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Devonshire Research Group, LLC

Tesla Motors, Inc.


Part II

May 2016
This presentation is a research report and is for informational purposes only. Opinions expressed are solely those of Devonshire Research Group and this is not a recommendation to purchase securities discussed
herein. This presentation is confidential and may not be reproduced or distributed without the express consent of Devonshire Research Group. Please refer to the next slide for additional disclosures.

-Attorney Confidential-

Disclaimer
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directors, officers and employees.

-Attorney Confidential-

Notice of investment interests


As of the publication date of this report, the Devonshire Research Group LLC has a net
short position in the stock, put options, bonds, and credit swaps of Tesla Motors, Inc.
(TSLA or Tesla) and stands to realize gains in the event that the price of TSLAs
securities declines over the long run, or if investment sentiment improves the appeal of an
expected decline in any of its securities.
Devonshire Research Group recognizes that while its strategy reflects a long term bearish
outlook for Teslas security instruments, the short term implication of powerful
marketing, including the power of social media tweeting by the CEO and his PR firm, well
orchestrated and heavily blogged product launches, and a deep and powerful short term
media control and attention span, suggests unpredictable short term volatility.
Devonshire Research Group LLC has a long term net short position across multiple
security instruments.

-Attorney Confidential-

Notice of non-affiliation
Part I of this analysis, released publicly in March 2016, was widely praised as effective and fact-driven. Critics of
the analysis allege that the work of the Devonshire Research Group is unfairly biased, due to affiliations with
industry players who seek to limit the market performance of Tesla. This is interesting, but untrue.
Devonshire Research Group hereby asserts that it does not have professional or business relationships with any of
the following organizations:
General Motors
Ford
Toyota
The City of Detroit
Koch Industries
ExxonMobil
Royal Dutch Shell
BP
CB Insights
The Illuminati
Marshall Mathers, aka Eminem

-Attorney Confidential-

On financial innovation and creative accounting

Everything should be as simple as it can be, but not simpler.


- Occams Razor

Never assume malice when stupidity will suffice.


- Hanlons Razor

-Attorney Confidential-

Executive Summary

How closely does TSLAs financing model mirror the features of common Ponzi, Pyramid, and Matrix schemes?
Numerous cautionary examples share features with TSLA, including hype driven by visionary leaders
TSLA has accepted capital from unsophisticated investors with bold claims on return and/or product value
If TSLA fails to deliver on these claims it has the potential to enter a death spiral
Most common death spirals do not require malicious intent, but rather excessive (even delusional) ambition
The profitability of the Model 3 depends on TSLAs ability to squeeze its supply chain; this is a tall order
Sophisticated suppliers (most notably Panasonic) will fight for their share of the profit
Panasonics rechargeable battery division is constrained in terms of investment capacity and profit demands
Current suppliers of numerous strategic, high-technology components have little IP and export to the US
Many Chinese suppliers are vulnerable to patent infringement accusations and could face ITC injunctions
TSLAs use of tax credits disproportionately benefits the wealthy at the expense of the average taxpayer
This inequality is a feature of the luxury-first market penetration strategy
The election year introduces significant risk for TSLAs continued reliance on taxpayer subsidies

-Attorney Confidential-

Tesla has engaged in aggressive accounting that calls to mind the


experiences of Enron and WorldCom; its future is highly uncertain
WorldCom Net Income
(US Billions)
1.0

4
3

Enron Net Income


(US Billions)

Originally
reported

0.9
0.8
0.6

0.5
0
-1

0.5

Originally
reported

0.7

-3

Non-GAAP
0.0
-0.5

Revised
Nov 2001

-1.0

0.4

1997 1998 1999 2000 2001 2002

-1.5

0.3
0.2

-2

Tesla Motors Earnings


Per Share (USD)

Revised
Aug 2002

-2.0

GAAP

0.1
-2.5

0.0
1996 1997 1998 1999 2000 2001

2012

2013

2014

2015

Tesla has escalated a dangerous habit of unorthodox future-earning-based financing in pursuit of the
questionably profitable and long-delayed Model 3. A misstep in the next two years risks entering a death spiral
Source: Devonshire Research Group considers Teslas decision to use non-GAAP accounting methods
to be inherently aggressive; unorthodox future earnings based financing defined on slide 11

-Attorney Confidential-

Tesla is not a car, battery, or tech company; it is an experimental


financial services company and should be regulated as such
2003 - 2007

2008 - 2012

2013 - 2015

Early 2016

Late 2016

TSLA acting as an unregistered broker dealer


Use VC to
bootstrap Roadster
prototypes

2017 - ?
Speculative upcoming innovations

Overprice
Roadster; use
profit to direct
Model S R&D

Use tax credits,


multi-year payback
to deploy
Superchargers

Collect $1k
deposits for Model
3 to finance SG&A

Use high preorders to boost


share price, issue
shares

Pay interest on
deposits of future
models?

