On September 4, Nevada Governor Brian Sandoval announced that electric car-maker Tesla had chosen Nevada for the location of its much sought-after Gigafactory. Contrary to its claim that it wanted $500 million, Tesla in fact wanted speed plus the highest bidder. As I analyzed last month, a $500 million subsidy would have been relatively low as measured by the benchmarks of cost per job and aid intensity (subsidy divided by investment).
Instead, Nevada gave Tesla subsides worth $1.25 billion over 20 years. This is not a good deal, as I will detail below.
First, of course the cost was far higher than Tesla had hinted; it clearly was just trying to squeeze extra incentives out of the "winner" by conducting a five-state auction. Using a discount rate of 2.5% (the 10-year Treasury bond yield on Sept. 4 was 2.45%) the $1.25 billion in nominal value has a present value of about $1.1 billion, by my calculations. In fact, it is probably quite close to the full $1.25 billion because the sales tax breaks based on the actual investment in plant and equipment will be heavily front-loaded, not spread evenly over the 20-year period.
According to the Reno Gazette-Journal article linked above, the incentives break down as follows:
$725 million in sales tax abatements over 20 years
$332 million in property tax abatements over 10 years
$120 million in investment tax credits
$75 million in job creation tax credits for up to 6000 (note: not 6500) jobs
$27 million in a 10-year business tax abatement
$8 million in discounted electricity rates for 8 years
Note by the way that we should, in this instance, count the sales tax breaks as a subsidy. Because Nevada does not have either personal or corporate income tax, sales tax becomes more important to the state, though of course not as much as for a state lacking Nevada's taxes on gambling revenue. More specifically, though, this is for sales of plant and equipment to be used in the factory, so it is directly tied to the investment.
Second as pointed out to me by Richard Florida in a draft article for CityLab, while these jobs pay $25 per hour, the facility will be relatively self-contained, and will not create spinoff jobs on the scale that, for example, an automobile assembly facility does. Tesla's research and development will still be conducted at its headquarters in Palo Alto, California, not at the Gigafactory. One way we can tell: Tesla is giving a whopping $1 million to the University of Nevada-Las Vegas for research on batteries. (Professor Florida's excellent article is here.)
In terms of our usual metrics, a $1.1 billion subsidy for a $5 billion investment is 22% aid intensity, certainly not Boeing territory but higher than would be allowed in the European Union. It is lower than the typical U.S. auto assembly plant aid intensity of about 33%. However, the cost per job is $183,333, about 20% higher than an auto plant typically receives in the United States, for a project that is not as good as an auto plant. Thus, while it is hardly the worst deal we've seen, the incentive package is far too high for what the state is getting.
Moreover, this is quite a risky deal, too. As the Reno Gazette-Journal points out, this incentive package is 13 times larger than Nevada's previous biggest incentive, a mere $89 million for Apple. Talk about putting all your eggs in one basket!
Finally, we should note that if the Tesla project is successful, it will mean that we will see job losses at competing facilities (mainly engine plants) elsewhere in the country, so that national net job creation will be less than 6500. This will raise the true cost per job of the project.
Thus, we see yet another bad incentive deal, but at a much larger scale than usual. The package does need legislative approval, so it's not quite a done deal. But assuming it passes, Nevada taxpayers will take on a tremendous burden to lighten CEO Elon Musk's load.
Cross-posted at Angry Bear.
Showing posts with label automobile industry. Show all posts
Showing posts with label automobile industry. Show all posts
Friday, September 5, 2014
Friday, August 8, 2014
Tesla wants $500 million for its Gigafactory
Leigh McIlvaine (@Leigh M.) of Good Jobs First alerted me to this article on what Tesla Motors wants in incentives to land its $5 billion Gigafactory: $500 million. This massive 6500 worker facility will produce the next generation of batteries in order to introduce a less expensive line of cars in 2017, the Tesla Model 3. This would be a more affordable vehicle than the widely praised Model S, which starts at $69,900.
I'm not joking about the praise: Consumer Reports, my go-to source for product testing due to the fact that it does not accept ads and thus has complete independence, gave the Model S its best-ever score of 99 out of 100 when it tested the car earlier this year. It also leads the magazine's subscriber survey of customer satisfaction, with 99% of owners saying they would buy the car again. This is a vehicle, and a company, that is generating some serious excitement.
It's no surprise that the Gigafactory is generating serious excitement, too. 6500 jobs, a $5 billion investment, and cutting-edge technology is a heady mix for an economic development official. San Antonio, where Toyota makes pickup trucks, jumped into the auction quickly, offering "almost $800 million in incentives." Although Tesla has broken ground at a location near Reno, Nevada, last week CEO Elon Musk announced plans to break ground at one or two other sites as well. The company clearly considers speed to be of the essence.
It's unclear exactly what the company wants financially, and Tesla did not respond to my request for an interview to seek clarification of some important points. To be specific, does it want that $500 million in cash, in the form of property tax breaks over some number of years, land and infrastructure, or what? Most importantly, is Tesla's goal speed plus $500 million, or speed plus the highest bid? The company has sent mixed signals on this question.
As Forbes wrote, "Last week, Musk said that Tesla wanted to make sure a package was right for the winning state, as well as for Tesla." In the article's very next sentence, however, Tesla VP for communications and marketing, Simon Sproule, said, "Any publicly traded company has a fiduciary responsibility to get the best deal for its investment." Musk's comment seems to imply that $500 million is all the company wants. By contrast, fiduciary responsibility has often been used to justify a company going after the maximum incentives possible. Forbes quotes the business editor of the San Antonio Express-News that it was hard to tell if Tesla is conducting "a search (or) a shakedown."
