Elon Musk’s full support for Donald Trump threatens to damage Tesla in more ways than one.
His support for the former president’s political leanings has led to a growing exodus of customers in California to its direct competitor, Rivian, another electric vehicle-only automaker founded in the Golden State.
But it could hurt it elsewhere, too. After the market closed Tuesday, Tesla revealed that quarterly profits from electric vehicle sales fell to a five-year low, unnerving investors and sending its shares lower in early Wednesday trading (the stock was down more than 8% in premarket trading). Worse still, nearly half of the $1.89 billion it made before taxes came from regulated sales of CO2 credits, which could be phased out if Trump is re-elected.
Rohan Patel, Tesla’s global head of public policy until April, warned that the Trump administration had done everything in its power to dismantle California’s carbon credit scheme and was likely to try again.
“One of the key drivers of this quarter’s earnings was mentioned twice as an elimination target by Trump in his convention speech,” Patel wrote Tuesday.
Tesla raked in a record $890 million from selling EV credits, a market-based tool to reduce CO2 levels in the environment by encouraging the adoption of electric cars. Essentially, competitors that don’t sell enough EVs to meet minimum quotas pay companies that comply in order to continue selling combustion-engine cars.
Reminder…. One of the key drivers of this quarter’s revenue (GHG and ZEV Standards) was mentioned twice as a target for elimination by Trump in his convention speech.
From 2017-2021, Trump and his EPA leadership did everything they could to eliminate the pollution… https://t.co/gAAr6Ev7Bi
—Rohan Patel (@rohanspatel) July 23, 2024
These additional revenue streams are essentially pure profit and companies can get more credits than they need. In the case of EV-only players like Tesla that don’t have a combustion business to offset, the constant flow of profitable credits has become what the fossil fuel industry calls a “rain shower,” for lack of a better word.
Musk downplays concerns around Trump
When Tesla initially started turning a profit, it was thanks to these generous regulatory benefits, leading critics to argue at the time that Tesla was essentially an electric vehicle credit sales company with a money-losing automotive business.
The importance of credit has recently increased as a result of Musk’s EV price war. Tesla’s steep discounting has cut into profits from auto sales, with auto gross margins (excluding credits) falling to 14.6% in the quarter. That’s the lowest since at least early 2019, according to UBS. Additionally, other automakers unable to compete with Tesla are scaling back their money-losing EV businesses and now need to buy more credits.
Unsurprisingly, Musk, who has not been shy about putting his politics ahead of his business interests, has sought to downplay the risks of his support for Trump.
“I think there will be an impact,” he admitted Tuesday. “It will hurt Tesla a little bit,” but not so bad that it will “destroy” its competitors.
Giga Mexico construction likely delayed by Trump tariffs
Another major risk posed by Trump is the Giga Mexico facility in Nuevo León, first announced in March 2023. It is supposed to be home to his low-cost car models that will sell in the millions and drive a wave of 50% annual volume growth.
As EV growth slows after demand from early adopters has saturated, automakers have begun to delay investing in new EV plants—and Musk is no exception. Now he says he could scrap plans for the Nuevo León facility altogether if his preferred candidate is elected.
“Trump has said he’s going to put high tariffs on vehicles made in Mexico,” Musk told investors on Tuesday’s earnings call. “So it doesn’t make sense to invest heavily in Mexico if that’s what’s going to happen.”
There’s a potential scenario where a Trump presidency could help Tesla. The real estate mogul has been dismissive of government involvement, viewing regulatory guardrails as more of a restraint that stifles entrepreneurship.
He left the top job at the National Highway Traffic Safety Administration (NHTSA), the federal agency for the auto industry, vacant during his term after the Senate rejected his nomination.
Trump could help Musk’s robotaxi plans by easing traffic safety regulations
Musk’s endorsement of Trump could give the Tesla CEO a key role in influencing policymaking at NHTSA. Expected to play a key role in regulating self-driving vehicles, the agency is taking a more forceful approach to enforcement under Biden after getting its first new administrator in five years.
Musk’s top priority right now is the launch of his own special robotaxi model on October 10. Built on a new vehicle architecture designed from scratch, the model is expected to be without a steering wheel and pedals. The problem is that regulators are already grappling with the risks of fully autonomous cars. Removing all manual controls from the vehicle would add complexity to the equation.
That’s one of the key reasons GM cited as why its robotaxi business, Cruise, will now ditch its custom-built model called the Origin in favor of what will essentially be a road-ready version of the next Chevrolet Bolt EV, only with more sensors and integrated computing.
When asked what this would mean for Musk’s robotaxies, Musk falsely claimed it wouldn’t be a problem because Waymo already has permits to operate in several cities. However, Alphabet’s autonomous car subsidiary uses a modified Jaguar i-Pace EV for its robotaxies.
