Should Taxpayers Back Tesla Motors?

December 1, 2008, 7:39 am

The Tesla Roadster is an electric car that goes fast, looks sensational and excites envy. But the seductive appearance, Randall Stross writes in The New York Times, obscures some inconvenient truths: its all-electric technology remains woefully immature and don’t-even-ask expensive.

Despite all this, Tesla Motors is requesting $400 million in low-interest federal loans as part of the $25 billion loan package for the auto industry passed by Congress last year.

If enough billionaires step forward to inject additional capital to keep Tesla’s doors open, then fine, says Mr. Stross.

But, he asks, if investors pass up the opportunity, however, why should taxpayers fork over the capital that Tesla needs? The Roadster, Mr. Stross says, is not much more than a functioning concept car that sells for $109,000.

The Congressional loan program is intended to encourage automakers to improve fuel efficiency, but, asks Mr. Stross, should it be used for a purpose like this, as the 2008 Bailout of Very, Very High-Net-Worth Individuals Who Invested in Tesla Motors Act?

Is there any way, Mr. Stross wonders, that federal dollars could be put at greater risk - and for no equity in return, keep in mind - to benefit fewer people?

Tesla Motors, a privately held company based in San Carlos, Calif., has spent almost all of the $145 million in capital it has raised to date. It says it will soon receive another round of $40 million from its private investors to sustain operations.

In the start-up ecosystem of Silicon Valley these would be respectably large numbers, but in the automotive world, fully developing an entirely new line of technology can easily run $1 billion, Mr. Storss says. That is what General Motors‘ first attempt at an electric vehicle, the EV1, was estimated to have cost to develop in the 1990s.

Tesla says it cannot move forward on plans to bring out a second-generation car, a less expensive sedan seating five, without federal funds. It’s also counting on rapid improvements in the core component of its powertrain - a thousand-pound pack of lithium-ion batteries - but such improvements don’t happen at the pace Tesla needs them to happen, Mr. Stross argues.

Tesla’s backers in Silicon Valley, he says, can be forgiven for hoping for a miraculous technical breakthrough, because Moore’s Law makes miracles appear in the Valley every day: costs drop by half every two years, again and again and again. The law is actually a rule of thumb, not a scientific law, and is based on the recurring doubling of transistors placed on an integrated circuit.

Unfortunately for Tesla, batteries are based on chemistry and have nothing to do with Moore’s Law, Mr. Stross says. Lawrence H. Dubois, chief technology officer at ATMI, a semiconductor industry supplier, told Mr. Stross, “With batteries, you can’t just squeeze more energy into a smaller and smaller space the way you can squeeze more transistors.”

Elon Musk, the chief executive of Tesla, told Mr. Stross his company would benefit from what he called “a weak Moore’s Law,” referring to the 8 percent annual improvements in the price performance of lithium-ion batteries. But 8 percent, compounded, would bring too few benefits, too late to Tesla: it would take nine years to halve the price of its battery pack, Mr. Stross calculates.

The company would not be saddled with such costly components had it not elected to pursue a design that endows its car with both high performance and a long range between charges - 244 miles, Tesla says. Earlier this month at the Los Angeles auto show, BMW unveiled its all-electric Mini E, with a smaller battery, a motor with about 20 percent less horsepower than Tesla’s and a shorter range, 150 miles. BMW believes that current technologies used in the all-electric vehicles have not been tested enough in real conditions to be ready to be sold to the public. It will begin by leasing for one year a fleet of 500 Mini E’s for $850 a month each. At the end of the lease term, the cars will be returned to BMW for testing.

Tesla would have needed a much smaller battery pack had it forsaken the all-electric design and instead offered a plug-in hybrid, a more affordable design that many auto manufacturers are readying for production, like that for the Chevrolet Volt. An electric motor provides the primary motive force, and a small internal combustion engine serves as an auxiliary source of power to extend the range that the car can go between charges. The battery need be no bigger than what is necessary to provide enough juice to go 40 miles, the maximum daily round-trip commuting distance for 78 percent of surveyed households, according to a widely quoted Department of Transportation study in 2003.

Tesla pitches all-electric cars as the greenest form of personal transportation, eliminating vehicle emissions and helping to wean the United States from its dependence on foreign oil. The cars reduce air pollution indirectly, to whatever degree the power generation on the grid uses energy sources other than coal. And for households that install their own power-generating solar panels, electric cars can rightfully claim to attain truly zero emissions today.

