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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Tesla’s License Plate Mystery Debunked

Across the entire auto industry, perhaps no company attracts more interest than Tesla despite the fact that the company sells only a tiny fraction of the number of cars sold by most of its competitors. That level of attention is an indicator that the Tesla investment story is not over yet and in a world where true revenue growth is so hard to come by, Tesla is very unusual indeed. A strange story out of Denmark illustrates this point.

The Danish government recently accused Tesla of trying to exploit loopholes in current tax law to benefit from a series of expiring tax subsidies. The Danish Tax minister Karsten Lauritzen initially accused Tesla of buying its own cars now to benefit from the subsidies with plans to sell them later after the subsidies expired. The plan would have been quite clever and a great way for Tesla to exploit a loophole in Denmark’s tax structure – if it were true. Shortly after the story broke, Lauritzen appeared to backtrack saying that he had received a satisfactory explanation for the company’s actions, which did not involve an effort to exploit Danish tax law for a profit. Related: OPEC’s Newest Member That Actually Likes Low Oil Prices

The crux of the story is that Tesla ordered 2,500 license plates for cars it sells, leading the government to believe it was going to buy 2,500 cars with the subsidies and then turn around and sell those cars at unsubsidized prices after the subsidies expired. There would actually be nothing illegal about this. In fact, any average Danish citizen could do exactly that. Buy a Tesla, park it in the garage for a year, and then sell it as essentially new once subsidies expire the price on new Tesla’s triples.

Yet that is not what Tesla was doing. It turns out that the apparent license plate mystery is really a classic matter of supply and demand. Tesla sold a little under 1,000 cars in Denmark last year. As Tesla’s products have gotten better and concern about range anxiety has eased, the company’s demand has been growing consistently. Critics say that Tesla’s demand growth is not keeping up with the hype, and perhaps that is true, but there is little doubt that the company does have real growth in a world otherwise largely bereft of it. Related: Turkey Prepares For Protracted Standoff With Russia

Tesla says it expects to sell 2,500 cars in Denmark over the next year and that is why it ordered the license plates. That rate of growth also highlights the unintended consequences of variation in tax subsidies over time. People always have an incentive to maximize their own prosperity, and the elimination of the Tesla tax subsidies is distorting demand as a result of that human propensity. As the subsidies expire the prices on top of the line Tesla’s will roughly triple from around $90,000 to around $270,000. Related: The Hidden Danger Of OPEC’s Market Share Strategy

The expected increase in Tesla prices is causing everyone who was even considering buying a Tesla in the next couple of years to rush to buy one this year. Put differently, what rational consumer would voluntarily choose to pay three times the price for a product in a couple years when they could buy it this year instead? This problem is particularly acute for durable goods like cars.

The reality is that Tesla’s license plate mystery is no mystery at all. It’s simply a story of rational consumers, inefficient government policies, and a product with growing demand. Mystery solved.

By Michael McDonald of Oilprice.com

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Leave a comment
  • Carlo Ombello on December 13 2015 said:
    How could a $100k Tesla ever get to cost 270,000 dollars?! Not so sure figures are correct.
  • Zwalderon on December 14 2015 said:
    Wow. An unbiased follow up to an article that was critical to Tesla. Unprecedented.
  • Brent Jatko on December 14 2015 said:
    I think the $270,000 figure may be correct. I know Danish import taxes on cars are tremendously high, around 180%, see link: http://www.bloomberg.com/news/articles/2015-09-29/teslas-hit-by-180-tax-in-denmark-as-green-goals-get-left-behind
  • Johnny on December 14 2015 said:
    I'm still confused. The subsidies expired at the beginning of 2016, right? Tesla ordered 2,500 plates in advance with the plan to sell these throughout 2016, and that's not wrong?

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