The en­tre­pre­neur says bil­lions in gov­ern­ment cash will speed a shift to re­new­able en­ergy.

Los Angeles Times - - BUSINESS - By Jerry Hirsch

Elon Musk says his com­pa­nies don’t need the es­ti­mated $4.9 bil­lion they en­joy in gov­ern­ment sup­port, but the money will help them move faster to trans­form the dirty busi­ness of en­ergy.

“If I cared about sub­si­dies, I would have en­tered the oil and gas in­dus­try,” said Musk, the chief ex­ec­u­tive of Tesla Mo­tors and SpaceX and the chair­man of So­larCity.

Musk’s re­marks came in re­sponse to a Times story de­tail­ing his cor­po­rate strat­egy of in­cu­bat­ing high­risk, high-tech com­pa­nies with gov­ern­ment money — es­ti­mat­ing the to­tal re­ceived or pledged so far at $4.9 bil­lion, a fig­ure Musk did not dis­pute. The story noted that his com­pa­nies have seen a big fi­nan­cial up­side from the in­cen­tives — help­ing them build bil­lions in stock value — while tax­pay­ers have shoul­dered the cost.

The com­pa­nies at first did not re­spond to re­peated re­quests for com­ment about sub­si­dies, but Musk on Mon­day granted The Times a wide-rang­ing in­ter­view on gov­ern­ment money for his com­pa­nies and their com­peti­tors; Tesla’s strug­gle to pro­duce an af­ford­able elec­tric car; and the rea­sons his com­pa­nies are not prof­itable.

The Times’ es­ti­mate of gov­ern­ment sup­port com­prises a va­ri­ety of in­cen­tives, in­clud­ing grants, tax breaks, fac­tory con­struc­tion, dis­counted loans and en­vi­ron­men­tal cred­its that Tesla can sell. It also in­cludes tax cred­its and re­bates to buy­ers of so­lar pan­els and elec­tric cars. The com­pa­nies have al­ready re­ceived large sums and will get more over time as they meet mile­stones in deals with cer­tain states.

“All three of th­ese busi­nesses get gov­ern­ment sub­si­dies and con­tracts, but none of them get much in the way of profit,” said Mark Spiegel, a hedge fund manager for Stan­phyl Cap­i­tal

Part­ners who is short­ing Tesla’s stock, a bet that pays off if Tesla shares fall. “He is go­ing into cut­ting-edge, fringe in­dus­tries.”

Musk said Tesla and So­larCity are tied to­gether by their mission to help the en­vi­ron­ment. Tesla’s elec­tric cars and So­larCity’s pan­els aim to ac­cel­er­ate the devel­op­ment of clean power, he said.

“Ul­ti­mately, hu­man­ity has no choice but to tran­si­tion to re­new­able en­ergy,” he said. “It is just a ques­tion of when and how much dam­age oc­curs be­tween now and that tran­si­tion.”

Gov­ern­ment money for Tesla and So­larCity helps speed that tran­si­tion, Musk said.

Musk called SpaceX an “in­sur­ance pol­icy” in the case of an en­vi­ron­men­tal catas­tro­phe. Its rock­ets, he said, will help col­o­nize new plan­ets.

“We should be­come a multi-planet species,” Musk said.

Musk said the sub­si­dies for Tesla and So­larCity are “a pit­tance” com­pared with gov­ern­ment sup­port of the oil and gas in­dus­try.

“What is re­mark­able about my com­pa­nies is that they have been suc­cess­ful de­spite hav­ing such a tiny in­cen­tive from the gov­ern­ment rel­a­tive to our com­peti­tors,” Musk told The Times.

A re­port late last year by the In­ter­na­tional En­ergy Agency said that the fos­sil fu­els in­dus­try col­lects $550 bil­lion a year in global gov­ern­ment sub­si­dies. That com­pares with about $120 bil­lion for re­new­able en­ergy, in­clud­ing wind, so­lar and bio­fu­els, ac­cord­ing to the Paris-based in­sti­tu­tion.

Those fig­ures don’t ac­count for the vast dif­fer­ence in size be­tween the two sec­tors.

But they also don’t in­clude the costs to so­ci­ety caused by pol­lu­tion from oil and gas, Musk said.

An­other mea­sure, the one cited by Musk, was re­leased by the In­ter­na­tional Mon­e­tary Fund last month and takes a wider view. The IMF said global en­ergy sub­si­dies amount to $5.3 tril­lion, in­clud­ing an es­ti­mated cost of the dam­age caused by en­ergy con­sump­tion.

SpaceX — which has been awarded bil­lions of dol­lars in gov­ern­ment rocket launch con­tracts, but rel­a­tively few sub­si­dies — also com­petes against com­pa­nies Musk says are sub­si­dized. United Launch Al­liance, a joint ven­ture of Boe­ing and Lock­heed Martin, re­ceives an an­nual pay­ment of about $1 bil­lion for op­er­a­tional costs, even if it doesn’t launch a rocket.

