Tread Carefully When Investing in the ‘Unseen’

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If you hone your focus sharply enough, you’ll eventually see the “unseen.” It’s a concept the brilliant French economist Frederic Bastiat explained 150 years ago.  That is, you’ll see the consequences – intended and otherwise – and costs that escape the unfocused eye.
The unfocused eye sees only the immediate non-emissions of the electric car. The focused eye sees the behind-the-curtains costs – crony capitalism, political largess, embedded emissions, and folly.unseen
The focused eye reveals Tesla Motors (NASDAQ: TSLA) to be a unicorn (as is the entire electric-car market). It’s not a market-based company, because it cannot exist without political uplift and wishful thinking. There’s a lot of Bastiat’s unseen in Tesla that needs to be shown.
You may know that Tesla is constructing a massive lithium-ion battery factor, labeled Gigafactory, in the Nevada desert. You may not know that Nevada wasn’t simply a state name drawn from a hat.
Tesla negotiated a sweetheart of deal that could see the company take in nearly $1.3 billion in tax benefits from the state. Assuming Tesla meets its obligations, it will enjoy 20 years free from sales tax and 10 years free from property tax. It will also benefit from millions of dollars in additional tax credits.
More political uplift for Tesla resides in the federal $7,500 tax credit available on every electric car sale. You buy an electric car, you get a $7,500 write-off against your tax bill (not a deduction, mind you, but an actual dollar-for-dollar reduction).
Despite its politically imbued advantages, Tesla still loses money. In fact, Tesla seems to have adopted the confused merchant’s mantra: “We lose money on every sale, but we make up for it in volume.” Tesla car sales continue to rise, but so do operating losses. In 2011, Tesla reported $251 million in operating losses; last year it reported $717 million in operating losses.
Yes, but it’s all worthwhile if electric cars make for a cleaner environment, right? It’s a nice cozy meme, to be sure. Unfortunately, that’s all it is.
Electric cars are not zero-emission cars. The Copenhagen Consensus Center, an environmental assessment think tank, crunched the numbers:

  • The extensive energy required to mine lithium means that an electric car is responsible for 25,000 pounds of carbon dioxide emissions when it rolls off the assembly line. A conventional car is responsible for 16,000 pounds of CO2 emissions.
  • The most popular electric car, the Nissan Leaf, produces 31 metric tons of CO2 over a 90,000 mile run. The emissions are attributed to the Leaf’s production, the electricity produced to power it, and its ultimate scrapping. A comparable Mercedes A160 CDI emits just three more metric tons times over the same lifetime.
  • Looking at top-shelf models, a Tesla Model S produces 44 metric tons of CO2, given the parameters applied to the Leaf. A comparable Audi A7 Quattro produces 49 metric tons.
  • In the European Trading System, it costs $7 to cut one ton of CO2. Therefore, the entire climate benefit of an electric car is about $35, yet the U.S. government provides U.S. car buyers with a $7,500 subsidy. How’s that for aligning costs with benefits?

Tesla’s business of battery-powered cars (and even batteries in general) can be traced back to the turn of the century. No, not the turn of the 20th century to the 21st century, the turn of the 19th century to the 20th century. In 1911, The New York Times predicted success for the nascent electric car, noting that “electric cars are ideal, for they are cleaner, quieter, and much more economical than gasoline-powered cars.”
As usual, the Times got it wrong. The same problems that existed in 1911 persists to this day: the power plant remains expensive and inefficient relative to the internal-combustion engine. Lithium ion batteries don’t adhere to Moore’s Law.
Replacing the battery pack on the Model S will run over $30,000. And if the battery pack lasts over 100,000 miles, as Tesla claims, the efficiency of the pack on mile 100,001 will be far inferior to that at mile one. Buy a Tesla, get 300 miles per charge on day one; by day 1,500 will get you far fewer miles per charge. All batteries continually lose their ability to hold power over time.
A brand new Honda 2.4L DOHC I-4 engine, in contrast, gets over 30 miles to the gallon and will easily last to 200,000 miles with little lost of efficiency if properly maintained. To replace Honda’s clean-burning 185-HP gem (highly unlikely) will cost around $8,000.
That said, as long as investors and politicians believe in unicorns, and have no compunction about funding monuments to them, Tesla Motors will exist. The risk is that one day they will stop believing. No government can hold back economic reality in perpetuity.
Last September, Denmark’s government pulled the plug on electric-car tax breaks. This means the cost of a Tesla Model S is set to rise to $270,000 from $98,000. Last time I looked, demand curves were downward sloping. That doesn’t bode well for Tesla car sales in Denmark.
But as another economist, John Maynard Keynes, never said, “Markets can remain irrational longer than you can remain solvent.” The promise of tomorrow has strung the electric car along for the past 100 years. Tesla, therefore, is no slam-dunk short, and it even might be a speculative trade, but because the promise of tomorrow never arrives, that’s all it will be.
(For spectacular companies that have stood the test of time, click here.)

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