What Tesla Can Learn From History

Throughout modern history, the electric car has thrived and then dived, and may soon be thriving again. The companies that have failed at ventures into electric vehicles can provide Tesla Motors with valuable lessons on what not to do.

Jan 18, 2014 at 11:19AM

Tesla Motors (NASDAQ:TSLA) has debatably been the hottest company over the past year, and with demand that is growing faster than expectations and deliveries that are exceeding estimates, the company seems primed for success. Though it is not the first high-profile electric vehicle manufacturer to see quick success, it hopes to be the first such company to survive through issues that have been the demise of the companies that have come before them.

The quick history
Those who forget history are destined to repeat it. The history of electric vehicles is riddled with successful innovations that aren't able to sustain a company, and Tesla would be wise to pay attention if it wants to change the trend.

At the turn of the twentieth century, Baker Motor Vehicle Company was the manufacturer of nickel-iron battery powered vehicles with a 100-mile range and a top speed in the low 20s. The company made a few different vehicles over the course of fifteen years until being overtaken in sales by its biggest competitor in electric vehicles, the Detroit Electric. The company merged with another automaker, and that shortly led to the end of the Baker Electric vehicle.

The Detroit Electric was an electric vehicle produced between 1907 and 1939. The car had a reliable range of 80 miles and a top speed around 20 mph. Over the course of 32 years, over 13,000 vehicles were built, maxing out at a pace of 1,000-2,000 vehicles sold annually in its earlier years. The vehicle died a slow death following the Great Depression, though the Detroit Electric brand was recently revived with the intent of building and selling a high-performance electric vehicle.

The most recent, well-known electric vehicle in production that eventually failed was the General Motors (NYSE:GM) EV1 made just before the turn of the century. The EV1 had a range of around 160 miles and a top speed of 80 mph. In spite of a positive customer response to the vehicle, General Motors produced only 1,100 vehicles over the three years of production.

Learning from the Baker Electric
In spite of high-profile customers including the White House and Thomas Edison, the Baker Electric failed over the long run by essentially pricing itself out of the market. Though its first vehicle sold for $850 (the equivalent of about $23,000 today), by 1910 its choice vehicle sold for $2,800 (about $68,000 today). When compared with the ~$400 pricetag of a Ford Model T around the same time, the Baker Electric was destined to fail. Throughout Baker Motor Vehicle Company's existence, its vehicles became more luxurious, but the corresponding cost increases are a likely cause of its eventual downfall.

Tesla's first vehicle, the Tesla Roadster, was priced at over $100,000, but that was akin to the company's strategic plan that directly contradicts the strategy employed by Baker. Like Baker, Tesla has high-profile customers, but the similarities end there. Rather than starting simple and gradually making a more expensive vehicle as Baker did, Tesla employed the strategy of starting at the high-end and transitioning into more accessible, lower-cost markets as consumer demand increases. Tesla's recent report of growing demand and the company's plans to manufacture a Model S in the next three years with a lowly price tag of $35,000 fall perfectly in-line with what could be a successful long-term strategy, albeit with diminished margins.

Learning from the Detroit Electric
The Detroit Electric was a solid electric vehicle that seemed like it could find a way to succeed, but struggled to match the competing technology of the day, which was at the time a gasoline-powered vehicle. Like the challenges faced by many renewable energy technologies, the public interest in the technology is indirectly proportional to the price of gasoline: If gas prices go up, interest in renewables drops, and if gas prices drop, interest in renewables goes up. Interest in and sales of the Detroit Electric were high as gas prices rose during World War I, but sales dropped when the price of gasoline-powered automobiles decreased and the quality of gasoline-powered automobiles rose.

Tesla survived through comparatively low gas prices in 2009 and 2010, and the company's most recent successes have occurred during a time of fairly stable gasoline pricing. Gasoline-powered vehicles are still the biggest competitor for electric vehicles, and significant advances by traditional automobile manufacturers outside of hybrid electric vehicles have not been realized. Range limitations and a still-developing infrastructure may scare some consumers away from electric vehicles, but Tesla is addressing these considerations with battery improvements and the building of Supercharger stations across the country.

Learning from the EV1
Pinpointing what the major cause of the failure of the GM EV1 was is difficult and is the subject of the entire movie Who Killed the Electric Car?. The failure of the Baker Electric and the Detroit Electric coincided with failures of the companies that made the vehicles, whereas General Motors was able to outlive the EV1. The failure of the EV1 was the result of a conscious decision by the leaders at General Motors to stop production.

Elon Musk has been recognized time and again as a visionary and a great leader by various publications. He seems wholly devoted to the success of Tesla, though skeptics could point out his willingness to abandon PayPal when eBay came with a suitcase full of cash. Companies with vested interests in fossil fuels are obviously attentive to Tesla's accomplishments. Though offers to buy Tesla may not be of interest to Musk, who already has a net worth well into the billions and a vision to change the world, the challenges of running Tesla alongside other ventures could someday influence his decisions. Regardless of the circumstances, Tesla is unlikely to fail on account of leadership that is not fully behind the concept of the vehicles they produce.

The takeaway
The success or failure of any company is rarely based on any single factor. Nonetheless, the issues of pricing, competing technology, and company commitment all contributed to past failures for electric vehicle manufacturers. Tesla has apparently read the history books and is a different and better company on account of the lessons learned. Let's hope that in another fifty years, the next great electric vehicle company won't be learning from Tesla's tragic mistake.

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Fool contributor Shamus Funk has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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