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Get Ready For A Pileup, Tesla

Holman W. Jenkins, Jr., The Wall Street Journal

The company braces for a $300 billion onslaught of money-losing green cars.

“I would have bought my Tesla even without the tax rebate.” So went any number of irate emails from readers over the years, nonsensically for any point I was trying to make. Elon Musk isn’t in the business of leaving money on the table. He priced his cars to make sure every penny of subsidy ended up in Tesla’s pockets and not its customers’.

Now Wall Street finds Tesla sales are not adding up as hoped this year.Morgan Stanley is forecasting 344,000, below the low end of Tesla’s last predicted range. An obvious culprit is the dwindling U.S. tax rebate to buyers. The handout, once $7,500, has been cut in half and will soon fall to $1,875. It turns out economics applies after all.

Worse for Tesla, the $7,500 rebate will continue to apply in full to a tidal wave of electric cars about to hit the U.S. market. This onslaught—coming from Mercedes, VW, BMW , Volvo, Porsche, Nissan, Kia, Hyundai, you name it—is the fruit of an estimated $300 billion in capital the industry has committed to building money-losing electric cars. This money is spent in response to emissions rules that essentially require building electric cars to offset conventional ones.

A report out last month from McKinsey tells the story: These cars cost an average of $12,000 more to produce than they can fetch in the marketplace. The role of regulation in causing this pileup “cannot be overstated,” the report adds, while proposing somewhat desperately that the industry try to save itself by “decontenting” its electric vehicles—that is, getting rid of every unnecessary frill and luxury, such as display screens, fancy seating, power windows or anything else that adds costs to what are essentially compliance vehicles.

Of course, this won’t happen. Not only would it turn off the stylish adopters who buy most EVs, it would also undermine the halo effect manufacturers hope and pray their green vehicles will shed over their conventionally powered lineups.

Unfortunately, unlike these companies, Tesla needs to make a profit from its electric cars. It doesn’t have a gasoline-car business. It can match other makers loss for loss only if investors are willing to keep throwing new capital into the company, and they no longer are. Mr. Musk might conceivably seek refuge in U.S. trade law. Domestic manufacturers are entitled to seek protection when overseas rivals sell products in the U.S. below the cost of production. Except that any such action would likely provoke a trade war and hurt Tesla’s access to the even more grossly subsidized electric-car markets in Europe.

An Apple analogy has long bolstered Tesla among its faithful. Something so ineffably wonderful about Tesla cars would let them command Apple-like margins even in a market polluted by competitors willing to offer roughly comparable products at money-losing prices.

We trust this idea has now died a natural death. An electric car is not an iPhone. Everyone already has a car; that car already fulfills the basic function of a car as well or better than any car built by Tesla can. Only limited profits are on offer from selling cars, and no way was Tesla going to exempt itself in the long run from the industry’s bare-knuckle fight over who gets a share.

Let’s also acknowledge that the insanity here is partly Mr. Musk’s own doing. He promoted the myth of the electric car as a solution to climate change. This column warned nine years ago, just before Tesla’s initial public offering, that political favoritism and tax handouts were drawing into the market for electric cars companies that had long experience building cars. Importantly, these companies also had large unionized workforces and lobbyist armies that would give them influence over regulation to dwarf whatever political clout Tesla could hope to muster.

Not even our cynicism, however, was up to anticipating the fallout that would actually materialize: The world’s traditional car industry, even as it continues to churn out 79 million vehicles annually, has been incentivized everywhere to divert some of its profits to making life miserable for the one company that genuinely thirsts to make electric cars and needs to be able to make them profitably.

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