Tesla Doesn't Expect Profit This Quarter But Maybe Next

Tesla's short term plans don't involve making money, Subaru is planning to recall millions of cars, and GM hasn't paid income taxes in years. All this and more in The Morning Shift for Friday, March 1, 2019.

In the wake of all the Tesla news to come to the fore last night (the introduction of the cheaper Model 3, the closing of Tesla stores as the company swaps to online sales only), CEO Elon Musk stated his doubts for actually turning a profit, as reported by CNBC:

[Musk] based his expectations on one-time charges and other financial commitments, and added that he does expect the company to be profitable in the second quarter.

"Given that there is a lot happening in Q1, and we are taking a lot of one time charges, there are a lot of challenges getting cars to China and Europe, we do not expect to be profitable. We do think that profitability in Q2 is likely," Musk said.

As a result, Tesla stock shares fell three percent Thursday night. Despite that fall, stocks are still higher than they were when Musk first announced that the company had news to share, according to Automotive News

Financial analysts like Garrett Nelson from CFRA are pegging the move to a cheaper model as an imminent source of Tesla's woes, possibly hinting at a downturn in profits even past Q1:

We think it's a mistake from a strategic perspective and are skeptical of the gross margins on that $35,000 vehicle. In our view, they would be better served sticking to premium electric vehicles instead of this mass market, Henry Ford-type mentality of affordable vehicles for all. It might be different if Tesla had the production capacity to drive volume and margin for this lower priced version, but they don't currently and to add the incremental capacity would require significant additional capital investment.

It seems like the drop in the price of the Model 3 is likely to be at the expense of Tesla employees, many of whom will be losing their jobs in sales when that process moves to the Internet, which Musk pins on law:

"In many parts of the U.S., we are unable to sell effectively because of franchise laws," he said. "Now anybody can buy the car online anywhere in the U.S., immediately. This substantially opens up our ability to sell the cars."

Subaru has a problem. A brake light problem. And it's going to have to recall 2.3 million cars—which amounts to the company's biggest recall ever.

Subaru's rapid expansion has resulted in some unfortunate quality control issues. They've been suffering from a range of problems, everything from faulty technology to poor inspection due to the boom in U.S. sales and the demand for more cars.

Here's more from Reuters:

Subaru Corp plans to recall around 2.3 million vehicles globally over a brake light problem, in what would be the automaker's biggest-ever recall as it grapples with a series of quality-related issues following rapid expansion.

Japan's sixth-largest automaker told Reuters on Friday that it was recalling nearly 2 million of its popular Impreza and Forester models in the United States, its biggest market, and other countries, along with around 300,000 units in Japan to fix a fault with the brake light switch which can lead to ignition problems.

Vehicles affected were produced from 2008 through 2017. If all of the identified vehicles are recalled, it would be the automaker's biggest in terms of affected units, excluding the ongoing Takata airbag recall.

The recall plan is still in the works and hasn't actually happened yet, but if it does, it could spell disaster for Subaru.

Plenty of Americans have watched in dismay this year as their tax refunds shrank considerably in comparison to past years. But, somehow, automotive companies like GM and Ford haven't had to pay their U.S. income taxes in years, but they still manage to line their pockets with an impressive refund every year. How is that even possible?

Here's some of the basic facts to get you grounded, thanks to the Detroit Free Press:

General Motors has not paid federal taxes in more than a decade. In fact, it will likely not pay U.S. federal income tax for the next several years, its former chief financial officer has said.

Likewise, Ford Motor Co. has paid U.S. income tax only three of the last 10 years, based on filings with the Securities and Exchange Commission. Each company has gotten about $450 million in tax refunds since 2009, an economist estimated, based on the filings.

According to GM's latest 10-K filing, the company is owed $104 million as a tax refund for 2018.

The two companies have turned profits between them totaling more than $100 billion in the past 10 years.

The main thing to note here is that personal income tax and corporate income tax are two totally separate concepts. When the Average Joe files their taxes, they're doing so solely on the basis of events that happened in the prior year. Big corporations like GM, however, can take into account things that happened years ago.

