Would Nikola Be Proud of Tesla? An ESG Analysis of Elon Musk’s Electric Car (and Clean Energy) Company
By: Sasja Beslik
Tags: Sustainability, Tesla, Esg, Elon Musk, Business

What would Nikola Tesla say about Elon Musk? Would he, as one of the most genius scientists that ever walked on this planet, view Mr. Musk’s incredible business achievements in the same light as stock markets are viewing them? Would he be proud of the fact that Mr. Musk runs his family name for a car brand? Would he, like Edison told Tesla in 1884, not understand “American Humor”?

Let’s begin this story with Nikola Tesla. He deserves to be part of it.

Nikola Tesla (1856–1943)

Nikola Tesla was born in 1856 in Smiljan, Croatia, then part of the Austro-Hungarian Empire. His father was a priest in the Serbian Orthodox church and his mother managed the family’s farm.

In 1863, Tesla’s brother Daniel was killed in a riding accident. The shock of the loss unsettled the 7-year-old Tesla, who reported seeing visions — the first signs of his lifelong mental illnesses.

Tesla studied math and physics at the Technical University of Graz and philosophy at the University of Prague. In 1882, while on a walk, he came up with the idea for a brushless AC motor, making the first sketches of its rotating electromagnets in the sand of the path. Later that year he moved to Paris and got a job repairing direct current (DC) power plants with the Continental Edison Company. Two years later he immigrated to the United States.

During the 1890s Mark Twain struck up a friendship with inventor Nikola Tesla. Twain often visited him in his lab, where in 1894 Tesla photographed the great American writer in one of the first pictures ever lit by phosphorescent light.

Tesla arrived in New York in 1884 and was hired as an engineer at Thomas Edison’s Manhattan headquarters. He worked there for a year, impressing Edison with his diligence and ingenuity. At one point Edison told Tesla he would pay $50,000 for an improved design for his DC dynamos. After months of experimentation, Tesla presented a solution and asked for the money. Edison demurred, saying, “Tesla, you don’t understand our American humor.” Tesla worked nights until he came up with a solution. Edison refused to pay up, claiming he had been joking. Soon after, Tesla quit to form his own electric company.

While he searched for backers to support his research into alternating current, Tesla took a job digging ditches for $2 a day to make ends meet. In the 1890s Tesla invented electric oscillators, meters, improved lights and the high-voltage transformer known as the Tesla coil. He also experimented with X-rays, gave short-range demonstrations of radio communication two years before Guglielmo Marconi and piloted a radio-controlled boat around a pool in Madison Square Garden. Together, Tesla and Westinghouse lit the 1891 World’s Columbian Exposition in Chicago and partnered with General Electric to install AC generators at Niagara Falls, creating the first modern power station. In the 19th century, Nikola Tesla envisioned a global wireless power grid that any home, business, or vehicle could tap into at will.

Tesla lived his last decades in a New York hotel, working on new inventions even as his energy and mental health faded. His obsession with the number 3 and fastidious washing were dismissed as the eccentricities of genius. He spent his final years feeding — and, he claimed, communicating with — the city’s pigeons.

Tesla died in his room on January 7, 1943. Later that year the US Supreme Court voided four of Marconi’s key patents, belatedly acknowledging Tesla’s innovations in radio. The AC system he championed and improved remains the global standard for power transmission.

Elon Musk (1971-) (Or: How the King of Mars relates to planet Earth…)

It’s rather amusing to read about Mr. Musk’s background and all the stuff — and I really mean “stuff” — that has been written about him.

I think Ashlee Vance, Musk’s personal biographer, describes it better than anyone could: “The people who love him and the people who hate him are equally irrational. It reminds me of Steve Jobs. It’s way beyond business or celebrity. It strikes me as religious, more than anything. His fans are acolytes.”

As a boy, Elon loved The Hitchhiker’s Guide to the Galaxy, and now he shoots astronauts into the Milky Way. Musk was born into a wealthy engineer family on June 28, 1971, in Pretoria, South Africa. As a child, Musk was so lost in his daydreams about inventions that his parents and doctors ordered a test to check his hearing.

