Why the electric vehicle ‘cost parity’ conversation doesn’t make any sense
GM CEO Mary Barra was recently asked about profitability targets for the company’s electric vehicle line and said that it’s on track for EV profitability in 2025.
But, frankly, the whole conversation about EV profitability and cost parity doesn’t make a lot of sense, and here’s why.
Barra is at the Aspen Ideas Festival this week, and conversations have predictably included lots of talk about electric vehicles. She sat down with Andrew Ross Sorkin from CNBC for an interview about the company’s EV transition, and the question of EV profitability came up, as it often does.
Barra gave the kind of answer we’ve heard before – EV profitability isn’t here but is coming soon, and affordable vehicles are going to be the hardest ones to make profitably.
Here’s the full exchange:
Sorkin: You’ve also talked about the challenges of producing cheaper vehicles, so $30,000 to $40,000 vehicles, and doing that profitably, that’s gonna take ’til when now?
Barra: Well a lot of the vehicles that we’re putting out now as we get to scale, because we’ve brought battery manufacturing inside, we have plans and we’ve said – I don’t talk about individual product line profitability – but we’re on track for 2025 to be in that low mid single digits, and that’s before IRA, and then we’ve said later in the decade we’re gonna be at parity with ICE. So a lot of it is going to rely on continuing to improve battery chemistry and getting cost of out of the battery, ’cause that’s where the cost opportunity is.
Sorkin: Is the idea that there will be vehicles that you will sell, effectively unprofitably, to “seed the market,” if you will?
Barra: I would say we’re going to where we know the consumer has to be to get to the volume, and we’re gonna drive to profitability as quickly as possible, and then when you put things like IRA on top of it, along with the software services, I think we’re gonna see profitability even in those affordable vehicles more quickly than anyone’s expecting.
The most crucial statement here is that Barra reiterated that the company’s EVs will be profitable in 2025, and she specified here that this is without accounting for Inflation Reduction Act tax credits. IRA includes significant credits both for consumers and manufacturers.
Barra’s comments didn’t split out individual product lines, so perhaps she was talking about overall profitability across all of GM’s EV projects. This is necessarily going to be low at the moment because GM is currently spending a lot of money building manufacturing for its Ultium platform, which hasn’t produced many EVs yet. Product lines usually don’t become profitable until they’ve been manufactured for a while, as companies recoup initial investments and get costs down over time.
But what about the Bolt EV? It’s been in production for a long time now – to the point that it’s about to be discontinued. Has GM really not made any money on any of the units it has sold? Could it have done so if it had produced the car in higher volume or hadn’t dealt with an extended recall (which LG ended up paying for anyway)?
But this whole conversation is strange and has been for a long time for several reasons.
A short history of “cost parity” in EVs
There is a long history of car companies saying they can’t produce EVs profitably. One of the earliest was Fiat’s late CEO Sergio Marchionne, who famously told customers not to buy his company’s Fiat 500e because Fiat supposedly lost $14k per unit (among a lot of other bonkers EV-related comments).
Currently, most manufacturers will tell you that they are not making a direct profit on their electric vehicle lines. The most notable exception is Tesla, a company that’s focused entirely on making electric cars and, at times, has had higher margins than anyone in the overall auto industry. Those margins have now dropped as Tesla has dropped prices, starting a price war that is threatening other automakers due to Tesla’s significant apparent cost advantage.
So it is definitely strange to have every company saying that EVs are less profitable, except for the one most profitable company. That company also happens to be the one that has taken EVs the most seriously and for the longest period of time.
And, importantly, Tesla is one of few companies that doesn’t have an interest in making the public think that EVs are inferior in some way or otherwise pushing back the timeline for EV adoption. Because Tesla’s current product mix isn’t heavily fossil-based like the rest of the industry is.