Corporations do pay hundreds of millions in local, state and other taxes. It is only on the federal level most are getting a break.

The corporate income tax was established in 1909 as a hallmark of the Progressive Era to control monopolies. It was later folded into the New Deal in the 1930s, said Ballard.

"It was a reaction to the Gilded Age, the days of the robber barons," said [MSU economics professor Charles] Ballard. "It was an attempt to control the excesses of inequality and great wealth.

But U.S. tax policy has reversed in the last 40 years, now benefiting the wealthy, said Ballard. Last year, the U.S. corporate income tax rate for income generated in the United States dropped to 21 percent from 35 percent, he said. In the 1940s through the '60s, the rate was 53 percent, Ballard said.

The U.S. corporate income tax on income generated outside the United States is now zero, compared with 35 percent prior to 2018, said Ballard.

So, how exactly does that apply to a company like GM. The Detroit Free Press goes into the nitty-gritty detail on both GM and Ford, figuring out why they're still given a refund despite not paying income tax. Basically, it comes down to the fact that corporations can be offered a refund, but it's not the same as a personal tax refund.

You can read the rest here.

Connectivity is one of the big buzzwords surrounding the way automakers are envisioning the future of the industry. Volkswagen has announced that it's teaming up with Microsoft to do just that—to outfit new cars with cloud computing as a way to connect cars around the globe. According to Automotive News Europe: 

By allowing vehicles to tap Microsoft's remote computer processors via the cloud, VW can offer its customers personalized on-board media streaming, and make suggestions for parking and charging.

The automaker will expand Automotive Cloud's global footprint to China and the United States, VW said. Previously it has been developed mainly for the European market.

The technology is intended to be implemented in VW's new I.D. electric cars first and foremost, with the I.D. Neo hatchback leading the charge with automotive cloud technology. The Neo is going on sale in Europe in 2020, with production intended to start the same year stateside.

The intention of uniting cars in a big network is essentially to take away the guesswork of driving. Your car is going to know how bad traffic is, or where conditions are dangerous, or where you can find the best parking spot because it will tap into the network of all the other cars that share the cloud connectivity. An automotive hive mind, if you will.

The automotive cloud has been a big talking point recently, but VW and Microsoft are the first to make tangible steps toward actually putting it into action.

After years of refusing to sell Turkey the Patriot missile defense system, the U.S. finds themselves at an impasse: they're offering the missiles, but Turkey doesn't want 'em. Here's more from Bloomberg:

Turkey has rejected a U.S. proposal to deliver one Patriot missile defense system by the end of 2019, which was conditional on Ankara abandoning a deal with Russia that's strained ties between the NATO allies, two senior Turkish officials said on Friday.

The U.S. administration made its offer before Feb. 15, and then increased the price of the multi-billion dollar system in return for quick delivery, according to the officials who are familiar with the talks but not authorized to speak to the media. The proposal didn't include a loan agreement nor a technology sharing pact, a key Turkish demand, they said.

Turkey wants missiles, and they're going to come from either Russia or the United States. The U.S. wasn't keen on the whole idea until Turkey started negotiating with Russia—which ultimately would turn out to be less than ideal for NATO.

Selling missiles to Turkey would be done on the clause that Turkey couldn't accept missiles from Russia. But there have been some rocky Turkey-U.S. relations lately that have resulted in Turkey turning to Russia for weapons—inspiring the U.S. to threaten tariffs on Turkey if that happens.

From Brookings.edu:

The designers of Castle Bravo seriously miscalculated the yield of the device, resulting in critical radiation contamination. They predicted that the yield of the device would be roughly five to six megatons (a megaton is the equivalent of one million tons of TNT). Scientists were shocked when Castle Bravo produced an astounding 15 megaton yield, making it 1,000 times as powerful as the U.S. nuclear weapons used on Hiroshima and Nagasaki in 1945.

Traces of radioactive material were discovered in Australia, India, Japan, the United States and Europe. Nuclear fallout spread over roughly 7,000 square miles.

Cheaper cars are always better, but going cheaper at the cost of slashing employment seems... less than idea. How is this going to play out for Tesla in the long run?