from Energy, Security, and Climate and Energy Security and Climate Change Program

What Tesla Tells Us About Innovation and the Electric Car

June 21, 2013

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Tesla has had an extraordinary year: strong sales, its first quarterly profit, and rave reviews for its Model S sedan. Investors, who have pumped the company’s stock up to strongly that Tesla’s market cap is now close to $12 billion, clearly expect more of the same to come.

Tesla’s success ought to be celebrated. In an op-ed in the Wall Street Journal today, though, I caution against excessive excitement and warn that three of Tesla’s biggest strengths – its small size, outsider status, and successful strategy of selling to an upmarket niche – could be its biggest liabilities

This says something not only about Tesla but about the future of the electric car more generally. Small and novel companies may be most likely to generate the big innovations necessary to push electrification ahead – but precisely those same companies may be less resilient and thus most likely to fatally falter. (The big auto companies, of course, have shown ample capacity for imploding too.)

I don’t discuss this in the op-ed, but it strikes me that this raises questions for government efforts to support innovation in the electric vehicle world. People mostly celebrated when Tesla paid back its DOE loan early. But was that a good thing? To be certain, it reduced the immediate risk of financial loss to the taxpayer. But it’s tough to argue that it didn’t also increase the risk that Tesla will fail.

The original point of the loan program wasn’t to spend as little money as possible – it was to cost-effectively raise the odds that electric cars would become competitive, helping the United States and the world cut oil consumption and emissions, which has its own long-term economic payoffs. If the proceeds from early payback were used to support other efforts to cut oil use, as might have been possible if a dedicated fund to support energy innovation were set up, that would be one thing. Given our current approach to funding energy innovation, though, policymakers ought to think about the downsides of policies that allow support to be withdrawn (potentially) too soon.

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