Elon Musk pushed for a carbon tax at meeting with Trump

Elon Musk is reportedly using his access to President Donald Trump to push for a carbon tax.

The Tesla and SpaceX CEO said the Trump administration should consider a carbon tax at a White House meeting he attended Monday morning, a senior official at the White House told Bloomberg. The official said the proposal got little to no support from the other executives in attendance.

Tesla declined to comment for this article.

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What Did Elon Musk Promise?

Musk is a crony-capitalist of the worst ilk. He plays both side of the aisle and wraps it all up in fanciful oratory about colonizing Mars. American’s literally eat it up. Musk is so popular you would think he was the real Tony Stark. His latest dazzling promise was to send colonists to Mars by 2024 (for $200K a one-way ticket). No guarantees you will make it alive, and no, Musk won’t be joining you on the trip. Have fun being the first Martians.

The lofty interstellar goal of living on Mars is inspired by Star Wars and Star Trek dreams and comes with an out of this world price tag…about $10 billion. Rockets are expensive and Musk has plans to blow up a few more of them as he pretends to be colonizes the red planet. The last rocket that blew, the Falcon 9, cost several hundred million in lost cargo alone. Musk actually blames that on real Martian sabotage, but that’s another story.

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The Autopilot Fiasco Could Crash Tesla’s Master Plan

Author: Rob Tracinski

Source: Real Clear Future

Elon Musk just unveiled part two of his “master plan” for Tesla, but somehow instead of seeming ambitious and visionary, it seems a bit delusional. The most immediate and practical parts of the new plan consist of doing what others are also doing, like working on electric buses. But Musk also doubles down on his existing approach to self-driving technology, rather than retrenching and trying to fix it.

It is Musk’s standard approach to always play the part of the futuristic visionary, but it’s worth taking a look at how the problems with Autopilot, including the recent death of Tesla driver who was relying on it, could prevent Musk from moving on to the next steps of his master plan.

First, we have to understand Tesla’s overall position. It is a small automobile startup that has rocketed to an enormous market capitalization. Its stock price indicates that it’s worth about $33 billion, half as much as General Motors—at the moment a little more than half—despite the fact that it made about 50,000 cars last year, while GM makes about 10 million. Yet Elon Musk has been flogging even higher valuations, projecting that in ten years, Tesla could be worth as much as Apple, about ten times its current value and considerably larger than the other big automakers.

This hype is actually a necessary part of Tesla’s business model, because it’s what allows the company to raiseendless rounds of new capital to make up for the fact that they it is constantly losing money.

So it seems relevant to ask what Tesla could possibly be doing that justifies these enormous expectations for its present and future value?

Well, it’s not that Tesla makes a really good car, because by itself, that would make them just a niche, boutique semi-luxury car maker—equivalent to just one division of one of the big automakers, like GM’s Cadillac, which currently sells about five time as many cars as Tesla.

It’s not that Tesla is making an electric car, because many other automakers do that, too. The difference is that the others dabble in electric cars as a sideline to a much larger operation, knowing that if or when electric cars finally catch on with the public, they have the expertise to scale up production to much larger numbers.

And that’s the big advantage traditional automakers have over Tesla. They know how to make and deliver cars. They know how to build giant new factories and start producing millions of cars in a new model line. Tesla, by contrast, has disdained gaining that traditional expertise and is having big problems both in scaling up its automobile production, and in achieving the kind of quality control necessary to keep warranty and maintenance costs reasonable and to ensure that its cars have adequate resale value.

Elon Musk also wants to merge his auto company with his solar power company and battery storage units. But that doesn’t really give his auto division an advantage. Electricity is electricity, and you can plug any electric vehicle into your solar panels.

So what does that leave Tesla with?

Last year, the argument circulating in favor of Tesla was that its real competitive advantage was its lead in self-driving technology. Tesla has taken a different, more aggressive, more daring approach compared to other automakers. It based its system on standard camera technology rather than much more expensive laser-based lidar systems used by companies like Google. And it rolled out self-driving technology earlier and on a much larger scale. Instead of spending years testing the technology in a small fleet of experimental vehicles, Tesla provided it to their entire customer base, offering wireless automatic updates as they improved the software. In effect, they were doing a live beta test on America’s roadways, and the theory was that this would give them the advantage of Big Data. Being able to assess the results of autopilot working in tens of thousands of cars already on the road would allow them to improve their system faster than anyone else, beating everyone in the race to sell the first fully autonomous vehicle.

We can now see how that’s working out, and it’s not looking like such a smart plan. And the danger was known and predicted. When you take away some or most of the functions of driving but not all of them, you can’t just tell people to be ready to take over in an instant. The human brain doesn’t work that way; it requires new stimulation and when not constantly needed for a task, it will naturally tune itself out.

