strategy for Tesla to maximize benefit of tax credit by production and delivery allocation

[bhzmark]

Let's assume Tesla would like to maximize the benefit of the IRC 30D tax credit for its customers within the details of the statute. How should it go about allocating its production and delivery of US and non US models?

I think it would be something like this:

Historical Tesla US Sales/Deliveries:

2016 Q1: ~9,000
2015: 25,202 (S), 214 (x) = 25,416
2014: 16,689
2013: 17,650 (estimate from Inside EV)
2012: 2,650 (estimate from Inside EV)
Roadster: 1,900

So an estimated total of 73,305 Tesla EV cars sold in the US at end of 2016 Q1.

Tesla can sell another ~126,695 cars before crossing the 200k limit.

Last month in March Tesla had 6,000 deliveries of S and X combined. That is likely to ramp up for future monthly sales. But, worst case, assuming that monthly US number of sales stays the same, they have 21 months (approx December 2017) until they cross the 200k line. or if it ramps up, likely sooner.

But that's not as terrible as it first sounds because the credit doesn't simply stop with the 200,001st car sold in the US. It continues for all other cars sold in that quarter where sales cross 200k and the next quarter. So the trick would be to only sell 199,999 cars in the US up to, say Dec 31, 2017. And in the rest of that quarter allocating any excess production capacity to sales outside the US -- and to the extent the balance sheet can bear it, stock piling US inventory to unload in a US sales torrent in the next two quarters to maximize US sales that get the benefit of the full credit.



Resources:

Monthly Plug-In Sales Scorecard

Introduction | Tesla Motors

https://www.gpo.gov/fdsys/pkg/PLAW-110publ343/html/PLAW-110publ343.htm (See the George W. Bush TARP bailout bill passed in 2008 -- including our beloved EV tax credit at section 205 creating new IRC 30D (Thanks George for lowering our taxes!))

26 U.S. Code § 30D - New qualified plug-in electric drive motor vehicles

 

[Fallenone]

That makes sense. But if oversea market demand is not high enough, to meet guidance number, they may be forced to cross the 200k line before 12/31/2017.

 

[bhzmark]

As a stock holder I suppose I would want them to maximize earnings, and therefore margin on sales, so I think I would want them to maximize the use of the credit to generate higher margin S and X sales instead of 3 sales. Makes me wonder if any M3 buyers will be able to use the credit if they can really ramp up S and X production/sales beyond my conservative estimate above.

On the other hand, it may be in the company's best interest to sell to their first in line employees on a timeframe that allows them to take the credit too as efficient nontaxable compensation to them.

And to extract as much value from the tax credit, they should maximize volume (how many US sales after the 200,001st can they cram into those 2 quarters) rather than margin. Lots of different interests and variables here.

 

[MikeC]

So the trick would be to only sell 199,999 cars in the US up to, say Dec 31, 2017.

Agree, it's been my expectation that they would hold back US deliveries in order to hit 2M on the first day of a quarter to ensure an additional 6 months of the full tax credit.

 

[Fallenone]

As a stock holder I suppose I would want them to maximize earnings, and therefore margin on sales, so I think I would want them to maximize the use of the credit to generate higher margin S and X sales instead of 3 sales. Makes me wonder if any M3 buyers will be able to use the credit if they can really ramp up S and X production/sales beyond my conservative estimate above.

On the other hand, it may be in the company's best interest to sell to their first in line employees on a timeframe that allows them to take the credit too as efficient nontaxable compensation to them.

And to extract as much value from the tax credit, they should maximize volume (how many US sales after the 200,001st can they cram into those 2 quarters) rather than margin. Lots of different interests and variables here.

Actually, if a buyer is going to order a highly optioned Model 3 at ~$60k because the $7.5k credit gives him/her the room, the margin Tesla makes would be more than a base S70.

 

[MikeC]

Agree, it's been my expectation that they would hold back US deliveries in order to hit 2M on the first day of a quarter to ensure an additional 6 months of the full tax credit.

And just confirmed by Elon on Twitter.

 

[lklundin]

Agree, it's been my expectation that they would hold back US deliveries in order to hit 2M on the first day of a quarter to ensure an additional 6 months of the full tax credit.

I guess in this forum the much frowned upon car analogy should be in order...

So when you are approaching an intersection with a red light, you want to time your arrival there not only so you cross just when the light turns green, but you also want to cross with maximum speed.

Now please be aware that the tax credit _and_ its cap is for domestic sales only.

So Tesla Motors has the option of keeping their pre-200k US deliveries going at a slow rate, while using exports to ramp up their actual production to its maximum.

Obviously, it may not be optimal to keep the US buyers waiting for so long, but taking this approach to its extreme, Tesla Motors could choose to reach their 200k domestic sales once they have reached their maximum projected production capacity of 500k vehicles per year, and then sell only in the US for 6 months.

In addition to the first 200k sales, that would allow them to sell an additional 250k vehicles at the full 7500$ tax credit, for a total of 3375 M$ tax credits to its US customers, not counting the reduced credits during the subsequent months.

That would probably make some government officials think carefully about how exactly to phrase any future tax credit programs.