Rep­re­sen­ta­tives of United Launch Al­liance were not im­me­di­ately avail­able to com­ment late Mon­day

Tesla, Musk said, com­petes with a ma­ture auto in­dus­try that has seen mas­sive fed­eral bailouts for Gen­eral Mo­tors and Chrysler.

“Tesla and Ford are the only Amer­i­can auto com­pa­nies not to have gone bank­rupt,” Musk said.

So­larCity, he said, is in a nascent in­dus­try that must fight en­trenched oil and gas in­ter­ests that have myr­iad sub­si­dies.

Many of the in­cen­tives for buy­ers of elec­tric cars or so­lar pan­els are sched­uled to dis­ap­pear over the next sev­eral years. But Musk be­lieves that his com­pa­nies would be suc­cess­ful even with­out the gov­ern­ment sup­port.

“Tesla could be prof­itable right now if we went into low-growth mode and we just served pre­mium buy­ers,” he said. “The rea­son we are not prof­itable is be­cause we are mak­ing mas­sive in­vest­ments to cre­ate an af­ford­able long-range elec­tric car.”

Tesla’s only cur­rent car, the Model S sport sedan, typ­i­cally sells for about $100,000. Musk said the de- vel­op­ment of that high-end car, how­ever, is teach­ing Tesla en­gi­neers how to slash costs for fu­ture mod­els. Musk said Tesla is work­ing on a car that will cost $35,000.

Some an­a­lysts agree that the com­pa­nies are on a path to sus­tain­abil­ity.

“Tesla doesn’t need gov­ern­ment sub­si­dies to be suc­cess­ful,” said An­drea James, an an­a­lyst with Dougherty & Co. “They have helped cap­i­tal­ize the com­pany, but gross mar­gins are bet­ter than in­dus­try av­er­age, even with­out cred­its.”

Musk said Tesla should also get credit for the jobs it aims to cre­ate in ex­change for its eco­nomic devel­op­ment sub­si­dies, such as those for its Ne­vada bat­tery fac­tory. Although Tesla will ben­e­fit from up to $1.3 bil­lion in in­cen­tives over time, the fac­tory will cre­ate 6,000 jobs, the com­pany has said.

Ne­vada and Musk have of­ten cited a state-com­mis­sioned es­ti­mate of the eco­nomic ef­fect from the fac­tory at $100 bil­lion over two decades, but some econ­o­mists called that fig­ure deeply f lawed. It counted Tesla em­ploy­ees as if they would oth­er­wise have been un­em­ployed, for in­stance, and it made no al­lowance for in­creased gov­ern­ment spend­ing to serve the in­flux of thou­sands of lo­cal res­i­dents.

Musk’s com­pa­nies have plenty of com­pany in win­ning eco­nomic devel­op­ment in­cen­tives from state and re­gional gov­ern­ments.

Wash­ing­ton is pay­ing $8.7 bil­lion to Boe­ing to en­sure that the aerospace gi­ant con­tin­ues to build com­mer­cial jet­lin­ers in the state. Ore­gon gave Nike $2 bil­lion to ex­pand is sports ap­parel busi­ness. Michi­gan paid Chrysler $1.3 bil­lion to in­vest in its Ster­ling Heights fac­tory

Whether th­ese tax breaks are good for the com­mu­ni­ties pay­ing them is an­other ques­tion, said Richard Florida, direc­tor of the Martin Pros­per­ity In­sti­tute at the Uni­ver­sity of Toronto, and global re­search pro­fes­sor at New York Uni­ver­sity.

His re­search has found al­most no link be­tween eco­nomic devel­op­ment in­cen­tives and im­prove­ment in eco­nomic mea­sures such as per-capita wages or in­comes, the num­ber of col­lege grad­u­ates and highly ed­u­cated work­ers in a com­mu­nity, or a state’s un­em­ploy­ment rate.

The de­bate raises dif­fer­ent ques­tions for long-term in­vestors — can Musk’s com­pa­nies bring down their costs be­fore the gov­ern­ment cash runs out?

The ex­tent to which Tesla de­pends on in­cen­tives is a likely topic at Tesla’s an­nual share­holder meet­ing June 9, said Dan Dolev, an an­a­lyst at Jef­feries Eq­uity Re­search.

“It’s a de­bate be­tween the bulls and the bears,” he said. “The bears think Tesla is all about the sub­si­dies. The bulls think the sub­si­dies don’t mat­ter.”

Jerome Adamstein Los An­ge­les Times

ELON MUSK says the sub­si­dies for two of his com­pa­nies, Tesla and So­larCity, are “a pit­tance” com­pared with gov­ern­ment sup­port of the oil and gas in­dus­try.

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