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Arctic Leaf

Is Elon Musk a welfare king?

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Elon Musk is a darling of libertarians and free-market advocates because he is proposing to change the way Americans drive their cars through purely private effort. But he is now coming under fire for accepting gobs of government assistance in the process.

Critics charge that he has already accepted $4.9 billion in federal and state assistance and is angling for more. One article even asks if Musk has not become a “welfare king.”

Well, let’s take a look at the charges and see how they stack up:

The original article appeared in Mother Jones and was not entirely unfavorable. Staff reporter Josh Harkinson thinks the Tesla is a marvelous car and quotes all the accolades from Consumer Reports and Motor Trend. He even thinks Musk may be the next Steve Jobs and quotes New York Times blogger Jim Motavalli to that effect: “Individuals come along very rarely that are both as creative and driven as that. Musk is not going to settle for a product that is good enough for the marketplace. He wants something that is insanely great.”

What Harkinson objects to is simply that Musk hasn’t given the government enough credit for helping him on his way. He quotes Fred Turner, a Stanford professor and author of From Counterculture to Cyberculture, as saying: “It is not quite self-delusion, but there is a habit of thinking of oneself as a free-standing, independent agent, and of not acknowledging the subsidies that one received. And this goes on all the time in the Valley (i.e., Silicon Valley).”

It’s important to note that Harkinson is not just talking about Tesla. Musk’s other enterprise, SolarCity, which is installing rooftop panels on private homes, actually gets more federal and state subsidies than Tesla. And SpaceX, Musk’s venture into space travel, has a $4.2 billion contract with NASA to build a launching pad in Texas, which does not count as a subsidy but still comes from the government.

As far as Tesla is concerned, here’s what Harkinson counts as government assistance:

• Everyone who buys a Tesla gets a $7,500 tax credit from the federal government. Buyers in California get an additional $2,500 tax credit. Tesla buyers have an average income of $320,000. The federal tax credit will go to the first 200,000 customers. So far, Tesla has sold only one-quarter of that.

• The state of Nevada gave Tesla $1.2 billion in tax benefits to build its Gigafactory outside Reno. The offer came as Nevada was in competition with seven other states for the siting. The factory is expected to produce 6,000 jobs.

• Tesla’s principal source of income in recent years has come from selling Zero Emission Vehicles credits to other manufacturers in a program particular to the state of California. All auto manufacturers are required to produce ZEVs. When they can’t meet their quota, they can buy credits from other manufacturers. Tesla has pocketed $517 million in recent years. Harkinson counts this as a government subsidy, although Musk points out that the money comes from other car companies, not the government.

Musk has been quick to fire back: “If I cared about subsidies, I would have entered the oil and gas industry,” he told the media after The Los Angeles Times ran a story repeating the Mother Jones charges.

He points out that the$1.2 billion from Nevada will be spaced out over a period of two decades. It will also be contingent on the factory having an output of $5 billion every year for the 20-year period. He notes that hiring and other aspects of the Gigafactory will make it a profitable venture for the state of Nevada. And of course he notes that the fossil-fuel industry has received huge subsidies over the decades.

It really isn’t fair to say that Musk is “living off welfare.” His original entrepreneurial success, PayPal, rose to a valuation of $1.5 billion without the slightest assistance from the government. Tesla did receive a $465 million loan guarantee from the Department of Energy under the same program that funded the ill-fated Solyndra. But Musk made a grand gesture by paying back the loan ahead of time.

The fact is, it’s almost impossible to start a business these days without becoming involved at some level with the government. If Nevada hadn’t offered tax abatements, some other state would have – and did in fact. Many other factors were involved in the selection of Nevada, and states obviously benefit from such facilities.

Musk is a unique visionary whose reach extends far beyond making money. His ambition is to completely remake America’s automobile system and end the dominance of fossil fuels. He also wants to see America succeed at space travel. He plans to build a colony on Mars and has said he hopes to die on the Red Planet.

“Just not on impact, he added.

(Photo credit: J.D. Lasica, posted to Flickr)

Arctic Leaf

Is Elon Musk the next Henry Ford?

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Elon Musk doesn’t mind making comparisons between himself and Henry Ford. Others are doing it as well.

In announcing his plans for a “Gigafactory” to manufacture batteries for a fleet of 500,000 Teslas, Musk said it would be like Ford opening his famous River Rouge plant, the move that signaled the birth of mass production.

The founder of PayPal and current titular leader of Silicon Valley (now that Steve Jobs is gone), Musk is not one for small measures. The factory he is now dangling before four western states would produce more lithium-ion batteries than are now being produced in the entire world. And that’s not all. He’s designing his new operation to mesh with another cutting-edge, non-fossil-fuel energy technology – solar storage. His partner will be SolarCity (where Musk sits on the board), run by his cousin Lyndon Rive. Together they are looking beyond mere automobile propulsion and are envisioning a world where all this solar and wind energy stuff comes true.

