On Bailouts and Sports Cars

Reprinted with permission from Jason's email list

Today, Randall Stross takes apart Tesla Motors' request for a $400m government loan in an illogical, factually incorrect editorial that screams of a "Kill The Affluent!" ethos that spreads every time the market crashes. Putting aside the issue of bailouts--which many of you know I'm against--let's look at Stross' reasoning.

According to Stross, Tesla shouldn't get a *loan* because:

1. According to the title: "Only the Rich Can Afford It."

2. Battery pack life isn't moving fast enough: "But 8 percent, compounded, would bring too few benefits, too late to Tesla: it would take nine years to halve the price of its battery pack."

3. Randy says there is no upside to the loan: "Can you conceive any way that federal dollars could be put at greater risk -- and for no equity in return, keep in mind -- to benefit fewer people?"

4. Stross says the Tesla isn't ready for prime time: "its all-electric technology remains woefully immature and don't-even-ask expensive" and "The Roadster is not much more than a functioning concept car that sells for $109,000."

These points are all, well, somewhere between short-sighted and outright false, leading me to think that Randy's big problem with a *loan* to Tesla is that he needs to write a piece that appeals to the short-term sentiment of the country right now ("damn the billionaires!") rather than one that pursues the actual truth. Car technology needs to advance, and the best place for that to happen in in Silicon Valley. If the government is going to give loans to any car companies, it should be the ones that have the best chance of successfully innovating, not the losers who haven't competed for decades.

So, let's take a moment to fisk* Randy's story:

1. "Only the Rich Can Afford It. Should Taxpayers Back It?"

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Yes Randy, the first version of technology tends to be expensive. Personal computers used to cost $5,000, flat-panel TVs were $10,000 and--gasp--the first decade's worth of solar panels were not worth the price. You're a *technology* journalist at the New York Times. You understand all too well that expensive technology becomes commodity technology within 10 to 20 years of its inception.

Personal computers now start at $200. Of course the first version of an all-electric sports car is going to be expensive.

2. Battery pack life isn't moving fast enough: "eight percent, compounded, would bring too few benefits, too late to Tesla: it would take nine years to halve the price of its battery pack."

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Really?

If Tesla cuts the cost of the battery pack in half over the next nine years, they will have two choices: take about $20,000 off the price of the car or double the range to 500 miles. You correctly point out that Tesla over-did the battery range, as most folks are commuting way less than 100 miles a day. Ever wonder why they did this? Well, skeptics are obsessed with the limited range, and Tesla must fight the public perception that an electric car is not viable. You're, of course, exacerbating this problem with your column today--something you should really think long and hard about, since you're so wrong and you have such a big platform.

You, in fact, could be in the documentary "Who Killed the Electric Car Part Two" as one of the contributors to the "It Can't Be Done" movement.

The fact is that Tesla could--right now--produce a car that is 1/3rd to half the price if they set it to go only 100 miles. In nine years, they will easily be able to produce a $40k car that does this. Is nine years too long to wait for this technology to reach the price point that 80% of the new-car-buying country could afford? I don't think so.

Your interpretation of the three central facts here--average commute, cost of the car and battery costs--all work about against your argument when you consider them holistically. You say in the same article that:

a) The Tesla is too expensive at $109k.

b) The Tesla's range is too far, and only needs to be 50 or 60 miles

c) That battery technology doubles in nine years at the slow estimate

Well, that all adds up to a reasonably priced car that goes a reasonable range today (100 miles), a reasonably priced car that goes a very nice range in four years (say 150 miles), or a cheap car that goes an absurd range in less than 10 years (250 miles). Your own data would lead any reasonable person to the conclusion that Tesla is well on it's way to an affordable electric car.

What's the problem here exactly? You're saying that America could have a brand new startup car company that produces an affordable car that goes an absurd range just 10 years from now? The cost is a $400 million dollar loan? You're problem with this is what?

Also, Tesla has publicly stated that they are pursuing a flagship--or tent pole--release of their cars. This means they start with the sexy, fast and expensive car for affluent folks, then move on to the sexy sedan for middle income folks. Finally, they take all the technological advances from these two models and move them into the affordable car for everyone.

This is, in fact, the best practice for the automotive and technology industries--you, of all people, know this! How do you think it's possible for cars under $30,000 to include GPS,antilock breaks, and air bags? Those items were once reserved for only the most elite cars, as you well know.