Which is precisely why nobody else took the same approach as Tesla. Every other automaker is used to dealing with a critical press and skeptical (if not outright hostile) regulators. They have learned to move cautiously and make safety a higher priority. In scorning that caution, it looks like Tesla has moved forward too fast.

That’s why the Autopilot problem is a really hard blow to Tesla. It calls into question the one area where they could expect to have a really strong competitive advantage. If it forces them to slow down on self-driving technology, or even start over from the drawing board—there have been sightings of a Tesla test car fitted with lidar—then they lose that advantage.

Meanwhile, Tesla also risks losing a lot of public sympathy. That’s important, because spectacularly good press—even a deferential press—is the biggest competitive advantage Tesla actually has. That, plus being able to cash in ongenerous government subsidies. But if the good press disappears, the subsidies may follow.

Lose that advantage, and eventually you have a small, money-losing niche automaker that can no longer keep itself alive by constantly pulling giant wads of cash out of the capital markets.

Elon Musk’s dilemma is that the very thing that makes Tesla seem so promising—the conceit of bringing a Silicon Valley start-up mentality to the staid world of heavy industry—is what just might destroy it. Musk employs a lot of standard Silicon Valley tropes. There are the insanely ambitious, visionary statements about how you’re going to transform the entire world, without a lot of detail on how you’re actually get from here to there. There are the exaggerated claims meant to impress investors and competitors and intimidate them into staying out of your market niche. There is the fast release of an early, buggy product in order to mark out the field as your own and show everyone you’re moving ahead faster. And there’s the combative, impatient dismissal of criticism and skepticism.

Hey, it worked for Steve Jobs, right? Then again, nobody ever died because their iPod crashed.

We all love a visionary billionaire who is rushing headlong into the future. (Indeed, that sort of thing is the basic remit of this website.) But sometimes the visionaries crash along the way, and the future ends up coming from somewhere that seems more sedate and cautious—which may get us there slower, but will do it more surely.

Which is to say that the big automakers’ master plans may end up being more important than Tesla’s for the future of autonomous vehicles. Continue reading “The Autopilot Fiasco Could Crash Tesla’s Master Plan”

How Tesla and Elon Musk Exaggeraged Safety Claims About Autopilot and Cars

The autonomous program isn’t meant for most types of driving, and the automaker compares its new luxury vehicles to older, cheaper cars.

After years of hype about its autonomous driving system, the facts are coming out about how safe Tesla and Autopilot really are.

Elon Musk’s company admits three of its vehicles have crashed while Autopilot was engaged, including one fatal accident in which Joshua Brown’s vehicle ran directly into a semi truck. In the wake of Brown’s death, Musk claimed Autopilot would save thousands of lives if it was deployed universally today. That bold claim is based on insufficient data and flawed comparisons between Tesla vehicles and all other cars that stack the deck in favor of the company.

 

Musk’s fame as a self-described “applied physicist” and serial entrepreneur have generated a seemingly inexhaustible public faith in his intelligence and leadership, but by promoting such a flawed statistical comparison of his firm’s controversial system he calls that confidence into question.

Autonomous drive technology was never mentioned in Musk’s ambitious 2006 “Top Secret Master Plan” for Tesla, and appears to have been tacked on to its world-changing mission in response to Google’s massively-hyped (but still not yet commercially deployed) self-driving car program. The reveal of Google’s radical, zero-human-control autonomous concept car in 2014 suddenly made Tesla’s cars-of-the-future look decidedly passé. And in contrast to Google, whose communication about autonomous drive focused entirely on the technology’s long-term safety benefits, Musk’s fixation on beating the competition to market looks more like a rush to protect Tesla’s high-tech image than the pure pursuit of safer roads. When Morgan Stanley in 2015 boosted Tesla’s stock price target by 90percent based on the projection that Musk would lead the auto industry into an“autonomous utopia,” it showed that even a perceived advantage in autonomous drive could help Tesla raise the huge amounts of capital it needs to continue growing.

 

Musk set about creating this perception in 2013, when he said that Autopilot would be capable of handling “90 percent of miles driven” by 2016. By mid-2014, Musk was promising investors that the system could handle all freeway driving, “from onramp to exit,” within 12 months of deployment. Tesla still has yet to make good on those bold claims, and competitors argue that Tesla’s relatively simple sensor hardware will never be capable of safely performing at such a high level of autonomy.

