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Welcoming Competition

Tech & Innovation | February 3, 2015

To highlight the changing nature of the U.S. economy, President Obama mentioned six companies in his 2015 State of the Union. While the majority of these players share a reliance on strong lobbying presences in D.C., one stands apart. With only $5,000 in lobbying expenditures in the past year—a far cry from the $1.6M – $19M range spent by the other five—it is clear that Tesla Motors’ ascent to national prominence has been hardly conventional.

Thus far, the automobile manufacturer has remained within a small niche of the total market despite its presence in the national spotlight. Currently, the company offers only its flagship, the Model S, an electric vehicle (EV) with a 270-mile range and a price tag of $69,000. Yet the founder of Tesla Motors, Elon Musk, has high hopes for the next fiscal years, pledging to sell “a few million cars” by 2025—a goal that would expand the company to the current size of BMW.

Musk’s hopes for Tesla’s future are especially ambitious considering the fact that the company spends zero money on marketing. Relying on word-of-mouth instead of the millions spent by industry leaders, Tesla’s business plan challenges accepted norms within the auto industry, and appears to have found success in its approach. In fact, Musk also claimed in January that the company struggles to produce enough models to meet demand.

Yet many analysts of the auto industry are quick to condemn Musk’s business approach, claiming that his unconventional business logic cannot hold up against challenges in the near future. Perhaps the most discussed of these difficulties is the sharp decline in gasoline prices. As global market research company JD Power confirmed in a recent study, fuel economy is the primary consideration among consumers looking to buy vehicles. Yet with gasoline listed at around $2.15 a gallon and a barrel of oil running at $45—the lowest price in more than half a decade—buyers face little incentive to shift from traditional vehicles to more expensive electric alternatives. Jeff Schuster, executive vice president of industry consulting firm LMC Automotive, confirmed the impact of such low prices, stating that electric cars are less likely to “get on car buyers’ radars” until gas prices adjust.

The low gas price compounds the largest challenge for Tesla’s growth—specifically, convincing consumers that EVs are a reliable alternative to traditionally-powered vehicles, especially for long-distance travel. This widespread reluctance to shift towards EVs has prompted Tesla Motors to develop and roll out a nationwide charging infrastructure, which will allow drivers to commute long distances with confidence. Generally located near shopping or dining destinations, Tesla’s “SuperChargers” are charging stations which can provide a full charge in approximately 30 minutes and currently cover 80 percent of the U.S. population. By the end of 2015, Tesla plans to increase that figure to 98 percent, a reality which would ease EV travel for nearly all U.S. consumers.

Yet Tesla Motors is not alone in its quest to expand the national EV infrastructure. BMW and Volkswagen recently announced a partnership to create a network of 100 charging stations across the US. This joint project works towards a shared goal between both companies, promoting sales of the companies’ respective EV offerings. Although announced in January, the project is expected to move quickly: as head of BMW EV infrastructure in North America Robert Healey said,“build-out schedule is literally as fast as humanly possible.”

The urgency behind this project stems from a major shift in the auto industry set to take place in 2017. With its limited luxury offerings, Tesla Motors is not currently in competition with the BMW i3 or Volkswagen e-Golf, both of which are aimed at the mass markets. Nonetheless, Elon Musk has no intentions of limiting Tesla Motors to its current niche; in 2017, Tesla will begin sales of a mass-market, 200-mile-range EV for $35,000. With this deadline looming, BMW and Volkswagen are both eager to develop a coherent infrastructure and get head start on their future competitor.

With Tesla’s plan to enter the mass-market in 2017 established, American automotive giant General Motors has no intentions of staying out of the fray. While it already offers the Volt, a plug-in hybrid that travels 38-miles on electricity before switching to gasoline, GM recently unveiled a model that some have dubbed the “Tesla Killer”—the Bolt, a concept EV with a 200-mile range and a 2017 release date. The potential for competition could not be more imminent; the Bolt poses a formidable hurdle for Tesla’s entry into the mass-market.

With BMW and Volkswagen expanding their charging infrastructure and the “Tesla Killer” hitting markets in 2017 or earlier, it is easy to assume that Musk’s goal of selling 500,000 cars by 2020 might be wildly unrealistic. In his usual fashion, Musk has defied traditional logic and has instead boldly invited competitors to enter the ring.

Musk has long criticized auto-manufacturing leaders for their unwillingness to invest sufficient time and resources towards the development of EVs and has done everything within his power to spur innovation across the entire industry. After significant developments in charging technology and battery safety, among many other innovations, Musk chose to open hundreds of patents so that his competitors could adopt Tesla technology.

“It’s sort of counterintuitive,” Musk acknowledged during a statement at the Automotive News World Congress in Detroit in mid-January. “Why would we want these competitors?” To understand this logic, one must first understand Musk’s vision for the future of the automotive industry—a future in which all cars are electric. In this world, Musk claimed that the so-called “Tesla Killers” are, in fact, not a competitive threat. “There are 100 million new cars made every year,” he continued in his Detroit appearance. “So what does it matter if someone makes a few hundred thousand additional electric cars? It’s not going to affect us, really.”

With this logic in mind, it becomes clear that the biggest challenge to Tesla’s future is not the number of high-profile competitors lining up; instead, Tesla is most hindered by an American consumer base reluctant to shift from traditionally-powered vehicles. To combat this challenge requires industry leaders to “make risky decisions to make electric vehicles.”

“I hope they do,” Musk concluded in Detroit. “We’ll try and be as helpful as we can.”