This Is The Year When Developed Nations Must Choose Between Pain And Disaster

One of Tesla’s (TSLA) main criticisms since the company turned public eight years ago in July 2010 is its inability to maintain a positive cash flow. Since then, Tesla has had only four positive cash flow quarters which investors have reasonably seen as an issue. Obviously in order for a company to survive, they need to be able to generate profits, otherwise they will run out of money. However, an idea that the market seems to forget is that Tesla was founded in 2003 and only started general production of their first car - the Tesla Roadster - in 2008. This is a company that has only been producing their product for 10 years. Companies such as Tesla need time to grow before they can reach their full potential. To add to this, growing is expensive. A rapid growth phase often does not yield immediate profits, but for a company like Tesla, with an established product, rapid growth is exactly what the company needs. Throughout this article I will lay the groundwork for a concept that could allow Tesla to thrive long term, although it may suffer short-term hits. The plan is to forego creating a quarterly profit, but rather invest as much capital as possible to expand the company. This will be risky, there's no denying that, but if it works, Tesla could be at the level of production of other top manufacturers. This is exactly what they need if they want to be a mass market brand.

What Needs to be Done

In order for Tesla to survive, it must stop being criticized for spending money, especially when it's setting up the future success of the company. It's more than understandable to criticize Tesla and question their ability to succeed when they are burning cash, but there's a difference between spending and burning. Burning cash is certainly a type of spending, one Tesla has been all to familiar with in the past. The Model 3 assembly line being the most recent and damaging. SolarCity was different, as Tesla acquired it in order to expand and grow their business, yet they were still criticized for it. Cash can be spent in many ways and Tesla needs to prioritize their spending on the expansion of the company. A major factor that bulls are leaning on is Tesla’s ability to profit in the coming quarters. Using the final two quarters of 2018 to profit may not be such a bad thing, even if it is prioritized over expansion for that time. An important side of Tesla profiting could be as a “proof of concept” to gain confidence from outsiders which Tesla might need to rely on for funding. For this reason, until the end of 2018 Tesla should continue on Musk’s goal of profiting without raising any capital, but for Tesla’s future growth, they will need to raise more capital.

If Tesla can prove that it can profit with its current business and manufacturing model, analysts and investors will have more reason to believe that profits will come from expansion. Investor and analyst confidence is very important as it will help finance Tesla’s future projects. The expansion will allow Tesla to execute at a higher rate and efficiency. With more vehicles being produced, Tesla will be able to reduce wait time for customers and increase profit margins. This is a big deal because there have been many Model 3 reservation holders that have withdrawn their orders because of the long wait. Even if the customer prefers the Model 3 over a competitor's car, many might opt to take the competitor’s car instead because it is available.

A new factory in the US would help Tesla immensely, but they would need more than just that. The production of their solar products needs dramatic ramp up as well and another factory could manage that pretty well. Overall, two new car manufacturing factories should be built, one in Europe and one in the US, both modeled after the Shanghai factory to produce both batteries and cars. In addition to the car factories, one new factory producing solar products in the US also would be necessary. Lastly, Tesla should be more open to make acquisitions if they believe that it will help them in the future. This article will discuss why Tesla needs to put aside short-term profit and focus more on their expansion.

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Image Source: Electrek

Tesla’s Growing Competition

Tesla was founded with the goal to accelerate the transition from gas cars to electric cars, which they have undoubtedly succeeded with. Both the head of the Nissan (OTCPK:NSANY) Leaf and the Chevy (GM) Bolt have credited the original Roadster for the creation of the cars and there's no doubt that other companies have been forced to follow suit. Unfortunately with Tesla reaching their goal of influencing other companies to start producing compelling electric vehicles, they now have to face competition. Although Tesla is still currently the lead producer of electric vehicles, this could change as more companies begin exploring electric vehicles more seriously.