 

In the wake of Brown’s fatal crash, Tesla’s sensor supplier Mobileye clarified that its current technology is not designed to prevent a crash with laterally moving traffic like the turning semi truck Brown’s Model S struck. This week, Tesla revealed another Autopilot accident that saw a Model X swerve into wooden stakes going 55 mph in a canyon road.

Experts have understood Autopilot’s hardware limitations for some time, but Tesla owners and investors clearly believed that Autopilot was either an autonomous drive system, or something very close to it. Brown clearly believed that Autopilot was “autonomous” and described it as such in the description of a video that Musk shared on Twitter. So great was his apparent faith in Autopilot’s autonomous capabilities that he was reportedly watching a DVD at the time of his fatal crash. The extent of Autopilot’s true abilities, which wax and wane with each Over The Air software and firmware update Tesla pushes to the car, is hotly debated on Tesla forums where even Musk’s most devout acolytes waver between extolling its miraculous powers and blaming drivers for their inattentiveness depending on the circumstances.

This ambiguity and overconfidence in semi-autonomous systems is why Google refuses to develop anything less than fully autonomous systems which requires no driver input, a level of performance the search giant insists requires the extensive testing and expensive LIDAR sensors that Musk has often dismissed. It’s also why major automakers are developing driver alertness monitoring systems that they say will keep drivers in semi-autonomous vehicles from relying too heavily on their vehicle’s limited capabilities.

 

Rather than waiting for LIDAR costs to come down or building in a complex driver alertness monitoring system, Tesla has chosen to blame its faithful beta testers for any problems that pop up in testing. One Tesla owner describes this Catch-22, after being told that a crash was her fault because she turned off Autopilot by hitting the brakes: “So if you don’t brake, it’s your fault because you weren’t paying attention,” she told The Wall Street Journal. “And if you do brake, it’s your fault because you were driving.”

Confusion about Autopilot’s actual abilities has persisted even after the first fatal crash was reported, with Musk dismissing questions about the wreck by claiming that road fatalities would be cut in half “if the Tesla Autopilot was universally available.” The shaky statistical basis for these claims is just the latest in a long line of confusing and contradictory statements about Autopilot’s abilities.

 

Musk first claimed that Autopilot is twice as safe as a human driver before any reported crashes involving Autopilot, when he asserted that the average distance driven before an airbag deployment was twice as long for vehicles with Autopilot. This position ignores the fact that airbag deployments are not the same as fatalities or injuries. In fact, about 3,400 Americans (about 10 percent of total annual road deaths) die each year in frontal crashes where airbags are not deployed. Moreover, Musk was drawing on just 47 million miles driven in Tesla vehicles, or less than 0.00001 percent of the more than 3 trillion miles driven by Americans in 2014.

 

The fact that Autopilot is only supposed to be activated on divided freeways, without cross-traffic, cyclists, or pedestrians skews the statistics so far in its favor that any comparison with broader traffic safety statistics “has no meaning” according to Princeton automotive engineering professor Alan Kornhauser. And since Tesla has blamed drivers for wrecks in which they turned off Autopilot features by attempting to steer or brake just before a crash may also be limiting the number of incidents Tesla reports as involving Autopilot.

 

In Tesla’s response to the recent fatality, the company emphasized that Autopilot is responsible for fewer fatalities (one per 130 million miles driven) than the overall U.S. fleet average (one per 94 million miles driven). The accuracy of the latter figure has been called into question by Sam Abuelsamid, who points out that vehicle occupant deaths in the U.S. occur only once every 135.8 million miles, making the average U.S. fleet slightly safer on average than Tesla’s one death per 130 million miles.

 

In addition to being potentially inaccurate, the company’s statistics are also fundamentally lacking in comparability because they fail to account for significant differences in vehicle age and vehicle cost—two attributes that significantly affect vehicle safety.

 

Tesla compares its fleet of (on average) 2-year-old cars to the U.S. fleet and its average age of 11.5 years, almost as old as the automaker itself. Data from the Insurance Institute for Highway Safety show that even when vehicles from 2004 were new, they were much less safe than modern vehicles are. At the time of manufacture, these vehicles were responsible for 79 fatalities per million registered-vehicle years—by comparison, the 2011 model-year vehicles cut the fatality rate by nearly two-thirds, to just 28 per million vehicle years. This yawning gap in safety is even wider now, since the 2004 vehicles are now over a decade old, and have likely racked up over 100,000 miles. Tesla holds up this aging U.S. fleet (including motorcycles, which are 26 times as likely to be involved in a fatal accident as passenger vehicles) as a reasonable safety comparison for its fleet.

Tesla’s comparison also overlooks the dramatic cost difference between its luxury cars and an “average” vehicle on the road in the U.S. today.