At age 17, in 1989, Musk moved to Canada to attend Queen’s University and avoid mandatory service in the South African military. Musk obtained his Canadian citizenship that year, in part because he felt it would be easier to obtain American citizenship via that path. Musk headed to Stanford University in California to pursue a PhD in energy physics. However, his move was timed perfectly with the Internet boom, and in 1995 he dropped out of Stanford after just two days to launch his first company, the Zip2 Corporation. Musk became a US citizen in 2002.

His business adventures started early on. As said, Musk launched Zip2 Corporation in 1995, together with his brother, Kimbal Musk. An online city guide, Zip2 was soon providing content for the new websites of both The New York Times and the Chicago Tribune. In 1999, a division of Compaq Computer Corporation bought Zip2 for $307 million in cash and $34 million in stock options.

In 1999, Elon and Kimbal Musk used the money from their sale of Zip2 to found X.com, an online financial services/payments company. An X.com acquisition the following year led to the creation of PayPal as it is known today. In October 2002, Musk earned his first billion when PayPal was acquired by eBay for $1.5 billion in stock. Before the sale, Musk owned 11 percent of PayPal stock.

Musk founded his third company, Space Exploration Technologies Corporation, or SpaceX, in 2002 with the intention of building spacecraft for commercial space travel. Musk oversees all product development, engineering and design of the company’s products. Yes, him personally. And if you don’t like it… well, not much can be done about that.

Musk believes there’s a better way to do everything, and he sets his sights on constant improvement. He has big ideas and wants to unite his team around his (sometimes outrageous) vision and objectives. One of his well-known quotes is: “Patience is a virtue, and I’m learning patience. It’s a tough lesson.”

Another one of his quotes will make anyone looking for work-life-balance feel utterly wasted: “Work like hell. I mean you just have to put in 80 to 100 hour weeks every week. [This] improves the odds of success. If other people are putting in 40-hour workweeks and you’re putting in 100-hour workweeks, then even if you’re doing the same thing, you know that you will achieve in four months what it takes them a year to achieve.”

He once scolded an employee for missing a company event to be present for the birth of his child, saying: “We’re changing the world and changing history, and you either commit or you don’t.”

Currently Elon Musk has relocated to Texas from California, making him yet another billionaire to announce a move that could deliver big tax savings. The mechanics of how the rich can enjoy those savings, however, are complicated and involve jumping through a few more hoops than simply announcing that they have moved from Los Angeles to Dallas, or New York to Miami.

“Tesla has benefited inordinately by being in California,” said Chris Hoene, executive director of the California Budget & Policy Center. Ironically that includes a tax perk — a state-funded rebate for electric cars that has helped make California one of Tesla’s largest markets. Even if Musk leaves the state as a taxpayer, Hoene said, “Musk is still benefiting enormously from the tax code in California from a company perspective.”

Tesla’s business model

Musk is the co-founder, CEO and product architect at Tesla Motors, a company formed in 2003 that is dedicated to producing affordable, mass-market electric cars as well as battery products and solar roofs. Today, Tesla builds not only all-electric vehicles but also infinitely scalable clean energy generation and storage products. Tesla believes the faster the world stops relying on fossil fuels and moves towards a zero-emission future, the better.

So far this story is so good, innovative and trilling. It entails all elements of a heroic mind transforming, disrupting and at the same time exploring new frontiers within and beyond this world. Or is this just a significantly superb business model? Let’s have a look!

Tesla’s stock performance in 2020 compared to the S&P 500. Source: Statista.

Tesla’s crazy valuation in one chart. Source: The Motley Fool.

Tesla’s recent breakout market performance is proving some of its skeptics wrong. By mid-January 2021, Tesla’s market capitalization had reached $800 billion, which is more than the next 10 biggest automakers combined!

The biggest challenge VW and other leading automakers face is that they lack the expertise required to compete in the age of the software car. Tesla took a unique approach to getting its first vehicle in the market. Instead of trying to build a relatively affordable car that it could mass produce and market, it took the opposite approach, focusing instead on creating a compelling car. Tesla builds cars by developing software on unique hardware, much in the way Apple develops the iPhone or Microsoft leverages Intel chips and Dell PCs. This enables the company to improve its cars’ software functionality every few weeks. This is in sharp contrast to the traditional auto industry model where the product is the same for as long as you drive it.