But lest we think Tesla is the only exception that proves the rule, it’s not the only company that has generated a profit on EVs. The unassuming Nissan Leaf, which is currently and has historically been one of the lowest-price EVs (and lowest-price vehicles period – after state & federal credits, many buyers can get one for under 20k), started making a profit in 2014. At the time, more Leafs had been sold than any other EV worldwide, which remained the case until the Model 3 eclipsed it in 2020.
So we know that EVs can produce profit – even a lot of profit – and we know that this has been the case for a long time, even for low-cost EVs.
What does this mean for consumers?
The question Barra answered assumed that cost parity would be hard to meet, particularly in “cheaper vehicles” in the $30-40k range.
But for consumers, the cheapest vehicles have already reached price parity in many cases.
Currently, and for the better part of a year, the Chevy Bolt has been a screaming deal with its $26k base price. Then you can apply the $7,500 federal tax credit and potentially state and regional credits or other various discounts, bringing it down to a price competitive with the cheapest new vehicles in America.
And that’s not just some bare-bones get-you-there car like the universally-panned Mitsubishi Mirage, but a vehicle good enough to earn Electrek’s Vehicle of the Year award despite being at the end of its lifecycle. So you’re not just getting a low-price car, but a good car – meaning the quality-for-price metric is through the roof.
While the Bolt is being discontinued, the Leaf is still around, is still cheap, and is also a good car. The package is a little worse on value than the current Bolt is, but there will still be a solid EV in the $20k range post-credit, which is about as low as you can expect new gas cars to go.
This holds true as you go up in price, with EVs standing out in terms of value against price competitors. The Tesla Model 3 is a phenomenal car and starts at around $30k after credits. Meanwhile, its cousin, the Tesla Model Y, is currently the best-selling vehicle on Earth because of its value proposition against the competition.
And throughout all of this, we’ve only talked about the purchase price. Running costs, both fuel and maintenance, tend to be cheaper on EVs and, as such, make the total cost parity calculation even more beneficial.
And this all has been the case for some time as well. There’s been no shortage of great EV lease deals in the past, with periods where EVs could be leased at $100-200 a month with little to nothing down (after taking into account state rebates). Admittedly, many of those have dried up recently due to excessively high EV demand.
So it doesn’t make a lot of sense to say that EVs can’t reach price parity for consumers until some time in the future because it’s clear that they’re already there, even in low-price segments.
How this conversation damages EV adoption
But really, is this even a productive conversation to be having?
The constant discussion of EV profitability and “cost parity” tends to migrate out of the purely financial press and make its way into consumer circles. And through the stock market, retirement plans, and so on, some consumers are concerned about a company’s ability to make a car profitably and don’t want that company to make cars with less profit, even if that could mean lower costs for them as a consumer.
So by stating that EVs are unprofitable, companies throw cold water on the idea of EVs and make everyone feel like the “proper time” to “switch” to EVs is some time in the future rather than now. These companies that are so heavily invested in the status quo want consumers to keep buying the models they offer – which are majority-ICE for nearly every automaker out there.
The conversation itself is harmful to EV adoption, at least in the way it is commonly presented – that this timeline is coming “in the future” rather than now (that said, Barra did say that this would come “sooner than anyone’s expecting,” which is a nice improvement in messaging).
The fact is: it doesn’t matter that much if an individual car, line, or effort is profitable, depending on how it fits into the company’s strategy. And companies know this because they keep making these EVs even though they claim they’re not profitable.
Why would companies do “unprofitable” things?
Companies exist to make a profit above all. But in the course of their existence, this doesn’t mean that every decision a company makes must drive a profit immediately.
Lower-cost vehicles, regardless of powertrain, tend to have lower profit margins. These are made up for by high volume and the expectation that the company may build brand loyalty amongst customers who, as they proceed in life, may end up in a position to purchase higher-priced, higher-margin vehicles.