The lowest-priced Model S starts at $66,000, about the same as an entry-level Audi A7, and climbs to around $135,000 with options, a similar price point as a fully-optioned Lexus LS 600h hybrid. The Model X starts around $83,000 and tops out around $145,000, a price range bracketed by the Porsche Cayenne SUV on the low end and a Porsche 911 Turbo on the high end. Vehicles in this price range are engineered to be some of the safest vehicles on the road, and many come with a panoply of advanced driver assistance safety functions, like Automatic Emergency Braking and Adaptive Cruise Control, making them the most direct competition for Tesla’s vehicles. Comparing a vehicle in this rarified segment to the overall market, where the average new vehicle costs less than $35,000, is beyond disingenuous.

 

Given Tesla’s sophistication and resources—and its strong incentive to make a robust case for the safety of its vehicles—it is surprising that they weren’t able to put together a more compelling comparison.

If federal safety regulators find that Musk’s public statements about Autopilot’s abilities similarly misleading, his bold “public beta test” could set back more than just his image and Tesla’s; it could raise suspicions that compromise the development of autonomous drive technology more broadly.

Continue reading “How Tesla and Elon Musk Exaggeraged Safety Claims About Autopilot and Cars”

Tesla uses Investors $7.4 Billion to bail out SolarCity

Summary

Tesla has proposed an exchange of shares that at the midpoint equates to paying $27.50/share for SCTY.

The market is telling us this deal is no good. Just how bad is this deal?

We crunch the numbers and show that, even in the most optimistic cash flow scenario for SCTY, Tesla should pay no more than $332 million, or $3/share for SolarCity.

Tesla (NASDAQ:TSLA) ended the week down 12% after proposing to buy SolarCity (NASDAQ:SCTY) for $2.5-$3 billion. SCTY ended the week well below the proposed offer price. The market is telling us this deal is no good. Some in the media called it a “bailout” for SCTY.

Just how bad is this deal? We crunch the numbers and show that, even in the most optimistic cash flow scenario for SCTY, Tesla should pay no more than $332 million, or $3/share for SolarCity, which is 89% below the midpoint of the proposed price range.

Tesla Would Be Acquiring A Highly Unprofitable Company

As noted when we put SolarCity in the Danger Zone in September 2015, the company’s revenue growth masks soaring profit losses.

From 2013-2015, SolarCity burned through -$6.5 billion in cumulative free cash flow. Over the last 12 months alone, SCTY’s free cash flow is -$3.6 billion. SolarCity’s revenue has grown from $164 million to $455 million over this same time, per Figure 1.

Figure 1: SolarCity’s Increasing Losses ($ in million)

Sources: New Constructs, LLC and company filings

SCTY’s economic earnings have declined from -$191 million in 2012 to -$1.2 billion over the last 12 months. Much of the losses have been covered by debt, but we think that source of capital may be drying up. The firm’s total debt, which includes off-balance sheet operating leases, has grown from $342 million in 2012 to $4 billion over the last 12 months.

Overpayment Is a Huge Misallocation of Capital

When we put Tesla in the Danger Zone in August 2013, we noted how overvalued the firm was. Now the company is using this overvalued share price as currency to overpay for SolarCity. Tesla has proposed an exchange of shares that at the midpoint equated to paying $27.50/share for SCTY. At $27.50/share, the value of the acquisition would total $7.7 billion ($2.7 billion equity, $5 billion net liabilities) to acquire -$685 million in after-tax profit (NOPAT). The return on invested capital (ROIC) earned on such a deal would equal -9%, well below Tesla’s 9.5% weighted average cost of capital (WACC). To justify paying $27.50/share, Tesla would need, at a minimum, SolarCity’s NOPAT (assuming no capex) to be $731 million or 9.5% of the $7.7 billion purchase price. At that level, the deal would earn Tesla a ROIC equal to its WACC, which is still a low hurdle, but the deal would not destroy value. For reference, the highest NOPAT earned by SolarCity was -$66 million in 2012.

This Deal Makes No Economic Sense for TSLA – A Big Transfer of Wealth to SCTY Investors

To get a sense of how much shareholder value Tesla is destroying, let’s look at some potential scenarios for how much Tesla could improve SolarCity’s business so that it generates some cash flow. First, we account for liabilities that investors may not be aware of that make SCTY more expensive than the accounting numbers would suggest.

