Thread by @fly4dat

1/ $FCAU and $TSLA have signed an agreement to include Tesla's vehicles in FCA's vehicle count to lower average CO2/km emissions per car sold. FCA has filed this for 2019 only, but most probably it can be extended.

https://twitter.com/temp_worker/status/1114844659640041472

2/ Right now the target is 130g/km. FCA easily meets this target, most probably even after new WLTP testing. If not, the difference is immaterial.

ec.europa.eu/clima/policies…

3/ In 2020, the average of (bottom) 95% of cars sold will have to be below 95g/km, and from 2021, 100% of them count. Penalty for each gram above is €95/g/car. That's a lot, potentially in excess of €2B for FCA.

4/ FCA had a net profit of €3.6B worldwide. But only €406M of EBIT came from EMEA, so probably €300M from the EU. If they had to pay €2B penalties, it would be much cheaper for FCA to simply pull out of the EU. That's obviously not going to happen.

5/ What are their options?
- They could price larger engines and more polluting cars higher
- Discontinue most polluting models (in the EU)
- Develop less polluting engines
- Sell more diesel (bad for everyone but lower CO2)
- Sell more PHEV's and BEV's in the EU

6/ That's probably all in the works. In 2017 only 8% of their cars were emitting <95g/km, but 62% were in the next category. It's not difficult to assume that in 4 years a lot more will fall in the cleanest category.

7/ It's safe to say that FCA is not the most aggressive in electrification. But even that way, they expect 20% of their cars sold by 2022 to be BEV/PHEV/HEV. And another 40% to be mild hybrids in Europe.

8/ They are introducing the new Fiat 500e. They've commited to electrify 100% of Alfa Romeo by 2022. There will be 4 BEV and 10 PHEV options available for Jeep by 2022. They are progressing, but are a bit late to the party. They had to do something in the meantime.

9/ This is where Tesla comes to the picture. Adding their cars to the vehicle count helps lowering average emission values until FCA can do it on their own. They could have chosen others, especially Toyota or even Renault-Nissan, who are ahead in the game.

10/ Why did they chose Tesla? We can only speculate, but it's safe to say they were the cheapest. Especially on the week before the converts were due, with all the fire sale and stuff. Remember: FCA didn't need the credits for 2019. But they do for 2020-2021, maybe 2022 too.

11/ So they've bought a call option. I believe what they have paid to Tesla, most probably before 3/1/2019 was an option premium of a few tens of millions. It wouldn't have made sense to pay more: regulations can change, FCA can make better progress on its own.

12/ Tesla can go out of business too. With just about €300 profits from Europe, FCA can't even justify spending more on an option this year.

13/ How much they will have to pay in 2020-21 (and possibly 2022)? That's yet to be seen. Most probably the contract is quite flexible for FCA. @PatrickMcGee_ , who wrote the FT article, estimates low hundreds of millions spanning across several years.

https://twitter.com/PatrickMcGee_/status/1114971214773202945

14/ And again: that should be optional for FCA to draw down, as there are lots of uncertainties about regulations, R&D, production and customer behaviour. According to estimates, FCA can get to 98.5g/km by 2021. That's less than 3% difference, or 30k BEV's. Not a huge number.

15/ It's worth noting that customer demand can easily justfiy selling more BEV's by 2021. The problem can solve itself for FCA. If not, they now can buy the required credits from Tesla.

16/ The above speculation means that in 2020-21-22 FCA could spend $1-300M cumulative, with 2021 being the peak year, when 100% of the cars sold count vs 95% in 2020, but less BEV's and PHEV's are available then in 2022.

16/ TL; DR: As FCA doesn't need (much?) credits this year, it's likely they've bought on option for the upcoming years for a low double digit sum. During the next several years this can go up to low triple digit millions, all years combined.

17/ Headlines of FCA paying several hundreds of millions of dollars to $TSLA are misleading.

$TSLAQ

18/ Correction: FCA should reach 91.8g/km as their cars are smaller -> lighter. 95g/km has to be the average of all cars of all OEM's in the EU.

This doesn't change my line of thought above.