And as mentioned in the Barra interview, everyone sees that the market is turning towards EVs, and companies are trying to establish a presence in the EV market, which is growing rapidly while gas car sales plateau. This means that companies may consider current EVs a “loss leader” to attempt to establish market share, especially if upfront investments in future capacity – growth of the company’s EV line – are accounted for as “losses” in the present due to the high upfront costs required.
Additionally, government requirements around the world are getting stricter in terms of required EV share. Companies simply have to sell a certain amount of EVs, so it doesn’t matter if they make a profit on any individual vehicle because if they don’t do it, they will be punished. The cost of that punishment (or the cost of credit-trading schemes) is greater than whatever they claim they’re losing on EVs.
This is why, for example, Fiat still sold the 500e in 2014 despite claiming it lost money – because selling the car meant it could continue selling in California, which made Fiat more profit than not doing so.
Companies and governments have different goals
One could call this “picking winners and losers,” but that is, again, a narrow view of the situation. Companies and governments (should) have different goals. Companies are in it for profit, but governments ought to be in it to enhance the public good. And these goals can be in opposition to one another.
To a company, the costs are whatever dollars it has to spend on materials, labor, distribution, etc. But other costs are ignored by a company, and instead absorbed by the rest of society. There is a long history of doing business by externalizing costs and privatizing profits – see the parable of the tragedy of the commons.
With cars, this means exhaust pollution, which is the largest contributor to smog that harms human health. The air is a common resource that all of us need, and the pollution put into that air by automotive and oil company products is responsible for enormous health and environmental costs (e.g., wildfires due to climate change, which are currently devastating much of North America, causing lung problems and property damage). Those costs are largely not borne by the polluters that are largely responsible for them, but instead borne by all of us on the back end.
It costs manufacturers more money to install pollution control equipment and engineer more efficient vehicles than it would if they didn’t have to do either of those things. Companies lobby fiercely against any requirement that might save you money – even if it costs them little to implement – because they only care about their own costs, not society’s.
But government at least should be different than that. Governments ought to account for these additional costs to society and tell polluters they need to pay those costs upfront.
Until they do, any discussion of “cost parity” is incomplete. If each EV saves $10,000 for society in health costs alone, then it is in the public interest to have more of them and fewer of the vehicles that are choking us. And if we spend all our time focusing on the cost of EV subsidies and not the much higher costs of fossil fuel subsidies, then we aren’t truly calculating which of these technologies has higher actual costs.
For these reasons, I believe we need to retire (or at least reframe) the whole conversation about “cost parity” for EVs. Consumers can already see parity in low-cost EVs and quality-for-price across various price ranges. Companies can already see it, assuming they’re taking their EV lines seriously and not just trying to throw cold water on the whole idea of EVs in the first place. And society can already see it, given that EVs are already making the air cleaner, resulting in lower societal costs that will compound in the future.
So why do we keep talking about some incredibly narrow definition of cost parity and perpetually say that it’s coming sometime in the future when, by so many meaningful metrics, we’re already here, and everybody in the industry already knows why they have to make EVs anyway? It just doesn’t make any sense.
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It looks like retail giant Target has been reading our posts about the Chevy Brightdrop being the best deal in the commercial EV business, because the company has picked GM’s electric box van to pilot a new, dedicated last-mile delivery service in Dallas-Fort Worth.
The new pilot program will see 50 new Chevy Brightdrop vans deployed in a collaboration between Target, Circuit EV Solutions, and a last-mile logistics startup called the Frontdoor Collective that relies on its franchise owners to make its deliveries instead of outsourcing that delivery work to independent contract carriers gig workers.
“We’re building the infrastructure backbone that makes high-volume electric delivery possible nationwide,” said Adam Greenberg, CEO at Circuit EV Solutions. “By ensuring fleets have the charging support they need, we’re removing the final barrier to true EV scalability in last-mile logistics.”
Circuit EV Solutions provides the backbone of the highly-visible Target collaboration, delivering the fleet management and charging software to monitors vehicle health, schedule depot charging, and ensure that every Chevy Brightdrop van leaves the hub with an optimally full battery and a fully optimized delivery route, eliminating range anxiety among the vans’ operators.
