Tesla Motors (Nasdaq: TSLA) hopes that its upcoming Model S will bring its brand of electric vehicles to a wider audience than its previous effort, the high-end Roadster. However, its recent deal with Toyota (NYSE: TM) makes me wonder whether Tesla might have the best chance for success if it stops building cars.
Under the $100 million Toyota deal, Tesla will supply battery packs and engines for an all-electric Rav 4 slated to go into production next year. This is on top of the $50 million Toyota agreed to pay for development of the components. Tesla also has an existing agreement to supply battery backs and chargers for Daimler's electric smart car.
I like these deals because I don't think Tesla can survive as an auto manufacturer. Sure, I understand why it had to build the Roadster. Someone needed to establish that EVs can be more than glorified golf carts. But now that Tesla's proved it possible, its major-league rivals have started to put serious money of their own into EVs.
Spurred on by the success of the Volt, General Motors (NYSE: GM) just broke ground on an electric motor plant in Maryland, and invested in the electric bus maker Proterra. Ford (NYSE: F) already sells an electric version of its Transit van, and it's working on an electric Focus. And Honda (NYSE: HMC) has been developing an electric Fit. The big boys have a tremendous advantage, since they can spread the costs of development across their operations. They can also take development shortcuts Tesla can't, like using existing platforms as the basis for their EVs.
There's also a question of demand. According to a recent Gallup survey, 57% of consumers say they won't buy an electric car, regardless of the price of gas. If this number never changes, the major players won't feel that sting as painfully as Tesla will. For the major automakers, EVs act almost as an alternative fuel side bet, along with natural gas, hydrogen, bio diesel, and more efficient gasoline engines. If one technology flops, or fails to escape niche market status, it won't hurt them much. Tesla, on the other hand, will find itself fighting for sales in a crowded and relatively small market.
I would like to see Tesla adopt a strategy similar to that of Westport Innovations (Nasdaq: WPRT). Westport develops technologies that allow diesel engines to run on natural gas. It has partnered with OEM engine manufacturers including Cummins (NYSE: CMI) and Volvo to manufacture natural gas engines. So far, the company has focused primarily on trucking, but recently it entered into a deal with GM to develop light-duty vehicles. The partnerships allow Wesport to reach more customers without having to take on the burden of developing its own manufacturing capacity, supply chains, and distribution networks.
Tesla has already started down this path with its existing partnerships, but it could go further. Ideally, it would move away from manufacturing vehicles -- though I suppose having a halo car to boost the brand name wouldn't hurt -- and focus on building strategic partnerships with automakers. This should allow Tesla to grow, without taking on the expenses and risks inherent in building a successful car brand.
Do you agree, or have I written off Tesla's prospects as an automaker too soon? Let us know what you think in the comments below.
