Debunking the myths about Elon Musk’s companies

I see a lot of misinformation being spewed on the internet about Elon Musk’s companies, Tesla and SpaceX. I have my own criticisms of these companies, based on environmental grounds, but almost all the criticisms that I encounter on the internet about Musk’s companies are erroneous and often malicious.

The two chief criticisms being bandied about on the internet are that Musk’s promises are based entirely on hype and fake claims and that his companies only survive due corporate welfare from the government. These charges are false, but like a lot of the misinformation on the internet, they are repeated so often that they obtain the status of commonly accepted wisdom.

Usually I ignore them, just like I ignore most of the obvious garbage floating around on the internet, but this comment from “Gmail X” to a Youtube video about the Falcon Heavy got under my skin:

Sorry kids. None of Musk’s companies deliver. He sells hype and imagination to low information people in return for billions in corporate welfare.

If this were just the erroneous opinion of one ignoramus on Youtube, then it would hardly be worth responding, but Gmail X’s flippant comment synthesizes a lot of what has been written about Elon Musk’s companies, including in some of the more reputable publications. There been an organized campaign by shorts in a number of news outlets to discredit Tesla. While the criticism is generally more subtle, it often boils down to these two basic points expressed by Gmail X that Musk’s companies peddle hype to gullible people and they only survive due to government subsidies. Both of these canards need to be debunked.

The technical innovation at Elon Musk’s companies is very real. Tesla’s Model 3 and SpaceX’s Falcon 9 are marvels of modern engineering. Elon Musk may lay out grand visions which appear impossible to fulfill, but his companies have doggedly worked at making those visions reality. They may not do it on Musk’s original time frame nor quite as grandiloquently as Musk presented the concept, but they have an amazing track record of eventually achieving goals that even the experts often believe to be impossible.

SpaceX was the first company in the world to do propulsive landing from orbit and its Merlin 1D engines have the highest thrust-to-weight ratio of any rocket engine in the world. The Raptor engine for the upcoming BFR will be the first methane rocket in commercial use and it will operate at 300 bar, which will be the highest rocket engine pressure in the world. The Falcon Heavy has achieved the lowest cost per kg to geosynchronous transfer orbit (GTO) of any rocket in the world and the BFR promises to eventually get to $1000 per kg.

Tesla not only produces the EVs with the longest driving range in the industry, but it has the best autonomous driving features currently on the market. Its batteries have the highest energy density per kg and its cars are rated the safest ones on the road. The Model 3 arguably has the most energy efficient EV engine on the market due to its innovative use of a Halbach array of permanent magnets. The Model 3 is also the first car to ever combine all cooling systems into one unit, so separate cooling systems are not needed for the battery and the air conditioning.

As for corporate welfare, SpaceX received no government grants or contracts for the first 6 years of its existence, which no other American rocket company can claim (ULA, Boeing, Lockheed Martin, Orbital ATK/Northrup Grumman, Aerojet Rocketdyne, etc.) except for Jeff Bezos’ Blue Origin, which has never even completed a single commercial launch. The only grant that SpaceX has received from the US government has been $33.6 million from the USAF to develop its Raptor low vacuum upper stage engine and SpaceX will pay for 2/3 of the cost. Compare that the fact that the USAF is paying 5/6 of the $353.8 million needed to develop Aerojet Rocketdyne’s AR1 engine. The US government hasn’t given SpaceX any grants to develop its Falcon 1, Falcon 9, Falcon Heavy or future BFR rockets, whereas the USAF just announced that it will give $967 to ULA million to develop its next generation Vulcan rocket, $792 million to Northrop Grumman to develop its OmegA rocket and $500 million to Blue Origin to develop its New Glenn rocket. 

All other money that SpaceX has received from the US government has been in launch contracts which have saved US taxpayers billions of dollars. SpaceX charges the USAF between $82 and $98 million to launch the Falcon 9, whereas ULA has charged an average of $397.5 million to launch the Atlas V between 2015 and 2019 (including the annual EELV Launch Capability contracts), so SpaceX saves the US taxpayers $300 million per launch. SpaceX just signed a $130 million contract with the USAF to launch the Falcon Heavy, whereas ULA charges over $500 million for the Delta IV Heavy, which carries half the payload of the Falcon Heavy.

