Devonshire Research Group - Tesla Motors - TSLA - Public Release - Part II

Devonshire Research Group, LLC
Tesla Motors, Inc.

Part II
May 2016
This presentation is a research report and is for informational purposes only. Opinions expressed are solely those of Devonshire Research Group and this is not a recommendation to purchase securities discussed
herein. This presentation is confidential and may not be reproduced or distributed without the express consent of Devonshire Research Group. Please refer to the next slide for additional disclosures.
-Attorney Confidential-
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Notice of investment interests

As of the publication date of this report, the Devonshire Research Group LLC has a net
short position in the stock, put options, bonds, and credit swaps of Tesla Motors, Inc.
(TSLA or Tesla) and stands to realize gains in the event that the price of TSLAs
securities declines over the long run, or if investment sentiment improves the appeal of an
expected decline in any of its securities.
Devonshire Research Group recognizes that while its strategy reflects a long term bearish
outlook for Teslas security instruments, the short term implication of powerful
marketing, including the power of social media tweeting by the CEO and his PR firm, well
orchestrated and heavily blogged product launches, and a deep and powerful short term
media control and attention span, suggests unpredictable short term volatility.
Devonshire Research Group LLC has a long term net short position across multiple
security instruments.
Notice of non-affiliation
Part I of this analysis, released publicly in March 2016, was widely praised as effective and fact-driven. Critics of
the analysis allege that the work of the Devonshire Research Group is unfairly biased, due to affiliations with
industry players who seek to limit the market performance of Tesla. This is interesting, but untrue.
Devonshire Research Group hereby asserts that it does not have professional or business relationships with any of
the following organizations:
General Motors
Ford
Toyota
The City of Detroit
Koch Industries
ExxonMobil
Royal Dutch Shell
BP
CB Insights
The Illuminati
Marshall Mathers, aka Eminem
On financial innovation and creative accounting
Everything should be as simple as it can be, but not simpler.

- Occams Razor
Never assume malice when stupidity will suffice.

- Hanlons Razor
Executive Summary
How closely does TSLAs financing model mirror the features of common Ponzi, Pyramid, and Matrix schemes?
Numerous cautionary examples share features with TSLA, including hype driven by visionary leaders
TSLA has accepted capital from unsophisticated investors with bold claims on return and/or product value
If TSLA fails to deliver on these claims it has the potential to enter a death spiral
Most common death spirals do not require malicious intent, but rather excessive (even delusional) ambition
The profitability of the Model 3 depends on TSLAs ability to squeeze its supply chain; this is a tall order
Sophisticated suppliers (most notably Panasonic) will fight for their share of the profit
Panasonics rechargeable battery division is constrained in terms of investment capacity and profit demands
Current suppliers of numerous strategic, high-technology components have little IP and export to the US
Many Chinese suppliers are vulnerable to patent infringement accusations and could face ITC injunctions
TSLAs use of tax credits disproportionately benefits the wealthy at the expense of the average taxpayer
This inequality is a feature of the luxury-first market penetration strategy
The election year introduces significant risk for TSLAs continued reliance on taxpayer subsidies
Tesla has engaged in aggressive accounting that calls to mind the

experiences of Enron and WorldCom; its future is highly uncertain
WorldCom Net Income
(US Billions)
1.0
4
3
Enron Net Income

(US Billions)
Originally
reported
0.9
0.8
0.6
0.5
0
-1
0.5
Originally
reported
0.7
-3
Non-GAAP
0.0
-0.5
Revised
Nov 2001
-1.0
0.4
1997 1998 1999 2000 2001 2002
-1.5
0.3
0.2
-2
Tesla Motors Earnings

Per Share (USD)
Revised
Aug 2002
-2.0
GAAP
0.1
-2.5
0.0
1996 1997 1998 1999 2000 2001
2012
2013
2014
2015
Tesla has escalated a dangerous habit of unorthodox future-earning-based financing in pursuit of the
questionably profitable and long-delayed Model 3. A misstep in the next two years risks entering a death spiral
Source: Devonshire Research Group considers Teslas decision to use non-GAAP accounting methods
to be inherently aggressive; unorthodox future earnings based financing defined on slide 11
Tesla is not a car, battery, or tech company; it is an experimental

financial services company and should be regulated as such
2003 - 2007
2008 - 2012
2013 - 2015
Early 2016
Late 2016
TSLA acting as an unregistered broker dealer

