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Tesla Has a Lucrative—but Fleeting—Window in Europe

When you’re burning through over $1 billion a quarter, you need every penny can you can get.

Tesla looks to be heading back to the capital markets after CEO Elon Musk admitted on a conference call last week that “there’s merit to the idea of raising capital at this point.” Morgan Stanley analyst Adam Jonas estimates it may have to raise as much as $2.5 billion.

How much Tesla actually needs will depend to a large extent on whether its Model 3 can have the sort of instant acceptance in markets in China and Europe that it has enjoyed in the U.S.

Success beyond the U.S.

Initial figures give at least some reason to be optimistic. In Norway and Switzerland, two countries where government subsidies have squeezed the price gap between battery powered cars and ones with conventional engines, the Model 3 got off to a roaring start in March.

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Elon Musk, CEO of Tesla Motors, addressed an environmental conference in Oslo, Norway in 2016. (HEIKO JUNGE/AFP/Getty Images)
HEIKO JUNGE AFP/Getty Images

According to the publication Auto Schweiz, it was the best-selling car bar none in Switzerland. It was the same story in Norway, where the first month of Model 3 sales was largely responsible for electric vehicles taking nearly 60% of the overall market in March. The figures appear to bear out claims that there is plenty of demand for electric cars if the price is right.

If Tesla can replicate that in the bigger European markets, then it stands to cash in handsomely, and not just because of the cash generated by the sales of the vehicles themselves.

A CO2 credit boon

The European Union has an emissions credit mechanism to reward new and cleaner engine technologies, similar to a U.S. one that has already earned Tesla hundreds of millions of dollars. The system allows companies whose cars emit more than the legal maximum of carbon dioxide to form ‘pools’ with companies like Tesla for credits that bring their average emissions under the limit. Fiat Chrysler (FCA) became the first company to say it would join Tesla’s ‘pool’ last month.

Neither company has given a formal estimate of how much money they expect to change hands, but the scope of the EU’s regulation, which really starts to bite in 2020, suggests it could be substantial. As of 2020, the average CO2 emissions of vehicles registered in the EU has to be below 95 grams per kilometer. For every gram above that threshold, the maker has to pay a fine of 95 euros ($105) per car sold. A study by Brussels-based NGO Transport & Environment last year argued that FCA—which sells fewer smaller-engine Fiats and more gas-guzzling Jeep SUVs every year—could be facing fines of over €1 billion in 2021 without help from such schemes. Honda and Hyundai could also be in need of credits, according to author Florent Grelier’s calculations.

FCA said in an e-mailed statement that it “is committed to reducing the emissions of all our products. At the same time, we will optimize the options for compliance that the regulations offer.”

“The purchase pool provides flexibility to deliver products our customers are willing to buy while managing compliance with the lowest cost approach,” it added.

Europe’s EV market

Tesla doesn’t dominate the electric vehicle (EV) space in Europe to the extent it does in the U.S., where it accounted for 75% of EVs sold in the first quarter. But automotive analyst Mathias Schmidt still estimates that it sold around 19,000 Model 3s in the period, almost as much as the next two best-selling EVs combined—Renault’s Zoe and Nissan’s Leaf. It also outsold all of Porsche and Alfa Romeo, he notes.

Some of Tesla’s competitors are holding back EV product launches until 2020 in order to have the biggest impact on fleet emissions that year. That gives Tesla a brief window of opportunity to stake its claim in Europe.

But it’s far from guaranteed that it can replicate its success so far in the markets that really count—Germany, the U.K., France and Italy, which, along with Norway and Switzerland, accounted for nearly two-thirds of all European sales. In the U.K., it’s already lost a month of the second quarter: deliveries will start only this week due to delays in shipping the necessary right-hand drive models.

More importantly, the Model 3 is significantly more expensive in Europe than in the U.S., something masked by the generous subsidies available to EV buyers in Switzerland and Norway. Tesla’s own order page shows that—at current exchange rates—prices start at around $42,500 in Norway, but are nearly $50,000 in Germany and even more expensive in Italy. In Europe, at least, that’s stretching the definition of a “mass-market” product. There—as so often before—Musk has left little room for error.