Tesla Q2 earnings reveal risks to EV business from Trump presidency

His embrace of the former president’s brand of politics has already led to a growing exodus of customers in California to his direct rival Rivian, another EV-only carmaker founded in the Golden State. 

But it could end up costing him dearly elsewhere as well. After the close of markets on Tuesday, Tesla revealed quarterly profitability from the sale of EVs dropped to its lowest level in five years, spooking investors and setting the stock up for a weak start in early Wednesday trading (shares were down more than 8% in pre-market trading). Worse, nearly half of the $1.89 billion it earned before tax accrued from the sale of regulatory CO2 credits, which could be on the chopping block should Trump be returned to office. 

Rohan Patel, Tesla’s head of global public policy until April, warned the Trump administration did everything in its power to dismantle California’s carbon credit scheme and he would likely try again.

“One of the major drivers of this quarterly revenue was mentioned twice as a target for elimination by Trump in his convention speech,” Patel wrote on Tuesday.

Tesla raked in a record $890 million from the sale of EV credits, a market-based instrument to reduce ambient CO2 levels by driving adoption of electric cars. Essentially rivals that do not sell enough EVs to meet minimum quotas pay companies that are compliant for the right to continue selling combustion engine cars. 

A reminder…. One of the major drivers of this quarterly revenue (GHG and ZEV Standards) was mentioned twice as a target for elimination by Trump in his convention speech.

From 2017-2021, Trump and his EPA leadership did everything they could to dismantle those pollution… https://t.co/gAAr6Ev7Bi

— Rohan Patel (@rohanspatel) July 23, 2024

This additional revenue stream is essentially pure profit and companies can bank credits in excess of what they need. In the case of an EV-only player like Tesla that has no combustion business to offset, the constant flow of lucrative credits has been what the fossil fuel industry would call a “gusher”, for lack of a better word. 

Musk downplays concerns around Trump

When Tesla initially began to turn a profit, it was only thanks to this regulatory bonanza, which led critics to argue at the time it was effectively a EV credit sales company with a loss-making auto business bolted on. 

The importance of the credits has grown of late as a result of Musk’s EV price war. Heavy discounting by Tesla has diluted profitability from auto sales, with auto gross margins (not including credits) dropping to 14.6% in the quarter. This is the lowest since at least the start of 2019, according to UBS. Moreover, other carmakers unable to compete with Tesla are dialing back their own loss-making EV business and now need to purchase more credits.

Unsurprisingly Musk, who is not shy about placing his politics above his business interests, sought to downplay the risks from his Trump endorsement.

“I guess there would be some impact,” he admitted on Tuesday. “It would hurt Tesla slightly,” but that’s not all that bad since it would be “devastating” for his competitors.

Construction of Giga Mexico likely shelved due to Trump tariffs

Another key risk posed by Trump is to its Giga Mexico facility in Nuevo León, first announced in March 2023. This was supposed to be the home of its low-cost car model that would sell in the millions and drive the next wave of 50% annual volume growth. 

As EV growth started to cool after demand from early adopters became saturated, car companies began to delay investments in new EV factories—and Musk was no exception. Now he said he could end up shelving plans for the Nuevo León facility entirely should his favored candidate be elected. 

“Trump has said that he will put heavy tariffs on vehicles produced in Mexico,” Musk told investors on Tuesday’s earnings call. “So it doesn’t make sense to invest a lot in Mexico if that’s going to be the case.” 

There is a potential scenario in which a Trump presidency could help Tesla. The real estate mogul takes a dim view of government involvement, viewing regulatory guardrails more as a straightjacket that chokes off entrepreneurism. 

He left the top job at the National Highway Traffic Safety Administration (NHTSA), the federal agency for the automotive industry, vacant for the entirety of his administration after the Senate refused his nominee.

Trump could help Musk’s robotaxi plans by relaxing traffic safety regulations

Musk’s support for Trump could hand the Tesla CEO an important say in influencing policymaking at NHTSA. Expected to play a key role in regulating self-driving vehicles, the agency took a more robust approach towards enforcement under Biden once it got its first new administrator in five years.

Musk’s immediate top priority is the Oct. 10 unveiling of his dedicated robotaxi model. Built on a new vehicle architecture designed from the ground up, it is widely expected to lack a steering wheel and pedals. The problem is regulators are already grappling with the myriad risks from fully autonomous cars. Removing all the manual controls from a vehicle throws additional complexity into the equation. 

That’s one important reason GM cited as to why its robotaxi business Cruise will now ditch the purpose-built model called Origin in favor of what will essentially be an off-the-shelf version of the next Chevrolet Bolt EV only with more sensors and onboard compute.

When asked what implications this has on Musk’s robotaxi, Musk incorrectly claimed it would  not be a problem since Waymo already has approval to operate in several cities. Alphabet’s autonomous car subsidiary, however, utilizes a souped-up Jaguar i-Pace EV for its robotaxis.