Chevy Brightdrop
Chevrolet Brightbrop electric vans were designed with last-mile delivery efforts in mind, and offers a best-in-class 272 miles of combined range, large, squared-off cargo hold for maximum capacity, and lower maintenance and fuel costs than the ICE-powered competition.
For independent delivery service providers, that’s a killer combination that can help translate to higher margins and more time back in their busy days to spend with their families – which is something I think we can all get behind.
Click here to find out if your business can take advantage of special tax incentives with the purchase of a new electric van, and click the link, below, to check out a new Brightdrop van near you.
SOURCE | IMAGES: Circuit EV, via Freightwaves.
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Tesla, a company that prides itself on not advertising, is in the midst of a serious marketing effort. In doing so it’s exploiting employees, attacking shareholders, and retaining outside strategy firms to help it advertise.
It’s running these ads not to boost its falling sales, but rather to advocate for another unprecedented award for its CEO, which would keep the company stuck with him for years even as earnings drop precipitously under his direction.
In September, Tesla’s board proposed a stock award worth up to $1 trillion for CEO Elon Musk. It includes several milestones regarding Tesla stock and product performance, each of which unlocks tens of billions of dollars for Musk.
It’s the largest award proposed for any CEO of any company by multiple orders of magnitude – with previous proposed Musk awards holding the second and third place positions as well. The proposal will be voted on by TSLA shareholders at Tesla’s shareholder meeting on November 6.
Previously, Tesla’s board has attempted to propose smaller, but still absurd, stock awards. A previous proposal to give Musk a ~$55 billion pay package was ruled illegal after the board misled shareholders and was found to be too closely tied to Musk. Tesla then put that same pay package up to another vote, using the same dishonest tactics, where it passed again.
Unsurprisingly, given that the same Elon-tied board engaged in the same misleading behavior as it had before, the pay package was again voided, saving Tesla shareholders $55 billion. That award is now in court again, with another decision soon to come.
The decisions were made by Delaware’s Court of Chancery, a famously pro-corporate court, and this resulted in Musk recommending a knee-jerk move of Tesla’s incorporation to Texas, a state with little established corporate law but where Musk thought he could exercise greater control over shareholders.
But the story has continued. Tesla’s board moved in August to give Musk an “Interim Award” worth ~$26 billion, which would still be the largest pay package for any CEO in history. It’s also more than the total profit Tesla has made over its lifetime (Tesla’s quarterly profits have been dropping for the last couple years, under Musk’s leadership).
Despite all of this, and Musk currently holding position as the richest man in the world, the company he runs has been engaging in underhanded marketing efforts to push its new proposed trillion-dollar reward, which would have tangible harms for shareholders and for the company they’re invested in.
Tesla ‘doesn’t do ads,’ but that’s changing for Musk’s $1T
Tesla has long prided itself on not relying on traditional paid advertisements. Instead, it has relied on word of mouth marketing, social media posts, and press coverage of the company’s ambitious promises in order to stay forefront in the public eye. Musk has stated that he “hates advertising” and that running ads is the equivalent of lying (even as he runs ads with lies in them).
But that’s changing. Tesla hired then quickly fired an ad team, but continues to do social media marketing largely on Twitter, the platform that Musk overpaid billions of dollars for and then turned into a white supremacist haven, causing advertisers to flee (who Musk told to leave and then sued to try to force them back).
After chasing away advertisers, Musk resorted to a common tactic of his – channeling money from one of his public companies into one of his private companies, in the form of paid Tesla advertisements.
Most recently, those advertisements have been focused not on marketing Tesla’s products to twitter users, but rather on marketing Musk’s stock award.
In fact, Tesla even recently broke the last bastion of its reluctance towards certain marketing efforts, and started running paid TV ads, but it wasn’t to market the company’s products, rather just to market Musk’s $1 trillion pay package.
