Tesla Beats the Odds — And the Haters — But Now Comes the Hard Part

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The electric car company Tesla has always been an easy target. There’s the CEO,  messianic Silicon Valley entrepreneur Elon Musk, who sometimes actually seems to be convinced that he’s the real-life Tony Stark. There’s the sheer chutzpah of a startup company from outside the auto industry trying to successfully build and market a new car in America—something that hasn’t been pulled off successfully in decades. There was the disconnect that came from marketing a $109,000 sportscar—the Tesla Roadster, the first model the company launched back in 2009—as a way to save the planet. There were the $465 million low-interest government loans approved to Tesla in 2009—public money that made the company a punching bag for conservative critics. So it shouldn’t be surprising that legions of haters have always cheered for bad news about Tesla—like the brutal, if contested, review of the Tesla Model S in the New York Times. According to Thomson Reuters StarMine, Tesla stock has been more heavily shorted by investors than 98% of the 4,200 companies tracked by the service.

But now it looks like Musk may get the last laugh. On May 9 Tesla posted its first profit, recording $11.2 million in first-quarter net income. Its stock surged after the news—and with a market capitalization of $8 billion, Telsa is now more valuable than the 113 year-old Italian car company Fiat. On top of that, Consumer Reports just gave the Tesla Model S—the more affordable sedan that the company is mass marketing—a near-perfect rating of 99 out of 100 points. Sales of the Model S are beating expectations and the vehicles have become the latest must-haves for the rich and the techie. Even Musk’s competitors in the traditional auto space are impressed. “My hat’s off to them,” Ford Motor executive chairman Bill Ford said at the company’s annual meeting yesterday. “It’s really hard to start a company, particularly in the auto business, and be successful.”

(MOREIt’s Not About the Range: How the Tesla/New York Times Controversy Misses the Point About Electric Cars)

But is Tesla’s success real—and is it sustainable?

First a little perspective. While Tesla did post its first profit, a year ago it lost $89.9 million in the same quarter last year. And its sales numbers are still small, though growing—in the first quarter of the year Tesla sold 5,000 cars. (Toyota, by comparison, sold more than 50,000 hybrid Priuses over the first quarter of the year.) And a good chunk of Tesla’s revenue comes not from selling cars but from selling credits—carbon credits, to companies trying to meet mandates to manufacture zero-emissions vehicles.

Still, even Tesla’s critics are impressed. Here’s the conservative writer Walter Russell Mead blogging in the American Interest:

Tesla has comfortably settled into a rich, environmentally conscious and geeky niche. It’s on track to pay back its government loan ahead of schedule and seems to be avoiding the pitfalls that have doomed the Fiskers and Solyndras of the clean tech world. Much of that can be attributed to Musk’s leadership. Also the founder of Paypal and SpaceX, Musk has charisma, vision, deep pockets, and an entrepreneurial savvy that’s been vital to Tesla’s success so far. He’s a model of American gumption, but his biggest test will be what happens next.

Indeed. Right now Tesla is successfully making a high-quality, high-price product. That’s not easy to do well—just ask its electric-car competitor Fisker Automotive, which is poised to lose hundreds of millions of dollars. Tesla is doing better than the more down-market Chevy Volt and Nissan Leaf largely because the Model S, though it may be extremely pricey at a base of $70,000, compares well with similarly-priced BMWs and Mercedes in terms of performance. It’s ironic—car manufacturers thought that buyers would want to shift to electric largely to save money at the gas pump. But anyone rich enough to afford a Tesla S isn’t exactly sweating their gas bill.

(MORE: Are Electric-Car Enthusiasts a Little Too Enthusiastic?)

This is, understandably, confusing to analysts, who wonder why anyone would pay essentially double for an electric car that—though it does have a range of about 200 miles on a single charge—is hampered by limitations that a much cheaper gasoline-powered vehicle does not have. But Tesla owners bought their Model S because they love the car—and, I suspect, they love what it says about them. After all, driving a Tesla basically says, “I love the planet—and I happen to be extremely wealthy.”

But you’re not going to save the world by selling a few electric cars to the wealthy—and Musk, a guy who has his own private space rockets, is nothing if not ambitious. For Tesla and other electric car companies to really grow, you’ll need to reduce the price of batteries and create an extensive electric charging infrastructure. And to do that, Tesla is actually working with other car companies, as Farhad Manjoo explains in Slate today:

Neither company has confirmed it, but there are reports that the Mercedes B-Class may be the first non-Tesla vehicle to be allowed at Tesla’s supercharging stations. If that’s true, it would be an indication that Musk sees his charging network as a kind of common tech platform. If Tesla’s technology helps Mercedes sell a lot of electric cars, the deep-pocketed luxury car company will have an incentive to build its own charging stations, too—places where Tesla owners could charge up. The more charging stations there are, the more attractive both firms’ vehicles would become. And then, as its battery production scales up to meet that demand, Tesla’s batteries will likely improve as well, as many in the industry see increased production as one of the main ways to lower the cost of electric-car batteries.

Pay attention to that last line. Until we can figure out a way to make batteries cheap enough to compete with gasoline, electric cars really will just be for the rich. I’ve been an electric car skeptic in the past, but if anyone can do it, I’m betting Elon Musk and Tesla can.

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