Why is what's good for Intel, GM, and countless other tech and automotive companies so bad for Tesla in your mind?

3. America has no upside from the $400m loan.

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First, these loans come with a very innovative concept: interest. The country would get *interest* on the loan. Second, the country gets added value from the following:

a) Sustainable, high-paying jobs for potentially thousands of Americans

b) Those employees spending money, buying houses and paying taxes

c) Tesla licensing its technology to other non-US companies (as they are *already* rumored to being doing with Mercedes)

d) Who says Tesla can't give the country warrants on two percent of their stock as an added bonus?

e) The country would not need to send mountains of cash to the Middle East

f) Smog levels would drop, and with them massive health care costs associated with smog

g) We would be doing our part to slow down global warming (and every bit counts)

That stock kicker in (d) above I just invented. Perhaps all the companies we give loans to should be required to give a two percent preferred share stock bonus to the United States in exchange for originating their loans? That could be an amazing bonus.

4. Tesla isn't ready for prime time: "its all-electric technology remains woefully immature and don't-even-ask expensive" and "The Roadster is not much more than a functioning concept car that sells for $109,000."

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I own the number 16 production car of the Tesla, and I've been driving it for two weeks now. Anyone who owns the car can tell you that a) it is not "woefully immature" and b) that it is not a "concept car."

The Tesla has been through many crash tests. It has air bags and, yes Randy, even a cup holder. It is a thrill to drive, safe and dependable. It gets the range it reports and the early owners have been delighted with the refinement of the car and the lack of problems. You are flat-out wrong when you say it's "woefully immature" and a "concept car." It's a production car and when compared to my two other cars--a Mini Cooper and a Corvette--it blows them away. How Tesla could create a car that competes with two cars that have been in the "Top Ten cars of the year" for the better part of the past 10 years is just mind-blowing. You and the New York Times should really alter these incorrect facts in the article.

Question for Randy: on what basis do you label the car "woefully immature?" Here's what other publications said (I found these in five seconds on Wikipedia--why didn't you?):

Road and Track: "The Tesla feels composed and competent at speed with great turn-in and transitioning response."

Motor Trend: "undeniably, unbelievably efficient" and would be "profoundly humbling to just about any rumbling Ferrari or Porsche that makes the mistake of pulling up next to a silent, 105-mpg Tesla Roadster at a stoplight."

Slate: "A week ago, I went for a spin in the fastest, most fun car I've ever ridden in--and that includes the Aston Martin I tried to buy once. I was so excited, in fact, that I decided to take a few days to calm down before writing about it. Well, my waiting period is over, I'm thinking rationally, and I'm still unbelievably stoked about the Tesla."

5. Factually Incorrect: Tesla is asking for help producing a rich man's car. --------------------------- Yet another factually incorrect statement Randy. Tesla is NOT asking for a loan to build the Roadster. They are asking for a loan to build a second, family-friendly, $60,000 version of the car called the Model S. The Tesla production run and technology is already paid for--Tesla has said this over and over again.

You know this, yet you spun the entire article with the headline "Only the rich can afford it." Only the rich can afford a $60,000 car? Really? I'm sure you make at least $80 to $120,000 as a New York Times writer, and your book advances have to be well into the six figures. Guess what, you can afford the Model S!

Finally, Tesla isn't asking for a handout, they are a asking the tiny, tiny piece of an incentive program from 2007 called the Advanced Technology Vehicle Manufacturing Incentive Program that was designed to give large automakers support in developing more energy efficient vehicles.

How did you miss this basic fact in your article? It's not a bailout--it's a loan that is part of an existing program for just this purpose! If we are going to give a loan for advancing vehicle technology shouldn't we give it to the only company which has actually produced 100% electric cars? How about the company that has over 1,200 orders for those cars? How about the company that has gotten absurd reviews from the press for their extremely capable car--a car you, and only you, call a "woefully immature" kit car.

How could pack so much bias, incorrect facts and absurd conclusions into one article Randy?!

6. Some perspective please!

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Randall says "Can you conceive any way that federal dollars could be put at greater risk -- and for no equity in return, keep in mind -- to benefit fewer people?"

Sure, how about the Iraq war, which costs around $400m a day--dollars that we have no chance of ever seeing again (as opposed to a loan, which is paid back with interest).