The charge that Tesla gets a lot of corporate welfare is also absurd. Tesla got a $465 million loan from the Energy Department’s Advanced Technology Vehicles Manufacturing (ATVM) program, which was repaid 5 years early with between $15 and $20 million in profit for US taxpayers. In comparison, Ford got $5907 million and Nissan got $1448 millon in loans from the ATVM which they still haven’t repaid and Fisker defaulted on its $192 million loan from the ATVM. In addition, Chrysler got a $12.5 billion loan from the Treasury Department’s Troubled Asset Relief Program (TARP) during the auto bailout, which was repaid at a $1.3 billion loss to US taxpayers. GM got a $68.2 billion loan from TARP, which was repaid at a $8.9 billion loss to US taxpayers.

Yes, buyers of Tesla cars get a $7500 federal tax rebate, but none of that money goes to Tesla and it is available to all buyers of electric vehicles from any automaker. The idea that people would not buy Tesla cars without the federal tax rebate is absurd. The Tesla Roadster in 2008 cost $109,000 and the Roadster 2.0 will start at $200,000 in 2020, yet both have enjoyed large numbers of preorders. The Model S currently costs between $78,000 and $142,500, yet 206,700 of them have been sold over the last 3 years. The Model 3 had over 450,000 preorders, more than any other car in history, and its typical selling price is $47,300, so it is hardly a cheap car. People who just wanted the Model 3 because of its federal tax rebate could have bought the Nissan Leaf or Chevy Bolt, whose starting prices are much cheaper at $29,990 and $37,495, respectively. Most people who are waiting for the cheaper $35,000 standard model of the Model 3 probably won’t end up getting any federal tax rebate, since it has been cut in half in H1 of 2019 and to a quarter in H2 of 2019 and will disappear entirely in 2020. In other words, almost all the Model 3 customers who will end up getting the tax rebate had to pay even more than the rebate in order to get early versions of the car before the standard model will be released. Despite making customers pay extra for the car, it still hasn’t been able to keep up with demand. The Model 3 is currently the fourth best selling car in the US, and it would probably be the top selling car if it weren’t production constrained.

The argument that Tesla only survives because of its Zero Emission Vehicle (ZEV) credits from California and 9 other states is also hogwash. In Q3 2018, Tesla sold $52.3 million in ZEV credits out of $6.8 billion in total revenue, which generated $312 million in profits. Tesla clearly doesn’t need ZEV credits to survive. Other car companies are buying ZEV credits from Tesla, because they failed to sell enough EVs, plugin hybrids and hybrids, so they need to buy credits from Tesla to make up for their own lack of innovation.

The problem with misinformation bandied about on the internet is that it is often based on a grain of truth, but that grain of truth is turned into a mountain of malarkey. For example, it is true that SpaceX only survived as a company due to government contracts. In late 2008, SpaceX was on the verge of going bankrupt, after 6 years of being funding almost exclusively by Elon Musk. It would have been very difficult for Musk to raise any venture capital for the company at the height of the economic crash. NASA saved SpaceX from bankruptcy by awarding it a $1.6 billion contract in December 2008 to launch 12 times to the International Space Station (ISS) between 2009 and 2016.

NASA did save SpaceX, but it was in NASA’s best interest to save the company, since it ended up saving NASA billion of dollars and dramatically reducing the cost of getting to space over the next decade. NASA paid SpaceX $133.3 million per launch, but paying SpaceX for launches was much more efficient that the old way of supplying the ISS by the Space Shuttle which cost an average of $450 million per launch. Hiring SpaceX to fly to the ISS was a much better deal than the other deal that NASA signed on the same day with Orbital Sciences Corporation to launch 8 times to the ISS for $1.9 billion. In other words, Orbital was charging $237.5 million per launch, which was $104.2 million more than SpaceX.

NASA awarded these launch contracts to the ISS in order to develop a privatized space industry in the US which would be able to lower NASA’s costs and guarantee the agency access to space in the future. NASA achieved those goals in spades with SpaceX, but it has largely failed with SpaceX’s competitors. Orbital’s Antares 100 rocket used a first stage built by the Ukranian company, Yuzhnoye SDO. It used old Russian NK-33 engines built in the late 1960s and early 1970s, which had been refurbished by Aerojet Rocketdyne. After two Antares rockets blew up in 2014, Orbital had scrap the Antares 100 and used ULA’s Atlas V rocket with its Russian RD-180 engines to get to the ISS. Orbital, now renamed as Orbital ATK, launched its redesigned Antares 200 rocket in 2016. Its first stage was now built in the US, but it used Russian RD-181 engines.