Enter into a zeroownership model;


the perpetual
lease?

Distribute cost of
scale by locking in
multi-year contracts

Convince Nevada
to subsidize
creation of battery
factories, lithium
mines

Convince
Panasonic to invest
majority of spend
in Gigafactory

Secure Colorado
used car resale
credit to uphold
depreciation

Partner with ride


sharing apps such
as Uber?

Develop one-carper-neighborhood
leasing?

Guarantee 3-year
Model S resale
value to ease
nervous buyers

Use ZEV and state


tax subsidies to
secure Model S, X
price point

Present Model 3
prototype vehicle
loaded with costs
>>> $35K target

Implement pooled
fractional / shared
ownership models?

Introduce a preorder lottery, allow


rights to be sold to
3rd parties?

Allow a barter
system to convert
pre-order deposits
into coupons?

Abandon P&L,
Balance Sheet, and
cash flow as
outdated reporting
methods

Contributes to
growing GAAP
discrepancies

Use global green


subsidies,
incentives to
reduce price point

Fragile, unsustainable,
unpredictable approaching
US election year

Teslas financing model is fragile; it is attempting to manage multiple financial instrument models under the same
accounting umbrella to our knowledge, one of the last companies to attempt this level of financial innovation was Enron

-Attorney Confidential-

Non-GAAP strategies to limit Model S depreciation boost stock


price at the cost of increased fragility and hidden downside risk

Model 3

Model S

Model S

RVG threshold
Model 3 reveal threatens to
tank Model S resale values, so
Tesla hoards used vehicles to
resell under Colorado used
EV credit incentive

Model S resale value


guarantee closes
negative feedback loop:
liability grows as Model
S depreciates faster

Source: Edmunds.com, NADA used car guide 2015; Devonshire Research Group analysis suggests
traditional accounting strategies would be sufficient without promised resale guarantees and buy-back pricing

-Attorney Confidential-

Similarly, Teslas 400,000+ unsophisticated, unsecured, and


unpredictable Model 3 creditors contribute to a bank run setup
The Model 3 reveal lights a twotwo-year fuse: setbacks and delays will escalate refunds on deposits
Probability before Probability after
Model 3 reveal
Model 3 reveal

What could go wrong?


Quality issues force delays in Model 3 delivery

30%

75%

Panasonic drags feet on Gigafactory investment

40%

60%

Tesla forced to implement Model 3 buyback guarantee

25%

35%

Consortium of auto companies lobbies to remove tax credits

20%

30%

GM raises war chest to acquire IP and litigate against Tesla

10%

20%

Tessera or RPX engage in an auto IP relicensing campaign

10%

15%

Sole-source parts supplier raises prices, taking inventory hostage

5%

10%

Factory workforce goes on strike / labor dispute

5%

10%

Model 3 subject to regulatory scrutiny for road safety

5%

10%

SEC antagonizes TSLA for improper Twitter promotion (Musk)

2%

5%

IP litigation results in ITC injunction on foreign part imports

2%

5%

60%

80%

Probability of one or more tail risk missteps:

Rationale

Urgent drive for cost reduction on fixed


timeline
Lack of promised partnerships,
minimum purchase agreement
Fear of high depreciation rates stemming
from quality concerns
Political hot-button issue, Tesla credits
benefit the rich
Minimal IP ownership by Tesla and
throughout its supply chain
Brewing automotive patent war brings
NPEs and related players
Model 3 deadline gives suppliers
incredible bargaining power
Model 3 deadline gives labor force
incredible bargaining power
Rapid push to delivery will face scrutiny,
especially after Model X
Increased scrutiny surrounding critical
upcoming capital raise
Incentive for competitors to hamstring
already-weak supply network

Tesla is operationally vulnerable to setbacks, and the deposit scheme amplifies this vulnerability.
Depositholders expect a $35k vehicle in 2017how many will vanish if this target is revised?

