While I'm a huge fan of Elon Musk, and I even think Tesla is pretty cool, I'm a little underwhelmed. Every one of my ventures could be cash flow positive if I got a half BILLION dollar loan from the taxpayers and then was able to sell my product with a $8k tax credit stapled to the side of each unit.
Do you have any idea whatsoever how hard it is to have a successful venture in the automotive industry?
You really should watch the Bloomberg Risk Takers documentary on Elon. I'm against handouts as much as anyone (it's a loan though), but try making a comment like this afterward.
The difficulties he went thru to keep Tesla afloat were outrageous. By this time he been dumping his fortune into both this and SpaceX and was essentially at the point of personal bankruptcy (ie. was friends/associates time to keep moving, no one was willing to continue investing). Note in the article the sentence "Last month, Mercedes’ parent company Daimler also invested $50 million for a 10 percent stake in Tesla." Do yourself a favor and learn what Tesla actually did to make this happen. Yes, you may have heard they retrofitted Smart Cars with the Tesla power train, but how they did that is a breathtaking example of innovation and teamwork for a company at the brink of death.
In short, this loan saved the company. This article we're discussing right now would not exist. Tesla Motors would be another footnote in history that people could point to - "automotive startups are a losing proposition, do not invest". Would you rather the government bet on a guy like Elon who's actually putting his all into carrying out on a promise to change the game, or industry stalwarts who pissed away good will by incompetence and greed?
Well, they've already built an interstate highway system and the US state dept and military are already going to bat for us worldwide ensuring access to oil.
But yeah. THIS is the real case of the government getting too involved in the market.
Government doesn't bet than society as a whole loses out.
Ideally your government should be attempting to maximize everyone's utility (read:society). Private corporations are attempting to maximize their utility (In the case of modern economies: money).
Having an organization giving money to projects that are a net monetary loss, but provide a social benefit is the core reason why we have a government in the first place.
I disagree. The core function of government is to provide a social order. Police enforce rule of law, and legislatures write the law. Military protects our sovereignty against outsiders, and citizens pay taxes for these benefits. While military and police spending fit your description (they are not necessarily profitable but provide a social benefit), I argue that social order is the primary function of government.
In the U.S.'s case, our government happens to do much more than this, but this is not the core of why government exists.
Governments have been involved in 'public works' for at least the last 10,000 years. Without it you end up with a weaker society with a weaker military which is then easy pray to invaders.
It may have started out as roads, bridges, defensive structures, and irrigation systems. But the CDC is well within that domain.
I agree that the CDC is a legitimate example of something that only government can afford to offer. But we can have a government without the CDC. We can have government without welfare or social security. We can take many things away from government and still call it a government. Taking this to its extreme, if we remove the social order provided by police or the sovereign protection provided by military, laws and borders become meaningless and our government becomes anarchy.
This is not to day that we should or shouldn't take these things away (or add more, for that matter), but that the core of government's purpose is social order for its citizens.
You can have minimal governments, and going in that direction often seems like the right choice. Like most people I would be happy to cut 50% of all government spending, the problem is we don't want to cut the same 50%.
Take the US government remove the Air-force and you still have a functional government. In fact, we would still have the largest and most powerful Air force due to the Navy. But, that does not mean the Air force is worthless or even that taken in it's entirety it's a waste of money. And a lot of people want the Airforce which in a democracy means a great deal.
The real question is not how you can make a smaller government, but how you can have a better society and those are not always the same thing.
Agreed. The size of military and police forces are a completely different matter. It seems that many people have strong emotional reactions to military and/or public works spending, and I want to steer clear of that here.
Your argument is flawed and this can be demonstrated with countless examples. For example, it is difficult to have social order when your elderly and your poor are dying on the streets. This is why we have welfare and social security.
OK. Let's look at my argument. I posit that the core purpose of government is social order. I also imply that this is primarily provided through rule of law (police and legislatures) and sovereignty (military protection).
You state that it is difficult to have social order without welfare and social security, because the poor and elderly would be dying on the streets. This example doesn't dispute my core argument that government provides social order. In fact, it supports it, showing that social order is necessary and provided through government.
Remember, I argue that the core function of government is social order (which you seem to agree with), and that the primary means of providing this order is through police and military. I agree that there are other secondary means of providing social order (welfare and social security), but they can all be linked to the primary means of social order.
