Time for Tesla to share the road.

Photographer: Yuriko Nakao/Bloomberg

Why Tesla Has a Target on Its Back

Edward Niedermeyer, an auto-industry analyst, is the co-founder of Daily Kanban and the former editor of the blog The Truth About Cars.
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Thanks to luck, pluck and its brilliant execution of the Model S luxury sedan, Tesla has been flying high. Buoyed by visions of a self-driving car "utopia," the Silicon Valley startup has garnered a market capitalization that's nearly twice as high as that of the hottest-selling automaker in the U.S., Fiat Chrysler Automobiles. But how long can it last? 

Tesla's battery technology, long seen as its advantage over established competitors, is coming under attack. Last week, Volkswagen reportedly bought a stake in battery firm QuantumScape, giving one of the world's largest automakers access to a technology that could potentially deliver far more range than Tesla's industry-leading 300 miles. QuantumScape's solid-state batteries also carry a smaller fire risk than the lithium-ion batteries used in many electric vehicles, including Tesla's. Hybrid technology leader Toyota has been developing comparable technology since at least 2010, and battery EV leader Nissan has been promising similar developments. 

Tesla has considered implementing a new graphene-based battery, which could allow for vehicle range of 500 miles. But Chief Executive Officer Elon Musk has also downplayed the possible impact of the new batteries, saying their potential is unproven. And if Tesla does begin using new battery types, they won't be found in its next generation of car, the more affordable Model 3; Tesla's strategy is to drive down cost by creating scale around existing battery technologies. The much-hyped Gigafactory will reportedly build the same cylindrical lithium-ion cells Tesla currently uses, rather than rush potentially toxic graphene batteries into production.

Volkswagen's investment in solid-state batteries is especially interesting. At one point, it was actually copying Tesla's approach to EV battery technology: In 2009 and 2010, VW worked with Tesla co-founder Martin Eberhard to develop Tesla-style cylindrical lithium-ion cells but formally rejected the technology as overly complex when it brought its electric e-Golf to market. With Volkswagen looking to leapfrog Tesla with solid-state battery technology, Tesla's fidelity to its core technological vision is starting to look downright conservative.

And though gas prices are falling, the competition remains focused on replicating Tesla's zero-emissions hype -- not just in terms of surpassing its battery technology in the medium term, but by meeting Tesla's move down-market with a wide supply of competitive products. At around $100,000, Tesla's Model S plays in a tiny consumer segment that automakers simply can't be bothered to respond to. But with the Model 3 likely to start at around $50,000 and Tesla's aim to reach sales of 500,000 cars per year, established automakers need to take Tesla's forthcoming model far more seriously. After all, Tesla's startup culture, hands-on CEO and limited distribution channels become more of a liability at higher scale, especially compared to automakers with decades of experience building and selling huge volumes.

The line in the sand is already being drawn. Volkswagen's long-term investment in solid-state batteries comes as it begins a short-term product offensive against Tesla that includes the $100,000 electric R8 sports car and an electric version of the forthcoming Q8 crossover coupe, both from its Audi subsidiary. BMW is likely to add more products to its electric "i" brand, and it has unveiled an electric powertrain it calls "the Tesla-killer." Porsche is said to be planning an electric version of a new smaller sedan, codenamed Pajun, and former Tesla investor Mercedes-Benz is working on an electric version of its flagship S-Class. Add the new hydrogen fuel-cell technology featured in the $57,500 Toyota Mirai, and Tesla can expect its Model 3 debut to be greeted by a host of competitors.

This is not to say that Tesla can't handle the competition. But automakers have grown weary of Tesla hogging the limelight, especially when many of them funded Tesla's rise by buying its zero-emission credits. Even if automakers are now spending more on EV technology than on Tesla credits, at least that money is now being spent on new technology. Now that Tesla is tooling up to steal sales in real volume, the sleeping giant is stirring. Tesla's trial by fire is only just beginning.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Edward Niedermeyer at edward.niedermeyer@gmail.com

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net