Running any ads in the first place for a shareholder vote seems odd – shareholder proposals usually do come alongside a board recommendation, and that’s usually enough to convince shareholders to vote alongside the board (at least, if the board has proven itself to be working in the best interests of the company, which may not apply here).
But it’s exceptionally rare to see a company undertake a whole advertising campaign, with produced videos, paid ads, and an outside strategy firm to help, especially when those ads don’t just target shareholders, but are on platforms for the general public (though this is perhaps a recognition that a huge percentage of Americans own TSLA stock via their retirement plans, whether they purchased the stock themselves or not).
And the ads are… questionable.
Tesla’s marketing effort has been exploitive to say the least
Just about every day, Tesla has filed a new document with the Securities and Exchange Commission detailing another solicitation it has made regarding the upcoming shareholder vote.
Often these are just tweets by the company or by Musk related to the shareholder vote. Musk has made several statements supporting the vote to his millions of followers on the social media app that he purchased so that he could control narratives and quash free speech on it.
Tesla has also purchased several ads on Google, moving beyond just Musk-owned properties.
But these solicitations also include produced videos by the company telling shareholders to vote on it. Two of these ads include testimonials by Tesla employees, stating how Tesla stock improved their lives.
In the videos, the two Tesla employees state that they wouldn’t have been able to own a home if it weren’t for Tesla stock.
One, Kiyoko, invokes her dead father, who would have been proud to see her owning a home.
Another employee, Sarah, invokes her daughter, who couldn’t have had a quinceañera if not for Tesla stock (notably, Musk is also the largest individual funder of a group that is racially profiling Mexican-Americans, staking out high school graduations to break up families and putting pressure on local businesses, including quinceañera dress-sellers).
Put aside for a moment the nightmare scenario where housing is so unaffordable that workers need to feel lucky to be able to afford a place to live after having held a job for 12 years (and apparently are unable afford that house through salary alone, instead needing to rely on a highly overvalued stock to get them there), these emotional statements seem designed to distract from the rational case against this stock award, and to pull on heart strings instead.
They also conflate stock options for the employees that keep Tesla running, and who are counting on those options to help pay for their housing, with an unprecedented stock award for its part-time CEO so he can, uh… bribe more political candidates?
And if you’re wondering how giving the world’s richest man a trillion dollars will help Kiyoko afford a home or Sarah afford a quinceañera, you’re not wrong to wonder. These ought to be two different concepts, but because of the nefarious structure of the shareholder vote, they’re not.
Tesla stock helped employees. Now it can’t, since Elon took it all
One of the questions being asked is whether or not to refill Tesla’s “general share reserve” of shares set aside to be granted to employees as compensation.
Proposal 3 not only fills the general share reserve with 60 million shares as compensation for Tesla’s current and future employees (of which the company currently numbers ~120,000 strong), but also fills a “special share reserve” with nearly 208 million shares for one single part-time employee, Elon Musk, who spends most of his time working for companies other than Tesla (and whose interests can be directly opposed to Tesla’s). The board would be able to give these shares, currently worth around $91 billion, to Musk at their discretion without further shareholder approval.
This is one of many issues brought up by several pension funds who named their concerns with the shareholder proposals. Normally, it would seem reasonable to split up the “general” and “special” share reserve votes, but Tesla has seen it fit to combine the two – such that if you want Tesla to be able to compensate employees with shares, you must also accept that Musk will have 3.5x as many shares set aside for him personally as will be set aside for every other employee at the company combined.
It must feel incredibly insulting for the engineers who actually design the cars, the manufacturing associates who build them, the software team that continues to improve the best software out there, the best-in-the-biz charging team, et cetera, to see a guy who spends most of his time working for other companies (or pretending to be good at video games on his private jet) and be told that he’s worth hundreds of thousands of times more than you are.
Even worse, the reason this vote is necessary is because the share reserve was recently drained… to pay Elon Musk.