With fewer parts, the total cost of Tesla ownership is significantly lower than an internal combustion vehicle. There’s no need for expensive oil changes, tune ups, replacing mufflers, and the like. The automakers, who derive significant profitability from their service businesses, know this.

Tesla’s business model is based on a three-pronged approach to selling, servicing, and charging its electric vehicles. However, Tesla has never turned a full year profit. Indeed, it has only managed four profitable quarters in its entire existence. It also appears that Tesla has never paid any Federal taxes, at least not according to their most-recent 10K annual SEC filing. They are also carrying forward a large amount of losses. So they will probably not pay taxes for some time into the future if they ever manage to make money.

Buying a Tesla is relatively simple: You go online, pick a model, add your features, place your deposit, and schedule pickup. Done. Unlike other car manufacturers who sell through franchised dealerships, Tesla uses direct sales. Unlike car dealerships, Tesla showrooms have no conflict of interest. Also, customers only deal with Tesla-employed sales and service staff. Including the showrooms, Service Plus centres (a combination of retail and service center), and service facilities, Tesla has around 1,000 locations around the world as of early 2021.

Tesla has also made use of Internet sales — consumers can customise and purchase a Tesla online, Tesla has created its own network of Supercharger stations, places where drivers can fully charge their Tesla vehicles in about 30 minutes for free. The premise behind building and owning these stations is to speed up the rate of adoption for electric cars. Without the ability to charge on the go (similar to the concept of getting gasoline while driving), electric cars face a huge obstacle to mass adoption.

Indeed Tesla did not invent the electric car or even the luxury electric car. What Tesla did invent was a successful business model for bringing compelling electric cars to the market. Tesla’s unique business model, which includes control over all sales and service, is one of the reasons its stock has soared since its initial public offering.

How sustainable is Tesla really?

Buts let’s have a look behind the hood and see how sustainable Tesla really is. Electric cars pull electricity from the grid. So if you are driving your Tesla (or any other plug-in vehicle) in the US, 77.6% of the electricity you are using is from petroleum, natural gas, or coal.

Not perfect, but certainly better than 100% from your gas-powered car. In a gas-powered vehicle, 80% of parts are re-usable and recyclable.

Teslas (and electric cars generally) incorporate 1,600 lbs or more of e-waste, yet global capacity for recycling e-waste is only about 5%. In the US, only about 30% is actually recycled.

People (not robots) behind King of Mars

Tesla has been involved in several disputes with employees in recent years. For instance, in 2017, Tesla faced worker complaints on pay and overtime at its Fremont facility in California, US.

None of Tesla’s full-time employees were represented by labor unions or covered by collective bargaining agreements unlike most of its global peers. While union representation may increase the likelihood of work stoppages in some industries and countries, higher rates of unionisation as a proxy to indicate that a company’s compensation, benefits, and treatment of workers meet basic standards. Tesla’s current management practices are not considered adequate to manage the risks related to a larger labor force, with little evidence of feedback mechanisms to monitor employee satisfaction, attractive retirement plans, or robust employee training and professional development plans.

Weak labor management practices may pose risks to the company’s growth strategy. In the three years through 2020, Tesla has faced multiple claims of labor rights violations, including discriminatory and anti-union activities. Successive layoffs (7% and 9% of total workforce in 2019 and 2018, respectively), and the absence of strong staff engagement efforts, may exacerbate its labor challenges.

Digging behind the flashy 100km/h in 3 secs…

The social media habits of Mr. Musk have landed him in legal hot water on several occasions. But for the battery industry one boast stands out: a tweeted pledge to remove an obscure mineral mined in the Democratic Republic of Congo from the next generation of Tesla’s electric cars.

Batteries are the key component in the electric car revolution that Tesla kick started, and each one contains cobalt. Yet concerns about human rights abuses and child labor have prompted a dual effort to cut the amount of cobalt used in batteries and to clean up complex global supply chains. The battery industry accounts for the majority of global cobalt demand, and that demand is set to soar with more than $60bn of investments in new battery factories during 2019, according to the data firm Benchmark Minerals.

Musk tweeted his pledge in 2018 but demand for cobalt has since accelerated. Benchmark’s forecasts suggest that global demand for cobalt in 2029 will be 300,000 tons compared with an estimated 70,000 tons used in 2019.