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Source: AutoCar

Tesla’s Fremont factory is currently not producing the 500,000 cars annually it was predicted to upon the release of the Model 3. It produced just 53,339 vehicles in Q2 of 2018 which is the most ever out of the factory. However, if Tesla can reach even 8,000 Model 3s weekly, it should be able to top 500,000 cars annually at Fremont with the Model X and Model S production taken into consideration. Though even more importantly, the number of 8,000 isn’t just a random number, an August report from an Evercore Analyst who had received a tour of the Fremont Factory stated that “the capex required and constraints that need to be overcome to reach 7 to 8,000 units per week seem well within reach.” In addition, after Worm Capital received a tour of Tesla’s Nevada based Gigafactory 1 in September, they predicted that Tesla can ramp up to producing 8,000 Model 3 battery packs weekly from the current rate of 6,000. This prediction came from news that Tesla will be receiving three new Grohmann machines in order to increase production of the Model 3 battery packs and evaluating the current state of the battery assembly lines. Tesla acquired Grohmann Engineering for $135 million in 2017 in order to increase the production rate of the Model 3. Again, this move prioritized growth over short-term profit and evidence already has started to show that this was a good acquisition. This news of the battery production increase coupled with the car manufacturing increase work hand in hand together, as production in both factories have seen the potential to begin producing 8,000 Model 3s per week with only minimal capital investment. This is just one example of how Tesla can better itself by putting more capital toward growing the company, instead of its current focus of short-term profit. This manufacturing model, if proven successful, can then be emulated on a larger scale with an investment into more factories.

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Source: FutureCar

Tesla currently owns two factories and is building a third in Shanghai. The $2 billion Shanghai Gigafactory 3 is a huge step for Tesla in terms of its global reach and production increase. China is a huge market that Tesla is missing out on because of the incredibly high tariffs on automobiles made in the US put in place by the Chinese government. This new Gigafactory would avoid all of the tariffs and give Tesla a direct ticket into the world’s biggest electric vehicle market. China has huge government incentives in place to try and get their country to 100% electric by 2030, giving Tesla a huge market. The factory will produce both batteries and cars with an eventual goal of producing 500,000 cars annually, most automotive factories produce approximately 200,000-300,000 cars annually. Cars will start rolling out of the factory in 2021 according to Tesla, not at its maximum rate however, as the factory will still be under construction. Upon completion, this factory is set to double the amount of total Tesla vehicle production and will help Tesla immensely in its plan to go global. Having a factory in China is huge because of the strong demand for electric vehicles and the ability to get around tariffs by producing directly in China. The factory will pay for itself quickly and be a key part in expanding Tesla and its customer base. This factory is not enough by itself however. Ford (F) currently has 86 factories, three of which are joint ventures where Ford owns 50%. By no means would it be wise for Tesla to invest in 80 new factories, but adding a few to their short list would be wise.

To add onto the fear of a lack of production capacity, three new vehicles will be entering production in 2020, one of which is another mass market car. Production for the Semi and Roadster aren’t of high concern, the Roadster because it is a low volume car and the Semi because of its internal simplicity and similarities with the Model 3. The production of the Model Y will be under a microscope to see if they can produce it without the disaster of the Model 3, but Musk has assured skeptics that they will be able to “avoid all the pain that they went through with Model 3 production ramp up.” If Tesla has learned from its past mistakes, this shouldn’t be an issue as Model 3 assembly lines and parts will be used for both the Semi and the Model Y. Unfortunately, the issue now becomes where to produce the vehicle. Tesla has hinted that the new factory in Shanghai will produce Model Ys, but nothing for the manufacturing plans in America. If not manufactured at another facility, the Model Y as well as the other vehicles will cut into the production of other cars at the Fremont factory. If Tesla were to build another factory to assemble Model Y, Model 3, and the Tesla Semi, they could avoid this issue altogether and supply both cars and the truck at the necessary levels without hindering the production of the other vehicles. This is because all three of these vehicles will run on the same motors and will be built on very similar, if not identical, assembly lines. The Roadster can be built at either location, because of its low volume shouldn’t cut into production of the other vehicles very much. Tesla’s automotive sales generated $3.4 billion in the second quarter, a pretty sizeable number that's up 23% from the quarter before it. This dramatic increase provides indisputable evidence that by adding new factories, not just a higher functioning assembly line, Tesla can increase its revenue astronomically. A fully operating factory built in Europe could increase Tesla’s business a lot more by again getting rid of tariffs and exposing the car company to a much larger audience. Tesla will need time in order to build up to the numbers of bigger car manufacturers, but a rapid increase of factories needs to be done. These factories will be necessary as Tesla needs to manufacture more cars in order to stay ahead of its competition and to meet its demand. They will be expensive and risky, because of the expense, but they could be the assets that allow Tesla to thrive in the future.