When Musk’s friends on the Tesla board decided to hand him an “Interim Award” of $26 billion without a shareholder vote, the process through which they did this was to simply award shares to Musk that had previously been set aside in Tesla’s share reserve.
Those shares had been intended to be available for years to come, as compensation for employees, to help Tesla attract and compensate talent (as the heartstring-tugging videos above suggest). But instead, almost the entire reserve was drained to give to Musk, with only one stipulation: that he continue working at Tesla for two years.
But that’s only part of the shares that Musk would get if these shareholder votes pass, because those 208 million shares aren’t even associated with the separate $1 trillion award in Proposal 4, which would include over 423 million shares. So now we’re up to 630+ million shares for Musk (~276B at current TSLA valuation), and only 60 million for every other employee at Tesla combined, being voted on at this shareholder meeting.
And even if proposal 4 is voted down, the board could still give Musk $91 billion worth of stock, and it’s holding employees’ compensation hostage to ensure that it be able to do so.
Musk gets largest payday ever for being a bad employee
The Interim Award was given with the rationale that it might “focus and energize” the CEO, who has been distracted with his running of several other companies and his world famous social media addiction as Tesla earnings and sales have been dropping in an otherwise rising market.
Tesla’s sales drops are largely due to the brand damage Musk himself is doing, and also its lack of innovation under his direction – but at least he can sell some cars to himself to try to hide this failure.
Tesla got saved in Q3 by a pull-forward in demand due to the end of US tax credits (which Musk himself backed, despite that his actions have hurt Tesla in more ways than one), but otherwise its earnings have been trending dangerously close to unprofitability.
Thus, this marks not only the largest payday in the history of the world, but the largest payday given with explicit acknowledgement that the payee is an underperforming and distracted employee, leading the company in a worse direction.
And yet, the board wants shareholders to approve even more pay for that bad employee, and has attached no strings to require he stop distracting himself with other companies, merely hoping that the promise of a large payday will coax Musk into being less terrible at his job than he has recently.
But it has to be an exceptionally large payday if Musk is to complete his goals (and to be clear, they are Musk’s goal, not the company’s), given the inflated nature of TSLA stock.
This is about power… and money
Musk wants this award because he wants more control over Tesla. He has stated clearly many times that he “doesn’t feel comfortable” with his current ownership percentage, even though it’s the result of him continually selling Tesla stock to fund his white supremacist, anti-free-speech project on twitter.
After his many stock sales, his ownership percentage has diluted from around a quarter of the company in 2021 to around 13% today. Musk has threatened Tesla shareholders, saying that that “the future of the world” relies on him getting $1 trillion and that if he doesn’t get 25% of the company he will take AI and robots elsewhere (nevermind that he already has sent Tesla resources to his private company in multiple ways, and wants Tesla shareholders to bail twitter/xAI out, another proposal on the current slate of votes).
Musk having more voting power would protect him from shareholder proposals that seek to improve Tesla’s corporate governance, as several proposals in front of shareholders right now would do. These include modifications to Tesla’s bylaws enabling changes through majority vote rather than supermajority vote, and repealing the threshold requirement to bring derivative actions against the company.
If Musk had 25% of the company, that makes it a lot easier for him to vote a chunk of his shares towards consolidating his power, and makes him less accountable to shareholders who are rightly concerned about Tesla’s current dropping sales and earnings under his direction.
And given that the vote on the current pay package somehow allows Musk to vote his own shares in support of it (unlike the last one, where he was recused), there’s no reason he couldn’t continue to do the same in the future, and have even more opportunity to enrich himself and consolidate power at the cost of all other Tesla shareholders.
But beyond the power, it’s also about money (as Fred here at Electrek pointed out). If Musk wanted to increase his ownership percentage, he could have Tesla engage in stock buybacks, which would not only decrease dilution for him but also for other shareholders who hold long term. This would also increase share prices, something shareholders might like to see (but then again, it would also require profits, which have tanked recently under Musk’s direction).
