How Tesla Makes Millions Selling Carbon Credits
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Tesla Motors (NASDAQ: TSLA) was formed in 2003 with the idea of building a car with an alternative current (AC) electric motor similar to Nikola Tesla's original design. Ten years later, Tesla eked out its first profit - an $11.25 million take in the first quarter of 2013.
It's been a long road for Tesla, and the company has had to get creative in how it finances itself to keep revenues flowing in. From 2011 to 2012, the company was able to double its revenue, going from $204 million to $413 million. Some of that can be attributed to the doubling of its fleet from one car to two. The company also makes money from its competitors in a very crafty way, however; it sells carbon credits to other automakers.
How it works
California has some of the most stringent state emissions regulations in the U.S. That state allows auto manufacturers who produce a surplus of zero emissions vehicles (ZEV) to sell credits to companies that need to comply with regulations. By 2025, all large-volume auto manufacturers need to have 15.4% of their fleets be ZEV. Similar rules are in effect for a handful of other states, and the Environmental Protection Agency also has emissions credit rules as well.
This gives Tesla a tremendous upper hand since the only product that it sells is emission-free electric vehicles. The company is able to sell credits to companies like General Motors (NYSE: GM) and Ford Motor (NYSE: F), among others. This has allowed Tesla to make $2.8 million in 2010, $2.7 million in 2011 and $40.5 million in 2012 from its competitors. This was a big contributor to Tesla's ability to finally show a profit.
The competition is subsidizing Tesla
Yes, the auto manufacturing space is a dog-eat-dog market. What's interesting is how Tesla has been able to cull cash from its two biggest American competitors, GM and Ford. Both of these companies are still focused on selling high-margin gas-guzzling trucks, a strategy that ended up causing them major problems when the economy tanked a few years ago.
Of Ford's 14.8 million units sold in 2012, 645,000 of them were full-sized trucks. Ford has stated that the average age of a truck on the road in America is 10 years old, which gives the company hope that these numbers, and their corresponding proportion of sales, will go up. GM has very similar numbers; of the 14.7 million vehicles that GM sold in the United States last year, 645,000 were full-sized trucks. This just means that more credits will be needed from Tesla in order to subsidize these sales.
How these companies are competing
Despite their love of trucks, Both GM and Ford are taking steps to make their fleets more fuel-efficient. GM has the Chevy Volt and in 2013 will produce the all-electric Chevy Spark. The company has discontinued its hybrid truck line, but it does have 12 hybrid models overall. Ford has the Focus Electric and four other hybrid vehicles.
Ford's research and development expenses have hovered around $5 billion the past three years. For GM, research and development dropped 9% from 2011 to 2012, spending a total of $7.3 billion last year. By comparison, Tesla spent $273 million on research and development, which is 66% of its total revenue of $413 million last year. GM spent 4.7% of its revenues on R&D in 2012, while Ford spent 3.7% of its revenue on research and development last year.
The R&D numbers suggest
The gigantic spending numbers on R&D by both Ford and GM would suggest that they are working towards fuel efficiency. They need to, since these two companies comprise a 29.2% market share of vehicle sales in the United States. That doesn't mean that Tesla isn't going to continue to make money from its competitors on credits, however.
The Wall Street Journal has reported that the number of credits that states will require from manufacturers will jump in 2018. Tesla saw a whopping 1400% increase in the amount of money it brings in via carbon credits last year. The increasing regulatory environment surrounding automotive efficiency suggests that credit sales is going to continue to be a way for Tesla to be profitable into the future.
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Daniel Cawrey has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!