Federal welfare parasite Elon Musk's growing empire is fueled by $4.9 billion in government subsidies

[Leroy N. Soetoro]

http://www.latimes.com/business/la-fi-hy-musk-subsidies-20150531-
story.html?track=lat-pick#page=1

Los Angeles entrepreneur Elon Musk has built a multibillion-dollar fortune
running companies that make electric cars, sell solar panels and launch
rockets into space.

And he's built those companies with the help of billions in government
subsidies.

Tesla Motors Inc., SolarCity Corp. and Space Exploration Technologies
Corp., known as SpaceX, together have benefited from an estimated $4.9
billion in government support, according to data compiled by The Times.
The figure underscores a common theme running through his emerging empire:
a public-private financing model underpinning long-shot start-ups.

"He definitely goes where there is government money," said Dan Dolev, an
analyst at Jefferies Equity Research. "That's a great strategy, but the
government will cut you off one day."

The figure compiled by The Times comprises a variety of government
incentives, including grants, tax breaks, factory construction, discounted
loans and environmental credits that Tesla can sell. It also includes tax
credits and rebates to buyers of solar panels and electric cars.

A looming question is whether the companies are moving toward self-
sufficiency — as Dolev believes — and whether they can slash development
costs before the public largesse ends.

Tesla and SolarCity continue to report net losses after a decade in
business, but the stocks of both companies have soared on their potential;
Musk's stake in the firms alone is worth about $10 billion. (SpaceX, a
private company, does not publicly report financial performance.)

Musk and his companies' investors enjoy most of the financial upside of
the government support, while taxpayers shoulder the cost.

The payoff for the public would come in the form of major pollution
reductions, but only if solar panels and electric cars break through as
viable mass-market products. For now, both remain niche products for
mostly well-heeled customers.

Musk declined repeated requests for an interview through Tesla
spokespeople, and officials at all three companies declined to comment.

The subsidies have generally been disclosed in public records and company
filings. But the full scope of the public assistance hasn't been tallied
because it has been granted over time from different levels of government.

New York state is spending $750 million to build a solar panel factory in
Buffalo for SolarCity. The San Mateo, Calif.-based company will lease the
plant for $1 a year. It will not pay property taxes for a decade, which
would otherwise total an estimated $260 million.

The federal government also provides grants or tax credits to cover 30% of
the cost of solar installations. SolarCity reported receiving $497.5
million in direct grants from the Treasury Department.

That figure, however, doesn't capture the full value of the government's
support.

Since 2006, SolarCity has installed systems for 217,595 customers,
according to a corporate filing. If each paid the current average price
for a residential system — about $23,000, according to the Union of
Concerned Scientists — the cost to the government would total about $1.5
billion, which would include the Treasury grants paid to SolarCity.

Nevada has agreed to provide Tesla with $1.3 billion in incentives to help
build a massive battery factory near Reno.

The Palo Alto company has also collected more than $517 million from
competing automakers by selling environmental credits. In a regulatory
system pioneered by California and adopted by nine other states,
automakers must buy the credits if they fail to sell enough zero-emissions
cars to meet mandates. The tally also includes some federal environmental
credits.

On a smaller scale, SpaceX, Musk's rocket company, cut a deal for about
$20 million in economic development subsidies from Texas to construct a
launch facility there. (Separate from incentives, SpaceX has won more than
$5.5 billion in government contracts from NASA and the U.S. Air Force.)

Subsidies are handed out in all kinds of industries, with U.S.
corporations collecting tens of billions of dollars each year, according
to Good Jobs First, a nonprofit that tracks government subsidies. And the
incentives for solar panels and electric cars are available to all
companies that sell them.

Musk and his investors have also put large sums of private capital into
the companies.

But public subsidies for Musk's companies stand out both for the amount,
relative to the size of the companies, and for their dependence on them.

"Government support is a theme of all three of these companies, and
without it none of them would be around," said Mark Spiegel, a hedge fund
manager for Stanphyl Capital Partners who is shorting Tesla's stock, a bet
that pays off if Tesla shares fall.

Tesla stock has risen 157%, to $250.80 as of Friday's close, over the last
two years.

Musk has proved so adept at landing incentives that states now compete to
give him money, said Ashlee Vance, author of "Elon Musk: Tesla, SpaceX,
and the Quest for a Fantastic Future," a recently published biography.

"As his star has risen, every state wants a piece of Elon Musk," Vance
said.

Before his current ventures, he made a substantial sum from EBay Inc.'s
$1.5-billion purchase of PayPal, the electronic payment system in which
Musk held an 11% stake.

Soon after, he founded SpaceX in 2002 with money from that sale, and he
made major investments and took leadership posts at Tesla and Solar City.


Musk is now the chief executive of both Tesla and SpaceX and the chairman
of SolarCity, and holds big stakes in all three, including 27% of Tesla
and 23% of SolarCity, according to recent regulatory filings. The ventures
employ about 23,000 people nationwide, and they operate or are building
factories and facilities in California, Michigan, New York, Nevada and
Texas.

Tense talks

The $1.3 billion in benefits for Tesla's Nevada battery factory resulted
from a year of hardball negotiations.

Late in 2013, Tesla summoned economic development officials from seven
states to its auto factory in Fremont, Calif. After a tour, they gathered
in a conference room, where Tesla executives explained their plan to build
the biggest lithium-ion battery factory in the world — then asked the
states to bid for the project.

Nevada at first offered its standard package of incentives, in this case
worth $600 million to $700 million, said Steve Hill, Nevada's executive
director of the Governor's Office of Economic Development.