Highly Confidential

Note: probabilities are Devonshire Research Group estimates

10

-Attorney Confidential-

To understand Teslas business model, we must introduce novel


financial definitions
Future-Earning
Pyramidal Financing
(FEPF)

Future-earning pyramidal financing (FEPF) is a business dynamic characterized by the act of raising
capital to finance future losses rather than future returns. The assumption in this dynamic is that
the future losses will be covered by a second capital raise (similarly pyramidal) which will allow
some investors to exit profitably, although many will reinvest and / or accept losses.
When properly recognized, managed, and regulated, FEPF can be a sustainable arrangement that
operates within both the spirit and letter of the law. Examples may be found in the realm of public
services, non-profits, and social service programs. However, when performed maliciously with
intent to defraud, FEPF forms the dynamic underlying illegal Ponzi, pyramid, and matrix schemes.
Aggressive cash-negative growth ventures that rely entirely on profitability at scale occupy a
dangerous middle ground where delusion often substitutes for malice.

Loss-Tolerant
Investors
(LTIs)

A category of investors that are capable of losing their investment in an enterprise, company, or
asset with or without their knowledge of this loss.

Financing Pyramid
Reporting
(FPR)

A form of financial reporting adopted from non-profit and venture capital investing that accurately
reflects businesses that are designed to lose money for long periods of time until subsequent
investors are secured, who must confront the needs to building a profitable business

If a business is operated as a FEPF, investors should not carry the expectation that such an enterprise will be run
for a profit; instead, this organization should be terminated, or regulated as a social service or non-profit

11

-Attorney Confidential-

How to detect future-earning based financing: 8 key features


Risk factors for FEPFs

Description

Strong presence

Investors who contribute capital to a


fundamentally moneymoney-losing venture

FEPF finances future losses; investors in these


ventures may be victims of fraud, but not always

Continual postponement of profitable operation


with fresh investor capital

Pyramidal financing requires future pyramidal


financing to succeed; this recursive aspect is key

Offer of unusual, timetime-sensitive incentives to


increase demand among investors

FEPF is not standard fundraising, and nonstandard fundraising tactics are commonly used

Impressive returns which are projected on


paper but may not be achievable at scale

Loss of investor confidence will destroy the FEPF


dynamic, so reinvestment rates must be kept high

Minimum return guarantees to increase


confidence of skeptical investors

Permitting investors to exit with generous terms


increases odds of subsequent reinvestment

Appeal to moral sensibility with highhigh-minded


aspirations toward equality and generosity

Often an offsetting factor allowing investors to


justify investment in a loss-making enterprise

Disruptive business model, often with


reasoning opaque to all but a visionary leader

A common theme is that old rules no longer


apply; irregularities are written off as complexities

Rapid growth leading to collapse unless tightly


monitored and regulated

Uncontrolled growth in these scenarios is often


the catalyst for failurecontrol is key to legitimacy

Typical occurrence cases:

Malicious

Some presence

Delusional

Overambitious

No presence

Sustainable

Source: Devonshire Research Group analysis of comparable financing models

12

-Attorney Confidential-

Tesla is currently engaged in an aggressive future-earning financing


dynamic; failure to manage this vulnerability risks collapse
Risk factors for FEPFs

Description

Tesla

Investors who contribute capital to a


fundamentally moneymoney-losing venture

FEPF finances future losses; investors in these


ventures may be victims of fraud, but not always

Crowdfunding via zero-interest deposits despite


serious risk that Model 3 will not be profitable

Continual postponement of profitable operation


with fresh investor capital

Pyramidal financing requires future pyramidal


financing to succeed; this recursive aspect is key

Plan to fund economy vehicle with multiple


generations of unprofitable luxury models

Offer of unusual, timetime-sensitive incentives to


increase demand among investors

FEPF is not standard fundraising, and nonstandard fundraising tactics are commonly used

Model 3 deposits hold a place in line (despite


anticipated regional rollout of the vehicle)