Use VC to
bootstrap Roadster
prototypes
2017 - ?
Speculative upcoming innovations
Overprice
Roadster; use
profit to direct
Model S R&D
Use tax credits,

multi-year payback
to deploy
Superchargers
Collect $1k
deposits for Model
3 to finance SG&A
Use high preorders to boost

share price, issue
shares
Pay interest on
deposits of future
models?
Enter into a zeroownership model;

the perpetual
lease?
Distribute cost of
scale by locking in
multi-year contracts
Convince Nevada
to subsidize
creation of battery
factories, lithium
mines
Convince
Panasonic to invest
majority of spend
in Gigafactory
Secure Colorado
used car resale
credit to uphold
depreciation
Partner with ride

sharing apps such
as Uber?
Develop one-carper-neighborhood
leasing?
Guarantee 3-year
Model S resale
value to ease
nervous buyers
Use ZEV and state

tax subsidies to
secure Model S, X
price point
Present Model 3
prototype vehicle
loaded with costs
>>> $35K target
Implement pooled
fractional / shared
ownership models?
Introduce a preorder lottery, allow

rights to be sold to
3rd parties?
Allow a barter
system to convert
pre-order deposits
into coupons?
Abandon P&L,
Balance Sheet, and
cash flow as
outdated reporting
methods
Contributes to
growing GAAP
discrepancies
Use global green

subsidies,
incentives to
reduce price point
Fragile, unsustainable,
unpredictable approaching
US election year
Teslas financing model is fragile; it is attempting to manage multiple financial instrument models under the same
accounting umbrella to our knowledge, one of the last companies to attempt this level of financial innovation was Enron
Non-GAAP strategies to limit Model S depreciation boost stock

price at the cost of increased fragility and hidden downside risk
Model 3
Model S
Model S
RVG threshold
Model 3 reveal threatens to
tank Model S resale values, so
Tesla hoards used vehicles to
resell under Colorado used
EV credit incentive
Model S resale value

guarantee closes
negative feedback loop:
liability grows as Model
S depreciates faster
Source: Edmunds.com, NADA used car guide 2015; Devonshire Research Group analysis suggests
traditional accounting strategies would be sufficient without promised resale guarantees and buy-back pricing
Similarly, Teslas 400,000+ unsophisticated, unsecured, and

unpredictable Model 3 creditors contribute to a bank run setup
The Model 3 reveal lights a twotwo-year fuse: setbacks and delays will escalate refunds on deposits
Probability before Probability after
Model 3 reveal
Model 3 reveal
What could go wrong?

Quality issues force delays in Model 3 delivery
30%
75%
Panasonic drags feet on Gigafactory investment
40%
60%
Tesla forced to implement Model 3 buyback guarantee
25%
35%
Consortium of auto companies lobbies to remove tax credits
20%
30%
GM raises war chest to acquire IP and litigate against Tesla
10%
20%
Tessera or RPX engage in an auto IP relicensing campaign
10%
15%
Sole-source parts supplier raises prices, taking inventory hostage
5%
10%
Factory workforce goes on strike / labor dispute
5%
10%
Model 3 subject to regulatory scrutiny for road safety
5%
10%
SEC antagonizes TSLA for improper Twitter promotion (Musk)
2%
5%
IP litigation results in ITC injunction on foreign part imports
2%
5%
60%
80%
Probability of one or more tail risk missteps:
Rationale
Urgent drive for cost reduction on fixed

timeline
Lack of promised partnerships,
minimum purchase agreement
Fear of high depreciation rates stemming
from quality concerns
Political hot-button issue, Tesla credits
benefit the rich
Minimal IP ownership by Tesla and
throughout its supply chain
Brewing automotive patent war brings
NPEs and related players
Model 3 deadline gives suppliers
incredible bargaining power
Model 3 deadline gives labor force
incredible bargaining power
Rapid push to delivery will face scrutiny,
especially after Model X
Increased scrutiny surrounding critical
upcoming capital raise
Incentive for competitors to hamstring
already-weak supply network
Tesla is operationally vulnerable to setbacks, and the deposit scheme amplifies this vulnerability.
Depositholders expect a $35k vehicle in 2017how many will vanish if this target is revised?
Highly Confidential
Note: probabilities are Devonshire Research Group estimates
10
To understand Teslas business model, we must introduce novel