Tesla negotiators wanted far more. The automaker at first sought a $500-
million upfront payment, among other enticements, Hill said. Nevada pushed
back, in sometimes tense talks punctuated by raised voices.

"It would have amounted to Nevada writing a series of checks during the
first couple of years," said Hill, calling it an unacceptable risk.

With the deal imperiled, Hill flew to Palo Alto in August to meet with
Tesla's business development chief, Diarmuid O'Connell, a former State
Department official who is the automaker's lead negotiator.

They shored up the deal with an agreement to give Tesla $195 million in
transferable tax credits, which the automaker could sell for upfront cash.
To make room in its budget, Nevada reduced incentives for filming in the
state and killed a tax break for insurance companies.

Nevada Gov. Brian Sandoval and Musk sealed the agreement in a Labor Day
phone conversation. Hill said it was worth it, pointing to the 6,000 jobs
he expects the factory to eventually create.

The state commissioned an analysis estimating the economic impact from the
project at $100 billion over two decades, but some economists called that
figure deeply flawed. It counted every Tesla employee as if they would
otherwise have been unemployed, for instance, and it made no allowance for
increased government spending to serve the influx of thousands of local
residents.

A $750-million factory

Musk has similar success with getting subsidies for a SolarCity plant in
Buffalo, N.Y. The company currently buys many of its solar panels from
China, but it will soon become its own supplier with a new and heavily
subsidized factory.

An affiliate of New York's College of Nanoscale Science and Engineering in
Albany will spend $750 million to build a solar panel factory on state
land. SolarCity estimated in a corporate filing that it will spend an
additional $150 million to get the factory operating.

When finished in 2017, the 1.2-million-square-foot facility will be the
largest solar panel factory in the Western Hemisphere. New York officials
see the subsidy as a worthy investment because they expect that it will
create 3,000 jobs. The plant will replace a long-closed steel factory.

"The SolarCity facility will bring extensive benefits and value to this
formerly dormant brownfield that provided zero benefit to the city and
region," said Peter Cutler, spokesman for Empire State Development, New
York's economic development agency.

SpaceX, though it depends far more on government contracts than subsidies,
received an incentive package in Texas for a commercial rocket launch
facility. The state put up more than $15 million in subsidies and
infrastructure spending to help SpaceX build a launch pad in rural Cameron
County at the southern tip of Texas. Local governments contributed an
additional $5 million.

Included in the local subsidies is a 15-year property tax break from the
local school district worth $3.1 million to SpaceX. Officials say the
development still will bring in about $5 million more over that period
than the local school district otherwise would have collected.

"That's $5 million more than we have ever seen from that property," said
Dr. Lisa Garcia, superintendent of the Point Isabel Independent School
District. "It is remote.... It is just sand dunes."

Crucial aid

The public money for Tesla and SolarCity factories is crucial to both
companies' efforts to lower development and manufacturing costs.

The task is made more urgent by the impending expiration of some of their
biggest subsidies. The federal government's 30% tax credit for solar
installations gets slashed to 10% in 2017 for commercial customers and
ends completely for homeowners.

Tesla buyers also get a $7,500 federal income tax credit and a $2,500
rebate from the state of California. The federal government has capped the
$7,500 credit at a total of 200,000 vehicles per manufacturer; Tesla is
about a quarter of the way to that limit. In all, Tesla buyers have
qualified for an estimated $284 million in federal tax incentives and
collected more than $38 million in California rebates.

California legislators recently passed a law, which has not yet taken
effect, calling for income limits on electric car buyers seeking the
state's $2,500 subsidy. Tesla owners have an average household income of
about $320,000, according to Strategic Visions, an auto industry research
firm.

Competition could also eat into Tesla's public support. If major
automakers build more zero-emission cars, they won't have to buy as many
government-awarded environmental credits from Tesla.

In the big picture, the government supports electric cars and solar panels
in the hope of promoting widespread adoption and, ultimately, slashing
carbon emissions. In the early days at Tesla — when the company first
produced an expensive electric sports car, which it no longer sells — Musk
promised more rapid development of electric cars for the masses.

In a 2008 blog post, Musk laid out a plan: After the sports car, Tesla
would produce a sedan costing "half the $89k price point of the Tesla
Roadster and the third model will be even more affordable."

In fact, the second model now typically sells for $100,000, and the much-
delayed third model, the Model X sport utility, is expected to sell for a
similar price. Timing on a less expensive model — maybe $35,000 or
$40,000, after subsidies — remains uncertain.

"Some may question whether this actually does any good for the world,"
Musk wrote in 2008. "Are we really in need of another high-performance
sports car? Will it actually make a difference to global carbon emissions?
Well, the answers are no and not much.... When someone buys the Tesla
Roadster sports car, they are actually helping to pay for the development
of the low-cost family car."

Next: Battery subsidies

Now Musk is moving into a new industry: energy storage. Last month, he
starred in a typically dramatic announcement of Tesla Energy-branded
batteries for homes and businesses. On a concert-like stage, backed by
pulsating music, Musk declared that the batteries would someday render the
world's energy grid obsolete.

"We are talking about trying to change the fundamental energy
infrastructure of the world," he said.

Musk laid out a vision of affordable clean energy in the remote villages
of underdeveloped countries and homeowners in industrial nations severing
themselves from utility grids. The Nevada factory will churn out the
batteries alongside those for Tesla cars.

What he didn't say: Tesla has already secured a commitment of $126 million
in California subsidies to companies developing energy storage technology.



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