Tesla Corporation, the maker of electric cars, has been in the news recently due to bad reviews from the New York Times and others. Tesla responds by basically saying the reviewer doesn’t understand electric cars. But that’s irrelevant. Electric cars have some significant issues even with modern battery technology. The first is range — it’s difficult to get even 200 miles of range out of an electric car, especially if you have to run the heater or air conditoner. The second is recharge time. It takes me five minutes to pump a tank of gas. It takes about an hour to recharge an electric car even with a so-called “fast charging” station. This relegates electric cars to urban commuter duty — where they’re certainly adequate, but most Americans want cars that will take them everywhere, not just within 50 miles of their home.
But the biggest reason Tesla is doomed is not the limitations of the technology. I’d buy an electric car for commuting if it were cheap enough — say, around the price of a motorcycle, rather than the price of a Rolls Royce. Which points out the real reason that Tesla is doomed: They do not have the economies of scale needed to drive price down, and until they drive price down, they cannot achieve economies of scale.
This chicken-and-egg problem is why there has been no new automobile company in America since the 1950′s, where American Motors Corporation emerged from the wreckage of the post-Korean-war recession and lasted until the late 80′s. And AMC had the advantage of starting out with the intellectual property and factories of its two predecessors, Nash Motors and Hudson Motors, while Tesla is starting out at nearly zero, the only fortuitous thing being that Toyota decided to shut down their Fremont factory for making Toyota Corollas at exactly the same time that Tesla was looking to build an auto factory. It turns out that to achieve economies of scale in a mature industry one of two things have to happen: a) you have a technology so compelling and unique that people will pay outrageous sums of money for it until you manage to sell enough of them to achieve economies of scale, or b) you have massive amounts of government backing to subsidize your product until you can achieve those economies of scale. Even AMC, in the end, failed because they could not achieve the economies of scale needed to make a profit at the prices the market dictated for their cars.
So let’s look at Tesla. They do have one advantage over traditional auto makers: their drive train is much simpler. An electric motor has a few dozen parts while an internal combustion engine has thousands of parts. Furthermore an electric motor starts making torque at zero RPM, so you don’t need a clutch (whether automatic or manual) to disengage the motor from the drive train at idle, you simply stop the motor. This simplifies the drive train significantly. Furthermore, the cost of certifying a new engine and transmission to meet all emissions standards can be as much as a billion dollars. Tesla has no emissions, thus no certification cost. The problem is the batteries. The batteries are horrifically expensive. Tesla had to build their own factory for making batteries but now they have to absorb the full price of that factory themselves, while most auto components makers can share the costs of developing and manufacturing a new part amongst dozens of conventional auto makers and models that use that part.
But still, is their technology compelling and unique? In two words: Nissan Leaf. I.e., clearly there is nothing unique about their technology, and due to the limits of electric cars, it’s hard to say that a Tesla is so compelling that people will pay $50K+ to buy the hundreds of thousands of Tesla cars needed to achieve the economies of scale necessary to drive prices down.
In short, the only thing that could make Tesla a success would be massive government intervention similar to what Hyundai received in Korea to turn into a successful auto company. And Hyundai was part of a massive conglomeration capable of cross-subsidizing their auto division in the first place, while Tesla is a startup with relatively feeble funding. It cost Chisler Corporation over $5B to install a modern automated roboticized assembly plant to build the new model Jeep Wranglers in 2007, the last time it had a complete redesign to make it easily assembled by robots. Tesla hasn’t even raised half a billion dollars. Good luck on convincing the U.S. government to fork over the remaining $4.5B needed to install that kind of assembly line for Tesla.
Not compelling and unique, and not enough subsidies from the government or cross-subsidies from a larger corporate parent. In other words, no — zero — way to get to the economies of scale needed to survive, much less thrive. The numbers say it’s fore-ordained: Tesla is doomed. About the only saving grace is that the technologies they developed will live on after bankruptcy, even if only as drive train components in a Nissan or Chevrolet.
- Badtux the Numbers Penguin.