Tesla Motors has had a very good year. First came an announcement that the California-based maker of electric cars had, in the first quarter of 2013, turned a profit for the first time. Then came news that the Tesla Model S sedan had earned Consumer Reports' highest rating. With a base price of $62,400 (after a $7,500 federal tax credit) the Model S even outsold similarly priced luxury BMW and Mercedes models in the first quarter.
Tesla has come on so strong that auto dealerships across the country, threatened by the electric-car company's model of selling directly to customers, have mounted a legal and political campaign to force Tesla to change course. The company's market capitalization is now more than $11 billion, nearly triple where it stood two months ago, and roughly a quarter of General Motors' $44.8 billion market cap.
Yet despite all the excitement, Tesla is not yet in an open lane to success. Tesla has been able to do well so far in substantial part because it is a small and focused company. It isn't saddled with outsize legacy costs like the Big Three auto makers are. Another reason for Tesla's success is founder and CEO Elon Musk's skill at partnering with other companies and developing new technology for them. Toyota and Daimler AG, for instance, teamed up with Tesla to help develop batteries for their electric cars, and both invested in Tesla.
For a company of Tesla's size (under 3,000 employees), delivery of roughly 4,750 Model S sedans in the first quarter of this year was an impressive feat, the sort of accomplishment that attracts the resources and management attention that are necessary for a new product to thrive. It would be much tougher for a fledgling electric vehicle with that level of sales to attract the same attention at an established auto maker, like Ford or Honda, that sells millions of vehicles every year.
But Tesla's small size also presents big challenges. A major safety incident or large-scale recall could present formidable challenges, both financially and logistically.
On Wednesday, Tesla announced a recall of more than 1,200 Model S sedans manufactured between May 10 and June 8 of this year because "the attachment strength of the mounting bracket for the left hand latch of the second row seat could be weaker than intended." Ironically, this relatively minor recall, not involving a safety issue, could give Mr. Musk and his company just the sort of experience they'll need should a larger recall be required in the years to come.
Tesla and other electric or hybrid auto makers have clearly benefited from state and federal subsidies and regulations aimed at promoting alternatives to oil. But the company's success so far has ultimately hinged on Tesla's smart strategy of selling to an upmarket niche.
Instead of marketing electric cars as only eco-friendly and a way to save money on gas, Tesla has managed to position the Model S as a superior luxury vehicle, with better acceleration, a quieter interior and a slicker appearance than the cars it competes with.
Tesla ultimately will need to move beyond the luxury-car market if the company is to come anywhere close to justifying the nearly $11 billion value that investors have assigned it. Unless Tesla follows a Porsche-like strategy of moving dramatically upmarket—a direction it shows no intention of pursuing—that will mean radically reducing costs and moving down-market.
Make no mistake: Tesla's recent success is encouraging. But the mainstream electric car is still far from a reality.
This article appears in full on CFR.org by permission of its original publisher. It was originally available here.