In 2014, NASA signed contracts with Boeing and SpaceX to carry crew to the ISS. Boeing will launch its CTS-100 Starliner atop an Atlas V rocket. Boeing is charging $1.4 billion per crewed flight to the ISS, whereas SpaceX is charging $866.7 million per crewed flight. NASA also signed contracts in 2016 with Sierra Nevada and Boeing to supply the ISS, but both companies will launch their vehicles atop the Atlas V, so all four of SpaceX’s competitors are relying on Russian engines to get to the ISS, and all charge NASA almost twice as much as SpaceX.

Between 2010 and 2018, SpaceX’s share of the international commercial rocket launch market, grew from 0% to over 60%, while the Russian share fell from almost 60% to %0. SpaceX now has over 100 launches on it manifest worth $12 billion dollars. Considering that it only launched 22 times in 2018, it has a 4 year backlog of launch orders, so it hardly needs US government contracts to survive. In fact, it is doing the American people a favor by launching for so much cheaper than its competitors. Any suggestion that the US government is subsidizing SpaceX should be turned into a discussion of how much money SpaceX has saved American taxpayers.

One area where there is some validity to the claim that Tesla is dependent upon government subsidies in in selling its solar panels. SolarCity wouldn’t have grown nearly as fast as it did without the help of the Investment Tax Credit (ITC) which deducts 30% of the price of residential and commercial solar panels from federal taxes and the California Social Initiative which used to pay $3 per installed watt of solar in single family homes. SolarCity installed 34.1% of residential solar in the US in 2015, but after the company was acquired by Tesla for $2.6 billion in November 2016, its market share has since fallen to 18% of residential solar. Tesla’s Energy division, which includes both solar and battery storage, only represented 6.5% of the company’s total revenue in Q3 2018, and solar probably represents around 4%. The loss of the ITC would probably only reduce total revenue at the company by 1% or 2% and would hardly bankrupt the company.

Tesla didn’t receive any money from the ITC, the California Solar Initiative and similar government incentives to promote the use of solar, but they did increase market demand for solar which helped increase Tesla’s solar sales and the demand for its home batteries. The federal Production Tax Credit (PTC) for wind and solar also helped increase demand for Tesla’s grid storage batteries, since utilities investing in renewable energy needed a way to store it. The new mandate from the California government that new residential construction must have solar panels will also increase the demand for Tesla’s panels and batteries, which may be a significant factor in the future, but is currently only a tiny proportion of the company. By the time Tesla manages to produce its batteries at enough scale to ramp up its sales of the Powerwall and Powerpack, most of the federal ITC and PTC subsidies will have expired. The ITC will only allow 10% of the cost of a new residential solar system to be deducted from federal taxes after 2021 and California’s mandate for solar in new construction provides no subsidies.

The biggest direct subsidies that Tesla has received have been in the form of subsidies from states hoping to attract investment and jobs. In 2014, Nevada pledged to provide up to $1.25 billion in tax rebates and incentives over 20 years if Tesla set up its battery factory, known as the “Gigafactory” outside Reno. Tesla was given a 10 year exception from property and business taxes, and a 20 year exception from sales taxes, plus some other perks like $43 million dollars in road construction to connect to a south-bound highway. In return, Tesla pledged to invest $3.5 billion in the factory by 2024 and provide 6,000 jobs that paid at least $22 per hour in 2018 and at least $25 per hour in 2024.

Tesla has already met its pledges to the state 6 years ahead of schedule. According to a report issued in December 2018 by the Nevada government, the Tesla has carried out $6.05 in capital investment in the Gigafactory and it now has 7,059 employees. The average hourly wage is $25.78. Plus, its construction has created 17,000 direct construction jobs and 7,900 indirect jobs between 2015 and 2018. The total economic impact of the Gigafactory’s construction has been $3.23 billion in the region. The three surrounding counties have grown by 25,500 inhabitants since 2014 and other tech companies have set up shop in the region. Gigafactory employees accounted for $57.7 million in total tax revenue in 2018.

