Tesla – Exploiting Cognitive Deficiencies

Competition Is Heating Up

The free market never leaves bags of money lying around and waiting to be picked up. In fact, if you ever find this, it is almost certainly the result of government intervention. Remember the £1 billion that George Soros made betting against the British Pound in 1992? That was a direct transfer from the UK Treasury to Soros. Absent any barriers to entry, these types of extraordinary profit opportunities rapidly draw so much investment that the “arbitrage” disappears. Likewise Tesla’s $30 billion stock valuation.


Tesla’s newest car, Model X, which is a bit reminiscent of the likewise very cool, but ultimately doomed de Lorean. The biggest news with respect to this car is however the amount of government subsidies in the form of tax breaks it will attract. As the LA Times reports, without a hint of irony:

“Take heart, prospective Tesla buyers alarmed by the probable $100,000-plus price tag for the company’s new Model X: You may qualify for a $25,000 tax break. Tesla has confirmed reports that the falcon-winged all-electric SUV, because of its gross vehicular weight, may qualify for a federal tax break designed for heavy equipment.  The tax break was originally intended to encourage farmers to invest in their businesses by spending more freely on equipment.

This particular tax break is only available to businesses (for a detailed account of the situation, see this article by Paulo Santos), but to this assorted “green energy” subsidies have to be added as well as the paper reminds us:

The $25,000 windfall, available only to buyers who own businesses and are making the automobile purchase as a business investment, would be in addition to other official incentives. Tesla’s Model X, as a non-polluting, zero-emissions, battery-electric vehicle, also qualifies for a $7,500 federal tax deduction and a $2,500 California state rebate. Tesla is particularly adept at using subsidies to market its cars, noting that the tax credits and state rebates help reduce the cost of ownership.” 

This “reduces the cost of ownership” for Tesla buyers, but someone still has to pay – ultimately, all other taxpayers are providing an indirect contribution to every sale the company makes (of course the same applies to EVs made by other manufacturers). PT

The incumbent automobile manufacturers are now entering the EV market in force. VW/Audi. Mercedes Benz.  BMW.  Nissan.  Honda.  KIA.  Porsche.  Like turkeys welcoming Thanksgiving, the Tesla supporters applaud this, saying that it is an “endorsement” of the Tesla approach that can only help the company. One proponent recently entitled an article “The Auto Industry Just Admitted That Tesla is Right.” I am sure that this will be a great comfort when these competitors start eating into the growth and profitability that is the basis of Tesla’s extraordinary stock valuation.

The massive entry of the incumbents proves two things. The first is that there are no barriers to entry – no “economic moat,” to use the popular phrase – that will give Tesla the competition-lite growth and profitability needed to justify its stock price. And the second is that the free run that Tesla has enjoyed so far is purely because the incumbents have been happy for Tesla to pioneer this market, knowing that the pioneers are often the ones with the arrows in their backs. Now that Tesla has been proven to be “right,” they can use their myriad scale and other advantages to eat Tesla’s lunch.

The PC crowd will never get this. Implicitly or explicitly, they assume that all businessmen are short-sighted, greedy dolts sitting around and waiting to be disrupted by some Silicon Valley type who says “cool” a lot, never wears a tie and votes solidly Democratic. They don’t realize that, for example, the automobile industry is one of the most internationalized, dynamic and competitive industries in the world. And it is also one of the most high tech, both in its products and the way it makes them.

Little known fact: automotive giants Volkswagen and Toyota are in the top-10 companies in the world in terms of R&D expenditures, with VW leading the pack at $13.5 billion per year. Much of this is spent exploring alternative drive train technologies, such as EV, cleaner and more efficient internal combustion engines (“ICE”), hybrids, fuel cells, etc. If the PC crowd backing Tesla thinks that the incumbents are sitting around waiting to be disrupted, then they should think again.