Tesla Model

Tesla’s Rise Forces Other Automakers to Up Their Electric Car Game

All the public adulation and attention is forcing bigger manufacturers to play catch-up to Tesla, says Daniel Gross.

Cars can’t fly. But Tesla Motors, the electric sports car manufacturer, continues to defy gravity. Its stock has risen six-fold in the past year, giving it a market capitalization of $22 billion. That’s stunning, especially given that Tesla sells only about 2,000 cars per month and last quarter reported a $70 million profit.

By contrast, GM, which sold more than 275,000 cars in August and earned $1.2 billion in the most recent quarter, has a market capitalization $51.8 billion—about 2.5 times that of Tesla. And Ford, which sold 221,270 cars in August, more than 100 times Tesla’s total, and notched a $2.6 billion profit in the most recent quarter and is valued at $68 billion, about three times what Tesla is worth. Put another way, these companies have more in profits each quarter than Tesla has in revenues.

The astronomical valuation of Tesla could be a sign that investors are shrewdly predicting the future. The stock market, after all, is famously a futures market. Or it could be a sign of the sort of exuberance that frequently infects American investors. Hopped up on momentum and dreams, investors often bid up shares of companies beyond all reasonable valuation.

Tesla’s continuing rise is angering electric car haters, auto dealers (who have sought to keep Tesla’s direct-sales model out of several states), and investors who focus on fundamentals. A hedge fund manager I know hisses the word “Tesla” with the same mixture of fear and annoyance that Jerry Seinfeld used to deploy when he said, “Newman.” Indeed, it’s hard to escape Tesla and its founder, Elon Musk. While others are contracting in Europe’s poor car market, Tesla is expanding. It opened a plant in the Netherlands last month. In the first half of September, Tesla was the leading car seller in all of Norway, with 322 units sold. It’s building out its supercharging network in California. This spring Tesla repaid its loan from the Department of Energy several years early and raised $1 billion in private capital. Earlier this month, the media dutifully covered the news that Musk would drive his family cross-country in a Tesla.

But Tesla’s stock and its vehicles aren’t just driving people to distraction. Tesla, the stock and the phenomenon, is having an impact far beyond the 2,000 cars it sells. Rather, this tiny tail of the car industry is starting to wag the dog. Innovation happens when start-ups get huge—think of Google or Facebook or LinkedIn. But it also happens when giant incumbents decide they want to be part of something new. And that is happening, thanks to the success of Tesla. Larger auto companies, which generally have remained aloof from the electric car industry, are now actively seeking the, um, juice and earnings valuation that Tesla has. And they’re doing it by investing more seriously in electric cars, or in the electrification of gasoline-powered cars.

We see it all the time. Innovation tends to come from the high-end and the fringes, not from the low end and the center of the market. The first cars Henry Ford built cost a fortune for early 19th century Americans. A decade ago, Toyota captured the imagination of the auto marketplace by selling a small number of expensive hybrids. After a while, other car companies rolled out their own versions. They did so not because they believed they could make money and sell lots of hybrids. Rather, these technology companies—and make no mistake, car companies are technology companies—didn’t want to be seen as being left behind. They wanted some of the cachet that came with making and selling hybrids. But cachet has a way of developing into a real business. Toyota still dominates the hybrid market. But Ford is coming on strong, there are dozens of models, and 53,000 hybrids were sold in the U.S. in August. What’s more, hybrid-lite technology is starting to become a standard offering in American-made trucks, SUVs, and cars, and that’s helping to boost the fleet’s mileage and performance. The pressure Toyota exerted forced other automakers to adapt—in a way that benefited consumers and the auto industry as a whole.

Something similar may be happening with Tesla and electric cars. Larger, established companies that want some of what Tesla has—the cool factor, the higher multiple, the public adulation and attention—respond by saying they’ll be part of this exciting new market.

The website Hybridcars.com publishes a constant flow of news items on electric cars. Mitsubishi is bringing a plug-in electric hybrid to the U.S. in 2015. BMW has conducted field trials of its ActiveE model. Ford is building charging stations for employees at its factories and offices. General Motors CEO Daniel Akerson last week told The Detroit News that GM, which a few years ago didn’t bother to apply for federal loans to support the development of electric vehicles, is now very interested. “If you want to compete head-to-head with Tesla, and we ultimately will, you want to do it with a Cadillac,” he said. “I do think when the [Cadillac] ELR comes out late this year, early next —it’s certainly in the same postal code as Tesla, but now we’re going to move up.”

GM, which already produces the Volt (technically a plug-in hybrid), and the Spark, a small all-electric vehicle, is pledging to work on an electric vehicle with a battery range of 200 miles and a sticker price of about $30,000—about half the cost of a Tesla Model S, which has a battery range of about 265 miles. GM recently tripled the size of its battery research operation.

Sure, Tesla investors have pushed the stock up to levels that are insanely high and perhaps unsustainable. It may all hit a brick wall. But in the meantime, Tesla’s charge is putting pressure on manufacturers—manufacturers with more resources, more customers, and more engineering capacity—to up their game. And that’s all to the good.