Impressive returns which are projected on


paper but may not be achievable at scale

Loss of investor confidence will destroy the FEPF


dynamic, so reinvestment rates must be kept high

In Devonshires opinion, Tesla may not be in a


position to refund deposits if Model 3 delays force
widespread refunding

Minimum return guarantees to increase


confidence of skeptical investors

Permitting investors to exit with generous terms


increases odds of subsequent reinvestment

Model S three-year 50% resale value guarantee; no


questions asked refund on Model 3 deposits

Appeal to moral sensibility with highhigh-minded


aspirations toward equality and generosity

Often an offsetting factor allowing investors to


justify investment in a loss-making enterprise

Green branding, heavy reliance on tax credits and


other incentives, save the world image

Disruptive business model, often with


reasoning opaque to all but a visionary leader

A common theme is that old rules no longer


apply; irregularities are written off as complexities

Vague plans to partner and achieve profitability at


scale anchored to Elon Musk

Rapid growth leading to collapse unless tightly


monitored and regulated

Uncontrolled growth in these scenarios is often


the catalyst for failurecontrol is key to legitimacy

Increasing stakes and unrealistic investor expectations


on a highly speculative business

Source: Devonshire Research Group analysis and opinion; commentary from Elon Musk interviews and quarterly reports; limited
information about deposit vaulting available; https://www.teslamotors.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me

13

-Attorney Confidential-

While future-earning financing is often not malicious, delusional


ambition can be a different path to the same outcome
The futureuture-earning pyramidal financing landscape

Massive fraud

Large-scale

Medium-scale

Masks fraud by mixing with


legitimate business activities
Carefully balances growth and
risk to prolong scheme
Escapes before scheme fully
collapses

Typical Ponzi, pyramid,


and matrix schemes

Too big to fail

Giants poised to fail

Aggressive-growth Unicorns

Everyday fraud

Small-scale

Targets unsophisticated /
vulnerable investors
Encourages investor
entrepreneurialism
Remains anonymous, then
vanishes
Unsustainable

Vital, ubiquitous, and


nationalized public goods
Operates outside the public
marketplace
Limits accounting scrutiny
and speculative investment

Charities and public works

Acceptance of value loss

Many VC-backed startups

Delusional / Overambitious

Argues for non-financial value


proposition to offset loss
Appeals to emotion and
instinct (branding, PR, etc.)
Fails fast and acknowledges
limits to growth
Sustainable

Source: Devonshire Research Group analysis and opinion; commentary from Elon
Musk interviews and quarterly reports

14

-Attorney Confidential-

While Tesla has bet the farm on extreme growth, insolvency is an


unacceptable fallback strategy for a publicly traded company
Notable pyramidal financing enterprises

Enron
Large-scale

Fractional
Reserve Banking

Madoff Ponzi
scheme
US Social
Security

WorldCom

Medium-scale

Bitcoin Savings
and Trust

Medicare

Ride Sharing
Large charities

Tesla Motors
(Today)

Multi-level
marketing

Shared Payment
Systems
Nigerian prince
email scams

Televangelism

Small-scale

Unsustainable

Peer to Peer &


Crowd Funding
projects

Startup seed
funding

Delusional / Overambitious

Sustainable

Source: Devonshire Research Group analysis and opinion; commentary from Elon
Musk interviews and quarterly reports

15

-Attorney Confidential-

To sustain its financing model, Tesla would need to court


successively larger loss-tolerant investors or seek subsidies
Tesla: anticipated strategic options

Large-scale

Medium-scale

Tesla only survives as long as it


can continue to secure
successively larger loss-tolerant
investors Panasonic has agreed
to be next, investing in the
Gigafactory. If Panasonic fails to
invest at an aggressive rate, the
financing scheme collapses
Prepay deposits become
unsustainable; Tesla continues to
launch new models, accepting
steadily larger up-front deposits
from prospective customers, with
longer projected delivery dates.
Current deposit refunds are
funded by future model deposits

Tesla
Model Z

Supercharger
Network

Gigafactory

Tesla embraces the subsidy


hunting business model fully,
becomes a public good managed
as a non-profit, supplying electric
vehicles to police departments,
schools, state transportation
programs, welfare recipients

Tesla
Model 3

Tesla Motors
(Today)
Tesla
Model X

Tesla
Model S

Tesla
Roadster

Small-scale

Unsustainable

Delusional / Overambitious

Sustainable

Source: Devonshire Research Group analysis and opinion; commentary from Elon Musk interviews
and quarterly reports; Panasonic quarterly reports and press releases

16

Our
thesis
-Attorney

Confidential-

Tesla is operationally vulnerable, too dependent on the success of the Model


3, and needs to prepare for the possibility of a future-earning death spiral
Likelihood

