NEW YORK -- Fiat Chrysler Automobile's deal to pool its fleet with Tesla to comply with stricter emissions rules in Europe is in effect funding the electric-car maker's upcoming Germany factory, according to a U.S. investment bank.
FCA reached an agreement with Tesla last spring that could cost FCA an estimated 1.8 billion ($2 billion) through 2023. That breaks out to about $150 million to $200 million per quarter and will pad Tesla's profit margins starting in the first three months of this year, according to Ben Kallo, a Robert W. Baird & Co. analyst.
"While we acknowledge investors may want to strip out credits in evaluating operational execution, we do note the credits effectively fund Tesla's European factory," Kallo wrote in a report Thursday.
While he cut his rating on Tesla to the equivalent of a hold, from a buy, the analyst raised his price target to $525, from $355.
Representatives for FCA and Tesla did not immediately respond to a request for comment.
CEO Elon Musk announced in November that Tesla planned to build a plant outside Berlin. Tesla will build several models at the factory starting with the Model 3 sedan and Model Y crossover, according a public notice published by the German state of Brandenburg.
FCA plans to launch a new electric version of its Fiat 500 minicar in Europe this year, along with plug-in hybrid versions of its Jeep Compass, Renegade and Wrangler models. That, combined with the Tesla credits, should make the company compliant with Europe's emissions rules, CEO Mike Manley told analysts in July.
While FCA would otherwise struggle to meet new CO2 emissions standards in Europe, the so-called open-pool option available in the European Union allows automakers to group their fleets together to meet targets.
Compliance has gotten harder for automakers as consumers have shifted toward gasoline cars, which emit comparatively more CO2, following Volkswagen Group's diesel-emissions scandal that first erupted in 2015.
