Tesla Races to Success with Electric Model S
Business + Economy

Tesla Races to Success with Electric Model S

Tesla Motors

In recent years, the electric car has been hyped, debated, derided, even used as “a political punching bag,” in the words of Tesla Motors’ serial-entrepreneur CEO Elon Musk. Republican presidential candidate Mitt Romney lumped Tesla in with other green energy “losers” like Solyndra. Just last month Sarah Palin used that label for Tesla, too, when she took to Facebook to criticize the Obama administration for backing another electric car maker, Fisker Automotive, which may soon file for bankruptcy protection: “This losing tax-subsidized venture joins other past losers like the Obama-subsidized Volt that gets 40 miles per battery charge, or like the Obama-subsidized Tesla that turns into a ‘brick’ when the battery completely discharges and then costs $40,000 to repair.”

Palin’s point, like Romney’s, was that the government shouldn’t be in the business of picking winners and losers in the marketplace. Well, Tesla may have gotten $465 million in loans from the Energy Department to develop and build its cars, but it says it will pay off the loan by 2017, five years early. And if the market is picking, the company is anything but a loser right now.

The 10-year-old company on Wednesday reported its first-ever quarterly profit, with earnings of $11.2 million, or $15 million excluding one-time items, on revenue of $561.8 million for the first three months of the year. Those sales were helped by $68 million from sales of Zero Emission Vehicle credits to other automakers. Tesla’s gross profit margin for the quarter was 17.1 percent, up from 8 percent for the prior quarter and higher than Ford’s 11 percent margin for its North American business.

RELATED: The 10 Greenest Cars to Buy in 2013

Tesla sold 4,900 of its Model S in the first quarter and expects to sell about 21,000 cars this year – or, as The Wall Street Journal noted, “four times the combined U.S. sales of Maserati, Lamborghini and Ferrari.” For the quarter, Tesla also outsold Chevy’s Volt plug-in hybrid and Nissan’s Leaf. (On the other hand, Toyota sold nearly 56,000 of its various Prius models in the first quarter and was aiming to sell 250,000 of the hybrids this year, though it said last month it may not reach that goal as gas prices fall faster than expected.)

Then on Thursday, the famously stringent testers at Consumer Reports showed how charged up they were over the battery-powered Model S. The car scored a 99 out of 100 on the magazine’s rating system, matching the highest rating of any vehicle ever tested and prompting an outpouring of superlatives. The reviewers praised the car’s design, construction and handling, while warning about the Tesla’s limited driving range (about 208 or 265 miles on a charge, depending on which battery is in the car) compared to gas-powered vehicles. The car, Consumer Reports said, “is brimming with innovation, delivers world-class performance, and is interwoven throughout with impressive attention to detail. It’s what Marty McFly might have brought back in place of his DeLorean in ‘Back to the Future.’” In case the point wasn’t clear enough, they also wrote that the Model S is “truly a remarkable car.”

That echoed earlier praise from Motor Trend magazine, which also called the Model S “truly remarkable.” In November, Motor Trend had named the Tesla Model S its 2013 Car of the Year. Consumer Reports considered an even loftier designation: “So is the Tesla Model S the best car ever? We wrestled with that question long and hard. It comes close. And if your needs are confined to Tesla’s driving range, it just may be.”

So even if it’s not the best car ever, Tesla might just have had the best week ever. Such high praise from the tough, typically reserved reviewers at Consumer Reports could put the Tesla on the lists of plenty of luxury-car shoppers. And combined with the profit and sales picture from earlier in the week, it has already scored the company huge gains in the stock market. Tesla shares jumped more than 40 percent last week and have now rocketed 127 percent on the year. Many of those who bet against the company – and there has been no shortage of short sellers – had to scramble to cover their positions, fueling the rally. Tesla now has a market capitalization of $8.7 billion. That’s “truly remarkable” alright.

But Tesla still has further to go if it really is to become the first successful automotive startup the U.S. has seen in nearly a century. As Justin Lahart at The Wall Street Journal pointed out this week, Musk has laid out his plan: “First, build a high-performance electric sports car, to prove it could be done. Second, market a luxury car that broadens Tesla's appeal. Finally, produce an affordable mass-market electric car.” Step 1 is complete. Step 2, already well underway, just got another huge boost. Step 3, where the rubber will really meet the road, is still in question. “It has always been my dream to produce a low cost, compelling electric car,” Musk tweeted in March. “We are 3 to 4 years away. Wish it could be sooner.”

To get there, Tesla is working to reduce component costs, improve its manufacturing efficiency and speed its production process. “We haven't really tried to push volume super hard yet,” Musk told analysts this week, “because I think you need to make sure that staff is in order and the car is being made as efficiently as it can be made before you try to push volume.” At the same time, Musk said that sales could grow next year as the company tests just how much demand exists for a luxury electric car with a starting price of $62,400 (including a $7,500 federal tax credit). “I think it's probably quite a bit higher than what we had originally thought,” the CEO told analysts.

Tesla will also need to build out an infrastructure that can support electric cars nationwide. It will need better batteries and a network of supercharging stations to allow drivers to hit the road without getting stranded on the side of the road. Tesla isn’t necessarily going to do all that on its own, potentially partnering with other carmakers such as Mercedes. As Farhad Majoo detailed at Slate:

"If Tesla’s technology helps Mercedes sell a lot of electric cars, the deep-pocketed luxury car company will have an incentive to build its own charging stations, too—places where Tesla owners could charge up. The more charging stations there are, the more attractive both firms’ vehicles would become. And then, as its battery production scales up to meet that demand, Tesla’s batteries will likely improve as well, as many in the industry see increased production as one of the main ways to lower the cost of electric-car batteries."

Tesla’s ride won’t always be as pleasant as it was this week, but after a decade of promoting the promise of electric vehicles, the road to success may finally be opening up.