Your editorial should have started with this fact: if we leave Iraq a week early, we can give two billion dollars in loans to *five* electric car companies. That's your lead right there, Randy. That's leadership, that's the truth and that's your job as a journalist. Not this "damn the billionaires" crap. In fact, the billionaires in this country have done a hell of a lot (see Gates, Buffet, Turner and countless others)...But that's for another email. Let's get back on the subject.

You need to put things back in their proper perspective instead of obsessing about the fact that some of the investors in Tesla are really rich, that the first version of the car is slightly more expensive than a luxury car, and that battery power is *only* going to *double* every ten years.

You really should rewrite the editorial and give the public a fair world view instead of one warped by some short-term populist propaganda. Tesla isn't about rich Silicon Valley guys in sports cars: it's about extracting ourselves from the environment-killing, human-rights violating, terrorist-supporting regimes in the Middle East. The only reason we deal with countries that suppress women and homosexuals and give money to terrorists who kill based on a religion is because we are dependent on their oil. If we didn't need their oil, we would treat them like we treat other rogue regimes--isolate them until they got their act together.

Companies like Tesla are the direct path to our independence from such treachery.

In Conclusion

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The reason I bought the Tesla was to help fund the Model S--and because I like things that are fast, sexy and high-tech. I'm a proud sports-car loving technophile American and it gives me great joy that the best sports car money can buy is produced by an American company that is paving the way to independence from dirty, foreign oil.

I've already committed to buying the 16th Model S (Tesla lets you get to keep your production slot in future models), and if another company makes a better electric car, I'll replace my Mini Cooper with that. Supporting American technology companies is one of the most patriotic things you can do--the technology industry is the reason our country has such a high-standard of living and why we can afford to spread the democracy virus around the globe.

You should be proud of Tesla and support them, as well, because if Tesla gets the *loan* (a loan, not a gift), you just might be driving an electric car built in the United States by American workers. That consumer purchase is a vote which, once cast, will help us shift our interactions with the Middle East back to condemning them for violating basic human rights instead of our dual-headed approach of insincere appeasement and inappropriate force. That approach hasn't been working out to well, has it?

Good luck rewriting the article--which you or another New York Times journalist will wind up doing in another two or three years, I'm sure.

ps - If you're ever in Santa Monica lets drive the Tesla down to the Promenade and you can see first hand what normal Americans think of the car--they love it.

* Fisking: The act of delivering criticism on a line-by-line basis established by conservative bloggers to check the British journalist Robert Fisk.

Comments

[jsarets]

I love electric cars.

It's almost impossible to imagine what life would be like today if the automotive industry had shunned hydrocarbon combustion and embraced electricity. But I imagine it would be a more peaceful society with brighter hopes for the future.

But we don't have the luxury of imagining what could have been. As the saying goes, if we can face it, we can fix it. We have to face the fact that we went in a different direction. We have to face the fact that our infrastructure is a dead end.

We've known this for quite a while. We certainly knew this wasn't going to end well for many decades, and deep down, we've all seen it in our daily lives (e.g. stuck in traffic). We've just chosen not to let that bother us. We chose not to face it.

And so we've already chosen not to fix it. We're never going to have hundreds of millions of electric vehicles stuck in traffic on an extensive network of highways as we have had during the petroleum era.

We hardly have enough oil to make that many new vehicles. To attempt it would be social suicide. The only "viability plan" that makes any long-term sense for the auto industry is to dramatically scale back production.

The automobile is done. Gasoline, electric, hydrogen, alcohol, vegetable oil, or otherwise, the automobile is done. Face it.

[William1950]

so what comes next, the transporter?

[BuckeyeGal]

Maybe giant conveyor belts.

[jsarets]

Localism.

For much of the history of human civilization, people would often live their entire lives without leaving their village. Most of the food, clothing, and construction materials were produced in and around the village by a largely self-sufficient workforce of skilled craftsmen. Trade was limited to raw materials and specialized products that could not feasibly be sourced locally.

Of course we've come a long way since then, and even without cheap, abundant hydrocarbon energy, we'll enjoy a substantially higher standard of living than our pre-industrial ancestors simply due to our intellectual advancement. Digital communication, for example, is particularly important because it adds so much value to our society for the amount of energy it requires.

