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What Tesla Tells Us About Innovation and the Electric Car

by Michael Levi
June 21, 2013

Tesla has had an extraordinary year: strong sales, its first quarterly profit, and rave reviews for its Model S sedan. Investors, who have pumped the company’s stock up to strongly that Tesla’s market cap is now close to $12 billion, clearly expect more of the same to come.

Tesla’s success ought to be celebrated. In an op-ed in the Wall Street Journal today, though, I caution against excessive excitement and warn that three of Tesla’s biggest strengths – its small size, outsider status, and successful strategy of selling to an upmarket niche – could be its biggest liabilities

This says something not only about Tesla but about the future of the electric car more generally. Small and novel companies may be most likely to generate the big innovations necessary to push electrification ahead – but precisely those same companies may be less resilient and thus most likely to fatally falter. (The big auto companies, of course, have shown ample capacity for imploding too.)

I don’t discuss this in the op-ed, but it strikes me that this raises questions for government efforts to support innovation in the electric vehicle world. People mostly celebrated when Tesla paid back its DOE loan early. But was that a good thing? To be certain, it reduced the immediate risk of financial loss to the taxpayer. But it’s tough to argue that it didn’t also increase the risk that Tesla will fail.

The original point of the loan program wasn’t to spend as little money as possible – it was to cost-effectively raise the odds that electric cars would become competitive, helping the United States and the world cut oil consumption and emissions, which has its own long-term economic payoffs. If the proceeds from early payback were used to support other efforts to cut oil use, as might have been possible if a dedicated fund to support energy innovation were set up, that would be one thing. Given our current approach to funding energy innovation, though, policymakers ought to think about the downsides of policies that allow support to be withdrawn (potentially) too soon.

Post a Comment 3 Comments

  • Posted by mlallen

    Tesla paid off early because the DoE had warrants for more than 3 million shares at under $10 that they could exercise beginning in December 2018. (See their 10-K). Tesla so outperformed expectations that they were able to get out from under the loan sooner, to their own benefit. They could (and did) easily go to the market to get cheaper money.
    One could ask whether its the government’s job in the first place to be a venture capitalist. But if you grant that, putting in a potential upside is smart. DoE put no such warrants in Ford’s agreement, although they got 10x the loan Tesla did. It’s a risk equation. Tesla was a high risk / high reward.
    In any case, if the goal is to cost-effectively cut carbon, there are better ways than electric vehicles.

  • Posted by John Smithson

    I saw this article listed on RealClearEnergy.com. The title of the article says that it will discuss “what Tesla tells us about innovation and the electric car.” But the short article really says nothing about that topic.

  • Posted by Andrew Dimock

    I beg to differ, The payoff was a bit of marketing genius. All other car manufacturers are struggling. and the newcomer stands at the top waving a big flag.. we are healthy and here for the long run. That bit along with using the pocket books of the wealthy is smart. From my perch I see that electric vehicles are our future. However, there is tremendous economic disincentive to move in that direction as our world is fully immersed in an oil economy. Imagine the disruption caused by the transition from fossil fueled vehicles to electric. Simply put, a mere 10% efficiency gain of the worlds fleet of vehicles would put the terra-economy in a state of depression unlike anything ever encountered. Musk is also on the forefront of innovation. So much more to discuss here that warrants another blog… In a nutshell, solar charged super capacitor like cells will become the power source for all vehicles.
    The writing is on the wall….

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