Here is an example: Let's say that we do not have any form of welfare or social security (America didn't for nearly half of its existence). When times get particularly tough, the poor may start stealing more in order to survive (notwithstanding the impact of food banks, churches, and other charitable organizations). If theft goes up, the government's primary means of providing social order is strained, because police must protect against more thieves.
Here is how I support my claim that police and military are the primary means of providing social order. Can our government exist without welfare? It has. Can it exist without the public school system? It has. A government that ONLY created and enforced rules is still a government. A government stops being a government if it cannot create and enforce laws, even if it provides all of these other things, will quickly fall into anarchy. Why pay taxes if there is no threat of imprisonment?
This might be an interesting argument from the point of view of pure philosophy or ideology, but it is a pointless argument when discussing practical politics. It does not matter which is the primary means of providing social order.
It is particularly pointless because "being a government" is not an interesting measure outside of the realms of philosophy and ideology. There are very many governments that would have done the world a great service by ceasing to "be a government".
Personally, I'd argue that a government that provides no welfare are often a net negative - many of the early nation states saw enormous societal harm resulting from law enforcement and military being used as a bulwark against the effects of the lack of working welfare systems.
E.g. I'm from Norway. A large proportion of the Norwegian emigrants who settled in the US (like the Irish) came during periods of extreme poverty and often starvation in Norway (Norway didn't become wealthy really until oil finds in the 60's, and until at least the 20's it was really a quite poor country). Poor people could get forcibly put to work in poor-houses, as they were in many other countries. Yet the state at the time used the police to restrict emigration:
You needed permission, or you could get thrown in jail for trying to leave. It was seen as essential in order to provide social order. As it was in many other countries.
> Here is how I support my claim that police and military are the primary means of providing social order. Can our government exist without welfare? It has. Can it exist without the public school system?
Can it exist without government run police? Many governments have historically largely deferred policing to volunteers (UK for example, where volunteers still have a role in policing). Without military? There are examples of that too - the modern nation state with standing armies is a relatively new invention and prior to that at least some societies had what amounted to functioning governments without military or police - Iceland, for example, which had a functioning parliament and established laws and court system for hundreds of years before it got a government run police and military.
While the nature of a government that is not a monopoly provider of violence and force is by necessity very different, that does not mean they can not exist.
Horrible idea. Especially in industries that are capital intensive (i.e. high starting costs), the markets heavily favor the existing players, who have a vested interest in preserving the status quo. In such markets, if you want innovation then you need government assistance for startups.
So you're arguing that the search engine space, or new computer manufacturers, or rocket ships did better before venture capital and startups got involved?
While this would be a good option in the spirit of the free market, many parts of the transportation industry are subsidized already making the play-field unfair to begin with.
Define "highest quality". I'd say "of most utility to the largest number of people." By that metric, the market picks the highest quality of winner pretty much by definition.
Exceptions I can think of are cases where individuals don't have enough info to decide (eg, a product will cause cancer, but the company can get rich before consumers find out) and Tragedy of the Commons issues (eg, every individual has incentive to pollute and only collectively do we have incentive to prevent it).
You might argue that the pollution exception applies here, but I'd still want the market involved. For instance, "the government will award $LargeAmountOfMoney to the first company who sells X vehicles meeting the following efficiency requirements..."
> By that metric, the market picks the highest quality of winner pretty much by definition.
I dunno, Windows and Internet Explorer has been the "winner" for the past few decades ;-) By the metric you mention ("of most utility to the largest number of people."), yes, they are "high quality". By many other metrics, they are not the highest quality products.
Jokes aside, I absolutely want the market involved as well. I think the market is fairly efficient, but it has it's downsides (e.g., the great patent wars - I'd hardly call that market efficiency).
I don't think the government has all the answers - but I don't think the market does either.
>> I think the market is fairly efficient, but it has it's downsides (e.g., the great patent wars - I'd hardly call that market efficiency).
I agree, but since patents are government-granted monopolies, that's really an example of government intervention rather than market freedom
>> I don't think the government has all the answers - but I don't think the market does either.
Agreed. By itself, the market can be ruthless. One proper role of government, in my view, is to ensure fair play.
Another is to provide incentives, when necessary, for research and infrastructure needed by society at large. ARPANET is a good example: a government initiative carried out by private contractors which never would have been undertaken by entrepeneurs.
BTW, Windows has been the market winner for good reason: more usable and universal than Linux, and cheaper than Mac. It's not my favorite, but there you go. IE has ridden Windows' coattails; few Mac users and no Linux users have ever used it.