  1. $836 million in minority interests (40% of market cap prior to acquisition announcement)
  2. $232 million in off-balance-sheet operating leases (11% of market cap prior to acquisition announcement)
  3. $181 million in outstanding employee stock options (9% of market cap prior to acquisition announcement)

Next, Figures 2 and 3 show the implied stock prices that Tesla should pay for SolarCity to achieve separate “goal ROICs.” Each implied price is based on different levels of revenue growth; 43%, 53% and 63%. These revenue growth rates are equal to or higher than the consensus estimates for 2017 (43%). In each of these scenarios, we conservatively assume that Tesla can grow SolarCity’s revenue and NOPAT without any capital spending beyond the purchase price.

Each scenario also assumes SolarCity immediately achieves 11% NOPAT margins, which is the average of First Solar (NASDAQ:FSLR), NRG Energy (NYSE:NRG), and Canadian Solar (NASDAQ:CSIQ). These competitors are involved in the manufacturing of solar panels, which help boost their margins, and represent a business SCTY is expanding into with the opening of its new manufacturing plant. For reference though, SCTY’s TTM NOPAT margin is -151%.

Figure 2: Implied Acquisition Prices For TSLA To Achieve 9.5% ROIC

Sources: New Constructs, LLC and company filings. $ values in millions except per share amounts. $ value destroyed equals the difference between implied price and midpoint of proposed purchase price plus net liabilities.

The first “goal ROIC” is 9.5%, which is equal to Tesla’s WACC. The big takeaway from Figure 2 is that even if SolarCity grows revenue by 63% compounded annually and achieves 11% NOPAT margins for the next five years, the most Tesla should pay to ensure an ROIC equal to WACC is $3/share, or 88% less than the current market value. We include this scenario as a best case scenario given that consensus estimates peg revenue growth at 47% in 2016 and 43% in 2017. Note that any acquisition that earned a 9.5% ROIC would be value neutral and not create shareholder value.

Figure 3: Implied Acquisition Prices For TSLA To Achieve 12% ROIC

Sources: New Constructs, LLC and company filings. $ values in millions except per share amounts. $ value destroyed equals the difference between implied price and midpoint of proposed purchase price plus net liabilities.

The next “goal ROIC” is 12%, which is the average ROIC of traditional auto manufacturers Ford (NYSE:F), General Motors (NYSE:GM), Toyota Motors (NYSE:TM) and Honda (NYSE:HMC). We chose this level of ROIC as a goal to which Tesla could aspire rather than the bottom-quintile -13% ROIC the company scored over the last 12 months. In Figure 3, we see that even in the most optimistic scenario, the implied value of SCTY’s stock price remains negative. The price remains negative because the present value of the future cash flows (even with the 11% profit margins and rocket growth in revenue) remains less than the company’s large liabilities.

The bottom line is that Tesla’s management should have some explaining to do to justify this acquisition at $27.50/share. Why should they pay so much for an unprofitable company?

At the same time, Tesla has operated as a highly unprofitable company for some time with little to no shareholder pushback. Perhaps bailing out Solar City will be the straw that breaks the backs of investors?

The Real Motivation Behind Acquiring SCTY?

Why is Elon Musk doing a deal that, from an economic perspective, looks to destroy so much value for TSLA investors?

When you see the overlap between the executives and board member between the two companies, the conflicts of interest loom large. Tesla purchasing SolarCity for a premium is an easy way to line the pockets of executives of SolarCity, many of who also are Tesla executives, e.g. Elon Musk.

We think it is more than a little unfortunate that Mr. Musk did not make his plans to buy SCTY more prominent during Tesla’s recent $1.4 billion equity sale. Perhaps investors would have been less interested in buying shares in a company that is not only losing money but also paying big premiums for other companies that are losing money. In the same vein, Mr. Musk should have disclosed the fatal crash of a Tesla Model S when it was on auto pilot.

Perhaps, Mr. Musk’s ego is getting the best of him. Major misallocations of capital and withholding of material information from investors do not suggest Mr. Musk has his inventors’ best interests in mind.

Conclusion: Proposed Deal Destroys Shareholder Value

Given the multiple potential conflicts of interests (Elon Musk being the largest shareholder in each company for starters), the completion of this deal is no sure bet. Many board members have already recused themselves from voting on the deal to avoid appearances of any conflict of interests.

Nevertheless, shareholders are not off the hook. The ultimate arbiter for this deal is the market. Investors need to hold management accountable for intelligent capital allocation, or else they can expect companies to continue to destroy shareholder value without feeling any accountability to their investors. Given the analysis above, we think it’s fair to ask both management teams how this deal is fair to their investors. The answer for SCTY investors appears easy. On the other hand, TSLA investors must ask why they should accept such an overpayment for a profitless company.

Continue reading “Tesla uses Investors $7.4 Billion to bail out SolarCity”