American Consequences - August 2017

Tesla destroys capital better than almost any other publicly traded company.

GIGAFACTORIES : The first gigafactory is Tesla’s battery factory in the middle of the Nevada desert. The facility will cost around $5 billion, and Tesla expects it to be the biggest building in the world once fully completed. Musk has said that Tesla will announce locations for another “two to four” gigafactories this year. FREMONT FACTORY: Late last year, the city of Fremont, California approved Tesla’s plans to nearly double the size of its factory there at a cost of around $1.3 billion. Most of the new manufacturing space will be used to produce the Model 3 sedan. RETAIL STORES AND SERVICE CENTERS: Unlike other automakers, Tesla doesn’t have an independently owned network of car dealerships. Instead, it sells directly to car buyers. This year, the company plans to add nearly 100 retail, delivery, and service locations globally (a roughly 30% increase in facilities). CHARGING INFRASTRUCTURE: Tesla has built more than 5,400 fast-charging stations (known as “Superchargers”) across North America. It plans to nearly double that amount to 10,000 Superchargers in coming years. The

company also plans to add 6,000 “Destination Charging” connectors (at hotels and restaurants) to its network of 9,000 existing connectors. All told, Tesla spent $1.3 billion in capital expenditures last year... that could climb to more than $3.5 billion this year. Tesla’s spending spree is unlikely to slow down... Earlier this year, Musk said that he envisioned around 100 gigafactories across the globe. Based on Musk’s aspirations, there is only one logical conclusion: Tesla will never generate positive free cash flow. In other words, Tesla’s cash flow will never be sufficient to halt its debt growth. The Model 3 is Tesla’s big test... Cars started rolling out of its factory this summer. Will the current investor hype survive the reality of the low-margin, lousy business of making cars? And for how much longer will cash-strapped governments around the world be willing to subsidize expensive luxury cars for the rich? We suspect Tesla shareholders won’t like either answer. More in the September issue of American Consequences ...

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