| Tesla Motors: A Model for Innovation in the Automotive Space
American roads are home to some 250 million passenger vehicles,1 nearly twice as many as any other nation, including car-hungry China.2 This dependence on automobile transport has long propelled the U.S. to the top of the oil consumption tables, with the country still consuming nearly 19 million barrels of petroleum per day, over 20 percent of worldwide demand.3,4 America’s oil addiction also results in some 1.5 billion tons of greenhouse gas emissions yearly from on-road vehicles alone.5 But in recent years, there has been a change in the air. Growing oil demand from the BRICS and other emerging economies has pushed up the prices of liquid fuels and offered a market opportunity for alternative powertrains for transportation, not least electric vehicles (EVs).
This paper addresses the launch path that Tesla Motors has followed in its efforts to be a leader in the burgeoning EV arena. Relatedly, it highlights the direct and indirect policy support that Tesla has received and continues to receive, as well as the challenges the company faces in the wider effort to develop an EV that is both affordable and appealing to mainstream consumers. More generally, it makes the case that government support has played an integral role in supporting Tesla’s rise from niche startup to $25 billion game-changer that is rapidly transforming the public’s perception of EVs.
Tesla Motors: from Inception to Today
Tesla Motors was founded by the Silicon Valley engineers Martin Eberhard and Marc Tarpenning, both of whom were driven by a vision: simply, that “electric vehicles could be awesome.”6 More fundamentally, the pair were disenchanted with the internal combustion engine (ICE) and increasingly concerned about climate change.7 They named their nascent company Tesla Motors, a tribute to the legendary innovator, Nikola Tesla, and their vehicles’ electric motors descend directly from his original 1882 design.8 The company was incorporated in 2003 and, just one year later, the IT entrepreneur, Elon Musk, contributed $6.3 million of some $7.5 million in Series A funding, handing him the role of Chairman of the Board. And through subsequent funding events prior to its IPO, Tesla was able to raise approximately $200 million to fund its ambitious early-stage commercialization plans.9 But while Musk had a similar short-term vision to the company founders, his long-term goal has always been far more revolutionary: to “expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy.”10
Tesla’s first step towards this grander vision was to develop a high-performance premium electric sports car, a potentially disruptive proof of concept that could, just as importantly, help fund key research and development for future models. This was an obvious requirement given the firm’s goal to eventually produce more affordably-priced, mass-market models.
The Tesla Roadster: Early Challenges; Lucky Breaks; and Helping Hands
In 2008, Tesla launched its first car, the two-door Roadster. The vehicle, with its $109,000 price tag, fell in the “ultra luxury” segment (i.e., for vehicles costing more than $100,000), which make up just a fraction of one percent of total cars sold in the U.S. annually.11 With the Roadster, Tesla was targeting a niche market with a low-volume, high-price proof of both its technical and commercial concept that specifically targeted early adopters. And while it believed that customers would pay a premium for a groundbreaking product it knew that a major element would be assuring investors that it could meet its manufacturing targets, stay financially solvent, and identify cost-reduction pathways going forward.
While the Roadster concept itself was a genuine success when measured by critic reviews and consumer demand, Tesla faced regular manufacturing and cash flow challenges most clearly evidenced by two full recalls and a rapidly dwindling cash stockpile.12 Luxury vehicle giant, Daimler AG took a 10 percent stake by investing $50 million in Tesla in May 2009, but by the end of the year, SEC reports indicated that the company had burned through some $37 million in cash in just three months. Further, after injecting millions of his personal wealth into Tesla, Musk himself admitted to being broke.13
However, the timing of Tesla’s financial problems ended up being rather fortunate. The company was in the process of hashing out its plans for a cheaper sedan that would have much broader appeal and thus help drive sales and reduce per unit R&D and production costs. And this played into the January 2010 granting of a $465 million loan from the U.S. Department of Energy’s Advanced Technology Vehicles Manufacturing (ATVM) Loan Program intended to support “the commercial-scale deployment of advanced technologies that help keep American auto manufacturers competitive in the growing global market for advanced vehicles.”14 The government loan ensured the company remained temporarily solvent as it moved across the veritable valley of death. And then in May of the same year, Toyota announced plans to invest $50 million in Tesla15 and to sell it a production plant in the San Francisco area rumored to be worth nearly $1 billion for just $42 million.16 The federal loan, cut-price factory acquisition, and new partnerships began to raise investor hopes that profits were in sight.
