Tesla (TSLA, Financial) takes pride in its parentage, not from a conventional auto expert but a group of Silicon Valley engineers who set out to prove that electric vehicles could be a marvel. Tesla being a specialty automotive company has a very strong market hold in the electric cars and electric vehicle powertrain components manufacturing segment.
The Tesla management strategy was first launched as a premium segment car targeted at the topline buyers and after it has carved a name for itself in the premium category it is eyeing an entry in the larger and more competitive mass buyer market with an affordable price tag. In order to accomplish its vision of earmarking a strong presence in the mass production automotive sector it is looking to enhance its manufacturing facility and hence had launched a mega search for space to setup their new facility. Let us take a look at what brewed out of this mega search and its impact and outcome.
Nevada: The Icing on the Cake
The whole world was aware of the expensive $5 billion gigafactory deal of Tesla and had their eyes set on to find out the state that would win this deal and have Tesla as its laurel. Till last Thursday the street estimate was at least a $500 million, or 10 percent of the total expense would be the worth of the deal for the state which would bag Tesla.
Nevada emerged as the unexpected contender and swept the deal with heart winning incentive program for Tesla. Going by the market estimates the state of Nevada has offered a package to Tesla which values at $1.25 billion to be paid over the next 20 years.
To quote the Reno Gazette-Journal, they termed this offer by Nevada as “unprecedented in size and scope for the state of Nevada and is one of the largest in the country.” If approved, the package would be the 10th-largest offered by a state to convince a company to invest.
The local dailies have reported that this summer the state authorities of Nevada has already granted the required permits for Tesla to lay the foundation of their gigantic plant which would be running across 5 million square feet area. The whole package offered to Tesla by the state of Nevada is not just a lucrative deal but a bouquet of benefits which no one ever expected and should have managed to pierce the cupid arrow right through Tesla’s heart.
Apart from the pricing of the deal Nevada has also offered Tesla 100 percent sales tax rebate for $725 million which is a little over half the package value spanning over a period of 20 years. Tesla would also get 10-year, 100 percent property tax abatement worth $332 million. The state of Nevada has also made a provision for $120 million in transferable tax credits for Tesla. So should we term this effort of the state of Nevada as just an incentive business package for Tesla or a level ahead of the term incentive? Thursday in Carson City, Tesla’s billionaire CEO, Elon Musk, called Nevada a “get things done state.” This is the most befitting comment for the red carpet that Nevada has rolled out for Tesla.
Give and Takes between Tesla and its New Found Love in Nevada
Tesla would build a monster manufacturing unit here facilitating the mass production of their new age innovative cars. According to Tesla management’s projection the gigafactory will produce up to 500,000 battery packs a year for its electric cars by 2020 housing about 6500 workers and to top it up Tesla would be doing business in Nevada absolutely tax free for the first 10 years.
In return for all these exciting and mouthwatering toppings that Nevada is offering, Tesla must agree to invest $3.5 billion in manufacturing equipment and other property in Nevada. That’s only a third of what state officials as well as street analysts expect the company would eventually spend. To offset the other close contenders Texas and Arizona, where no sales tax is charged on manufacturing equipment, the tax abatement dossier by Nevada did work well. Tesla was also eyeing other locations like California and New Mexico but the package offered by Nevada was unparalleled and won the heart of team Tesla.
As pointed out by Wall Street Journal the $120 million in transferable tax credits is also nevertheless a cherry on the cake the advantage of which both Tesla and the state of Nevada can reap equally in the long run. Here’s how it will work for both of them: Businesses that don’t expect to owe much in taxes can sell the credits to other companies facing larger tax burdens. In this scenario Tesla can sell them to any company in Nevada which has got a fairly large tax liability, now since for the first 10 years Tesla’s business is made tax free in Nevada that will mean earning for Tesla by means of selling the transferable tax credits to a tax laden company in Nevada. On the other hand such transferable tax credits are often used to attract movie makers to a state, so is Nevada eyeing to woo a ‘20th Century Fox’ or a ‘Columbia Pictures’ next that is yet to be seen.
Market Opinion
The Reno paper says that this deal dwarfs Nevada’s previous incentives record, an $89 million package provided to Apple (AAPL, Financial). The sales tax abatement appears to have been crucial to Nevada winning the Tesla factory.
Although this is a remarkable achievement in terms of luring business to the state for Nevada however the deal is in no way comparable to the biggest incentive package on the book. That is the $8.7 billion provided by Washington State to Boeing (BA, Financial), according to the advocacy group Good Jobs First.
Take Away for the Observers
This new deal in the history of business has not only painted a positive picture for the state of Nevada to the business community but has also offered a lot to Tesla motors in particular to encash upon. The whole set of financial benefits rolled out in this deal for Tesla can make a huge difference in their book of accounts and if contemplated and used wisely can take the financial figures of Tesla motors sky high. The kind of tax abatement that has been meted out to Tesla is bound to create an upsurge in its earnings and profit bookings if things go as per schedule. For now it’s best to keep a close watch on how the whole deal get executed till the end and then take an outlook on the future performance of Tesla motors.