I am okay with governments betting on winners as long as these were similar to the Ansari X Prize. Any government interventions should be there to stimulate and reward competition and not to decide winners and losers.
That's rather disingenuous. Musk is selling an innovative product worth tens of thousands of dollars to individual consumers. Considering the engineering that had to go into making the Model S a reality, I would consider this very impressive. Moreover, there is no reason to think that Tesla will not continue to increase in profitability with each passing week.
Great question! The answer is a resounding no! Also, just because you're profitable doesn't mean you have a positive cash flow!
Profit is what's called Net Income (for argument's sake, let's do EBIT--Earnings Before Income Taxes). Cash flow is simply your delta in cash from one period to the next.
Lots of things go into net income, but essentially it's revenue minus costs. Because of GAAP (Generally Accepted Accounting Practices--only in the US), you recognize revenue when it is earned not when it is collected. So, let's say you buy a car and you pay $5,000 down on a $30,000 car. The car company records revenue of $30,000. In their balance sheet, they also add $5,000 to cash, and $25,000 to what's called Accounts Receivable. Their cash flow is now $5,000.
Let's further say that they owe payroll, to the tune of $10,000 for that month. And you were the only poor bastard that bought a car from them that month. They have to pay $10,000 in cash for payroll, and that also gets logged as an expense. So, their profit shows a $20,000 net profit, but they have -$5,000 in cash flow.
You can extend the example to make it positive for a company that's not profitable, if you'd like.
Being operationally cash flow positive means that on a day to day basis your bank balance is increasing. Being profitable means that all of the money comes in in greater than your total costs.
So for example, if you look at HP's write down, they were operationally cash flow positive for the quarter but are 'writing off' 8+ billion dollars. So they "lost" over $8B this quarter. Aka not profitable during the quarter.
So the milestones you look for as a company are that you are cash flow positive for the day (all of todays costs covered by revenue), cash flow positive for the quarter (net increase in cash on and over the quarter) and cash flow positive for the year (net cash increase for the year), and finally profitable (total income exceeded all costs, both tangible and intangible (like depreciation)).
So to put it simply, cash flow is like a differential of profit? So you can have a profit of -1M$, but as long as the next month you get more (like -0.8M$), you're cash flow positive (+0.2M$), right?
I'm having trouble parsing the examples given in this thread; the above sounds like what I more-less understood from them.
Nope, no differential. It's more like profit = cash flow (i.e. profit on day-to-day things) + profit/loss on investments/loans (e.g. taking out a loan, paying off a loan, but also cases where you own the same thing as before, but value it higher or lower now for some reason).
So e.g. during the housing bubble, some companies were cash flow negative (i.e. losing money on their day-to-day business), but they recorded a profit for the quarter because the buildings they owned were worth more at the end of it than they had been at the start.
Let's say one month the only business you do is when I write you an IOU for $40k and your expenses are $30k. You have made $10k in profit (since the IOU is worth $40k), but you are cash-flow negative, since you have $30k less cash in the bank.
No, not at all. To put it simply, profit is cash flow over a long period.
A business might have customers on a monthly plan, paying $2000 over their entire lifetime. If it costs $1000 in sales and set-up expenses to get a customer, they are profitable. But the expenses have to be paid up front, whereas the income will trickle in over a long period.
This means that even profitable companies might need to take loans or raise financing if they need to pay for expenses now, but the income from those sales arrives in months or years down the line. A cash-flow positive company doesn't have the risk of running out of money while waiting for the profits to come in.
No, cash flow and profit are both differentials of net value. But they are both noisy.
Ideally, profit abstracts away all the messy details of cash flow. If you buy a new robot, that's not a loss, that's an investment, so your profit shouldn't change (until the robot starts depreciating). So profit (not cashflow) is a better metric. On the other hand, you don't know that the robot will really be useful, so maybe cashflow is better.
cash flow positive just means you had more money coming in that going out. Profit is calculated on an accrual basis, not a cash flow basis. For instance, if I sell you a car, I can recognize the revenue from that before you give me the cash. The debt you owe me is now an asset. On the other hand, there are things like depreciation of assets which count as expenses even though no cash changes hands right now. These are just a couple of examples on how cash flow and profit are not the same, but to get the full gist of it, you need to cover basically what gets covered in an intro accounting course.