An IPO and the Model S
In June of 2010, Tesla filed an initial public offering that raised $226 million, with shares surging 41 percent on the first day of trading. Its IPO, the first for a U.S. automaker since Ford went public in 1956, provided Tesla with much needed cash to move forward with late-stage R&D and to lay the production groundwork for its new mid-priced, mid-volume sedan, the Model S.17
Fast forward to 2014, and Tesla is on track to deliver 35,000 Model S units to customers by year’s end,18 up from 22,300 in 201319 and just 2,650 in 2012.20 Its stock price has risen tenfold since its IPO, handing it a market capitalization in excess of $25 billion.21 This is due in large part to the Model S being rated Motor Trend’s Car of the Year for 2013, and it achieving the best safety rating of any car ever tested, as well as a range of 208 to 265 miles depending on the battery pack chosen.22 But at a base price of roughly $70,000, the car is by no means targeted at the masses, or even a majority of the middle class. Similarly, Tesla’s Model X crossover vehicle which is expected to see first deliveries in the spring of 2015 will be “priced comparable to a similarly equipped Model S.” 23,24 But while this upcoming vehicle is unlikely to be any more financially accessible, its introduction is nevertheless expected to help Tesla scale up production and drive down costs.
Tesla EV Production – Past & Future
*Company and Analyst Forecasts25,26
The Next Generation
In the longer-run, if electric vehicles are to seize any meaningful market share and thus play a significant role in the decarbonization of the energy system, their upfront costs must come down and their practicality must increase. Musk and his Tesla team have shown that they are well aware of these two needs, and have begun addressing them in increasingly potent ways.
Following their success in demonstrating “that EVs can indeed be superior to conventional ICE competitors” at the high end, they have now announced plans to launch a high-volume “Gen III” vehicle with a 200-mile range and a $35,000 price tag before subsidies.27 And it is this vehicle that would be the true global game-changer, not so much for its ability to boost Tesla sales so much as its power to shake-up the traditional auto industry. If Tesla can drive down battery pack costs and build a $35,000 compact luxury sport sedan with a compelling range, it implies that the holy grail is on the horizon: cheap mass-market EVs that can compete directly with ICE-powered models without subsidies.
But sales of Tesla’s Gen III vehicle would still remain limited without investments and innovation in battery charging systems. One-car families that rely on a single vehicle for commuting and long road trips would demand an extensive charging network before making the leap to an electric vehicle. In anticipation of this, Tesla has begun rolling out a “supercharger” network that allows owners to rapidly charge their existing Model S vehicles along key transit corridors around the US. And it has targeted a significant expansion of this supercharger network in the short term.28 Tack on battery swapping capabilities, something that the company is dabbling with,29 and good reasons for not switching to an EV may become increasingly scarce.
Tesla’s success going forward rests on its ability to scale up, but moreover, to significantly reduce battery costs—currently the largest single contributor to overall production costs. If it can achieve this while proving to consumers that EVs are not just practical but better than ICE-powered cars, it will merit its $25 billion valuation and then some. That said, it’s unlikely to get there without another helping hand or two from the government, either directly or indirectly.
It can be stimulating to remind ourselves that the first practical electric motor was invented nearly 180 years ago,30 making its way into a wide range of products in subsequent decades, including passenger vehicles. And EV prototypes were abundant throughout the second half of the 19th century.31 The concept of the electric vehicle is quite simply not new. And despite the fact that ICEs have dominated the auto world over the last hundred years, the advantages of EVs remain clear. They are roughly three times more efficient than their gasoline-powered peers, emit no tailpipe pollutants, offer greater torque (and thus rapid acceleration), and require considerably less maintenance.32
However, from the beginning, batteries—the predominant sources of power for EVs—have proved a significant technological and economic hurdle for manufacturers. Furthermore, on the logistical front, the difficulty in providing public charging stations for EVs that have yet to be produced or sold has become a veritable chicken or egg challenge. Given that these remain the two most significant technological and economic barriers to greater EV rollout, they merit the focus of this section.
