The government helped Tesla conquer electric cars. Now it’s helping Detroit, and Elon Musk isn’t happy.

Source: By Faiz Siddiqui, Washington Post • Posted: Wednesday, September 15, 2021

Tesla enjoyed hands-off regulation and lush government incentives, but then came the Biden administration

Elon Musk arrives at court during a trial over energy subsidiary SolarCity in Wilmington, Del., on July 13. (Samuel Corum/Bloomberg)

SAN FRANCISCO — President Biden held a splashy event on the White House’s South Lawn last month to announce an ambitious goal: to make half of new passenger vehicle sales electric, plug-in hybrid or fuel-cell electric vehicles by 2030.

But a key player in the industry was nowhere to be seen. Elon Musk and the country’s leading electric-car manufacturer, Tesla, had been left out of the festivities.

For Tesla, it may have signaled the end of a long honeymoon period with the government, when the company was bolstered by federal tax incentives that drove growth and sales, emissions compliance credits that ushered in profitability and relatively hands-off oversight that allowed it to put new technology in the hands of customers without much fear of regulators stepping in.

The latest blow came this month. House Democrats unveiled a proposal to allow an extra $4,500 in consumer incentives to buy a new electric vehicle — provided it was union-made in the United States. Tesla is the only major American automaker whose production is not unionized.

The House Ways and Means Committee is expected to take up the portion of the bill concerning electric-vehicle and green energy proposals Wednesday.

The proposal prompted Musk, Tesla’s chief executive, to sound off on his preferred medium, Twitter, over the perceived slight in recent days.

“This is written by Ford/UAW lobbyists, as they make their electric car in Mexico,” he wrote in response to a tweet accusing lawmakers of “targeting one company.” “Not obvious how this serves American taxpayers,” Musk said.

It’s a different playing field for the company, which enjoyed closer relationships with both of the former administrations. It’s also part of a bigger twist for tech giants and Silicon Valley, which have generally faced an uptick in regulation, public criticism and overall scrutiny under the Biden administration.

Tesla, in particular, is used to being touted and even coddled by a government eager to show off Silicon Valley’s ingenuity and the innovative spirit ushered in by a friendly regulatory climate. President Barack Obama toured Musk’s rocket-building company SpaceX with Musk in 2010. Musk talked with President Donald Trump, The Washington Post has reported, and even welcomed Trump’s support as he defiantly reopened Tesla’s Fremont, Calif., production facilities amid coronavirus lockdowns last year.

The same month Musk was snubbed at the Biden event, the National Highway Traffic Safety Administration opened an investigation into Tesla’s driver-assistance suite, known as Autopilot, in connection with about a dozen crashes involving parked emergency vehicles. Tesla has faced scrutiny over the until-now largely unregulated technology in connection with driver deaths while the software was activated and concerns that it has led to driver inattentiveness.

Now, the House Ways and Means committee is on the cusp of advancing a bill that would extend a $7,500 tax credit to consumers for new electric vehicles — plus $4,500 for cars that are assembled using union-labor in the United States. (An additional $500 would be available if battery cells are manufactured in the country, and no less than half of the vehicle’s component parts are American-made.)

Erin Hatch Thomas, communications director at the House Ways and Means Committee, said the proposal merely reflected the priorities of the committee.

“The Democratic Caucus strongly values workers’ rights as well as American-based manufacturing, both of which this proposal encourages,” she said.

Still, the House bill, analysts and officials said, puts pressure on other automakers that Musk targeted in his tweet. Ford, for example, assembles its electric Mach-E SUV in Mexico, and so the vehicle would not qualify for the additional $4,500 in incentives unless it brings production into one of its U.S. plants, officials said.

General Motors did not immediately provide comment, and Tesla did not respond to a request for comment.

Tesla has previously benefited from government programs meant to stimulate demand for electric vehicles and help companies adopt green technologies. For example, consumers cashed in on $7,500 in federal tax credits for the first 200,000 vehicles Tesla sold in the country, an option that was quickly exhausted as consumers took around $10,000 worth of combined total incentives in California, which provided its own bonuses.

The initial incentives were part of Great Recession-era programs aimed at stimulating demand in budding electric and plug-in hybrid vehicles.

Tesla also sells regulatory credits to other automakers, such as Chrysler-parent Stellantis, that allows it to burnish its quarterly profits. The credit systems are a result of a patchwork of state, federal and even international regulations meant to lower vehicle emissions.

It works like this: Automakers are required to meet certain emissions compliance thresholds and are penalized if they fail to do so. Because Tesla exclusively sells electric vehicles, it easily meets those compliance thresholds and can bank its progress through a credit system. It can then sell excess credits to other automakers that are failing to meet their targets on their own. One dramatic example of how Tesla uses the system to its advantage: Tesla reported a total profit of $331 million in the third quarter of 2020. Without the $397 million worth of regulatory credits it sold that same quarter, the company would have reported a loss.

Tesla has benefited dramatically for a regulatory landscape that has fallen in its favor, analysts say, but it faces a new one now.

Dan Ives, an analyst with Wedbush Securities, said the company is headed for new and uncertain waters.

“Tesla’s defending its turf but at the same point they have a head wind as more and more of these EV tax incentives benefit the likes of a GM, Ford and other union-driven stalwarts,” he said. “And Tesla is on the wrong side of this trend the way the bills are today.”

Musk has long opposed unionization at Tesla and the company has been charged with unfair labor practices over conditions at its Fremont assembly plant. Tesla was found to have unfairly threatened workers with losing their stock options if they unionized and fired a worker for protected union-related activity.

Musk’s response to the coronavirus drew new criticism. Tesla faced opposition as it initially kept the plant open as shelter-in-place restrictions went into place, and then reopened before the orders expired. Tesla even issued termination notices to workers who opted to stay home rather than return to work, The Post reported, despite the company’s promises they would not be punished.

Meanwhile, Tesla has recently further pushed regulators with the release of software it dubs “Full Self-Driving,” placing technology that overpromises its capabilities in the hands of beta testers on public roads.

Musk himself admitted the software isn’t ready for prime time, calling it a “debatable” proposition, saying Tesla needs to “make Full Self-Driving work” and even saying on Twitter that one version was “actually not great.” The government probe into Autopilot could signal forthcoming action on Full Self-Driving, which is an extension of the features that deploys them to navigate city streets and other locations previously limited to the software. The California Department of Motor Vehicles, which regulates autonomous vehicles in the state, has placed Tesla “under review” over the Full Self-Driving nomenclature, the Los Angeles Times reported in May.

Ives called the concerns over Full Self-Driving a “black eye” for the company.

“I think for the first time in a few years Tesla’s seeing some both supply chain competition as well as safety issues that have come to the forefront and Musk and company needs to navigate this: it’s a critical time,” he said.

Ross Gerber, a Tesla investor who is close with the company and has spoken with Musk, believes the failure to make inroads with the Biden administration was a strategic blunder on the CEO’s part. The administration stood at the ready to provide millions in incentives for electric vehicles and green energy, both areas of focus for Musk, but the Tesla chief took a defensive position.

“If Tesla gets behind Biden, if [Musk] even supported Biden, it would have been a huge boost to the administration and Biden would have done anything to help Tesla,” Gerber said.

That failure falls on Musk, he added.

“I think he just misplayed his hand and now it’s hurting him,” Gerber said. “This is the cost.”