the fastest production car ever made.