After the immediate needs of food, clothing, and shelter are satisfied, what else do we need, in the context of the human condition, to have a joyous and fulfilling life? I submit that the ephemeral state we call happiness lies in fruitful pursuit of love and truth.

We don't need a whole lot of material stuff to be happy. We need each other. We need exchange thoughts and feelings with each other. We need to give and receive respect and affection. We need intimacy and understanding. We need creativity and wisdom.

None of that requires an excessive amount of energy. We all possess our own personal transporter -- our hearts and minds -- and when we mesh them together, there's really no limit to where we can go.

[Luigi53102]

Wow. To think that people are ragging on GM because they are tentatively pricing the Chevy Volt, scheduled for release two years from now, at $40,000. If they paid attention to Jason, they would know that $40,000 isn't too expensive, as it's only 2/3 of cheap! What a New York Times columnist might be able to pay for an automobile does not define affordability for the average American.

Electric car technology needs to be developed, and Tesla is one of the leaders at this time. The loan they seek is not a bail-out, but part of a targeted program for technological development. If we can afford to save the @sses of Wall Street criminals, we can probably afford a loan guarantee for someone doing something productive, not to mention ethical. To help this country kick the oil habit, a company like Tesla has to produce and sell reliable, practical vehicles for a lot less than $60K and a lot sooner than ten years.

We must not lose sight of the fact that electricity, as currently available, can be either a perfectly clean energy source, or a nasty polluting energy source, depending on what's generating it. Some electric car advocates act like they believe that a car with no exhaust pipe produces no pollution. Tell that to the millions of people living downwind of technologically obsolete coal-fired power plants.

[brassminnie]

"depending on what's generating it." This week in 'green science,' we added 'gently' flowing water to the renewable sources of power. (Cheap!) Coal can be used cleanly, but clean use is a scattered proof, not a common practice. Maybe what we need is battery-pa­ck-changin­g service stations; like turning in your propane tank for a full one. I'm for the loan. The Tesla business plan is and always was sensible.

[FarOutFish]

The supporters of the Big Three in Detroit should see this as the way out. Let the Dinosaurs die, new, more efficient, innovative companies like Tesla will emerge from the ashes and the nation will be better off. Let the market decide. No Bailouts for fools.

[pharmer]

I am not surprised that a high-capital, high-tech business like Tesla would seek a government loan rather than looking for increased private investment. Most business owners would prefer to grow the business through a low interest loan than through outside investment-- the outside investment would dilute existing inventor ownership stakes (in terms of both financial and corporate control). Many private tech companies (including high-tech and biotech) take advantage of government grant and loan programs to improve or commercialize their technologies-- the benefit from the government's perspective is the enhancement of US ingenuity and creation of US jobs.

[JoeBear55]

Well written, I was hoping someone would put that other article and writer in it's place. Thank you so much for the great article.

[lizardbrain]

Very well said, Mr. Calacanis.

Tesla is the embodiment of American ingenuity and should serve as the example for the big three to follow.

[MarkAWallace]

I'm usually one that enjoys to silently watch discussions without actually putting in the effort to contribute. However I'm noticing a common thread through a lot of comments that is influenced by a lack of understanding of the Commercial Paper market. Tesla can't borrow 400 million dollars right now, because no one can borrow 400 million dollars. The reason that the government is pumping money into the banks and markets right now is to desperately try to get the Commercial Paper market moving again. Frankly I like the fact the government is being so aggressive about lending. Now is the time to seize opportunities like this to help green companies thrive in the new market. If the US doesnt make a Tesla then you can bet that South Korea, China or Japan will. In the scheme of things this Tesla loan is absolutely a drop in the pond, and the potential return to all of us through ancillary returns in outstanding.

[davidrdesign]

The argument presented by Randall Stross is -at best - juvenile, moronic and almost unworthy of a response by Jason. It's only relevance is that it comes from the NYT so it'll be read by a lot of people and will be taken as fact in the same way that political TV ads are (remember Obama was a Muslim once!) . It's inconceivable to me that in this day there are people who can't get behind the notion of a product that has delivered not only inspiration but rather the real deal even if only accessible by a select few... tomorrow that will to change. Yes we can.

[FearlessFreep]

That's THE NEW YORK TIMES for you--always thinking inside the box!