Instead, the plan increases dilution for everyone by printing hundreds of millions of shares – dilution for everyone except Musk, who gets far more shares than everyone else combined.
But you better not bring that up, because if so, Tesla might put out a mean tweet about you.
Tesla pays for PR to attack its own shareholders
We covered a group of pension funds who brought up many of these legitimate concerns in a dispassionate letter sent to Tesla investors, including the draining of the share reserve to pay Musk, the negative effect of dilution on current shareholders, and others. The concerns are well-argued and the letter is signed by several public pension funds, whose interest is generally in stable long-term returns, rather than volatility or speculation.
Many public funds are required to invest significantly in funds like the S&P 500, of which TSLA is an outsized member. They are also interested in a generally less volatile economy overall, and thus, it makes sense that they would argue in favor of stability.
The funds also stated that the requirements for various tranches of Musk’s share reward are somewhat arbitrary, and that many could be met easily with creative interpretations. Others have pointed out the same, recognizing even meeting the easiest targets would pay Musk more than the lifetime pay of the next 8 highest-paid CEOs combined.
But after these valid criticisms were lodged, Tesla responded in a way that should not be a surprise for longtime watchers of the company – by doubling down and firing back.
Tesla put out a tweet titled “setting the record straight,” essentially just making the same argument it has already made. It claims that there is no way to creatively interpret product goals, that the board is “disinterested” (that is, they do not hold a personal financial interest in the outcome, which is an odd thing to say about the personal friends and family of Musk on Tesla’s board), and that this plan, which will dilute current shareholders’ holdings in order to retain a bad CEO for the next decade, is “in the interest of shareholders.”
It also claims that none of the operational milestones are “easy” and that previously-cited creative interpretations would not be possible. However, even with only below-average share growth and flat vehicle delivery growth, Tesla is on course to easily reach some of the simpler milestones (well, perhaps this is hard with a CEO who is seemingly doing his best to ruin company performance…), which would still result in a record payday many times over.
And it ends the tweet with a slight against the performance of the various public funds who signed on to the letter. Tesla claims that it has provided much better returns than each of the funds, which have had 6.51%-13.3% annualized returns since 2018. Notably, these are in line with the expected returns that a public fund counts on (with S&P averaging ~8%), who typically invest in stable companies rather than speculating on high-risk investments or tech companies with unheard-of 250:1 P/E ratios (which only gets higher as price goes up and earnings go down).
Sending this tweet about an active shareholder vote is already a rare move as far as public companies go, but Tesla, who does not advertise, also seems to have retained an outside firm to further publicize its rebuttal. Due to our previous article on this matter, we got an email from FGS Global, which bills itself as “the world’s leading stakeholder strategy firm,” directing our attention to the tweet. We asked FGS why it thought diluting shareholders by $1 trillion was truly the optimal strategy for stakeholders, and did not receive an answer.
Since then, proxy advisory group ISS, the largest independent advisor for institutional investors which offers disinterested insight into shareholder proposals, has also recommended against voting for the proposals. Tesla responded by attacking ISS in a tweet.
Even if you think Musk is necessary, this isn’t Tesla’s best option
Defenders of the plan will argue that shareholders will benefit if share targets are met. But that’s a big “if,” and even if they are met, how much of that can we attribute to the direction of a distracted CEO (with no requirement to not be distracted), and is it really necessary to give that CEO a full trillion dollars worth of dilution in order to get the performance requested?
Again, Musk has already been given the largest payday in history out of shares that were earmarked for employees, and now a payday that’s over thirty times larger than that has been proposed. Even at the inflated share prices that would be necessary to meet milestone targets for the award, shareholders would still have their voting rights and share appreciation diluted by about 12%.