financial definitions
Future-Earning
Pyramidal Financing
(FEPF)
Future-earning pyramidal financing (FEPF) is a business dynamic characterized by the act of raising
capital to finance future losses rather than future returns. The assumption in this dynamic is that
the future losses will be covered by a second capital raise (similarly pyramidal) which will allow
some investors to exit profitably, although many will reinvest and / or accept losses.
When properly recognized, managed, and regulated, FEPF can be a sustainable arrangement that
operates within both the spirit and letter of the law. Examples may be found in the realm of public
services, non-profits, and social service programs. However, when performed maliciously with
intent to defraud, FEPF forms the dynamic underlying illegal Ponzi, pyramid, and matrix schemes.
Aggressive cash-negative growth ventures that rely entirely on profitability at scale occupy a
dangerous middle ground where delusion often substitutes for malice.
Loss-Tolerant
Investors
(LTIs)
A category of investors that are capable of losing their investment in an enterprise, company, or
asset with or without their knowledge of this loss.
Financing Pyramid
Reporting
(FPR)
A form of financial reporting adopted from non-profit and venture capital investing that accurately
reflects businesses that are designed to lose money for long periods of time until subsequent
investors are secured, who must confront the needs to building a profitable business
If a business is operated as a FEPF, investors should not carry the expectation that such an enterprise will be run
for a profit; instead, this organization should be terminated, or regulated as a social service or non-profit
11
How to detect future-earning based financing: 8 key features

Risk factors for FEPFs
Description
Strong presence
Investors who contribute capital to a

fundamentally moneymoney-losing venture
FEPF finances future losses; investors in these

ventures may be victims of fraud, but not always
Continual postponement of profitable operation

with fresh investor capital
Pyramidal financing requires future pyramidal

financing to succeed; this recursive aspect is key
Offer of unusual, timetime-sensitive incentives to

increase demand among investors
FEPF is not standard fundraising, and nonstandard fundraising tactics are commonly used
Impressive returns which are projected on

paper but may not be achievable at scale
Loss of investor confidence will destroy the FEPF

dynamic, so reinvestment rates must be kept high
Minimum return guarantees to increase

confidence of skeptical investors
Permitting investors to exit with generous terms

increases odds of subsequent reinvestment
Appeal to moral sensibility with highhigh-minded

aspirations toward equality and generosity
Often an offsetting factor allowing investors to

justify investment in a loss-making enterprise
Disruptive business model, often with

reasoning opaque to all but a visionary leader
A common theme is that old rules no longer

apply; irregularities are written off as complexities
Rapid growth leading to collapse unless tightly

monitored and regulated
Uncontrolled growth in these scenarios is often

the catalyst for failurecontrol is key to legitimacy
Typical occurrence cases:
Malicious
Some presence
Delusional
Overambitious
No presence
Sustainable
Source: Devonshire Research Group analysis of comparable financing models
12
Tesla is currently engaged in an aggressive future-earning financing

dynamic; failure to manage this vulnerability risks collapse
Risk factors for FEPFs
Description
Tesla
Investors who contribute capital to a

fundamentally moneymoney-losing venture
FEPF finances future losses; investors in these

ventures may be victims of fraud, but not always
Crowdfunding via zero-interest deposits despite

serious risk that Model 3 will not be profitable
Continual postponement of profitable operation

with fresh investor capital
Pyramidal financing requires future pyramidal

financing to succeed; this recursive aspect is key
Plan to fund economy vehicle with multiple

generations of unprofitable luxury models
Offer of unusual, timetime-sensitive incentives to

increase demand among investors
FEPF is not standard fundraising, and nonstandard fundraising tactics are commonly used
Model 3 deposits hold a place in line (despite

anticipated regional rollout of the vehicle)
Impressive returns which are projected on

paper but may not be achievable at scale
Loss of investor confidence will destroy the FEPF

dynamic, so reinvestment rates must be kept high
In Devonshires opinion, Tesla may not be in a

position to refund deposits if Model 3 delays force
widespread refunding
Minimum return guarantees to increase

confidence of skeptical investors
Permitting investors to exit with generous terms

increases odds of subsequent reinvestment
Model S three-year 50% resale value guarantee; no

questions asked refund on Model 3 deposits
Appeal to moral sensibility with highhigh-minded