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Image Source: Tesla


Many analysts agreed in August of 2016 that the acquisition of SolarCity by Tesla was not a good move for the company. Tesla was burning through cash and spending $2.6 billion on a new company while Tesla was having issues of its own seemed like a bad call. Musk saw the potential of SolarCity and knew that obtaining the company would help them in the future. Though the skeptics and criticism flowed, Musk did not doubt his decision, even stating that he believes SolarCity could surpass their car manufacturing. SolarCity has built huge batteries in Australia, New Zealand, and Puerto Rico that are connected to their power grids. The vast majority of Puerto Rico’s new electric grid is powered by what is essentially one big battery and solar farm system. This system allows the power grid to be a lot more reliable and allows the grid to continue to give power from the batteries for a short period of time even if the means of producing electricity have been exhausted. Other areas, such as Australia and New Zealand, are using the batteries as a way to store excess energy and to be able to distribute it when needed. When there's too much energy being drawn from the grid, instead of overworking the powerplant and risking a power outage as a result, the grid automatically draws the energy from the system of Tesla Powerpacks. The batteries allow for electric companies to release stored energy when it is most profitable, based on the current price of electricity. This is incredibly profitable for the power companies which is a huge incentive for the companies and governments to create these projects in the first place. One of Tesla’s projects in Australia was reported to have saved the local energy company around $800 million. Tesla does not receive these profits directly, but if this can draw many other larger scale projects in the future from other companies it would bring in big profits for Tesla’s energy division by providing the batteries. Lots of the electricity comes from solar power as well and the need to store solar energy is very high for nighttime power use and times when sunlight isn’t available. Pacific Gas & Electric (PCG) recently signed a huge contract with Tesla in order to replace power plants with solar panels and batteries. This invites many other companies to potentially follow in the footsteps of PCG as it has already proven elsewhere to be the most efficient, both in terms of cost and performance.

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Source: Elektrek (this particular shot includes just one of many Tesla batteries throughout Australia)

SolarCity doesn’t only deal to electric companies and governments with their energy products. The solar panel division of SolarCity has seen a lot of attention recently and will continue to as solar power becomes more and more popular. California has a pending law that requires all homes under three stories as well as small apartment buildings built at the beginning of 2020 to run on solar energy. It will require homeowners to install solar panels on their roofs in order to power their home. This bill is big for Tesla and the California solar industry as a whole because the demand for solar power will increase dramatically. Tesla also is only one of very few companies to make home batteries which is critical to having a solar home. The Tesla Powerwall is the name of the battery designed to store excess energy, produced by the solar panels, which is later released when energy isn’t being produced by the panels. The Powerwall is compatible with any solar company which allows Tesla to be in even more homes, even if they aren’t supplying the solar panels. Another big product is the Tesla Solar Roof, a solar shingle that's practically indistinguishable from an ordinary shingle. They produce solar energy and work just as well as a traditional solar panel, but look like a regular roof. Tesla has slowly begun to roll out installations exclusively in California, but is expected to ramp up production greatly by the end of 2018 and early 2019. The shingles are supposed to be ready in mass for California’s 2020 law and will be a huge area of profit for Tesla. Tesla generated $374 million of revenue in Q2 with their energy storage and generation business which is what SolarCity is responsible for. This is a relatively small number if compared to the rest of the company, but with a large upscale this number will inflate to a much larger figure. Again, possibly to an even higher number than their automotive revenue. Currently, their only solar product producing factory isn’t producing close to their full capacity yet, so expanding this side of the company would lead to huge increases in solar energy profits.

