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Fiat Chrysler will effectively fund Tesla's German factory
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Thread: Fiat Chrysler will effectively fund Tesla's German factory

  1. #1
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    Fiat Chrysler will effectively fund Tesla's German factory

    [COLOR=#000000]NEW YORK -- Fiat Chrysler Automobile's deal to pool its fleet with Tesla to comply with stricter emissions rules in Europe is in effect funding the electric-car maker's upcoming Germany factory, according to a U.S. investment bank.
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    [COLOR=#000000]FCA reached an agreement with Tesla last spring that could cost FCA an estimated 1.8 billion ($2 billion) through 2023. That breaks out to about $150 million to $200 million per quarter and will pad Tesla's profit margins starting in the first three months of this year, according to Ben Kallo, a Robert W. Baird & Co. analyst.[/COLOR]

    [COLOR=#000000]"While we acknowledge investors may want to strip out credits in evaluating operational execution, we do note the credits effectively fund Tesla's European factory," Kallo wrote in a report Thursday.[/COLOR]

    [COLOR=#000000]While he cut his rating on Tesla to the equivalent of a hold, from a buy, the analyst raised his price target to $525, from $355.[/COLOR]

    [COLOR=#000000]Representatives for FCA and Tesla did not immediately respond to a request for comment.[/COLOR]

    [COLOR=#000000]CEO Elon Musk announced in November that Tesla planned to build a plant outside Berlin. Tesla will build several models at the factory starting with the Model 3 sedan and Model Y crossover, according a public notice published by the German state of Brandenburg.[/COLOR]

    [COLOR=#000000]FCA plans to launch a new electric version of its Fiat 500 minicar in Europe this year, along with plug-in hybrid versions of its Jeep Compass, Renegade and Wrangler models. That, combined with the Tesla credits, should make the company compliant with Europe's emissions rules, CEO Mike Manley told analysts in July.

    While FCA would otherwise struggle to meet new CO2 emissions standards in Europe, the so-called open-pool option available in the European Union allows automakers to group their fleets together to meet targets.
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    [COLOR=#000000]Compliance has gotten harder for automakers as consumers have shifted toward gasoline cars, which emit comparatively more CO2, following Volkswagen Group's diesel-emissions scandal that first erupted in 2015.[/COLOR]
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    [COLOR=#000000]Last August, [/COLOR]we reported on an agreement between Fiat Chrysler Automobiles (FCA) and Tesla[COLOR=#000000] that allowed the two companies to legally group their carbon emissions. As it sits, the agreement will help FCA avoid significant fines levied against the automaker by the European Union as stricter pollution rules are put in place. Tesla, however, isn’t getting a raw deal out of the agreement either, as we’re now learning that FCA’s payments are effectively funding the construction of its highly-anticipated new Gigafactory outside of Berlin, Germany.

    [COLOR=#000000]Gigafactories are expensive, the Nevada one cost Tesla $5 billion alone. Tesla has reduced the total cost over the years, but they're still not cheap. The deal with FCA will help reduce Tesla's construction expenses as [/COLOR]Automotive News Europe[COLOR=#000000] is reporting that the payments could reach $150 million to $250 million per quarter through 2023, which would "effectively fund Tesla's European factory." With the Berlin factory coming online so soon after construction begins, due to the financial aid, Tesla will then be able to better meet global demand and its own production goals—as shown by the production start at its Chinese Gigafactory.

    [COLOR=#000000]Tesla also always has a looming specter of financial instability, as well as the need for extra cash, so the FCA deal is likely appreciated by Tesla's board.

    [COLOR=#000000]The deal for FCA is that the pooling essentially “dilutes" the company's vehicles’ emissions by including Tesla's vehicles in the count. This spreads the CO2 pollution over a larger number of vehicles, which lowers the overall emissions footprint—at least on paper. FCA says that [/COLOR]Tesla’s vehicles[COLOR=#000000], along with the planned rollout of an electric Fiat 500 and plug-in hybrid versions of the Jeep Compass, Wrangler, and Renegade, should help the company meet the emissions rules on time. Though it’s a bit of creative accounting on FCA’s part, the agreement will allow it so sidestep a 700 million euro fine for not hitting [/COLOR]emissions targets[COLOR=#000000] by 2021.

    [COLOR=#000000]If [/COLOR]Tesla’s planned due dates[COLOR=#000000] are met, with the above assistance of FCA—or the entity that comes out of its [/COLOR]merger with Peugeot[COLOR=#000000]—the Berlin-based Gigafactory should open in July 2021 and will house production of the company’s Model 3 sedan and Model Y crossover.[/COLOR]
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    [COLOR=#373e44]That's an interesting move by both companies,but I have to imagine this may not work out the way Tesla thinks it will. Itwill depend largely on how long it will take Tesla to fund the plant by thismethod, and how long FCA will really need the assistance to meet targetedemissions requirements.
    In both cases, the answer doesn't come easily as FCAcould come up with significantly better MPG (and lower emissioned) vehicles...that don't sell. If people keep buying Hemis, this deal works and Tesla and FCAbenefit. If they adopt newer, more efficient engines; then Tesla may not getenough to fund the factory. Feels like a band-aid, but could be areinforced-concrete load-bearing wall.
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