Historical precedent

Adjustment needed

High

Tesla escalates the


FEPF dynamic safely
and sustainably

Growth of the private pension and


old-age insurance market predating
the Social Security Act

Become a public good org, exit the


public market, and reduce scrutiny;
possible government acquisition

Low

Tesla escapes FEPF


dynamic with a wildly
successful Model 3

IBM survives Great Depression


and claws back from death (due
largely to Social Security Act)

This is the operating assumption;


we believe the Model 3 will be late
and will not be profitable

Low

Tesla escalates
pyramidal financing
but mismanages risk

Enron and WorldCom started as


legitimate ambitious business
model innovators that went rogue

Aggressively court loss-tolerant


investors, and provide investors
with roadmap to profit

Tesla deposit system


converts to Ponzi
scheme

Some Ponzi schemes (e.g. Madoff)


were well-regarded and not
considered fraudulent at the time

Properly inform $1,000 depositholders of their exceptionally risky


position as unsecured creditors

Low

Growth outcome

Our thesis is twofold: (1) the likelihood of a successful Model 3 launch is low, and (2) Tesla will be forced
to seek residual value as a heavily-subsidized (and decidedly non-luxury) public good provider

Source: Devonshire Research Group analysis and opinion

17

-Attorney Confidential-

On the US auto industrys impending competitive response to Tesla

Where's my gangstas and all my thugs


Throw them hands up and show some love
And I Welcome you to Detroit City
I said Welcome to Detroit City
Every place, everywhere we go
Man we deep everywhere we roll
Ask around and they all know Tricky
That's what's good man they all say Tricky
- Trick Trick, Welcome 2 Detroit

18

-Attorney Confidential-

Executive Summary

How closely does TSLAs financing model mirror the features of common Ponzi, Pyramid, and Matrix schemes?
Numerous cautionary examples share features with TSLA, including hype driven by visionary leaders
TSLA has accepted capital from unsophisticated investors with bold claims on return and/or product value
If TSLA fails to deliver on these claims it has the potential to enter a death spiral
Most common death spirals do not require malicious intent, but rather excessive (even delusional) ambition
The profitability of the Model 3 depends on TSLAs ability to squeeze its supply chain; this is a tall order
Sophisticated suppliers (most notably Panasonic) will fight for their share of the profit
Panasonics rechargeable battery division is constrained in terms of investment capacity and profit demands
Current suppliers of numerous strategic, high-technology components have little IP and export to the US
Many Chinese suppliers are vulnerable to patent infringement accusations and could face ITC injunctions
TSLAs use of tax credits disproportionately benefits the wealthy at the expense of the average taxpayer
This inequality is a feature of the luxury-first market penetration strategy
The election year introduces significant risk for TSLAs continued reliance on taxpayer subsidies

19

-Attorney Confidential-

The recent Model X issues highlight the fragility of automotive


supplyTeslas production will be limited by its weakest link
TSLA US shipping imports by geography
Panama
Colombia
Spain / Portugal
Italy

Australia

Supply chain threats

USA
ITC injunction on
Chinese-imported
parts

Germany
China

UK
Shanghai

Price pressure by
Japanese and
Taiwanese suppliers

Belgium

Netherlands
Thailand

Singapore
Taiwan

S. Korea

Low quality and / or


reliability from lowcost Chinese players

Japan
Source

Destination

Source: Devonshire Research Group trade data & analysis, lines in


diagram reflect imports by supplier and port of departure

20

-Attorney Confidential-

The cost reduction needed to achieve a $35k Model 3 will


generate strain throughout the supply network
Cost bucket

Cost reduction Achievable?

Obstacles

Gross Profit

78%

Likely

Need offsetting sales volume, must maintain hype

Supercharger Allowance

0%

Likely

Will continue to build out infrastructure

Manufacturing Overhead

46%

Maybe

Need to realize economies of scale in production

Drivetrain

63%

Unlikely

Suppliers unlikely to accept price reduction

Battery Pack

65%

Unlikely

Requires discontinuity in battery pricing to achieve

Interior

43%

Unlikely

Suppliers unlikely to accept price reduction

Systems

0%

Maybe

Tires, Brakes and Suspension

40%

Unlikely

Body & Final Assembly

3%

Maybe

More sensors, larger feature set expected for Model 3


Suppliers unlikely to accept price reduction
Depends on aluminum content and other design factors

( Model 3 model unit cost ) / ( Model S model unit cost )