Sproule disputed the shakedown thesis, despite invoking "fiduciary responsibility." How should we think about this project?
On the one hand, we could take Musk's comments as meaning that the company wants $500 million, no more, no less. Given that he expressed it as a percentage of the investment, my intuition is that we should assume that means $500 million in cash or cash equivalents like free land (my guess is that San Antonio's "$800 million" was mainly tax breaks, which would have a lower present value). If that's true, Sproule's contention that the incentive is not really so expensive is actually true in a comparative sense. A 10% aid intensity (subsidy/investment) would be the second-lowest for a large automotive facility in the modern history of megadeals. It would even probably be legal in the European Union under its Regional Aid Guidelines, if it were located in one of the EU's poorer regions. Moreover, the cost per job would be $76,923, substantially below the $100,000-$150,000 level common for most U.S. automobile assembly plants.
Of course, cost alone doesn't make a deal a good one. In particular, if Tesla wants its incentives up front, there is a substantial risk that the project won't ultimately produce 6500 jobs, or that changes in the market could even lead to the Gigafactory closing. New Mexico lawmakers have certainly recognized the importance of this vis-a-vis Tesla. In my email to Tesla, I asked what taxpayer protections, like clawbacks, the company is prepared to accept. Alas, no response, but I will update if I do hear back from Tesla.
On the other hand, if $500 million really is just meant as the minimum acceptable opening bid, all bets are off for saying how (comparatively) good a deal it might be.
Once again, we are confronting the issue of information asymmetry: government officials have less information about what the company really wants than the company has about the various governments, and of course its own intentions. This is a major source of bargaining power for companies shopping around for an investment location. If Musk really means that Tesla will voluntarily limit the incentives it requires, that would be a refreshing change from the typical bidding wars we have seen in so many industries. Or, it could just be business as usual, with the highest bid (adjusted for cost structure at the different locations) winning. We just don't know, but the decision is expected by the end of the year.
Cross-posted at Angry Bear.
I'm not joking about the praise: Consumer Reports, my go-to source for product testing due to the fact that it does not accept ads and thus has complete independence, gave the Model S its best-ever score of 99 out of 100 when it tested the car earlier this year. It also leads the magazine's subscriber survey of customer satisfaction, with 99% of owners saying they would buy the car again. This is a vehicle, and a company, that is generating some serious excitement.
It's no surprise that the Gigafactory is generating serious excitement, too. 6500 jobs, a $5 billion investment, and cutting-edge technology is a heady mix for an economic development official. San Antonio, where Toyota makes pickup trucks, jumped into the auction quickly, offering "almost $800 million in incentives." Although Tesla has broken ground at a location near Reno, Nevada, last week CEO Elon Musk announced plans to break ground at one or two other sites as well. The company clearly considers speed to be of the essence.
It's unclear exactly what the company wants financially, and Tesla did not respond to my request for an interview to seek clarification of some important points. To be specific, does it want that $500 million in cash, in the form of property tax breaks over some number of years, land and infrastructure, or what? Most importantly, is Tesla's goal speed plus $500 million, or speed plus the highest bid? The company has sent mixed signals on this question.
As Forbes wrote, "Last week, Musk said that Tesla wanted to make sure a package was right for the winning state, as well as for Tesla." In the article's very next sentence, however, Tesla VP for communications and marketing, Simon Sproule, said, "Any publicly traded company has a fiduciary responsibility to get the best deal for its investment." Musk's comment seems to imply that $500 million is all the company wants. By contrast, fiduciary responsibility has often been used to justify a company going after the maximum incentives possible. Forbes quotes the business editor of the San Antonio Express-News that it was hard to tell if Tesla is conducting "a search (or) a shakedown."
Sproule disputed the shakedown thesis, despite invoking "fiduciary responsibility." How should we think about this project?
On the one hand, we could take Musk's comments as meaning that the company wants $500 million, no more, no less. Given that he expressed it as a percentage of the investment, my intuition is that we should assume that means $500 million in cash or cash equivalents like free land (my guess is that San Antonio's "$800 million" was mainly tax breaks, which would have a lower present value). If that's true, Sproule's contention that the incentive is not really so expensive is actually true in a comparative sense. A 10% aid intensity (subsidy/investment) would be the second-lowest for a large automotive facility in the modern history of megadeals. It would even probably be legal in the European Union under its Regional Aid Guidelines, if it were located in one of the EU's poorer regions. Moreover, the cost per job would be $76,923, substantially below the $100,000-$150,000 level common for most U.S. automobile assembly plants.
Of course, cost alone doesn't make a deal a good one. In particular, if Tesla wants its incentives up front, there is a substantial risk that the project won't ultimately produce 6500 jobs, or that changes in the market could even lead to the Gigafactory closing. New Mexico lawmakers have certainly recognized the importance of this vis-a-vis Tesla. In my email to Tesla, I asked what taxpayer protections, like clawbacks, the company is prepared to accept. Alas, no response, but I will update if I do hear back from Tesla.
On the other hand, if $500 million really is just meant as the minimum acceptable opening bid, all bets are off for saying how (comparatively) good a deal it might be.
Once again, we are confronting the issue of information asymmetry: government officials have less information about what the company really wants than the company has about the various governments, and of course its own intentions. This is a major source of bargaining power for companies shopping around for an investment location. If Musk really means that Tesla will voluntarily limit the incentives it requires, that would be a refreshing change from the typical bidding wars we have seen in so many industries. Or, it could just be business as usual, with the highest bid (adjusted for cost structure at the different locations) winning. We just don't know, but the decision is expected by the end of the year.
Cross-posted at Angry Bear.
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