aspirations toward equality and generosity
Often an offsetting factor allowing investors to

justify investment in a loss-making enterprise
Green branding, heavy reliance on tax credits and

other incentives, save the world image
Disruptive business model, often with

reasoning opaque to all but a visionary leader
A common theme is that old rules no longer

apply; irregularities are written off as complexities
Vague plans to partner and achieve profitability at

scale anchored to Elon Musk
Rapid growth leading to collapse unless tightly

monitored and regulated
Uncontrolled growth in these scenarios is often

the catalyst for failurecontrol is key to legitimacy
Increasing stakes and unrealistic investor expectations

on a highly speculative business
Source: Devonshire Research Group analysis and opinion; commentary from Elon Musk interviews and quarterly reports; limited
information about deposit vaulting available; https://www.teslamotors.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me
13
While future-earning financing is often not malicious, delusional

ambition can be a different path to the same outcome
The futureuture-earning pyramidal financing landscape
Massive fraud
Large-scale
Medium-scale
Masks fraud by mixing with

legitimate business activities
Carefully balances growth and
risk to prolong scheme
Escapes before scheme fully
collapses
Typical Ponzi, pyramid,

and matrix schemes
Too big to fail
Giants poised to fail
Aggressive-growth Unicorns
Everyday fraud
Small-scale
Targets unsophisticated /
vulnerable investors
Encourages investor
entrepreneurialism
Remains anonymous, then
vanishes
Unsustainable
Vital, ubiquitous, and

nationalized public goods
Operates outside the public
marketplace
Limits accounting scrutiny
and speculative investment
Charities and public works
Acceptance of value loss
Many VC-backed startups
Delusional / Overambitious
Argues for non-financial value

proposition to offset loss
Appeals to emotion and
instinct (branding, PR, etc.)
Fails fast and acknowledges
limits to growth
Sustainable
Source: Devonshire Research Group analysis and opinion; commentary from Elon
Musk interviews and quarterly reports
14
While Tesla has bet the farm on extreme growth, insolvency is an

unacceptable fallback strategy for a publicly traded company
Notable pyramidal financing enterprises
Enron
Large-scale
Fractional
Reserve Banking
Madoff Ponzi
scheme
US Social
Security
WorldCom
Medium-scale
Bitcoin Savings
and Trust
Medicare
Ride Sharing
Large charities
Tesla Motors
(Today)
Multi-level
marketing
Shared Payment
Systems
Nigerian prince
email scams
Televangelism
Small-scale
Unsustainable
Peer to Peer &

Crowd Funding
projects
Startup seed
funding
Sustainable
Source: Devonshire Research Group analysis and opinion; commentary from Elon
Musk interviews and quarterly reports
15
To sustain its financing model, Tesla would need to court

successively larger loss-tolerant investors or seek subsidies
Tesla: anticipated strategic options
Large-scale
Medium-scale
Tesla only survives as long as it

can continue to secure
successively larger loss-tolerant
investors Panasonic has agreed
to be next, investing in the
Gigafactory. If Panasonic fails to
invest at an aggressive rate, the
financing scheme collapses
Prepay deposits become
unsustainable; Tesla continues to
launch new models, accepting
steadily larger up-front deposits
from prospective customers, with
longer projected delivery dates.
Current deposit refunds are
funded by future model deposits
Tesla
Model Z
Supercharger
Network
Gigafactory
Tesla embraces the subsidy

hunting business model fully,
becomes a public good managed
as a non-profit, supplying electric
vehicles to police departments,
schools, state transportation
programs, welfare recipients
Tesla
Model 3
Tesla Motors
(Today)
Tesla
Model X
Tesla
Model S
Tesla
Roadster
Small-scale
Unsustainable
Sustainable
Source: Devonshire Research Group analysis and opinion; commentary from Elon Musk interviews
and quarterly reports; Panasonic quarterly reports and press releases
16
Our
thesis
-Attorney
Confidential-
Tesla is operationally vulnerable, too dependent on the success of the Model

3, and needs to prepare for the possibility of a future-earning death spiral
Likelihood
Historical precedent
Adjustment needed
High
Tesla escalates the

