How Will a Trump Presidency Affect Tesla?

By Markets Fool.com

Since Donald Trump was elected president of the United States on Nov. 8, shares of electric-car maker Tesla Motors (NASDAQ: TSLA) have declined about 5% as investors contemplate what a Republican-controlled White House and Congress means for electric-vehicle incentives.

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Tesla vehicles are fully electric, making them prime candidates for electric vehicle incentives. Image source: The Motley Fool.

President-elect Trump has outlined actions to eliminate some climate change-related government spending, noting in a press release on his campaign website he plans "to rescind all the job-destroying Obama executive actions including the Climate Action Plan."

This has left some investors wondering how the elimination of incentives would affect Tesla. But you'll probably be surprised by what Tesla actually anticipates the elimination of incentives would do for Tesla's business.

"Tesla's competitive position would increase, not decrease," Tesla CEO Elon Musk said on Thursday when discussing how the elimination of electric-vehicle incentives could affect the company.

How Tesla could benefit from incentive elimination

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Musk explained Tesla's stance on incentives during the company's shareholder meeting about its SolarCity (NASDAQ: SCTY) acquisition:

One of the biggest misunderstandings about Tesla -- and some are counterintuitive -- is the degree to which Tesla is reliant upon incentives or subsidies. Ironically, if all incentives and subsidies were removed for Tesla, Tesla's competitive position would increase, not decrease. This is a really fundamental misunderstanding.

Musk went on to explain that Tesla can only sell its zero emission vehicle (ZEV) credits for about $0.50 on the dollar to other automakers because of the weakness of ZEV mandate. Meanwhile, General Motors and Ford can monetize their ZEV credits at face value, he said.

"So if there were two ZEV credits on a vehicle," Musk explained as an example, "General Motors would have a $5,000 cost advantage over Tesla."

Any concern about how incentives impact Tesla, therefore, should be directed about the company's strategy to "overcome the competitive disadvantage of EV incentives -- not the other way around," Musk said. (Emphasis mine.)

Tesla Model S and Model X. Image source: The Motley Fool.

As far as the $7,500 tax credit for qualifying buyers, Musk emphasized that the program does not emphasize any high-volume production of electric vehicles. Stopping at a quarter of a million vehicles, "it's essentially irrelevant for any high-volume program," Musk explained. Given that Tesla's cumulative vehicle deliveries are approaching 200,000 units, and considering Tesla plans to build as many as 500,000 vehicles per year by 2017, this customer credit will soon be irrelevant for Tesla.

But Musk was also careful to say that he's actually not against the idea of incentives, even if the incentives are putting the company at a disadvantage:

We do believe there should be incentives, and government incentives for electric vehicles, but we believe they should be there for the good of the industry and to accelerate the advent of sustainable transport, not because Tesla needs them.

But what about SolarCity?

Tesla CEO Elon Musk shows off a French Slate Tesla solar tile. Image source: Tesla Motors.

Of course, now that Tesla shareholders have voted in favor of the company's acquisition of SolarCity, Tesla investors should also be interested in how dependent Tesla's solar segment will be on governmentincentives. After all, today there's a 30% investment tax credit for installation of residential and commercial solar systems in the U.S., and this credit could be threatened by the Trump administration, too.

But Musk seemed unconvinced that Tesla's solar business would be dependent on the credit. Expecting the company's recently announced solar roof cells to sell for about the price of comparable high-end roofing options or less, Musk noted that assuming the company can really sell the solar roof at these price levels, "subsidies don't really matter."

While Musk clearly isn't worried about how an unfavorable credit and subsidy environment could impact Tesla, investors should still keep a close eye on any change to policies related to Tesla's business and carefully consider for themselves how changes might affect the company.

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Daniel Sparks owns shares of SolarCity and Tesla Motors. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.