Source: Estimates based on existing optimistic cost analyses

21

-Attorney Confidential-

Tesla relies for the most part on a low-cost supply chain many of these
players lack protectable technology and have little give on margin
Tesla foreign imports by country: approximately half of suppliers hold no US IP
100%

70

% of suppliers with no US patents

60

Total # of suppliers
80%

50
40

60%

30

40%

20

20%

10
0

0%
China

Belgium

Hong Kong

Taiwan

Germany

UK

Japan

UK

1,000
10,000
100,000
1,000,000
10,000,000
# of containers

Tesla has opted for a low-cost and low-IP approach, with close to half of all foreign parts
suppliers for the Models S and X holding exactly zero protective US patents

Source: Devonshire Research Group trade & IP databases

22

-Attorney Confidential-

Many low-IP suppliers provide complex, high-tech componentry;


these parts are vulnerable to US patent suits and ITC import bans
Teslas largest suppliers: where does the profit come from?
100,000,000

1,000,000

Containers shipped to
Tesla since Q3 2009

Shipping company
Panasonic Corporation / Sanyo Electric
Luvata Oy
Fukuta Electric & Machinery Co., Ltd.
Ceramtec Gmbh
Ningbo Jinyi Automotive Parts
Fuji Polymer Industries Co., Ltd.
Hota Industrial Mfg. Co., Ltd.
Srems Zhongshan Cenity Electronic
Pektron Plc
Barum Continental Spol Sro
Nishikawa Rubber Co., Ltd.
Premo Group
Amtek Precision Engineering
Amtek Plastic Ltd
Wabco Fahrzeugsysteme Gmbh
Dura Automotive Systems Gmbh
Sixxon Precision Machinery Co., Ltd
Leopold Kostal Gmbh & Co
Rogers Technologies Co., Ltd
Flextronics International Kft
Transtek Magnetics Ltd.
Huf Huelsbeck & Fuerst Gmbh & Co
Isabellenhuette Heusler Gmbh & Co
Bizlink Technology Inc

US granted patents
56,392
11
1
250
0
22
0
0
0
0
141
0
0
0
1
128
0
27
350
576
0
171
6
4

Product Description
Lithium ion batteries
Copper rods & wiring
Induction motor
Performance ceramics
Charging plugs, integrated plates
Performance rubber & plastics
Gears, shafts, rotors, axles
Cooling tubes
Electronic components
Tires
Weatherstrips
Inductive elements
Bracket components
Plates, trays, pipes, etc.
Air suspension

Key areas of
exposure

Unspecified parts
Powertrain components
Steering column switches
Busbars (conductors)
Audio system
Transformers
Keys & starters
Battery monitoring
Cables / connectors

Tesla will need to realize significant cost savings across the board to make the Model 3 profitablebut
advanced components are already produced by low-cost suppliers with no patent holdings
Source: Devonshire Research Group IP databases

23

-Attorney Confidential-

The suppliers who do own IP are not loss-tolerant and will not
budge on margins for a relatively small purchaser such as Tesla
US patents granted
to supplier

International Tesla Suppliers with At Least One US Granted Patent

100,000

Country of Origin

Panasonic Corporation

Germany
LG Electronics Inc

Toyota Motor Corporation

Australia

10,000

China

Hongfujin Precision

Samsung Sdi Co., Ltd

Italy
LG Chem Ltd.
Kobe Steel, Ltd.

1,000

Belgium

Foxconn Computer

South Korea

Flextronics International Kft

Taiwan

Ceramtec Gmbh
Nishikawa Rubber Co., Ltd.

100

Fuji Polymer Industries Co.

Hong Kong
United Kingdom
Panama
Japan
Singapore

10

Luvata Pori Oy
Fukuta Electric & Machinery Co., Ltd

1
1

10

100

1,000

10,000

100,000

1,000,000

10,000,000

Containers shipped
to Tesla since Q3 09

Source: Devonshire Research Group trade & IP databases

24

-Attorney Confidential-

Panasonic will face organizational pressure to abandon the Tesla


partnership if its Gigafactory investment does not pay dividends
2.6x
$1.6 B
Automotive

16%
Batteries

Devices

28%

17%
Chargers

Housing

17%

B2B

25%

Safety

$616 MM

Comfort
Consumer
electronics

23%

45%

26%

Panasonic sales breakdown


Batteries are $3.5B of $72B total revenue

The automotive segment is the smallest


segment at Panasonic, and EV battery
sales are just one component of this
revenue stream