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Source: Tesla

SolarCity has the potential to bring in huge profits for Tesla as it continues to grow and expand its product availability. The only problem is that SolarCity isn’t growing and expanding product availability at near the rate it needs to be. Currently the only effort being made in order to increase production is a new wave of job recruitment at Gigafactory 2. Tesla has slated Gigafactory 2, the factory dedicated entirely to SolarCity and producing solar products, to produce 2 GW of solar panels annually. This will make it one of the largest solar factories in the world, but it's still not enough. The average US home uses 10,766 kWh of electricity annually. This means that in order to fully power each customer’s home, Gigafactory 2 will only be able to serve approximately 328,000 customers upon reaching full capacity. Unfortunately Gigafactory 2 hasn’t even reached 1 GW of annual production which is less than half of what they need to reach 328,000 fully powered homes. It's worth noting that not all homes use solar energy to power their entire home, but as a way to decrease the cost of certain electric commodities leaving more potential customers than the 328,000. In just the first quarter of 2018 alone, 2.5 GW of solar energy was installed in the United States. SolarCity can capitalize on that growing number, which should skyrocket once California’s solar law comes into effect in 2020. SolarCity used to exclusively lease solar panels without manufacturing their own which is attributing to their struggle to become a strong manufacturer. They still offer this service which provides them with the majority of their income, but have begun producing their own solar panels after Tesla’s acquisition. Demand for the Solar Roof is rising, but production is not. Tesla has stated that they plan to do a production ramp toward the end of 2018, but nothing has been specified yet. This product in particular is a unique product to Tesla and has the ability to bring in huge profits if they can deliver it. Tesla needs to dramatically upscale production in order to gain higher long-term profits and reach more customers. Without the ability to produce their product, Tesla will fall behind. Powerwalls and Powerpacks are produced at Gigafactory 1 where all Tesla batteries are made, not at Gigafactory 2 with the solar products. These are both being built at an adequate rate, and the factory itself is still undergoing expansion. Currently the factory produces 20 GWh annually, making it the biggest battery plant in the world and allowing it to produce more GWh annually than all other car companies combined. Tesla’s goal is for the factory to eventually produce 105 GWh of battery cells and 150 GWh of total battery pack output. This factory will have cost Tesla $5 billion when it's finally completed in 2020, but will have allowed for Tesla’s battery department to have flourished. Again, a successful example of Tesla putting rapid growth over short-term profit.

The need for Tesla to dramatically upscale production of their energy products is huge, especially solar. This need is fueled by the ability to profit from the rising demand of solar energy as long as they can provide their product. With a short-term burst of cash, Tesla has the possibility to set SolarCity up for years to come and bring in profits with more deliveries. This cash should be used to build a new factory for solar products that rivals the size of the original Gigafactory. Gigafactory 2 is 1.2 million square feet, while Gigafactory 1 will span an incredible 15 million square feet after construction is finished. Acquiring this additional facility to produce solar products could increase production to the scale that it needs to produce enough solar panels for all of America. SolarCity could then begin selling in other countries which they have yet to do, but to do so would bring them even closer to rivaling the automotive side of Tesla, making it probably the most undervalued aspect of Tesla.


Recently I was at a family dinner, and I was asked whether I would rather work for a company that understood the market better than anyone, or had the ability to execute their plans and promises better than anyone. I replied stating that I would rather work for the company that understood the market better than anyone. My reasoning was that experience and size can lead to execution, but understanding your industry takes a certain unteachable intuition. I agreed that the first years of the company would definitely be rough, but if the company survived, the rest of its life could be a huge success. After coming to this realization, one man came to mind. Elon Musk. He has often failed to deliver on his promises, sometimes missing targets by years. However, he seems to have a deep understanding of the market. The hype for each new Tesla vehicle is there without any ads appearing for them anywhere. He is the man who is getting rid of the stigma associated with electric vehicles with the release of each new Tesla vehicle. The man who understands the market, but can’t execute is Elon Musk, so if you can teach the man to execute, how far can the company go?

It appears that Musk is learning to execute. Leading a car company toward a mass market vehicle has proven to be much more difficult than he anticipated. Musk finally realized at the beginning of 2018 that he had built an assembly line that wasn’t going to work. There was too much automation. This was a very costly mistake, but one that isn’t unique to Tesla. Sam Abuelsamid, an industry analyst at Navigant Research, stated that "A lot of the mistakes we're hearing about are mistakes that were made in the rest of the industry in the 1980s and the 1990s." In particular, Mr. Abuelsamid names General Motors for wasting billions of dollars in the 1980s in an effort to autonomate car manufacturing. The silver lining in this story is that GM was able to bounce back as a car manufacturing superpower. This was an area of unnecessary spending that will be cut from future assembly lines and factories. In terms of building new factories, they will not be made with the same mistakes as the Fremont factory was and they also provide another great way for a company to execute. After all, if there are more places to build the car, more cars will be produced.