From the very beginning, Tesla has focused on making relatively cheap, high-quality battery packs that offer those who purchase their EVs “compelling” range. Their R&D team was quick to discard battery chemistries such as nickel metal hydride (NiMH)—which are typically used in hybrid vehicles—and instead to embrace lithium-ion cells, which were becoming increasingly sophisticated thanks to demand pull from the mobile telephony and computing industries. The technology promised superior energy density and therefore less weight per mile of EV range, greatly benefiting acceleration and handling.33 But it wasn’t Tesla’s choice of battery chemistry that proved so innovative. Rather, it was the decision to assemble battery packs composed of thousands of “18650” cells, with an 18 mm by 65 mm form factor. 18650 cells are a veritable commodity with over a billion of them produced each year.34 By repurposing these existing and increasingly cost-effective cells, the Tesla team was eschewing the large-format lithium-ion cells that its competitors were embracing. And in doing so, they hoped to reduce the cost of the overall battery design process, as well as final components.
The Roadster Battery
In 2008, Tesla rolled out its first EV offering, a two-door Roadster starting at $109,000. It sported a 56 kWh lithium-ion battery pack made up of 18650 cells, handing the Roadster a range of 245 miles with a reported pack cost of $32,000, or roughly $570/kWh.35 The battery system was heralded as pioneering given that, in 2008, large-format lithium-ion packs cost an average of $1,200 per kWh.36 As late as January 2011, an analysis of four major research groups indicated a general view that average lithium-ion battery costs would only fall below $600/kWh in 2014 or 2015 (see Fig. 1),37 corroborating the innovative nature of the 2008 Roadster’s pack. Nevertheless, with the battery alone costing as much as a BMW 3-series, considerable progress was clearly still required if Tesla were to ever achieve its grand vision.
Fig. 1: Estimates of EV battery costs in $/kWh38
Powering the Model S
Jump forward to the present day, where Tesla is producing nearly 700 of its Model S sedans per week (i.e. an annualized rate of roughly 35,000 units).39 The new car offers battery packs with capacities of either 60 or 85 kWh, which Tesla claims are manufactured at a cost of just $200-$300 per kWh.40 The Model S battery pack maintains a reliance on the same 18650 cells but they have been worked into an entirely new vehicle platform. A flat, slim-line battery pack is positioned below the vehicle floor with the electric motor and power electronics in a compact module between the rear wheels.41 The new system lowers the chassis’ center of gravity but, more importantly, means future Tesla models will be able to employ the very same platform, further leveraging economies of scale. Moreover, it will allow the battery pack to be swapped out for a fully-charged one at specialized stations in as little as 90 seconds.42
Strategic Relationships and Supply Concerns
While Tesla sources 18650 cells for the Model S from a number of different manufacturers, it has forged a strategic partnership with Panasonic, and the Japanese conglomerate has become its main cell supplier. This builds off of a November 2010 announcement that Panasonic had invested $30 million in Tesla and that the two companies would be collaborating on next generation battery cells designed specifically for EVs.43 By June 2013, Panasonic claimed to have supplied Tesla with more than 100 million cells for the Model S alone.44 And this does not include the cells Tesla uses to builds battery packs for Toyota and Daimler’s Smart Fortwo EV.45
However, by late 2013, investment analysts were becoming increasingly concerned by this tremendous demand for 18650 cells. Notably, if, by 2016, it is producing the 100,000 vehicles targeted,46 Tesla’s demand would amount to close to half of the total 18650 cell market today.47 So to ensure adequate battery inputs going forward, the company is planning to take matters into its own hands.
Gen III and the Gigafactory
Going forward, Tesla has two major battery concerns: the availability of supplies and achieving a considerable reduction in pack costs. Since the production of the company’s first Roadsters in the second half of 2008, Tesla’s battery costs have dropped by approximately half. And comments by Tesla CTO, JB Straubel, suggest that Model S battery costs have dropped below $250/kWh on average. For its Gen III model—a more compact luxury sedan—to achieve a 200-mile range, it would likely require a 50 kWh battery pack,1 which today would cost Tesla roughly $13,750. So if such a model is to eventually achieve a $35,000 sales price, battery costs would need to fall even further.