FEPF dynamic safely
and sustainably
Growth of the private pension and

old-age insurance market predating
the Social Security Act
Become a public good org, exit the

public market, and reduce scrutiny;
possible government acquisition
Low
Tesla escapes FEPF

dynamic with a wildly
successful Model 3
IBM survives Great Depression

and claws back from death (due
largely to Social Security Act)
This is the operating assumption;

we believe the Model 3 will be late
and will not be profitable
Low
Tesla escalates
pyramidal financing
but mismanages risk
Enron and WorldCom started as

legitimate ambitious business
model innovators that went rogue
Aggressively court loss-tolerant

investors, and provide investors
with roadmap to profit
Tesla deposit system

converts to Ponzi
scheme
Some Ponzi schemes (e.g. Madoff)

were well-regarded and not
considered fraudulent at the time
Properly inform $1,000 depositholders of their exceptionally risky

position as unsecured creditors
Low
Growth outcome
Our thesis is twofold: (1) the likelihood of a successful Model 3 launch is low, and (2) Tesla will be forced
to seek residual value as a heavily-subsidized (and decidedly non-luxury) public good provider
Source: Devonshire Research Group analysis and opinion
17
On the US auto industrys impending competitive response to Tesla
Where's my gangstas and all my thugs

Throw them hands up and show some love
And I Welcome you to Detroit City
I said Welcome to Detroit City
Every place, everywhere we go
Man we deep everywhere we roll
Ask around and they all know Tricky
That's what's good man they all say Tricky
- Trick Trick, Welcome 2 Detroit
18
Executive Summary
19
The recent Model X issues highlight the fragility of automotive

supplyTeslas production will be limited by its weakest link
TSLA US shipping imports by geography
Panama
Colombia
Spain / Portugal
Italy
Australia
Supply chain threats
USA
ITC injunction on
Chinese-imported
parts
Germany
China
UK
Shanghai
Price pressure by
Japanese and
Taiwanese suppliers
Belgium
Netherlands
Thailand
Singapore
Taiwan
S. Korea
Low quality and / or

reliability from lowcost Chinese players
Japan
Source
Destination
Source: Devonshire Research Group trade data & analysis, lines in

diagram reflect imports by supplier and port of departure
20
The cost reduction needed to achieve a $35k Model 3 will

generate strain throughout the supply network
Cost bucket
Cost reduction Achievable?
Obstacles
Gross Profit
78%
Likely
Need offsetting sales volume, must maintain hype
Supercharger Allowance
0%
Likely
Will continue to build out infrastructure
Manufacturing Overhead
46%
Maybe
Need to realize economies of scale in production
Drivetrain
63%
Unlikely
Suppliers unlikely to accept price reduction
Battery Pack
65%
Unlikely
Requires discontinuity in battery pricing to achieve
Interior
43%
Unlikely
Systems
0%
Maybe
Tires, Brakes and Suspension
40%
Unlikely
Body & Final Assembly
3%
Maybe
More sensors, larger feature set expected for Model 3

Depends on aluminum content and other design factors
( Model 3 model unit cost ) / ( Model S model unit cost )

Source: Estimates based on existing optimistic cost analyses
21
Tesla relies for the most part on a low-cost supply chain many of these
players lack protectable technology and have little give on margin
Tesla foreign imports by country: approximately half of suppliers hold no US IP
100%
70
% of suppliers with no US patents
60
Total # of suppliers
80%
50
40
60%
30
40%
20
20%
10
0
0%
China
Belgium
Hong Kong
Taiwan
Germany
UK
Japan
UK
1,000
10,000
100,000
1,000,000
10,000,000
# of containers
Tesla has opted for a low-cost and low-IP approach, with close to half of all foreign parts
suppliers for the Models S and X holding exactly zero protective US patents
Source: Devonshire Research Group trade & IP databases
22
Many low-IP suppliers provide complex, high-tech componentry;

