Sunday, March 30, 2014

The Revolution Will Proceed, With or Without Holman Jenkins Jr.


 Once again, Holman Jenkins Jr. is defending the bad guy, this time in “Tesla Seeks Loophole, Not a Revolution” (see here for our previous beef with the Wall Street Journal op-ed page writer).
 The “bad guy” Jenkins sticks up for in this weekend’s op-ed is not an individual, however, but rather the system of entrenched car dealers who have tried to shut out Tesla from selling its cars direct to consumers, with no “franchisee” in between, in various states around the country.
 What’s wrong with selling cars direct?  According to Jenkins, nothing, really.   He agrees the dealers are only “protecting their anticompetitive interests” by shutting down Tesla-owned outlets.
 But the way Jenkins sees it, Tesla CEO Elon Musk doesn’t really want to open up the system, he’s just “browbeating a few states into carving out friendly exceptions for Tesla.”
 What bugs him even more is that Tesla’s electric-car buyers benefit from federal and state tax rebates, although if Jenkins had ever spoken with an actual Tesla owner (which hasn’t seemed to cross his mind) he would discover that none of them bought the car for the tax credits: they bought it because it’s a great car that happens to recharge (and download software upgrades) while they sleep, no gasoline required.
 As often in Jenkins’ pieces, there is fuzzy logic to his knee-jerk defense of the bad guy: in this case, he uses the fact that GM has been selling direct in Brazil “for a decade” to make the case that what Tesla is doing is somehow less-than-ethical—but it’s not fathomable the way it’s written.
 Go ahead, try to figure out how this fits:
 His [Musk’s] bluster about a politically-favored gasoline oligopoly resisting its doom rings even hollower given that GM already has been practicing for a decade in Brazil the direct-sales approach that Mr. Musk preaches. Everybody wins: Buyers are willing to pay more for a car if they can get exactly the trim package they want rather than settling for the closest available facsimile on a dealer's lot. Chopped out of everyone's overhead is the enormous cost of maintaining a wide dealer inventory.
 But direct-sale may work better with an entry-level car like the Chevy Celta that GM sells in Brazil or a hobbyist item like Tesla peddles to dilettantes and early adopters.   Once Tesla makes its hoped-for transition from a niche business to a volume manufacturer, with mainstream customers who expect to make serious demands on the product, even Mr. Musk has suggested a franchise dealer network may be the way to go. If so, expect much of his current rhetoric to disappear down the memory hole though he's quite right on the substance of his critique of dealer-protection laws.
 If anything, the fact that GM sells direct in Brazil should be enough to satisfy both Jenkins and the American powers-that-be that selling cars direct will not end the world as we know it.   But Jenkins doesn’t see it that way. 
 He’s sees Tesla as “a hobbyist item,” a toy for rich people—hypocrites who depend on tax favors to show off on weekends.
 But the Tesla is no “hobby.”   In 2013, as Jenkins would know if he did a little research, the Tesla Model S outsold its luxury class peers sold by Mercedes, BMW, Lexus, Audi and Porsche.
 And Elon Musk is no hobbyist.
 As, again, Jenkins would know if he did a little research, it was Elon Musk who, at the same time he was gearing up Tesla (and paying off the government’s loan faster than his internal combustion engine counterparts), found the time to create SpaceX, which has already accomplished something that a) nobody thought possible and b) ought to appeal to Jenkins’ private sector instincts: he brought the cost of launching satellites down by more than half, and helped NASA resupply the space station in the process.
 And he did it faster than any government-subsidized, Washington lobby-dependent Lockheed or Raytheon could have done it. 
 The revolution will not be broadcast on the editorial pages of the Wall Street Journal if Holman Jenkins has anything to do with it.


Jeff Matthews
Author “Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”
(eBooks on Investing, 2013)    $4.99 Kindle Version at Amazon.com

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6 comments:

Mark B. Spiegel said...

>>...none of them bought the car for the tax credits: they bought it because it’s a great car...<<

Great, so how about if Musk offers to trade his subsidies (don't forget the 7% NJ state sales tax exemption!) for the free market principles he claims to be espousing.

By the way Jeff, it's interesting that you (of all people) lionize the guy considering some his "financial shenanigans." Did you know that...

1) Tesla claims to have achieved a 25% gross margin but is the ONLY car maker to include no engineering costs on its COGS line, and without this omission would have a gross margin in the teens?

2) Tesla only made its predicted (and self-defined) gross margin via a warranty cost reversal, despite knowing that it was about to have to retroactively install some very expensive titanium skid plates under its existing fleet of cars?

