Should Taxpayers Fuel Tesla Motors?

A $450 million green-technology loan would keep the startup plugged in, but with Ford and GM going electric, it may not be a very good bet
After losing $40,000 on every Roadster, Musk says per-car profitability is near Rebecca Cook/Reuters

Tesla Motors has defied skeptics by delivering an electric sports car many said would never see a showroom. But to develop a sedan with broader appeal, Tesla says, it needs $450 million in loans from the Obama Administration. That raises a thorny question: Are taxpayer dollars earmarked for green technology best gambled on small startups like Tesla or big but troubled players such as General Motors (GM) and Ford (F)?

Tesla deserves credit. The Silicon Valley upstart has raised some $195 million in capital, more than a third of it from Chairman and Chief Executive Officer Elon Musk, and has built the first car powered by cutting-edge lithium ion batteries. Technologically, Tesla's Roadster convertible is a winner. It travels 240 miles on a charge before it needs to plug in—more than twice as far as BMW's soon-to-appear Mini E. After initially losing $40,000 apiece on the sports car, Musk says he's close to making money on each Roadster.

Eager to build a sedan, Musk is pinning his hopes on the U.S. Energy Dept. The DOE is offering two kinds of credit lines: one for companies working on alternative energy projects and another for carmakers developing green vehicles. Automakers may apply for both kinds of credit, which they can access as projects hit key milestones.

To qualify for DOE money, Musk needs to prove Tesla is viable. "We'll be profitable in five months," he says. He also needs to raise tens of millions of dollars in matching funds. In what some industry watchers deem an act of desperation, Musk aims to ask potential buyers of the new sedan to pay a big chunk of the $50,000 sticker price up front. Yet the car won't be ready until 2011—and only if the government gives him credit. Musk acknowledges customers would put "their money at risk." He also has been trying to get Roadster owners and buyers to fork over $12,000 for a future replacement battery—even though the one in their cars is supposed to last well into the next decade.

Tesla is making other changes to get money fast. The company has scrapped plans for a brand-new factory in San Jose, Calif., opting instead to look for an old, idle industrial site where it could build a factory to make Model S cars and batteries. Tesla needs government loans for both projects, and loan applications that intend to use existing facilities get preference from the DOE. So Tesla may get money faster that way, if it gets approved. The company says it is negotiating deals for some industrial property for both sites and may have news soon.


Policymakers will need to assess whether Tesla can survive in a cutthroat marketplace. Being small makes the company nimble, but it's not necessarily scalable. Big parts makers typically won't even look at a car that doesn't sell in the tens of thousands, so Tesla has had trouble getting competitive rates. Mike Donoughe, Tesla's head of product development, says his expanded supplier base could bring down costs.

Even big automakers struggle to make money on cars that sell 20,000 units a year, and so far Tesla has sold just 140 Roadsters. "There's a lot more risk for the government with an unknown quantity," says Michael Robinet, vice-president of auto consulting firm CSM Worldwide. "[Tesla lacks] the global sales of mass-market players."

GM—battered as it is—has an advantage over Tesla. The auto giant plans to make up to 10,000 Chevrolet Volt electric cars, a mass-market volume that helps GM push down battery costs. What's more, the Volt is built on the chassis of the Chevy Cruze compact. The Cruze should easily sell half a million units a year around the world, so GM can amortize its development costs. Plus the Volt's high-tech guts will end up in several cars. "We can get scale much faster," says James E. Queen, GM's global engineering chief.

Tesla got a boost on Jan. 13, when Daimler announced it would buy Tesla's technology for its niche electric Smart car. That will help. But even if Musk gets federal aid, the rest of the industry could still pass him by.

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