Mr. Stross says that when he visited the Tesla showroom in Menlo Park, Calif., and took the Roadster out on the highway last week, he experienced a guilty pleasure derived not just from the speed available at his touch but also from temporarily possessing something that shouted to the world its exclusiveness.

Tesla says it is assembling about 15 cars a week and has delivered only about 80 to date. Many of those have gone to the Valley’s billionaires and centimillionaires who are Tesla investors as well as early customers; these include Sergey Brin and Larry Page, the co-founders of Google, and Jeff Skoll, co-founder of eBay. The company’s principal financier is Mr. Musk, who attained considerable wealth as a co-founder of PayPal.

Mr. Stross wonders how Tesla’s course has been influenced by at least some of its investors being helplessly smitten by the world’s quietest dragster.

Mr. Musk said: “I’m not doing this because I think the world has a shortage of sports cars.”

But, Mr. Stross notes, his customers must be loaded with green in order to go green.

Go to Article from The New York Times »


  1. 1. December 1, 2008 8:37 am Link

    I don’t think the government should pick winners.

    — David
  2. 2. December 1, 2008 10:00 am Link

    The short history of Tesla is a story of mis-management, bad judgment, waste, intrigue and inestimable opportunity costs. It is all there in writing on the various Tesla blogs, including the blog of the engineer who invented the operating systems on which the Tesla is based, and who harassed out of his job and then fired. Unfairly.

    — C. Alexander Brown
  3. 3. December 1, 2008 10:22 am Link

    NO! Help out Detroit’s Big 3 first!

    — alex
  4. 4. December 1, 2008 10:57 am Link

    At best the taxpayer through some government agency should invest/lend on the same basis as other private sector investors and lenders such as VC’s, private equity and banks and should not be allowed to stand on their own with separate agreements and different requirements and standards.

    Tesla and similar projects from GM and others are currently unsuccessful either because they require massive expenditure in another part(s) of the energy provision/transport system, reliance on materials and technology that do not exist right now nor are in the near-medium term pipeline or manufacture a car that is too expensive as with Tesla… or unproven, unreliable and unable to meet reasonable performance and maintenance standards as with GM.

    We are bound to hydrocarbons for our transportation fuels and will be for the foreseeable future. The oil producers, traders and market speculators made some serious money over the past few years and now have allowed oil prices to settle down again. Once again investment capital will depart the alternative fuels, devices and technologies market as has happened before. It’s a nasty cycle and dependance, and like death and taxes is here to stay during our lifetime, until there is disaster-level urgency for alternatives on any/all fronts, and even then the lead time is too long to make investment worthwhile. We are not even remotely close to that urgency right now but are instead well-ensconced in the hands of the drug dealers feeding our energy (and stupidity) addictions.

    If we want to hand out incentives provide them to Toyota and Honda to make some improvements to their existing hybrids and to increase production and servicing capabilities plus provide incentives to the producers and marketers (and buyers) of these urban mini-cars to put more of them on the road particularly for local driving and commuting where a single passenger SUV makes no sense at all other than false pride, greed and a need for psychic Viagra.

    — Hank
  5. 5. December 1, 2008 11:01 am Link

    Any thinking person reading the above article should also read the following rebuttal. It’s clear how poorly the article was researched, and it’s dangerous journalism.

  6. 6. December 1, 2008 12:54 pm Link

    The NYT article is based on a false premise. Tesla Motors isn’t asking for help with the Roadster, that work is done.

    Tesla is asking for a part of the incentive program for automakers to develop more energy efficient vehicles. The loans Tesla applied for are for their OEM drivetrain business and for their second vehicle, the Model S.

    Tesla’s goal is to bring the cost down and the production level up on subsequent vehicles to deliver affordable, energy efficient vehicles to the public. This is a perfect match for the federal incentive program.

    Also, a centimillionaire would be someone with a net worth of $10,000. I’m sure Stross meant hectomillionaire.

    — Tom Saxton
  7. 7. December 1, 2008 1:29 pm Link

    Why subsidize a company that has merely manufactured a toy for the wealthy? Tesla is a startup with no experience in the mass market and no record of driving down manufacturing costs.

    I pray the government does not succumb to the PR and looks at this issue rationally.