3) Musk re-Tweeted a factually wrong article claiming that used Model S's were selling for more than new ones despite the fact that he was simultaneously selling his own fleet of used loaners (in order to make the quarter) at substantial discounts of $1/mile plus 1%/month, and could have easily clicked into eBay and seen that transactions for one year-old cars were typically closing at 18% to 20% discounts vs. the original sticker even AFTER deducting the $7500 tax credit from those stickers?

In short, when it comes to the financial side of things Musk is an arrogant stock promoter who plays fast and loose with the numbers, and I guarantee you that one quarter when his back is up against the wall he'll cross a "bright line" rather than just a "grey" one.

Jeff Matthews said...

I don't know if I'd describe what's being referred to as "financial shenanigans"--what's referenced seems less goofy than the kind of EPS manipulation IBM does every day--but I do know Musk is one of the most refreshingly straightforward CEOs you'll ever hear.

Consider Musk's answer to the very first question on the most recent earnings call, from Adam Jonas. Any other CEO answering a question about a potential capital raise would have hidden behind "That's a board decision and yadda yadda." Not Musk.

Adam Jonas - Morgan Stanley, Research Division

Elon, the stock price and the results have been obviously performing very well lately. You've got some great investment opportunities and some growth opportunities ahead of you, not only in the auto business but also in the non-auto business and the battery business. So I'm just wondering, how are you thinking about being opportunistic and pulling in some fresh capital to help derisk the plan, plan for a force majeure, or to see some of these opportunities that you have.

Elon R. Musk

Yes, I think that's a good idea. I agree with that. I think that would be the smart move. We can talk more about that next week with -- and also discuss the Gigafactory plans. Unfortunately, I can't say anything [indiscernible] right now, except that I agree. I think your advice is good.

Mark B. Spiegel said...

>>Consider Musk's answer to the very first question on the most recent earnings call... Any other CEO answering a question about a potential capital raise would have hidden behind "That's a board decision and yadda yadda." Not Musk.<<

So he had already stated that just one week later he was going to announce the creation of a "gigafactory" costing billions of dollars (while having just $800 million in the bank) and you think he might have gotten away with ducking that question? If someone said "Hey Elon, how will you pay for the multi-billion dollar factory you're going to announce next week?", what do you think he would have said then? He KNEW he couldn't duck that question, and I don't think the guy is stupid-- just morally flexible.

I think Musk exhibits a kind of pseudo-candor, and if you disagree please explain why he has the right to define "gross margins" unlike any other company in the industry while simultaneously benchmarking himself to that industry in claiming that he's targeting the gross margins of Porsche? And explain his re-Tweet about the resale price of his cars, knowing full well it was nonsense.

And hey, you want to quote from the conference call? How about THIS kind of "candor" from a CEO and his CFO:

Musk: "And so our actual revenue number for Q1 is going to be less than it would be if we did try to sort of play all sorts of games with delivery..."

CFO: "we could have played games and tried to shift the mix and delivered more cars in the U.S. to hit a higher delivery number in Q1, but we decided to smooth in the flow of cars and our operational issues."

Do you want to give them "candor credit" for pointing out that they had thought about "playing games" but then decided not to? (They instead decided to play games with the warranty reserve while simultaneously engineering a very expensive skid-plate "non-recall".)

Anonymous said...

I don't have any opinion one way or another about Tesla, its cars or its financial statements. And I yield to few people in my scorn for Holman Jenkins, who is pretty dumb.

But he makes two perfectly valid points, though obscured by his detours into irrelevant, general denunciations of Tesla and Musk:

1. A law allowing Tesla, but no other car maker, to sell cars directly to consumers would give Tesla an unfair advantage over other car makers.

2. A $10,000 tax break for owners of Teslas but not owners of any other cars would give Tesla an unfair advantage over other car makers.

I don't know whether Musk really is seeking a special exemption just for Tesla or whether Tesla really does get a tax break not available to other car makers. Jenkins often has a shaky grasp of facts, so maybe not. But if he's right about these facts, then the two points above seem like ones you would normally agree with.

Anonymous said...

@anonymous

1) The law is due to the dealer's lobbying, if it was up to Tesla anyone would be free to sell direct, like any other product in America.

2) The $7500 tax break is for zero emission vehicles and applies to any electric car (e.g., Nissan Leaf). It's not Tesla's fault the other companies can't make an electric car that people want to buy.

sjgmoney said...

@Anonymous, how do you consider them "perfectly valid points" if you admittedly don't even know if they are true?

And they are not true actually, something a 2 second Google search would have shown you. I suggest you do a little reading, perhaps you (and Mr Spiegel) might enjoy the story of how some dealerships were registering electric cars in their name to get the tax credit and the reselling those new cars to the public. Niceeeee!