Can Tesla Survive?

As major automakers turn their attention to electric cars, the company faces serious challenges.

The year 2012 will be an important one for Tesla Motors. Amid growing competition from established automakers, Tesla plans to sell a new Model S luxury sedan in July, and to supply Toyota with batteries, motors, and control systems for a new electric RAV4 SUV. Yesterday it announced a similar deal with Daimler for a new electric Mercedes-Benz. The success of these efforts could determine whether the company survives long-term—and what it might look like if it does.

Hard ride: Tesla’s Roadster.

Even if Tesla can’t succeed as an independent automaker, it could still be acquired by a bigger company, or live on as a supplier to major automakers.

Tesla is best known for its electric sports car, the Roadster. But from its early days, the company has hoped to move beyond the Roadster to lower-priced electric vehicles sold in much higher volumes. Earlier this week, Tesla revealed a luxury electric SUV, the Model X, which it plans to sell starting in 2013.

But the automotive industry has changed dramatically since Tesla was founded in 2003. At the time, changes to a California mandate that had required carmakers to make electric cars had just led GM to cancel the electric EV1, and Toyota to cancel the original electric RAV4. By and large, Tesla had the electric vehicle market to itself, its only competition coming from a handful of other small electric car companies.

Now, GM, Nissan, and others are selling electric vehicles in numbers that after one year far exceed the total production of the EV1. In fact, every major automaker has announced plans to sell electric cars of some type. Furthermore, vehicles from companies including BMW and Mercedes will compete directly with Tesla in the market for high-performance or luxury electric vehicles.

In its earnings report this week, Tesla said it expects to triple its revenue this year, in large part from sales of the Model S and components for the RAV4. But it doesn’t expect to be profitable until it starts selling its Model S in high volume next year. Tesla’s business plan calls for the production of 20,000 Model S sedans per year, but selling that many cars could prove difficult. Aaron Bragman, a senior automotive analyst for IHS, compares the Model S, which will sell for between $50,000 and $98,000, to the Porsche Panamera, a four-door sports car with similar acceleration that has a base price of $75,000. It’s not a perfect comparison—the Model S is bigger and seats more people—but it’s close, he says, and Porsche sells only about 7,000 Panameras a year. And Porsche has far more dealers and is a better-known brand than Tesla. “The big question is, how will Tesla convince people en masse to give up their established brands and take a chance on them? It’s a difficult sell,” he says.

Tesla can still survive even if it doesn’t sell enough vehicles to become profitable. If it can sell a significant number of the Model S and Model X, this will further establish Tesla as a valuable brand, and could eventually make it an attractive target for acquisition. “Tesla could be an excellent electric vehicle brand for a major automaker,” Bragman says.

Some experts think Tesla could also have a future as a supplier to other automakers. Unlike Fisker Automotive, another small automaker that’s attempting to break into the electric vehicle market, Tesla developed its own motor, controls, and battery pack technology for its electric vehicles. That gives it valuable intellectual property and expertise and, as a result, it has developed similar technologies for electric vehicles made by Daimler and Toyota. In his shareholder letter this week, CEO Elon Musk said that the company has produced more batteries for these automakers than it has for its own Roadsters.

That arrangement might not last forever, though. If electric cars fail to sell in large numbers, and automakers abandon them, Tesla would have few options left. If, on the other hand, electric vehicles do become popular, major automakers may want to develop the core technology themselves. Just as GM, for example, likes to design its own engines, deeming those a core technology, it’s also decided to develop and build the battery packs for the Chevrolet Volt.

Paradoxically, a modest success for electric cars could also be good for Tesla. Recent changes in manufacturing make it easier for automakers to produce electric cars at volumes that are too low to justify developing their own technology in-house.

“The industry is getting very good at making profits on lower volumes of vehicles for niche applications,” says Jay Baron, CEO of the Center for Automotive Research. In part, this is because factories are using more robots, and robots that can perform more functions, so they can be quickly reprogrammed to make different vehicles. Some automakers have announced that they will offer three versions of a car—one gasoline-powered, one hybrid, and another electric. With flexible manufacturing, they can switch between these according to demand. Baron says Tesla may have a future in selling technology for these niche vehicles.

In this scenario, it would be cheaper for a company like Toyota to buy the batteries and motors from Tesla rather than developing them itself. And Tesla could make significant revenue by making relatively small volumes of its battery packs for several automakers, since it can adopt its technology for many different kinds of cars.

How Tesla fares this year with its Model S and its projects with Toyota and Daimler will give a clearer idea of the company’s future. But even if Tesla can’t stay afloat, it will have played a central role in the technological shift that’s now reshaping the auto industry.

“It’s arguable how much influence they had over the development of electric vehicles,” Baron says. “But there’s no doubt they created a lot of excitement around them.”

Updated 2/16/2012, 12:25 pm

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