It is still debatable whether Nevada should have spent $183,000 per job in order to attract Tesla to the state, but Tesla has exceeded the state’s projections in terms of the economic benefits. The construction of the Gigafactory has jumpstarted an advanced industrial base in a region that previously only had a service economy.

On the other hand, the subsidies that New York state is giving SolarCity/Tesla to set up solar manufacturing in Buffalo have not brought nearly as many economic benefits to a depressed region which has been losing its manufacturing jobs. Tesla must create 1,460 jobs at the RiverBend factory which Tesla calls “Gigafactory 2” by April 2020 and 5,000 jobs within 10 years or it risks paying up to $41.2 million for every year that it falls short. Tesla made the commitment in exchange for the state spending $750 million to repurpose an old steel mill that was shuttered in 1984 and equip the plant for solar manufacturing.

SolarCity projected when it signed the deal with New York in 2014, that it would need well over a gigawatt of solar capacity per year. Its solar installations, however, have fallen from a high of 870 MW in 2015 to roughly 350 MW in 2018. Tesla has retreated from the zero money down and purchasing power agreements that caused SolarCity to expand massively in the past, but put it $2.9 billion in debt. Tesla also sought to cut its costs by getting rid of its door-to-door solar sales force and its Home Depot stores, in favor of sales at its Tesla stores and selling online. These measures have made its solar more profitable, but have also reduced the need for a solar Gigafactory.

SolarCity never managed to perfect the manufacturing of solar cells using the techniques pioneered by Silevo, which it bought in 2013. After acquiring SolarCity, Tesla scrapped the idea of manufacturing its own cells and partnered with Panasonic which had decades of experience manufacturing high efficiency solar panels. Most of the 800 employees currently working in the Gigafactory 2 are now Panasonic employees. Tesla has encountered repeated production problems trying to manufacture solar roof tiles made of glass. It has over 10,000 preorders for its solar roof, but it hasn’t yet managed to iron out all the problems trying to sandwich solar cells inside of tempered glass.

Although Tesla has met its employment quotas thus far, the economic benefits of the Gigafactory 2 for Buffalo have been limited and some now regard the Gigafactory 2 as Governor Cuomo’s boondoggle. Much of the solar manufacturing equipment purchased by the state for the Gigafactory 2 turned out to not be useful, since Tesla decided to make solar tiles instead of panels and Panasonic needed its own specialized equipment to manufacture it high efficiency HIT cells. Even worse, the president of SUNY Polytechnic Institute which was the state’s local partner in the deal and the president of the company which was contracted to set up the factory were both convicted of corruption in 2018 for the way they handled the Gigafactory 2 contracts.

The Gigafactory 2 might eventually bring the promised economic benefits to Buffalo, but it is going to be a tough row to hoe. Many solar manufacturers in the US, including SolarWorld and Suniva, have gone bankrupt in recent years. Only specialty manufacturers, which don’t compete with the mass production of China, have managed to survive, such as First Solar, which makes thin film solar for utilities, and SunPower, which makes the highest efficiency panels on the market and has moved most of its manufacturing abroad to cheaper places like Malaysia and Mexico. Trump’s 30% tariff on foreign-made solar panels may help the profitability of Gigafactory 2 to some degree, but it has also increased component prices and reduced overall demand for solar in the US.  If Tesla can ever perfect its solar roof tiles, it can command a premium over other types of solar, but solar manufacturing is one of the most competitive industries in the world, so there is no guarantee.

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It can be argued that Elon Musk’s companies shouldn’t be receiving these sorts of subsidies, but it is disingenuous to single out Tesla and SpaceX  and accuse them of living off the public purse, while ignoring far more egregious examples of public subsidies going to their competitors. In November 2013, Washington State voted to give Boeing $8.7 billion in incentives between 2014 and 2040, which was the largest single subsidy ever granted by an American state. Boeing has wrangled a total of $12.3 billion in incentives from Washington State, plus $450 million from South Carolina and $229 million from Missouri, as well. According to Good Jobs First, Ford, GM and Fiat Chrysler Automobiles have received $4.06, $6.12 and $2.20 billion, respectively, in public subsidies since 1976. If Tesla and SpaceX are going to be criticized for sucking on the public teat, then their competitors should be lambasted even more.

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