2015 automotive
capital investment

Capital pledged
to Gigafactory

The Gigafactory investment alone


accounts for nearly three years of
automotive capital expenditurethis is
a hugely outsized segment investment
Source: Panasonic Annual Report 2015

25

-Attorney Confidential-

Panasonics rechargeable battery division is under the corporate


microscope already and targeted for margin increases, not compression
Rechargeable batteries are 1 of 37 Panasonic divisions
and managed within 1 of 4 large companies

Rechargeable batteries are 1 of 6 large scale divisions


within its portfolio specially targeted for margin increases

Source: Panasonic 2015 Annual Report

26

-Attorney Confidential-

Tesla needs a miracle in battery pricing to achieve the Model 3


target price; there is real doubt the Gigafactory will deliver
$ / kWh (log scale)

Model S battery pack cost estimates

1,000

800

400

$190 / kWh claimed by


Tesla head of IR, 04/16

200

Generally-accepted
critical pack price

150
114
100
2008

2009

2010

2011

2012

2013

2014

2015

2016

Zero-margin raw
material cost floor

Data fit gives 8% annual cost reduction by leading manufacturers, suggesting Tesla will not hit
$150 / kWh until 2020well past the promised end-of-2017 Model 3 delivery date
Source: Rapidly falling costs of battery packs for
electric vehicles, Nature Climate Change, 3/23/15

27

-Attorney Confidential-

Executive Summary

How closely does TSLAs financing model mirror the features of common Ponzi, Pyramid, and Matrix schemes?
Numerous cautionary examples share features with TSLA, including hype driven by visionary leaders
TSLA has accepted capital from unsophisticated investors with bold claims on return and/or product value
If TSLA fails to deliver on these claims it has the potential to enter a death spiral
Most common death spirals do not require malicious intent, but rather excessive (even delusional) ambition
The profitability of the Model 3 depends on TSLAs ability to squeeze its supply chain; this is a tall order
Sophisticated suppliers (most notably Panasonic) will fight for their share of the profit
Panasonics rechargeable battery division is constrained in terms of investment capacity and profit demands
Current suppliers of numerous strategic, high-technology components have little IP and export to the US
Many Chinese suppliers are vulnerable to patent infringement accusations and could face ITC injunctions
TSLAs use of tax credits disproportionately benefits the wealthy at the expense of the average taxpayer
This inequality is a feature of the luxury-first market penetration strategy
The election year introduces significant risk for TSLAs continued reliance on taxpayer subsidies

28

-Attorney Confidential-

If the Model 3 is not profitable, Tesla should establish itself as a public


good provider worthy of prop-up investment by the government
Strategic options in the case that Tesla remains unprofitable after the Model 3
Strategy

Best case outcome

Current impediments

Seek government aid by


positioning as a public good

Federal and / or state government


ramps up subsidies and oversight,
uses as a platform to create a
nationwide EV charging network

Brand inconsistency:
inconsistency Tesla sells
luxury vehicles to the wealthy.
Government aid would require
benefits for all incomes

Go private and seek other


sources of investment

Tesla is supported by a wealthy


philanthropist / visionary tech
investor with little regard for shortterm cash flow situation

A Model 3 failure would empower


EV competitors, and it would be
difficult to maintain market
presence even with private backing

Raise capital by boosting stock


price and selling shares

Tesla manages to hype stock and


raise a new round of capital from
fresh stock issuance

This continues the FEPF cycle


further reduces endgame options;
likely spiral into insolvency

29

-Attorney Confidential-

EV tax credits overwhelmingly favor the wealthy; the average


taxpaying citizen will realize little, if any benefit
Wealth inequality of EV tax credits

Average EV credit per tax return, by AGI


7.0

1.0
Tax credits

6.5

Adjusted gross income (AGI)

6.0

0.8

5.5

0.7

5.0

USD per tax return

Cumulative fraction of tax credits / AGI

0.9

0.6
0.5
0.4

4.5
4.0
3.5
3.0
2.5

0.3

2.0

0.2

1.5
1.0

0.1

0.5
0.0

0.0
0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Cumulative taxpayer fraction, ranked by AGI

1.0

<10

10-20

20-40

40-75

75-200

>200

Adjusted gross income, thousand USD

Would any current US Presidential candidate risk extending nation-wide EV credits if this story
of inequality were to be shared with the average voter?
Source: The Distributional Effects of U.S. Clean Energy Tax
Credits, UC Berkeley, July 2015, data collected from 2009-2012