Considering what he's up against in the industry, I'd say what he's done is fairly remarkable. My concern would be that if at any point one of the big three see Tesla as a threat they will put efforts into creating an electric car that undercuts Tesla's offerings and catapults Tesla into a high end niche oblivion. That said, if it comes to that, I will see that as a different means to the same end of reducing our gas guzzling obsession in America, and I can only see that as a positive.
I think you would be surprised I think Tesla's strategy has three stages.
1) Niche high cost vehicle sold in low volumes(Roadster)
2) Medium cost luxury vehicle sold in medium volumes(Model S)
3) Low cost high volume vehicle sold in high volumes. (Model ???)
Obviously this is a gross over simplification but I imagine that part of the engineering that is going on at TESLA is figuring out how to build 3 cheaper and at a higher quality then anybody else.
I am aware of their strategy, I just worry that the big automakers with their massive distribution and infrastructures already in place could easily come in and be 10 steps ahead of Tesla and provide a vehicle that isn't as sexy but has the same appeal to the electric car market. I could be overestimating their ability to innovate after so many years of sitting on the same old tired technology, but something tells me that they'd be willing to step up if it means they are going to be completely left in the dust of a tiny (by comparison) company.
> I just worry that the big automakers with their massive distribution and infrastructures already in place could easily come in and be 10 steps ahead of Tesla and provide a vehicle that isn't as sexy but has the same appeal to the electric car market.
I really doubt this. This is the classic innovators dilemma. The investments in electric don't look good enough yet for the car companies to go "all in". Their entire supply chain is built around making and selling cars that run on gas engines. Tesla isn't beholden to any kind of entrenched thinking and thus can build up an advantage here that is going to take the big car companies a while to catch up to once electric cars go mainstream. (http://dl.dropbox.com/u/120/Screenshots/innovators_dilemma_c...)
"the big automakers ... could easily come in and be 10 steps ahead of Tesla and provide a vehicle that isn't as sexy but has the same appeal to the electric car market"
Aren't they already trying to do that? Chevy's Volt, Nissan's Leaf, Ford apparently makes a fully PEV Focus now, as does Honda with a version of the Fit, and Toyota's gotta be working on the Prius...
What Tesla has done is made an electric car and marketed it as more luxurious and different from what's on the market. The Leaf is for hippies, the Volt is nowhere to be seen. The Tesla on the other hand is sexy.
A bigger concern is how Tesla will expand from this market. For most manufacturers, the high-end cars are not the major money-makers, and the quantities they move are just too small (Lexus sells over 8 IS/GS for each LS they sell). We'll see if they manage to expand from the niche they're in.
The Tesla on the other hand is sexy. A bigger concern is how Tesla will expand from this market.
The Nissan Leaf just isn't a good deal. If Tesla can beat range anxiety in a package that costs $20k or less, then they'll have a winner. Sexy still sells with econobox cars. (Fiat 500?)
> with their massive distribution and infrastructures
That is a disadvantage. Along with their size that represents massive costs and massive inertia.
The actual threat from incumbents is regulation(lobbying for) and legal. Both of which they can afford due to massive size and have established the "infrastructure" for.
Well, Ford and Toyota are buying electric drivetrains from Tesla to put into their electric vehicles. The big automakers are easily able to match Tesla just by buying Tesla's parts, which Tesla is more than willing to sell them.
The simple answer is they'll make a Model S but smaller, but that might be dependent on battery tech improving so they can fit the batteries into the reduced space. FWIW the Model S is at a reasonably decent price for what it is, and I don't think they're too worried about going mass market until the market is ready in terms of infrastructure, acceptance etc.
Many in the industry are still headed down the fuel cell route. It is quite possible that route will eclipse the Tesla route. The benefits available to the fuel cell route include truly quick refueling and a lack of range anxiety. Fuel cell stacks how come a long way, they just aren't sexy.
All of those never made it as far as Tesla has, for a lot of reasons, but failed mostly the Big Three's stranglehold on the market. In the Bricklin's case I would point to the parts/supplies cartel at the time.
Elon has a good opportunity in today's market with the decline of the Big Three's influence.
Elon Musk doesn't regard Fisker as a serious competitor. He said something like: "Fisker is headed up by a car designer, not an engineer. The reason we haven't had electric cars isn't because they looked bad" (or words to that effect).
Well most banks give out loans without the consent of their members on a per loan basis. Taxes are similar, people agree to pay taxes but they don't have a say on a per loan basis of what is done with those funds.
http://techcrunch.com/2009/06/23/the-government-comes-throug...