In February, Tesla announced it would tackle its battery concerns head on by building a massive factory to produce cells and assemble packs, breaking ground on it as early as summertime.48 The so-called “gigafactory” is slated to cost $4-5 billion, with Tesla investing $2 billion and yet-to-be-named partners the remainder.49 Under the projected timeline, production would commence in 2017 with full ramp-up by 2020. At full capacity, pack output would reach 50 gigawatt-hours (GWh) per annum, enough for well over 500,000 vehicles. Cell output would be limited to 35 GWh, suggesting that Tesla expects to continue purchasing cells from existing suppliers or to build an additional cell factory. Notably, total global cell supply in 2013 amounted to less than 35 GWh, illustrating the tremendous scale of the investment.50
While the gigafactory will certainly help allay cell supply concerns, Tesla also believes that it will cut the per kWh cost of packs by over 30 percent.51 This suggests a reduction to approximately $175 per kWh, or less than $9,000 for a 50 kWh pack suitable for the Gen III model. Whether or not the factory will actually achieve these cost reductions obviously remains to be seen. Since Tesla’s battery systems remain so far ahead of its competitors’ large-format lithium-ion packs on the cost curve, analysts have little information with which to critique the company’s projections. That said, it remains telling just how quickly both battery prices and associated future price expectations have come down in recent years. Laptop battery prices dropped at a compounded rate of 14 percent per annum over a 15 year period. And now, Deutsche Bank analysts believe EV battery costs will decline 7.5 percent per year through 2020.52 If, going forward, Tesla were able to achieve a similar cost decline rate, its packs would be approaching a cost of $140/kWh by 2020. This would be very much in striking distance of the EV Everywhere goal set by DOE’s office of Energy Efficiency & Renewable Energy (EERE), which targets battery pack costs under $125/kWh by 2022.53 Notably, at $140/kWh the price of a 50 kWh battery pack would be fully offset by the federal government’s existing $7,500 federal tax credit for electric vehicles.
The EV battery cost challenge is flanked by the ongoing question of charging infrastructure rollout. In 2008, when the Tesla Roadster was first launched, public charging stations were few and far between and thus seen as a significant roadblock to large-scale EV rollout. Today, while there are now over 8,000 charging stations nationwide,54 they are far from ubiquitous, and the notion of “range anxiety,” whereby EV operators fear running out of juice miles from the nearest charging station remains widespread. To alleviate this concern, extensive investment in charging infrastructure is required. And even if range anxiety dissipates over time thanks to a prevalence of larger capacity batteries, the issue of how to deal with the load spikes from charging EVs will likely remain. But Tesla has taken steps to deal with all of these issues, at least for owners of its vehicles.
Like rival manufacturers, Tesla offers a range of home charging solutions to customers. Both the Roadster and Model S come standard with the ability to charge using a typical 110 or 220/240 volt wall socket. But customers of both models instead tend to opt for a $1,200 high-power charger that can reduce charging times to as little as 3.5 hours.55 However, a federal tax credit that helped offset 30 percent of the equipment and installation cost expired at the end of 2013.56 Given its target market, Tesla can afford to charge its customers a premium for these devices. However, going forward, they are another component whose price will need to come down if EV solutions are to become cost-competitive with ICE-powered vehicles on the showroom floor.
Thanks to the over 200 mile range of Tesla’s vehicles, home charging systems are likely responsible for the vast majority of Roadster and Model S battery top-ups. Since Americans have round-trip vehicle commutes of just 25 miles on average, these vehicles have significant excess range for daily activities.57 Therefore Tesla’s business model benefits from rather little inherent need for public charging infrastructure. But that’s by no means the end of the story.
Public Charging, Superchargers, and Battery Swapping
In September 2012, Tesla announced its solution for existing or future Model S drivers with range anxiety or road-tripping desires. While customers already had access to an increasing number of public charging stations, the company decided it would build out a network of solar-powered “supercharger” stations in high-traffic areas across the continental U.S. that would charge a Model S battery to 80 percent in just forty minutes.58,59 Today, ninety four of these stations are up and running, providing completely free charging to Model S owners. By the end of 2014, it aims to provide coverage to 80 percent of the U.S. population, rising to 98 percent in 2015. Tesla also now has seventeen supercharging stations in Europe and three in China. Notably, the company determined that the appeal of free charging stations and its associated impact on EV sales would more than offset the additional costs of building and operating the stations.
Fig. 2: Tesla’s U.S. supercharger network as of May 23, 2014.60
Fig. 3: Tesla’s proposed U.S. supercharger network by the end of 2015.61
However, by fitting its supercharger stations with proprietary charging connectors rather than those following the CHAdeMO or SAE standards, Tesla is arguably propagating market inefficiencies.62 The stations preclude use by drivers of other EVs, unless auto manufacturers eventually opt to license the standard Tesla connector technology. Thus, if one also considers the exclusive high-speed battery swapping initiative Tesla is piloting at its supercharger stations, the company’s brand premium becomes increasingly apparent.