these parts are vulnerable to US patent suits and ITC import bans
Teslas largest suppliers: where does the profit come from?
100,000,000
1,000,000
Containers shipped to
Tesla since Q3 2009
Shipping company
Panasonic Corporation / Sanyo Electric
Luvata Oy
Fukuta Electric & Machinery Co., Ltd.
Ceramtec Gmbh
Ningbo Jinyi Automotive Parts
Fuji Polymer Industries Co., Ltd.
Hota Industrial Mfg. Co., Ltd.
Srems Zhongshan Cenity Electronic
Pektron Plc
Barum Continental Spol Sro
Nishikawa Rubber Co., Ltd.
Premo Group
Amtek Precision Engineering
Amtek Plastic Ltd
Wabco Fahrzeugsysteme Gmbh
Dura Automotive Systems Gmbh
Sixxon Precision Machinery Co., Ltd
Leopold Kostal Gmbh & Co
Rogers Technologies Co., Ltd
Flextronics International Kft
Transtek Magnetics Ltd.
Huf Huelsbeck & Fuerst Gmbh & Co
Isabellenhuette Heusler Gmbh & Co
Bizlink Technology Inc
US granted patents
56,392
11
1
250
0
22
0
0
0
0
141
0
0
0
1
128
0
27
350
576
0
171
6
4
Product Description
Lithium ion batteries
Copper rods & wiring
Induction motor
Performance ceramics
Charging plugs, integrated plates
Performance rubber & plastics
Gears, shafts, rotors, axles
Cooling tubes
Electronic components
Tires
Weatherstrips
Inductive elements
Bracket components
Plates, trays, pipes, etc.
Air suspension
Key areas of
exposure
Unspecified parts
Powertrain components
Steering column switches
Busbars (conductors)
Audio system
Transformers
Keys & starters
Battery monitoring
Cables / connectors
Tesla will need to realize significant cost savings across the board to make the Model 3 profitablebut
advanced components are already produced by low-cost suppliers with no patent holdings
Source: Devonshire Research Group IP databases
23
The suppliers who do own IP are not loss-tolerant and will not
budge on margins for a relatively small purchaser such as Tesla
US patents granted
to supplier
International Tesla Suppliers with At Least One US Granted Patent
100,000
Country of Origin
Panasonic Corporation
Germany
LG Electronics Inc
Toyota Motor Corporation
Australia
10,000
China
Hongfujin Precision
Samsung Sdi Co., Ltd
Italy
LG Chem Ltd.
Kobe Steel, Ltd.
1,000
Belgium
Foxconn Computer
South Korea
Flextronics International Kft
Taiwan
Ceramtec Gmbh
Nishikawa Rubber Co., Ltd.
100
Fuji Polymer Industries Co.
Hong Kong
United Kingdom
Panama
Japan
Singapore
10
Luvata Pori Oy
Fukuta Electric & Machinery Co., Ltd
1
1
10
100
1,000
10,000
100,000
1,000,000
10,000,000
Containers shipped
to Tesla since Q3 09
Source: Devonshire Research Group trade & IP databases
24
Panasonic will face organizational pressure to abandon the Tesla

partnership if its Gigafactory investment does not pay dividends
2.6x
$1.6 B
Automotive
16%
Batteries
Devices
28%
17%
Chargers
Housing
17%
B2B
25%
Safety
$616 MM
Comfort
Consumer
electronics
23%
45%
26%
Panasonic sales breakdown

Batteries are $3.5B of $72B total revenue
The automotive segment is the smallest

segment at Panasonic, and EV battery
sales are just one component of this
revenue stream
2015 automotive
capital investment
Capital pledged
to Gigafactory
The Gigafactory investment alone

accounts for nearly three years of
automotive capital expenditurethis is
a hugely outsized segment investment
Source: Panasonic Annual Report 2015
25
Panasonics rechargeable battery division is under the corporate

microscope already and targeted for margin increases, not compression
Rechargeable batteries are 1 of 37 Panasonic divisions
and managed within 1 of 4 large companies
Rechargeable batteries are 1 of 6 large scale divisions

within its portfolio specially targeted for margin increases
Source: Panasonic 2015 Annual Report
26
Tesla needs a miracle in battery pricing to achieve the Model 3

target price; there is real doubt the Gigafactory will deliver
$ / kWh (log scale)
Model S battery pack cost estimates
1,000
800
400
$190 / kWh claimed by