30

-Attorney Confidential-

Tesla is contributing to this inequality, as it is exhausting its tax


credits on the luxury Models S and X
Units sold
(through 12/15)
1,000,000

Vehicles qualifying for full $7,500 federal EV tax credit

Nissan Leaf

100,000

Tesla Model S

Chevrolet Volt

BMW i3

Fiat 500e
10,000

Smart Fortwo EV
Chevrolet Spark EV
Mitsubishi i-MiEV
1,000

Ford Focus Electric


Volkswagen e-Golf
Cadillac ELR

Mercedes-Benz B-Class EV
Kia Soul EV

Tesla Model X
100
0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

Base price
90,000

Source: Edmunds.com, Devonshire analysis

31

-Attorney Confidential-

In 2013, the average Tesla owner had twice the household income
of other EV owners

While the field of electric vehicles (EVs) has grown with the
Chevrolet Volt, Nissan Leaf and the Toyota Prius Plug-In, Tesla
buyers display unique differences. NVES shows that Tesla
owners have double the average household income of other EV
owners ($293,200).
($293,200) As a result, they are more likely to be adding
a Tesla to their household fleet (51%) rather than replacing a
vehicle with its purchase.
- Strategic Vision: New Vehicle Experience Survey (2013)

32

-Attorney Confidential-

Tesla relies heavily on manufacturing incentives and zeroemissions credits


Subsidy

Subsidy size

Source

Gigafactory incentives

$1,290 MM

Nevada taxpayers

Zero-emission credits

$518 MM

California taxpayers

Federal EV tax credits

$284 MM

Federal taxpayers

CA self-generation incentive

$126 MM

California taxpayers

CA Alternative Energy Financing

$90 MM

California taxpayers

Discounted DoE loan

$45 MM

Federal taxpayers

State EV tax credits

$38 MM

California taxpayers

Tesla is built on loss-tolerant public money, but this will not be a solution in perpetuity. Eventually
Tesla will need to stand on its own or accept a role as a government-sponsored public good provider

Source: LA Times investigation, June 2015

33

-Attorney Confidential-

Brand exposure: pandering to the wealthy is incompatible with the


concept of Tesla as a public good
Brand drivers

Luxury

Visionary

Green

Brand inconsistencies

High-performance vehicles

--

Modern feature set

--

Quality engineering

Issues with Model X

Disrupting auto industry

--

Leading technology

Limited technology ownership

Eventually affordable

To be determined

Developing EV infrastructure

--

Lowering emissions

Surprisingly high environmental cost

Government endorsement

Hurts average taxpaying citizen

Supporters say Tesla is saving the world. We believe the reality is that Tesla helps rich people buy cars.
This brand inconsistency is a key vulnerability going into a contentious US presidential election year; is
inequality a core feature of the Tesla brand?

34

-Attorney Confidential-

Takeaway: Tesla is fragile as a publicly traded company expected


to deliver a GAAP cash profit
Tesla is operating many financing business models that other entrepreneurs would be prohibited from
operating, as they might be labeled Ponzi, Pyramid, or Matrix schemes
Tesla is attempting to operate many complex, interwoven, novel financing schemes under one roof, and either
will be a successful version of Enron, or will fall victim to similar accounting challenges as it attempts to
reconcile its operational complexity to its cash position
If Tesla is indeed operating a FEPF, it is highly fragmented and overly diversified in its tactics, it should
dedicate more of its time to securing loss-tolerant investors
If Tesla does not successfully secure a larger loss-tolerant investor, the US government should seize the
company and convert it into a regulated social good and public service
Tesla should not be managed, valued, or reported by its ability to generate profit, and consequently it should
attempt to seek tax shelter as a non-profit or religious organization as quickly as possible
If Tesla is indeed operating for profit, it should announce a strategic roadmap to investors for earning a
profit in the coming decade

35

-Attorney Confidential-

On requisite skepticism over hyperbolic operating targets

But now they only block the sun


They rain and snow on everyone
So many things I would have done
But clouds got in my way
I've looked at clouds from both sides now
From up and down, and still somehow
It's cloud illusions I recall
I really don't know clouds at all
- Joni Mitchell, Both Sides Now

36

-Attorney Confidential-

Thank you

Image 2016 Devonshire Research Group

For more information, please contact Devonshire Research Group, LLC at surfhacker@bloomberg.net
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