    — Rational
  8. 8. December 1, 2008 4:15 pm Link

    This column is absurd. I realize the need to be provocative and take a stance. But the fact is that Tesla is not applying for a “bailout” or “lifeline” or money to fund ongoing operations, as are the Detroit Three automakers. Tesla is arguably the only company applying for the low-interest loans according to the Energy Independence and Security Act, which created a $25 billion fund known as the Advanced Technology Vehicle Manufacturing Incentive Program. The ATVM specified that the Department of Energy should provide loans, loan guarantees and grants to new and existing automakers and suppliers to encourage development and speed delivery of next-generation cars – vehicles that meet higher standards for fuel efficiency and stretch technology beyond the internal combustion engine.

    Although the Detroit Three have refashioned this program into a bailout, it would an enormous mistake to pervert this into a something other than a much needed program to boost fuel efficiency. The original spirit and intent of the program is critical for the nation’s economic security – and the importance of the program is even greater given the harrowing economic climate.

    Since its founding in 2003, Tesla Motors has been directly addressing the pressing crises of energy security and climate change. The company is already producing the Roadster, an innovative precursor to other all-electric, zero-emission models in Tesla’s product pipeline — de facto evidence that electric vehicle technology is here today. Tesla Motors is applying for the DOE loans in the truest spirit and intent of the program, and the company does not endorse the diversion of the ATVM resources for a bailout of any kind. This blogger should get his facts straight before writing such error-filled rants.

    If readers would like more information, look here:

    — Rachel Konrad
  9. 9. December 1, 2008 4:36 pm Link

    Didn’t GM already make, lease and scrap an electric car? Didn’t they buy the patent on NiMH technology that would have given the same car a 100 mile charge? Isn’t all of this a colossal waste of time and money? Is battery technology the “impressive secret” the Big 3 want to share with Congress this week. I’m sick of being the sucker in this milk off.

    Bring back the EV1. Even the execs admit that was a big mistake. “We could have had the Chevy Volt ready ten years ago.” The EV 1 was canceled in 2003. Markets had already invested in infrastructure (parking lots for plug ins.)

    With oil down again, (not a surprise) folks will want to push this down the road another 10 years.. Don’t let them!

    If Tesla’s REALLY got something to offer, let’s consider it. Otherwise, I’ll take an EV 1.

    — Abby Tucson, AZ
  10. 10. December 2, 2008 4:49 am Link

    Its companies like Tesla that change the game and bring the necessary developments required to let plebs like me buy an electric vehicle. So early adopters pay $100k for the privelage, of course they need to be rich and fair play to them. It’s only by real world production that the necessary developments will arrive to enable cost effective mass market production, regardless of how long it might or might not take for the battery density to improve. Maybe we should spite those that can afford it and not do it at all, sit around with our thumbs up our proverbials dreaming of a better car in a better world. Your didain for the wealthy makes you sound like a bloody communist.

    — Wayne Copeland
  11. 11. December 2, 2008 4:42 pm Link

    Tesla will go down in history along with Bricklin, DeLorean and mini-pipedreams like the Yugo. Let the likes of Toyota, Honda, Damlier and BMW run with this ball, as it is only these companies that have the strength and integrity not only to invent and produce the car but support its maintenance and repair follow-up for the actual user/owners. GM is too messed up to be in this space, and if Ford can pull off a merger with someone high-quality, which excludes the two other US auto makers, it might have a chance to play as well.

    — Hank
  12. 12. December 5, 2008 5:51 pm Link

    As a one time EV1 owner it really upset me the way GM crushed perfectly good running cars. It was just so wasteful. I drive a Rav 4 EV now and it is going strong– It is a nice feel the freedom of not having to maintain an internal combustion engine–

    — N. Pease
  13. 13. January 29, 2009 9:59 pm Link

    Tesla Motor Co. wants $450 million from government loan programs under the guise of promoting alternative energy? So some spoiled rich show-offs can drive around in $100,000 cars? Write to President Obama and ask him to just say NO! Fund Hardworking Middle Class folks in Middle America! (incl. the hard workers in Detroit!)

    — Linda Queen
  14. 14. May 5, 2009 1:44 pm Link

    Hats off to Tesla for having the testicular fortitude to come out with an advanced, reliable electrical vehicle that is also a very nice ride. I am looking forward to the day when they begin to produce a small electric truck for those of us who need one. I will be on the waiting list for that one….

    — Winford Nettles
  15. 15. May 19, 2009 1:03 pm Link

    Tesla motors will be like GM unsold cars.

    — Jim

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