Is This Possible?

The main question for this plan is whether or not it's actually possible for Tesla to go through with this and survive. Equity can be a safe option for a company looking to raise money, but only to a certain point. Companies must avoid giving up too much equity, lest they lose control over their own company. For a company such as Tesla, that doesn’t appear to be too big of a concern as the top three individual shareholders are all members of the board. The CEO, Elon Musk, owns about 20% of all outstanding shares. The percentages do dip sharply after that though, the CTO, Jeffrey Straubel only owns about .4%, and the CFO, Deepak Ahuja, owns about .03%. The three largest institutional investors are FMR LLC with about 12% of all outstanding shares, Baillie Gifford & Co owns about 7.5%, and Price T Rowe Associates owns about 7%. In terms of one group or person holding too much power, Tesla does not appear to be in any immediate danger, however it would be something that Tesla would need to watch if they were to pursue a large equity deal with a company or institution.

However, if Tesla can gain enough capital through smaller amounts of equity, purchased by multiple institutions and investors, there will be less of worry about losing control of the company. This would create a larger shareholder voting base which can complicate things, but Musk would still have the largest holding in the company. Also, investors choose to invest in companies because they believe in that company, so they would be likely to agree with what Musk and Tesla advise which wouldn’t make this much of an issue for big decision making. Unfortunately, this larger shareholder base also will create dilution. Dilution is never ideal for a company as it creates less value for each share. As long as Tesla doesn’t dilute their shares too much, the resulting increase of growth for the company that was provided by the equity financing can outweigh the lowering in the percentage value of each share. A recent analysis of Tesla’s stock showed that Tesla will be able to raise $2 billion through institutional equity investments in the third quarter. The analysis provides an in-depth valuation of the company and later went on to discuss that Tesla can raise $7.2 billion in equity in the first quarter of 2019 alone. These are significant numbers. If Tesla builds its new car factories modeled after the Shanghai factory, the total cost of each should be approximately $2 billion, the new solar factory should cost around the same. The reason that the new solar plant would be only around $2 billion as opposed to the $5 billion Gigafactory is because Musk has noted in the past that there were many mistakes made with the construction of Gigafactory 1. These mistakes have been optimized for Gigafactory 3 which is rumored to rival the size of Gigafactory 1 and therefore be built on similar principles as it will provide the same purpose.

Debt financing is the other option that Tesla can go with in order to fund the proposed expansions. Tesla had $7.3 billion in recourse debt and an additional $3.2 billion in nonrecourse debt at the end of the second quarter. With $4 billion in total quarterly revenue after the second quarter, Tesla is posting decent revenue numbers, but not enough to take on much more debt. Any more significant amount debt they very well could fall under, but they should be able to shoulder a bit more as their quarterly revenue continues to increase with the Model 3 production ramp. If Tesla were to take loans, they would add onto an already large pile of debt that seems rather close to imploding upon itself. Taking on more debt seems unavoidable if Tesla decides to follow this path, but the less new debt that Tesla adds, the better.

Equity financing on the surface seems like the obvious choice for Tesla, but funding with too much equity could destroy the company and its stock. Tesla should rely on outside investors to contribute to a large portion of their funding, but it also needs to remain wary of the resulting decrease in their position in the company and the impact on its shares. Taking loans allows for Tesla to maintain more control over their company, but will obviously put them even further into debt. Because of Tesla’s already high debt, as mentioned previously, loans become increasingly risky. In order to balance the risks and rewards of these two strategies, Tesla should use a combination of both, but build more capital through equity than debt. This is because Tesla has the ability to obtain large numbers of capital through equity without much risk, and while those numbers aren’t enough to cover all of the expenses, they will be able to cover a significant portion. Tesla also is generating their own revenue. They can use that revenue to help with financing as well. Tesla won’t be generating near enough internal capital in order to fund the projects and some, if not most, of the revenue will need to go toward operating costs and paying old debt. However, the earnings can help in reducing the need for outside financing. Musk’s plan to make final two quarters of 2018 will be profitable is OK, even though it puts aside the rapid growth for a bit. As mentioned earlier it helps will provide confidence in the future of Tesla, but more importantly it will give Tesla a bigger pocket of free capital to operate with. The rest of the capital needed for their rapid expansion can be financed through debt, but this should be utilized as a last resort. Through this plan of financing, Tesla should be able to remain afloat while conducting their expansion.