There are as many as 150,000 artisanal miners in Kolwezi, the regional capital in southern DRC that has become a major mining centre. Children working at the mines are easy to find within a five-minute drive fromthe city centre. Most electric vehicle batteries use lithium ions, with nickel, manganese and cobalt (NMC) in various proportions in the cathode, a key part of any battery. Early batteries contained the three metals in equal proportions, but companies such as South Korea’s SK Innovation and LG Chem are close to producing cathodes with 80% nickel and only 10% cobalt, known as NMC 811.

However, chemists have struggled to remove all cobalt, which is prized for stabilising the battery during recharging. Tesla’s first Model S, launched in 2012, and was built with an average of 11kg of cobalt per vehicle, but according to Benchmark Minerals that was down to about 4.5kg in its successor car, the Model 3, which launched in 2018. This has been achieved using a nickel-cobalt-aluminum chemistry. Cobalt is also the most expensive material used in batteries.

From cobalt to nickel and lithium woes

Tesla’s recently published impact report for 2019 reiterated the company’s ultimate goal to eliminate cobalt completely from its battery cells. But working with a different kind of battery will come with new challenges. The push to use less cobalt has driven up demand for another metal replacing it in batteries: nickel.

Musk urged mining companies to dig up more nickel during a July earnings call, and did so again during Battery Day: “In order to scale, we really need to make sure that we’re not constrained by total nickel availability. I actually spoke with the CEOs of the biggest mining company in the world and said, ‘Please make more nickel, it’s very important.’”

Nickel is mined in more places around the world than cobalt, but its extraction has polluted indigenous peoples’ lands in Russia. Norilsk Nickel, also known as Nornickel, is one of the largest nickel producers on Earth. It claims to be the largest producer of so-called class 1 or high-purity nickel, the type coveted by battery manufacturers. Demand for high-purity nickel is predicted to surge as the electric car market grows. While it’s not clear how much of Nornickel’s product currently winds up in car batteries, it’s definitely a direction Nornickel and other producers are looking at in terms of growth.

Nornickel is one of the biggest polluters in the entire Arctic. Its nickel production sites on the Taimyr Peninsula and its refineries on the Kola Peninsula are both enormous sources of regional air pollution. The Taimyr operations alone are responsible for roughly double the annual sulfur dioxide emissions of the entire United States. According to the Russian Federal Service for Hydrometeorology and Environmental Monitoring. Discharges of contaminated wastewater from Nornickel’s industrial facilities have resulted in severe heavy metal pollution in nearby water bodies and soils. Locals call the area around the city of Norilsk — a vast wasteland of dead trees and mud — “poison territory.”

Nornickel’s nickel operations in Taimyr alone are responsible for roughly double the annual sulfur dioxide emissions of the entire United States.

Indigenous groups living in this area of Russian Federation have issues an open letter to Mr. Musk appealing to him to not buy Nickel from Nornickel.

To keep its electric cars lightweight, Tesla uses high-performing metals including lithium which are hard to find and even harder to excavate. Mining these metals is an extensive process, which involves digging deep into the ground, adding ammonium sulfate to dissolve clay and acid bathing. The metals obtained account for approximately 0.2% of the materials removed from the ground, which means 99.8% of the now toxic material is returned to the earth.

In April 2019 the US Environmental Protection Agency fined Tesla $31,000 for federal hazardous waste violations at its factory in Fremont and required $55,000 to be spent on emergency response equipment.

Tesla and its own CO2 emissions then…

Tesla’s own CO2 emissions generated in production of electric vehicles are far from what they should be. Given current modus operandi Tesla is on a 3.4 degree Celsius path, according to our climate path model at J. Safra Sarasin.

Tesla is far away from the target set in the Paris Agreement. Source: J. Safra Sarasin.

If the growth of Tesla continues as predicted by “Mr. Mars”, much more will need to be done to reduce the CO2 emissions generated in the production of the electric vehicles.

Investors can forget about traditional ESG

If we recognise the enormous power of capitalism as a driver of positive social impact, by far the most powerful way to integrate social innovation and economic value is through a company’s strategy. Creating social impact through an innovative and profitable business model reshapes the nature of competition and makes social impact a part of capitalism itself. This requires going way beyond a checklist of ESG material factors.