So, is Musk a modern-day Prometheus, bringing the fire to propel an entirely new transportation system? Or, as many critics charge, is he just conning investors onto a leaky vessel that is eventually going to crash upon the shores of reality? As the saying goes, we report, you decide.

One investor that is already showing some qualms is Panasonic, which already supplies Tesla with all its batteries and would presumably help the company fill the gap between the $2 billion it just raised from a convertible-bond offering and the $5 billion needed to build the plant. “Our approach is to make investments step by step,” Panasonic President Kazuhiro Tsuga told reporters at a briefing in Tokyo last week. “Elon plans to produce more affordable models besides [the] Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.” Of course, this is Japan, where “the nail that sticks out gets hammered down.” Corporate executives are not known for sticking their necks out.

Another possible investor is Apple, which has mountains of cash and, at least under Steve Jobs, was always willing to jump into some new field – music, cell phones – to try to set it straight. This is a little more ambitious than the Lisa or the iPod and Jobs is no longer around to steer the ship, but Apple and Musk officials held a meeting last spring that stirred a lot of talk about a possible merger. A much more likely scenario, according to several commentators, is that Apple would become a major player in the Gigafactory.

And a Gigafactory it will be. Consider this. The three largest battery factories in the country right now are:

1)    The LG Chem factory in Holland, Mich. is 600,000 square feet, employs 125 people and produces 1 gigawatt hour (GWH) of battery output per year.

2)    The Nissan factory in Smyrna, Tenn. is a 475,000 square-foot facility with 300 employees puts out 4.8 GWH per year.

3)    A123 Systems’ battery factory in Livonia, Mich. is 291,000 square feet, employs 400 people and produces 0.6 GWH per year.

Both LG and Nissan received stimulus grants from the Department of Energy, built to overcapacity and are now operating part-time.

Now here’s what Musk is proposing. His Gigafactory would cover 10 million square feet, employ 6,500 people and produce 35 GWH per year of battery power. Basically, Musk’s operation is going to be ten times better anything ever built before, at a time that most of what exists isn’t even running fulltime. Does that sound like something of Henry-Ford proportions? Similar to Ford’s $5 a day wages, perhaps?

There are, of course, people who think all of this is crazy. In the Wall Street Journal blog, “Will Tesla’s $5 Billion Gigafactory Make a Battery Nobody Else Wants?,” columnist Mike Ramsey expresses skepticism over whether Tesla’s strategy of using larger numbers of smaller lithium-ion is the right approach. “Every other carmaker is using far fewer, much larger batteries,” he wrote. “Tesla’s methodology – incorrectly derided in its early days as simply using laptop batteries — has allowed it to get consumer electronics prices for batteries while companies like General Motors Co. and Nissan Motor Co. work to drive down costs without the full benefits of scale. Despite this ability to lower costs, no other company is following Tesla’s lead. Indeed, in speaking with numerous battery experts at the International Battery Seminar and Exhibit in Ft. Lauderdale a few weeks ago, they said that the larger cells would eventually prove to be as cost effective, and have better safety and durability. This offers a reason why other automakers haven’t gone down the same path.

But Musk has managed to produce a car that has a range of 200 miles, while the Leaf has a range of 85 miles and the Chevy Spark barely makes 82. Musk must be doing something right. And with Texas, Arizona, Nevada and New Mexico all vying to be the site of the Gigafactory, it’s more than likely that the winning state will be kicking in something as well. So, the factory seems likely to get built, even on the scheduled 2017 rollout that Tesla has projected.

At that point, Musk will have the capacity to produce batteries to go in 500,000 editions of the Tesla Model E, which he says will sell for $35,000. Sales of the $100,000 Model S were 22,000 last year. Does this guy think big or what?

To date, Silicon Valley doesn’t have a terribly good record on energy projects. Since Kleiner Perkins Caufield & Byers fell under Al Gore’s spell in 2006, its earnings have been virtually flat and the firm is now edging away from solar and wind investments. Venture capitalist Vinod Khosla’s spotty record in renewables was also the subject of a recent 60 Minutes segment. But, as venture capitalists say, it only takes one big success to make up for all the failures.

Will Tesla’s Model E be the revolutionary technology that, at last, starts making a dent in oil’s grip on the transportation sector? At least one investor has faith. “I’d rather leave all my money to Elon Musk that give it to charity,” was the recent evaluation of multi-billionaire Google founder Larry Page.