Could a similar goal not be achieved with much smaller dilution, say around 1%, which would still be the largest payday ever proposed for a CEO? And is Musk even worth that much to begin with, given his poor recent performance and his behavior that has proven to be hostile to his own company’s interests? (via lobbying for anti-EV policy, doing Tesla brand damage, self-dealing to benefit his own private companies with Tesla’s public assets, firing Tesla’s best teams on an ego trip, and so on)
Heck, even the option of buying xAI in an all-stock deal, at its absurd $200B valuation, would cost Tesla less than these two proposals would (~$276B, at current TSLA valuation). This idea would also do more to ensure Musk’s focus as then he would no longer split his time between his private companies which have his current interest and his public one, since all would be under the same umbrella.
To be clear, that would also be a terrible idea, due to ethical concerns that are currently subject to a lawsuit over Musk conflicts of interest (and surprise surprise, that terrible idea is also up for a shareholder vote). But the fact that there are potential legal problems with each of the options the board did consider is perhaps an indication that another individual, one without such a history of working in his own interests rather than the company’s, would be a better fit for Tesla.
Bad for employees, shareholders, and Tesla’s mission/ethics… so why is Tesla pushing it?
It seems quite clear that the option given to shareholders is not the optimal solution, but due to Tesla’s captured board, it’s the option that’s been put on the table. And since it benefits them (in fact, so much that the board had to return nearly $1 billion in excessive compensation) and their personal friend Elon Musk, it’s the only option shareholders get to vote on.
Were the board interested in Tesla’s best interests, some other options might be on the table. But they aren’t; they’re interested in their friend Elon’s best interests. The driving factor isn’t the goals of Tesla or its shareholders, but the goals of Elon.
If the board were independent and truly interested in Tesla’s best performance, it wouldn’t saddle the company with a hostile CEO for a decade, it wouldn’t overpay that CEO, it would be more sensitive to dilution, it would engage in options that are less likely to result in legal challenges, it would at least ensure that CEO work in the company’s interests, and it would use a more deliberative process than having a few of that CEO’s friends propose a comically large payday just so he can get himself out of the hole he dug for himself with a social media addiction so bad that he overpaid for his favorite app (twice).
The only concessions the board has made to any idea of reasonable governance is that it made the adoption of a succession plan a prerequisite for the last 2 (out of 12) tranches of stock. So Musk can still get ~558 million shares of stock without even giving a thought to what future the company might have with competent corporate governance.
Will shareholders finally reject this ridiculousness?
And yet, shareholders may vote for it, just like last time. That last vote had about the same downsides as this one, but TSLA shareholders voted for it anyway (twice, even after it was revealed they were lied to on the first vote).
But shareholders must currently feel trapped by Musk’s rhetoric. Even though he’s a bad CEO in terms of company performance, his constant overpromising has led to high appreciation of Tesla stock, with the market seeming much more interested in Musk’s constantly-delayed fantasies than in Tesla’s current performance. Essentially, Musk is saying “give me $1 trillion or I won’t lie for you anymore.”
Shareholders are worried that if Musk is gone, the market will no longer overvalue its future performance, and there might be a correction towards more realistic share price levels. Even though a competent CEO might benefit Tesla’s financial performance as a company, it may harm TSLA’s status as a meme stock.
And that’s what this particularly frothy market has become. Rather than investing in a company to focus on its products or even its future, “investors” have become consumers of the stock first, and focused on maintaining whatever illusions have resulted in these absurd price levels. TSLA shareholders have made the wrong decision before on an intrinsically similar issue, so it wouldn’t be a big surprise if they do the same here, only even dumber and ~20x bigger.
It is perhaps heartening that Tesla has seen it necessary to market the award so heavily, as Tesla can see results as they come in.
The more Tesla markets, the more it may suggest that the company may not like the numbers its seeing, and is desperate to swing the vote in its favor. (Either that, or the whole thing is engineered to give Musk something to act victimized about after the fact, when inevitably the award sees legal challenges again.)
For Tesla’s sake, for the EV transition as a whole, and perhaps for the future of the world, let’s hope it’s the former.
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