First step in moving beyond broad-brush ESG scores to focus on specific social issues that carry meaningful economic effects in specific industries. Yet even this analysis falls well short of truly connecting social impact with competitive strategy and opportunities for superior profitability. After all, materiality originated as a legal concept largely oriented toward identifying risks that require disclosure, rather than highlighting future opportunities for competitive differentiation, growth, and profitability.

In addition, many of the operational factors highlighted by traditional ESG approach as material are generic across an entire industry, not unique to a particular company’s competitive positioning. The result is that incremental improvements in most material ESG factors converge over time into industrywide best practices and therefore do not confer any long-term competitive advantage on a single company within the industry.

A materiality analysis of ESG metrics may help investors identify industry laggards or measure, analyse, and price risks that protect portfolio value. Yet this approach is insufficient to identify companies that are truly innovating by creating value through the use of social innovation to drive superior long-term economic results.

Companies can achieve superior economic performance only through a distinctive value proposition that either offers better value to target customers (differentiation) or achieves structural efficiencies that support lower cost versus competitors (cost savings).

What has been overlooked historically in ESG thinking is that social innovation on key issues within every industry can profoundly affect strategic positioning in both differentiation and cost savings

Questions to be answered about Tesla

– Is Tesla creating new products that address emerging social needs or open currently unserved customer segments?

Well mostly yes, and little bit of no. The world needs sustainable transport solutions. But do we need more cars?

We certainly need to shift from fossil fuels. But if every car in worlds is an electric vehicle, where will we find the metals and how will we power all of it?

The customer segment Tesla serves is very traditional, so in that sense it’s hard to dream at this stage that the average car buyer in India will be able to afford it within the foreseeable future. But it’s better than combustion cars any time.

– Is Tesla enhancing productivity in the value chain, whether by finding new efficiencies or increasing the productivity of employees and suppliers?

Yes and no, it is disruptive and very smart using tax subsidies like in California or Norway to boost its sales. But it’s still in very small number globally.

Competitors in China are doing faster, larger and more scalable solutions. It will be battle of scale and even a battle of new solutions like hydrogen coming up.

– Is Tesla investing to improve the business environment or industry cluster in the regions where the company operates?

Yes and no. It is certainly disrupting existing business model of car companies and pushing the transition towards non-fossil solutions creating new business opportunities.

However, its labor practices and dependency on minerals in quantities from some of most difficult countries in the world poses a question.

I suggest that Mr. Mars finds time in his busy schedule to visit the mines in DRC and the Russian city of Norilsk. (I have, and I can tell you that’s not as pleasant a ride as the one you can get in Tesla.)

The conclusion

So what is the conclusion? As always, it depends a great deal on the ESG style and outcome you are looking for.

A hard-core mission driven ESG investor would certainly invest in the stock. Tesla falls under the 98% green revenue threshold. No, it is not the holy grail of sustainability, but with some tweaks here and there it works fine.

An ESG libertarian will recognise the risks and harbour in stock as “all of the others do” given prospect of the stock counting on technological improvements of batteries, less child labor and more EV’s (i.e. less CO2 emissions).

A true LTA (long-term active investor) will assess real economic-value creation, which seeks out companies that achieve excellent economic performance by innovating to meet important societal needs and refrain from investing in a company that in practice just revamped and disrupted their existing business model with another one that in true sense does not provide scalable solutions we truly need.

Sure, it could still be potent in a 3–5 years timeframe, but what lies behind that timeframe is something completely different.

So at the end…

Nikola Tesla held around 300 patents and his alternating current — the way electricity reaches our homes to this day — won “the war of the currents” over Edison’s direct current.

But one of Nikola Tesla’s greatest ideas unfortunately never took off. He boasted he had a plan for a low-cost global power and communication system. He claimed that this system would allow for “the transmission of electric energy without wires” on a global scale. The worldwide system would also allow for point-to-point wireless telecommunications and broadcasting.

He spoke publicly about his ideas from the mid-1890s onwards and by the end of 1900, he had secured funding for the project from the banker J.P. Morgan. However, due to many reasons including a withdrawal of funding from Morgan, the project was abandoned in 1906 and never resurrected.

I wonder what the world we live in today would look like if Nikola Tesla had received the needed funding.