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Taxpayer Subsidies Helped Tesla Motors, So Why Does Elon Musk Slam Them?

Silicon Valley has always relied on the government to jump-start innovative businesses—no matter how much it clings to the go-it-alone narrative.

Tesla Model S
The Model S Tesla Motors

Inside Tesla's sleek showroom in Menlo Park, a group of high schoolers drools over the Model S with a lust once reserved for the Ferrari Testarossa or Lamborghini Countach. "Whoa, awesome!" a pimply kid says as a brush of his hand causes the car's recessed door handles to magically emerge. But the Model S's biggest feat of engineering can't be seen: "There's over 7,000 of these stacked underneath," Tina the sales rep tells me as she holds up what looks like a shotgun cartridge. It's a Panasonic laptop cell.

No other component means as much to Tesla's future. In order to make good on Musk's pledge to roll out an affordable version of the $70,000 sedan within a few years, Tesla must shave thousands of dollars off its battery costs without seriously sacrificing range. That, however, may again depend on massive subsidies—in this case funding to battery researchers and manufacturers by the governments of Japan and China. Over the past five years, Japan's New Energy and Industrial Technology Development Organization, a public-private partnership founded in 1980, has pumped roughly $400 million into developing advanced battery technologies. Tesla's Panasonic cells also might be pricier if not for subsidies the company received to expand its battery plants in Kasai and Osaka. Government support means "faster and more efficient development" of next-gen batteries, Panasonic spokesman Chieko Gyobu says in an email. Without that backstop, many private companies are reluctant to gamble on groundbreaking technologies whose costs can easily spiral out of control.

Tesla might have survived without the government loan, but "it would have been difficult," notes Musk's cofounder, and "would likely have diluted Elon's share of the company."

Just look at Tesla. In 2007, it was teetering on the brink after its Roadster model ran way over budget and took twice as long as promised to get to market. Musk, then Tesla's chairman, cut costs by pushing out many longtime employees—including cofounder and CEO Martin Eberhard. R&D director Peng Zhou anonymously leaked the company's financials to Valleywag, revealing that Tesla had burned through "multiples of tens of millions" in customer deposits but had only delivered 50 cars. "I cannot consciously be a bystander anymore and allow my company to deceive the public and defraud our dear customers," he told the tech blog a few days before submitting his resignation.

By this time, Musk had sunk $74 million of his own fortune into Tesla, and most of the rest into SolarCity and SpaceX. A divorce filing revealed that he'd borrowed from friends to cover his considerable living expenses. "Elon has huge steel balls. He truly does," wrote his ex-wife, who said she learned of their impending divorce from a voice mail Musk left for her therapist. (Six weeks after filing for divorce, he was engaged to a British actress 15 years his junior.)

Musk was determined to keep Tesla alive. Making the Roadster profitable and selling battery packs to Daimler, he believed, would buy him enough time to secure government support to launch the Model S. "The application for this loan guarantee (and others) was instigated near the end of my tenure at Tesla, and was pushed very hard by Elon," Eberhard told me via email. He doesn't dispute his old partner's claim that Tesla would have survived without the DOE loan, but writes, "it would have been difficult, and it would probably have required Tesla to raise more capital. This would likely have diluted Elon's share of the company: Loans are nondilutive, whereas selling stock is dilutive. This is perhaps why Elon was so enthusiastic about pushing for the loans."

The Tesla case "shows the value of these subsidies," says author Jim Motavalli. "And the Fisker case shows the danger of it."

So, in April 2009, Musk turned to one of his old business tactics: He threw a kegger. The politicos who gathered over beers in Washington's National Building Museum were given rides in the Model S around a giant indoor track. Three months later, the loan was approved.

It was money well spent, especially compared with some of the DOE's other investments: Fisker, a rival electric-car maker that received an even larger loan that year, has halted production and is now contemplating bankruptcy. By repaying his loan early, Musk distanced himself from such failures and helped reassure investors that Tesla could drive on its own. "I think the Tesla case is one that actually shows the value of these subsidies," Motavalli told me. "And the Fisker case shows the danger of it."

