Tesla stands to lose lucrative business selling CO2 credits to Fiat Chrysler successor Stellantis

Tesla is at risk of losing a crucial earnings stream after a key carmaker said it plans to wind down its purchases of regulatory CO2 credits from Elon Musk’s company.

Stellantis, the company formed mid-January through Groupe PSA’s acquisition of Fiat Chrysler Automobiles, said it expects to be carbon compliant in Europe this year with the help of new partially or fully electric vehicle models.

“Frankly, the fact that we won’t have the cost of credits in Europe is just a net positive,” Stellantis finance chief Richard Palmer told analysts during a first-quarter investor call on Wednesday. 

This would eliminate the need for at least some of the payments to Tesla, whose proceeds from the lucrative sale of regulatory credits hit a record $518 million in the first quarter.

This only represents 6% of Tesla’s revenue but unlike producing and selling cars, the proceeds come with no inherent cost, so turnover directly translates into pretax profit. Without them, Tesla would not have been profitable on a net basis in the past six quarters.

FCA Group said it spent around 300 million euros ($360 million) last year purchasing carbon credits, and expects to pay a similar amount this year.

Smaller bill

“The 300 (million euros) wasn’t all related to Tesla, but around two-thirds of it probably was, and that would be the type of benefit we would likely get by no longer participating in the pooling agreement,” Palmer added.

Stellantis declined to comment on the commercial terms of its arrangements with Tesla but last October, former Fiat Chrysler Automobiles chief executive Mike Manley surprised investors with news that it was “effectively locked” into its contract with Tesla and expected further payment transfers to Musk’s company. 

In a statement on Wednesday, Stellantis confirmed that dissolving the pooling agreement will result in a positive financial impact on its profit and loss statement for the financial year 2021 because it “will not be required to purchase regulatory emissions credits in Europe.”

Earlier, the company reported an increase of 14% in pro-forma revenue to 37 billion euros ($44.4 billion) on the back of double-digit volume gains and improved pricing thanks to slimmer vehicle inventories on stock. Stellantis plans to only publish earnings on a semi-annual basis, just like its French predecessor PSA. 

The group said it lost about 11% of its planned production in the first quarter due to the acute global semiconductor shortage and expected this could potentially double in the current three-month period.

“As a base assumption I don’t think it’s unreasonable, obviously we’re trying to do better than that, but that is the sort of ball park that potentially is going to be the impact in Q2,” Palmer said. 

Semiconductor trouble

After Ford shocked last week with a grim outlook for the full year due to the shortage, General Motors reassured shareholders it was managing and expected to achieve an underlying operating profit at the higher end of its forecast range.

Germany’s Infineon, the world’s top supplier of semiconductors to the auto industry, warned it would take until 2023 before supply constraints were fully eliminated.

Just over 100 days on since FCA was acquired, Palmer said the combined group was already posting encouraging results and reaffirming guidance for an underlying operating margin between 5.5%-7.5% in the full year.

“Clearly the semiconductor has changed for the whole industry but with the opportunities created by the merger, we are still convinced that 2021 will be a strong year for the company,” he said.

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