Here’s one way Elon Musk is ‘eating the lunch’ of Tesla’s competitors
Can you imagine getting paid by your competitors? That's precisely what's happening in the auto industry right now. Honda recently became another automaker joining Fiat Chrysler in pooling regulatory credits with Tesla in Europe. European regulations now require an average of 95 grams of CO2 emissions per kilometer per car that Honda (and many others) have failed to achieve.
Above: Honda e EV driving on a European highway, Elon Musk laughing in the background (Sources: Honda EU, Tesla)
In turn, Honda has to pay up. The beneficiary just happens to be Tesla. Tesla, it turns out, doesn't have to worry about this issue because they're an all-electric automaker and can "sell" credits to Honda and traditional automakers.
This unique situation with Honda has opened another revenue stream for Tesla that's potentially worth hundreds of millions of dollars stretching over the next few years. The financial details of the Honda-Tesla credits pooling have not been disclosed yet.
That said, Steven Mark Ryan from the YouTube channel Solving The Money Problem estimates a ballpark figure of $100M+ per year that Tesla can expect from Honda. The Fiat Chrysler deal is far bigger — the automaker has contributed $1.2 billion to Tesla profits this year.
Also, keep in mind, Honda is ceasing the sale of its diesel-powered vehicles in Europe in 2021 as they announced last year. This might lower the number of zero-emission vehicles (ZEV) credits Honda needs to buy each year until the automaker reaches its goal of a fully electric lineup in Europe — which, by the way, is set for 2025.
And, according to a Honda USA press-release from August, the Japanese auto giant is aiming to reduce its overall fleet CO2 emissions to 50% by the year 2050. It further states, "Electrification is one of the critical technologies we are deploying to further reduce greenhouse gas emissions."
Steve Westly, an early Tesla investor and former board member of the company, told CNBC: "Tesla is eating their competitors’ lunch, and they’re making them pay for it. That’s a pretty cool trick."
Above: Tesla shares can go higher if you believe its more than just a car company, says former Tesla board member (YouTube: CNBC).
Eric Rosenbaum reports in CNBC, "Tesla, unlike traditional automakers, risked it all on making and selling EVs. Meanwhile, traditional car companies are required to pay up, by other means, for the choice of delaying their transition to battery electric [vehicles]."
“The last thing a company wants to do is pay their competitor to eat their own lunch,” said Simon Mui, deputy director of the clean vehicles & fuels group at the Natural Resources Defense Council. "They won’t advertise this, but you can bet that every company, whether GM or Toyota or FCA, does not want to pay Tesla.”
"All of these automakers are facing similar standards in the other largest markets, like China and Europe... Automakers are finding themselves in make-or-break moment, either shift to innovate or become irrelevant. That’s why we see the success of Tesla in market value,” the NRDC analyst said.
“These standards are not going down, air pollution is not reduced as a problem and governments will be ratcheting up standards over time, so one or two EV products will not be enough. They will need to have a wholesale portfolio shift in each and every product line,” Mui said.
Garrett Nelson a senior equity analyst at CFRA Research does not begrudge Tesla's success in this area. "Other manufacturers don’t have the EV sales Tesla has right now," he explains.
“Analysts complain and the bears question the earnings quality because so much is driven by RECs,” said CFRA’s Nelson. “We view the credits market as operating efficiently and it is separate issue from the lack of predictability in forecasting earnings. Tesla takes all the risk and has many other hurdles to overcome and high fixed costs and it is a capital-intensive business with high barriers to entry,” he said.
“The big boys, the Fords and GMs, these companies are still kind of far from really getting a good high-selling electric vehicle on the market," Benjamin Leard, an environmental economist and fellow at Resources for the Future told CNBC. "They are far behind Tesla introducing popular, affordable electric vehicles... so Tesla and other companies introducing EVs will really be cashing in" for the foreseeable future.
If legacy automakers continue to drag their feet, Leard says, “They will have to go to Tesla, and say ‘we really need those credits,’ and that will bid up prices.”