Tesla head of IR, 04/16
200
Generally-accepted
critical pack price
150
114
100
2008
2009
2010
2011
2012
2013
2014
2015
2016
Zero-margin raw
material cost floor
Data fit gives 8% annual cost reduction by leading manufacturers, suggesting Tesla will not hit
$150 / kWh until 2020well past the promised end-of-2017 Model 3 delivery date
Source: Rapidly falling costs of battery packs for
electric vehicles, Nature Climate Change, 3/23/15
27
Executive Summary
28
If the Model 3 is not profitable, Tesla should establish itself as a public

good provider worthy of prop-up investment by the government
Strategic options in the case that Tesla remains unprofitable after the Model 3
Strategy
Best case outcome
Current impediments
Seek government aid by

positioning as a public good
Federal and / or state government

ramps up subsidies and oversight,
uses as a platform to create a
nationwide EV charging network
Brand inconsistency:
inconsistency Tesla sells
luxury vehicles to the wealthy.
Government aid would require
benefits for all incomes
Go private and seek other

sources of investment
Tesla is supported by a wealthy

philanthropist / visionary tech
investor with little regard for shortterm cash flow situation
A Model 3 failure would empower

EV competitors, and it would be
difficult to maintain market
presence even with private backing
Raise capital by boosting stock

price and selling shares
Tesla manages to hype stock and

raise a new round of capital from
fresh stock issuance
This continues the FEPF cycle

further reduces endgame options;
likely spiral into insolvency
29
EV tax credits overwhelmingly favor the wealthy; the average

taxpaying citizen will realize little, if any benefit
Wealth inequality of EV tax credits
Average EV credit per tax return, by AGI

7.0
1.0
Tax credits
6.5
Adjusted gross income (AGI)
6.0
0.8
5.5
0.7
5.0
USD per tax return
Cumulative fraction of tax credits / AGI
0.9
0.6
0.5
0.4
4.5
4.0
3.5
3.0
2.5
0.3
2.0
0.2
1.5
1.0
0.1
0.5
0.0
0.0
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
Cumulative taxpayer fraction, ranked by AGI
1.0
<10
10-20
20-40
40-75
75-200
>200
Adjusted gross income, thousand USD
Would any current US Presidential candidate risk extending nation-wide EV credits if this story
of inequality were to be shared with the average voter?
Source: The Distributional Effects of U.S. Clean Energy Tax
Credits, UC Berkeley, July 2015, data collected from 2009-2012
30
Tesla is contributing to this inequality, as it is exhausting its tax

credits on the luxury Models S and X
Units sold
(through 12/15)
1,000,000
Vehicles qualifying for full $7,500 federal EV tax credit
Nissan Leaf
100,000
Tesla Model S
Chevrolet Volt
BMW i3
Fiat 500e
10,000
Smart Fortwo EV
Chevrolet Spark EV
Mitsubishi i-MiEV
1,000
Ford Focus Electric

Volkswagen e-Golf
Cadillac ELR
Mercedes-Benz B-Class EV
Kia Soul EV
Tesla Model X
100
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Base price
90,000
Source: Edmunds.com, Devonshire analysis
31
In 2013, the average Tesla owner had twice the household income
of other EV owners
While the field of electric vehicles (EVs) has grown with the
Chevrolet Volt, Nissan Leaf and the Toyota Prius Plug-In, Tesla
buyers display unique differences. NVES shows that Tesla
owners have double the average household income of other EV
owners ($293,200).
($293,200) As a result, they are more likely to be adding
a Tesla to their household fleet (51%) rather than replacing a
vehicle with its purchase.
- Strategic Vision: New Vehicle Experience Survey (2013)
32
Tesla relies heavily on manufacturing incentives and zeroemissions credits

Subsidy
Subsidy size
Source
Gigafactory incentives
$1,290 MM
Nevada taxpayers
Zero-emission credits
$518 MM
California taxpayers
Federal EV tax credits
$284 MM
Federal taxpayers
CA self-generation incentive
$126 MM
CA Alternative Energy Financing
$90 MM
Discounted DoE loan
$45 MM
Federal taxpayers
State EV tax credits
$38 MM
Tesla is built on loss-tolerant public money, but this will not be a solution in perpetuity. Eventually
Tesla will need to stand on its own or accept a role as a government-sponsored public good provider
Source: LA Times investigation, June 2015
33
Brand exposure: pandering to the wealthy is incompatible with the

concept of Tesla as a public good
Brand drivers
Luxury
Visionary
Green
Brand inconsistencies
High-performance vehicles
--
Modern feature set
--
Quality engineering
Issues with Model X
Disrupting auto industry
--
Leading technology
Limited technology ownership
Eventually affordable
To be determined
Developing EV infrastructure
--
Lowering emissions
Surprisingly high environmental cost
Government endorsement
Hurts average taxpaying citizen
Supporters say Tesla is saving the world. We believe the reality is that Tesla helps rich people buy cars.
This brand inconsistency is a key vulnerability going into a contentious US presidential election year; is
inequality a core feature of the Tesla brand?
34
Takeaway: Tesla is fragile as a publicly traded company expected