Weighing the Options

In order to form a valuable conclusion from this article, it is important that both myself and the reader weigh the options. If Tesla continues on their current path, which is the first option, Tesla’s short-term risk of bankruptcy is dramatically decreased. At this point, even some bearish analysts have agreed that Tesla has successfully strayed from the looming threat of bankruptcy that had plagued the company for months. Instead, the main bear/bull argument is whether or not Tesla can deliver on its promises. Most of these promises involve production goals or new releases, but possibly the most important promise that Musk recently made was that Tesla will be profitable in Q3 and that it can be sustained. What should worry investors about Tesla isn’t doubt over whether they can fulfil this promise of the near future, what should worry them is Tesla will face throughout the next decade. Possibly even within the next five years. This is where Gordon Johnson from Vertical Group, perhaps Tesla’s biggest bear, believes the biggest risk for Tesla lies. Competition is their biggest threat. While many people argue that Tesla is years ahead of its competition, years are nothing for a car company like Ford (NYSE:F) that has been around for over 100 years. John McElroy, a test driver for media companies, discussed how far ahead Tesla is in revolutionizing vehicles. By his analysis 10 years. He does acknowledge that competition is coming, but he doesn’t believe that they will be able to match the feel of a Tesla even when they are on the same technological playing field. This, even if it is true, will not be as big of a deal as Mr. McElroy predicts. Would a consumer rather have their car cheaper and on time, or later, a bit more expensive, but with a few small details that make it “more fun.” To clarify, Tesla is currently ahead of its competition in both its energy and vehicle divisions, but they can lose that edge in a decade, or less. Without significant production ramp up Tesla stands to fall behind to its competitors. Tesla, if they continue on their current path, runs the risk of fading into an obsolete company and eventual bankruptcy. Although Tesla may be a household car name, it's far from capable of doing what established car or energy companies can do in terms of producing. Its Solar Roof is revolutionary as well, but if other companies can begin to replicate it before they can produce it at a mass market rate, Tesla stands to lose in that field as well.

The second option is the option that will lead to the long-term success and health of Tesla. The major risk of Tesla prioritizing growth over short-term profit is bankruptcy. This risk of bankruptcy is definitely a real problem, but it is possible for Tesla to fund this move without going bankrupt. If Tesla does manage to avoid bankruptcy, they will have set themselves up to thrive. They will have no need to expand until they have repaid debts. Tesla will be producing at an acceptable rate to the consumer, and will be earning more per quarter than they ever have. If Tesla does this, it could take a couple more years before they can see another quarter with positive cash flow without significant effort to do so, but that is a risk that they should be willing to take. I firmly believe that the risk of Tesla becoming obsolete in both the auto and solar industry before they can become a mass market brand is much more real than if Tesla were to risk bankruptcy on a rapid expansion.

Disclosure: I am/we are long TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source :

This Is The Year When Developed Nations Must Choose Between Pain And Disaster

Source:Seeking Alpha

This Is The Year When Developed Nations Must Choose Between Pain And Disaster

This Is The Year When Developed Nations Must Choose Between Pain And Disaster

Source:The Atlantic

This Is The Year When Developed Nations Must Choose Between Pain And Disaster

This Is The Year When Developed Nations Must Choose Between Pain And Disaster


This Is The Year When Developed Nations Must Choose Between Pain And Disaster

This Is The Year When Developed Nations Must Choose Between Pain And Disaster


This Is The Year When Developed Nations Must Choose Between Pain And Disaster

This Is The Year When Developed Nations Must Choose Between Pain And Disaster

This Is The Year When Developed Nations Must Choose Between Pain And Disaster

This Is The Year When Developed Nations Must Choose Between Pain And Disaster

This Is The Year When Developed Nations Must Choose Between Pain And Disaster