Tesla and the Future of Charging
By opting to only produce EVs with “compelling” range, Tesla has so far managed to help reduce its customers’ range anxiety fears. Further, by the time the more mass-market Gen III model is released, these fears will likely have faded somewhat on the back of greater public familiarity with EVs. Nevertheless, if the Gen III is to seize significant market share, a robust charging network will be required both as backup and to allow longer-distance travel options. And the government—at both the federal and state level—should support these efforts, particularly those that are inclusive and thus of the greatest benefit to the states and country as a whole.
EV Policy Support: the Past; Present; and Future
The U.S. government has, for some time, shown a considerable interest in electric vehicles, mostly due to their potential to reduce transport sector oil demand as well as greenhouse gas and local pollutant emissions. A number of government policies and initiatives have emerged in recent years to catalyze everything from EV component R&D to purchases of the vehicles themselves and associated charging equipment. A number of these are high-level, top-down approaches such as President Obama’s 2011 State of the Union target of getting one million EVs on the road by 2015.63 Others are bottom-up and focus on directly or indirectly reducing the costs or effective prices of EV technology.
The Innovation Adoption Lifecycle and Government Involvement
EV manufacturers looking to break into the U.S. auto market are fortunate in the sense that it remains one of the largest in the world, with sales of 15.6 million in 2013.64 Therefore from the time between when Obama announced his goal and end-2015, it would’ve required that EVs make up just over one perfect of annual sales to be achieved. Going by Everett Rogers’ innovation adoption lifecycle model (Fig. 4 below) suggests that reaching such a level of EV sales could be achieved by targeting just innovators and early adopters.
Fig. 4: Visualization of Everett Rogers’ Innovation Adoption Lifecycle model.65
However, given the high cost of electric vehicles relative to traditional ICEs, moreover, as a percentage of median annual income, Rogers’ model may not hold up for EV sales. Many Americans potentially would like to purchase an EV but simply cannot afford one. And in light of the myriad benefits that EVs offer to both consumers and the public as a whole, it is unsurprising that government policies are aiming to reduce the costs to produce, own, and operate them.
On the R&D front, the federal government has played an important role in supporting the advancement of the manufacture of EVs and their components in the United States. The high-risk, capital-intensive nature of advanced automotive manufacturing makes market entry particularly challenging for new firms such as Tesla. And during the financial crisis, even existing manufacturers relied on government incentives to support expansion plans.
Advanced Technology Vehicles Manufacturing Loan Program
The Department of Energy’s $25 billion Advanced Technology Vehicles Manufacturing (ATVM) Loan Program is the most notable support mechanism available to the EV manufacturing industry. It was created under the George W. Bush administration and funded by congress in the fall of 200866 with the intention of aiding “companies making cars and components in U.S. factories that increase fuel economy at least 25 percent above 2005 fuel economy levels.”67
Since its inception, the program has depleted roughly 40 percent of its funding through loans to a range of different firms including Ford, Nissan, and, of course, Tesla. The latter’s terms were finalized in January 2010, entitling it to a $465 million loan,68 $365 million of which was slated for the production and engineering of the Model S sedan, with the remaining $100 million funding a powertrain manufacturing plant.69 Despite Tesla’s recent success, many conservatives have criticized the program for funding “losers” such as Fisker Automotive Inc., which drew $193 million from a $529 million ATVM loan before going under in 2012. In contrast, proponents argue that these types of government programs exist to give risky but important ideas the chance to succeed. Tesla is surely a testament to this, having repaid its $465 million loan in May, fully nine years early.70
The ATVM loan program has, however, played little role in impacting Tesla’s battery sourcing practices. The company continues to purchase 18650 cells from Asia, assembling them into packs at its drivetrain facility in California. And though the future battery gigafactory will be located in the United States, Tesla is opting to fund its construction through the issuance of convertible bonds rather than seeking additional government loans.71 The firm has seemingly entered a phase in which direct government support is seen as no longer necessary and potentially even detrimental to the firm’s reputation as a serious auto manufacturer.
What has always been clear is that, without interested buyers, EVs could never take off. Tesla addressed this problem by producing an electric sports car that performed remarkably and then marketed it to only a sliver of society. But on the back end, along with other EV manufacturers, it is benefiting increasingly from government-supported demand pull as it begins producing vehicles for a wider audience.