to deliver a GAAP cash profit
Tesla is operating many financing business models that other entrepreneurs would be prohibited from
operating, as they might be labeled Ponzi, Pyramid, or Matrix schemes
Tesla is attempting to operate many complex, interwoven, novel financing schemes under one roof, and either
will be a successful version of Enron, or will fall victim to similar accounting challenges as it attempts to
reconcile its operational complexity to its cash position
If Tesla is indeed operating a FEPF, it is highly fragmented and overly diversified in its tactics, it should
dedicate more of its time to securing loss-tolerant investors
If Tesla does not successfully secure a larger loss-tolerant investor, the US government should seize the
company and convert it into a regulated social good and public service
Tesla should not be managed, valued, or reported by its ability to generate profit, and consequently it should
attempt to seek tax shelter as a non-profit or religious organization as quickly as possible
If Tesla is indeed operating for profit, it should announce a strategic roadmap to investors for earning a
profit in the coming decade
35
On requisite skepticism over hyperbolic operating targets
But now they only block the sun

They rain and snow on everyone
So many things I would have done
But clouds got in my way
I've looked at clouds from both sides now
From up and down, and still somehow
It's cloud illusions I recall
I really don't know clouds at all
- Joni Mitchell, Both Sides Now
36
Thank you
Image 2016 Devonshire Research Group
For more information, please contact Devonshire Research Group, LLC at surfhacker@bloomberg.net
37

Devonshire Research Group - Tesla Motors - TSLA - Public Release - Part II

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Devonshire Research Group, LLC

Tesla Motors, Inc.

Notice of investment interests

On financial innovation and creative accounting

Everything should be as simple as it can be, but not simpler.

Never assume malice when stupidity will suffice.

Tesla has engaged in aggressive accounting that calls to mind the

Enron Net Income

1997 1998 1999 2000 2001 2002

Tesla Motors Earnings

Tesla is not a car, battery, or tech company; it is an experimental

TSLA acting as an unregistered broker dealer

Use tax credits,

Use high preorders to boost

Enter into a zeroownership model;

Partner with ride

Use ZEV and state

Introduce a preorder lottery, allow

Use global green

Non-GAAP strategies to limit Model S depreciation boost stock

Model S resale value

Similarly, Teslas 400,000+ unsophisticated, unsecured, and

What could go wrong?

Panasonic drags feet on Gigafactory investment

Tesla forced to implement Model 3 buyback guarantee

Consortium of auto companies lobbies to remove tax credits

GM raises war chest to acquire IP and litigate against Tesla

Tessera or RPX engage in an auto IP relicensing campaign

Sole-source parts supplier raises prices, taking inventory hostage

Factory workforce goes on strike / labor dispute

Model 3 subject to regulatory scrutiny for road safety

SEC antagonizes TSLA for improper Twitter promotion (Musk)

IP litigation results in ITC injunction on foreign part imports

Probability of one or more tail risk missteps:

Urgent drive for cost reduction on fixed

Note: probabilities are Devonshire Research Group estimates

To understand Teslas business model, we must introduce novel

How to detect future-earning based financing: 8 key features

Investors who contribute capital to a

FEPF finances future losses; investors in these

Continual postponement of profitable operation

Pyramidal financing requires future pyramidal

Offer of unusual, timetime-sensitive incentives to

Impressive returns which are projected on

Loss of investor confidence will destroy the FEPF

Minimum return guarantees to increase

Permitting investors to exit with generous terms

Appeal to moral sensibility with highhigh-minded

Often an offsetting factor allowing investors to

Disruptive business model, often with

A common theme is that old rules no longer

Rapid growth leading to collapse unless tightly

Uncontrolled growth in these scenarios is often

Typical occurrence cases:

Source: Devonshire Research Group analysis of comparable financing models

Tesla is currently engaged in an aggressive future-earning financing

Investors who contribute capital to a

FEPF finances future losses; investors in these

Crowdfunding via zero-interest deposits despite

Continual postponement of profitable operation

Pyramidal financing requires future pyramidal

Plan to fund economy vehicle with multiple

Offer of unusual, timetime-sensitive incentives to