But make no mistake: Tesla still relies on subsidies to stay in the black. Its first-quarter profit, a modest $11 million, hinged on the $68 million it earned selling clean-air credits under a California program that requires automakers to either produce a given number of zero-emission vehicles or satisfy the mandate in some other way. For the second quarter, Tesla announced a $26 million profit (based on one method of accounting), but again the profit hinged on $51 million in ZEV credits; by year's end, these credit sales could net Tesla a whopping $250 million. There are also generous tax credits and rebates for electric-car buyers: $7,500 from the federal government and up to $5,000 if you live in California.

"We needed the incentives to get to the point where we are right now," admits SolarCity CEO Lyndon Rive.

SolarCity is even more dependent on subsidies. Its solar panels would cost a fortune if not for decades of government-funded R&D in the United States, Japan, and Germany—and huge manufacturing subsidies in China. Nor would SolarCity be profitable without a 30 percent federal tax credit for solar installations that allows it to sell electricity to consumers at rates below what the utilities charge. "We needed the incentives to get to the point where we are right now," CEO Lyndon Rive told me. "It's a fact."

SpaceX might as well be part of NASA, which has coughed up more than $685 million to help the company develop its rockets and commercial space-flight capabilities—not to mention the hundreds of billions of dollars NASA and other public institutions have spent researching space travel over the decades.

Could Musk's companies have taken flight without subsidies? Certainly many progressives would agree with his call for a carbon tax, but it's no replacement for subsidies. The carbon tax that would be needed to prop up SolarCity, which installs run-of-the-mill residential panels, is well beyond what would be politically palatable. "Even with a carbon price, you are still going to need funding for next-generation R&D," notes Cai Steger, an energy policy analyst with the Natural Resources Defense Council. "You are still going to need to address the fact that it's incredibly difficult to get a really exciting, really risky product online."

"I just think Elon hasn't thought really deeply about what a carbon tax can and can't do, and what it's actually going to take to get technologies like his solar panels and electric cars competitive everywhere," says Matthew Stepp, a senior policy analyst for the Information Technology and Innovation Foundation. "People in Europe, their gas is about $8 or $9 a gallon, and they are not driving electric cars, because there are a lot of inherent technological challenges with electric vehicles." The point of a subsidy, Stepp adds, is to help companies create a clean car that people will actually buy.

"You can make the case that SpaceX is the ultimate in libertarian thought," a former PayPal exec told me.

The libertarians in Musk's fan club seem willing to overlook his chummy relationship with Uncle Sam. At last year's Atlas Summit, a conference for libertarian devotees of Ayn Rand, a panel on "SpaceX and the future of space flight" inspired breathless comparisons between Musk and John Galt, Rand's persecuted inventor, who retires to a secret mountain hideaway dubbed Galt's Gulch. Libertarians see outer space as a sort of Galt's Gulch sans pareil—so long as getting there doesn't mean ceding any control (or profit) to the federal government. "You can make the case that SpaceX is the ultimate in libertarian thought," a former PayPal exec told me, "because although they are doing work with the government, they are also kind of taking away NASA's monopoly."

Of course, if SpaceX colonizes Mars on its own, it could very well become the government. Like the characters in the sci-fi novels he read as a child, Musk has a strong impulse to build his own city-state in the sky. He intends to lead the pilgrimage, and even has expressed his desire to die on the red planet—"just not on impact."

He contents himself in the meantime with more modest excursions. In a nod to the past, he and Ressi have been competing to see who can throw the most outlandish birthday parties—trips for 30 friends and spouses to far-flung corners of the world, all expenses paid. "I am more into unusual destinations," such as Florianópolis, an island off the coast of Brazil, Ressi says. "Elon favors castles."

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