The Federal Tax Credit for EVs
The most significant government support system for EVs remains the federal tax credit which, when rolled out in 2009, applied only to the Tesla Roadster. The full $7,500 credit can now be claimed by purchasers of new vehicles with battery capacities of 17 kWh or greater.72 The credit therefore reduces the cost of a Tesla Model S by roughly 10 percent. However, its impact is much more significant for lower-cost vehicles such as the 2013 Nissan Leaf, whose effective price drops by over 25 percent to $21,480. And so this type of program could be the difference between a Gen III Tesla costing $35,000 and $27,500. However, the credit is currently set to phase out for a manufacturer’s vehicles when 200,000 of its EVs have been sold for use in the United States since December 31, 2009.73 For Tesla, this milestone could be hit as early as 2016,74 likely challenging the federal government to determine both the need and value of extending such strong demand-side support for EVs.
State-Level Rebate Programs
At the state-level, dozens of governments have provided support for the purchase of EVs. A number of them, including but not limited to Colorado, Georgia, West Virginia, Illinois, South Carolina, and Oklahoma offer significant tax credits in addition to that offered by the federal government. In West Virginia—one of the more generous states—a total of $7,500 of tax credits are available to the purchaser of a Model S, feasibly reducing its effective cost by over 10 percent. Other states, including California, offer cash rebates or sales tax exemptions for EVs. And others still are employing indirect incentives to encourage EV purchases. The most common of these include HOV lane access and exemptions from public parking meters and emissions inspections.75 These exemptions attempt to boost the appeal of EVs at a very low cost to municipalities.
Additionally, California has a long-running Zero Emission Vehicle (ZEV) Program that sets long-term requirements for the deployment of electric-drive vehicles. In 2012, the program was amended to require ZEVs and plug-in hybrid electric vehicles (PHEV) to account for over 15 percent of new vehicle sales by 2025. Large-scale auto companies are thus required to sell a minimum percentage of ZEVs or else must purchase credits from manufacturers that enjoy an excess.76 Given that Tesla is small and produces only EVs, it is able to sell ZEV credits to manufacturers that are not meeting their requirements. And in 2013, Tesla netted just shy of $130 million from ZEV credit sales.77
While Tesla’s business model currently does not rely heavily on government incentives for charging infrastructure, it has benefited from a number of tax incentives both consumers and businesses. Lowering the costs of these charging systems will further reduce barriers to EV uptake by making their ownership more affordable and practical.
Support for Public Charging Systems
While Tesla’s 94 U.S. supercharger stations are open only to owners of their Model S vehicles, that did not prevent the company from collecting a federal tax credit for up to $30,000 of their installed costs through December 31st, 2013. While the program has since expired, Tesla’s supercharger rollout shows little signs of slowing. Moreover, the government still subsidizes the stations since they are powered, in part, by solar PV systems, which qualify for considerable tax credits.
Though non-Tesla EVs cannot charge up at the company’s supercharger stations, the opposite does not apply to Model S sedans and future Tesla models, which can be charged at most public stations using an adapter. The company therefore benefits going forward from any additional public charging infrastructure spurred by federal and state-level incentives and programs.
Support for Home Charging Systems
As mentioned earlier, consumers who purchased home charging systems through December 31, 2013, qualified for a federal tax credit of up to $1,000.78 But with funding for the program lapsing, future federal government support for both private and public charging infrastructure is in question. Regardless, as EV sales grow, increased competition from charging system suppliers is bound to reduce system costs, making government support less important.
Tesla has followed a fascinating trajectory for a company entering a high-risk, capital-intensive industry. Its small-scale, niche-market approach has allowed it to chart a more evolutionary course towards profitability. However, without the federal government’s support via the ATVM loan program and a range of incentives for EVs and charging systems, it is highly unlikely that Tesla would be valued at the level it is today. Moreover, it may not have survived at all—such is the risk that all innovators face.
Going forward, Tesla’s success will depend on a vast number of factors ranging from battery production cost and availability to the price of commodities such as gasoline, whose march upwards has already made EVs more competitive relative to their ICE-powered brethren. The federal and state governments will have varying power to influence these factors, but they ought to eventually take firmer, longer-term policy positions to ensure internalization of the positive and negative externalities of the different technologies at play.
Tesla’s approach to innovation is not first of its kind, but it will hopefully serve as a model for actors looking to upend other legacy sectors. It remains to be seen whether—with the right government support—it could be applied in commodity sectors such as electricity, where price need not be the sole differentiating factor between providers. However, for the time being, Tesla has done a great service by propagating the idea that EVs can transform the U.S. transport sector in the not-so-distant future.
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