NEW YORK (TheStreet) -- Tesla (TSLA) CEO Elon Musk made comments in Tokyo over the weekend to the effect that he envisions cutting another deal with Toyota (TM) sometime over the next two to three years. Whether he meant supplying battery packs, or an entire car, to Toyota, wasn't immediately clear.
This comment was odd and curious. Musk had been poking fun of Toyota over the past year for his belief that Toyota rejected battery-electric cars in favor of hydrogen fuel cell cars. The Japanese automaker plans to start to produce hydrogen fuel cell cars in the coming months.
Toyota's focus on hydrogen fuel-cell cars had been viewed as a positive for Tesla, because that meant one fewer competitor. And with hydrogen fuel cell cars several years away from being produced in large quantities, Toyota won't be much of a threat to Tesla, at least in the near term. As a result, Tesla's stock has soared 69% over the past year.
If Toyota is considering adding battery-electric cars on a significant scale across multiple continents, what would a deal with Tesla look like?
First, let's consider that Toyota and Tesla share the same battery vendor, Panasonic (PCRFY) . Toyota has been using Panasonic since before Tesla was founded. There is nothing that says that Toyota isn't considering a variety of battery vendors for use after 2016. For Toyota to continue to use Panasonic is one option indeed.
Panasonic has agreed to rent some space inside Tesla's future Nevada factory, and invest at least $200 million in equipment there in the years leading up to 2020, in order to produce battery cells for Tesla. This factory will be capable of operating at full capacity in 2020 according to Tesla.
Musk's latest statement may mean that either Tesla or Panasonic is unsure about whether it can achieve a high capacity utilization in this Nevada factory. And low capacity utilization means losses.
Clearly it would be beneficial for Panasonic to get Toyota to pick up the slack in this future factory. For Tesla, it would mean one more competitor who would be willing or at least able to sell battery-electric cars below cost -- which is of course a disaster for Tesla's mass-market ambitions in the context of achieving profitability.
One more thing: Let's say that Tesla and Toyota were indeed in talks to do something -- along these lines or otherwise -- wouldn't there be some sort of confidentiality agreement covering any such discussions? If there is, I'm sure Toyota is thrilled to be reading about any such confidential talks in the morning paper. Not.
The bottom line is this: The contradictions surrounding this latest Toyota comment by Elon Musk are several: Is Toyota just doing hydrogen fuel cells or not? Why would Toyota not simply deal with Tesla's battery vendor directly (Panasonic) instead of Tesla the middle-man? Why would Tesla want to encourage a competitor to enter the market and destroy pricing and margins?
Tesla officials didn’t immediately respond to requests for comment. Toyota has not commented on what Musk had to say about a potential future deal of some kind. Toyota spokesperson Jana Hartline said, "we don’t have anything to add." I would view all of this Tesla Toyota deal with skepticism on a multitude of levels.
At the time of publication, the author was short TSLA.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates TESLA MOTORS INC as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:
"We rate TESLA MOTORS INC (TSLA) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and good cash flow from operations. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, poor profit margins and generally higher debt management risk."
You can view the full analysis from the report here: TSLA Ratings Report