[nudger]

Who we (taxpayers) support - a Tesla or a GM or a Ford - is really a way of asking a much bigger question: Do we concentrate on seeding thousands of startups, and hope for economic salvation in the form of a few wildly innovative winners? Or do we focus on improving our infrastructure by helping existing industries (not necessarily all the individual companies) make their operations and supply chains more reliable and energy efficient? Otherwise said, do we turn to entrepreneurs or system builders to help us make the huge step from a relatively simple, disconnected world to a very complex, highly connected one? Before you answer, remember it was the financial entrepreneurs (remember CDO's??) that we let loose to innovate our financial infrastructure, while the systems thinkers were relegated to powerless regulatory agencies and think tanks.
http://blog.vanno.com/index.php/2008/11/23/tesla-gm-and-a-national-cto/

[Nikiska]

Public funding for DARPA paid for the foundation of the technology that is enabling this discussion to occur so, in my humble opinion, funding for technology advances is a good use of public resources.

For the case at hand, I think the contentious issue is that Tesla is a private company. From my perspective it seems that much thought has been put into the difference between DARPA (to whom money is provided with no expectation of a return) and private companies that show the potential to develop beneficial technology (to whom money is provided with the expectation of a return). Of course resources are limited so there needs to be a vetting/qu­alificatio­n process to discern where investments should be made, but I, for one, think it's worth the effort.

Put another way, if Tesla failed as a company but the loan provided resources for research that eventually led to a cleaner vehicle, would it be worth it? I would say yes (with the understanding that not every investment would work out the way we'd hope).

[Cannibaljp]

The Tesla Motors company needs to be celebrated and looked at as a model of efficiency and effectiveness. The company stands at a crossroad, and they really have the chance to change the world.

Jason said so much, so well - And that shouldn't be a surprise, really... He's been passionate about this product for close to two years, and he's taken every chance that he can to champion the forward steps into the future.

I just want to add one thing - IF the (supposed) "Big Three" do get a bailout, it should be on the contingency that they license the technology from Tesla Motors. If they want to build a future for themselves - let them do it by building cars of the future.

[LSStone]

Brilliant, Jason!

[AMSRay]

I could not afford the $109K roadster or the 60K family sedan. But the loan program in question was designed to encourage and support alternative motor vehicles, and this is the best use for it at this time. Tesla is committed to producing electric cars and they are an American manufacturer. GM killed their electric car program and only got involved again with the Volt after gas prices started climbing again. The Big 3 American auto firms have had decades to do better and they have squandered the time they had. They deserve everything that is happening to them. Only new management can save them, not more money.

Color Televisions, Computers and even cell phones were once only for the very affluent. Now every teenager has them. Tesla is a the first step to making electric cars affordable for everyone.

[Downix]

My eyes are on the Tesla BlueStar project, a $20k-$30k sedan.

[jarober]

If Tesla has a viable business model, then they don't need government help - they should be able to raise capital like any other business. If they can't, then it's clear to me that they don't have a viable business model. Calacanis is supposed to be a savvy business guy; this isn't hard stuff.

[StellaDuBois]

Tesla is a horribly run company. They constantly miss performance and production goals and run through CEOs like water. They fired almost 90 engineers via blogpost. It will be a surprise if Tesla Motors survives another 12 months as a manufacturer.

http://www.autoblog.com/2008/10/15/breaking-layoffs-and-executive-shuffles-at-tesla-motors/

http://jalopnik.com/5064700/electric-car-maker-tesla-lays-off-most-of-metro-detroit-office-with-blog-post

and check out this problem - 22 percent of the energy consumed by [the Tesla Roadster] car happens while [the] car is parked!

http://teslafounders.wordpress.com/2008/10/12/wasting-energy-like-two-really-nice-refrigerators/

[Nikiska]

Billions of dollars a year is given out to private companies in the form of research grants and development loan guarantees every year (see: http://en.wikipedia.org/wiki/Research_funding). Why should Tesla not seek out this funding source as other companies have done?

[vpoptom]

I agree with Jason that we need to innovate and produce here, in America. And I'd certainly place a company like Tesla in front of GM, Ford and other [supposed] U.S. companies. But I, like many I'd imagine, am a bit concerned that if this is such a great thing, why they need a loan from the people of the U.S.. If this is truly revolutionary technology why do local investors not flock to it?

Having been a forced participant of many U.S. investments (as a taxpayer) it must be understandable to hear such questions. Really: If Tesla was so great, why would it need a loan from us? Wouldn't investors be busting down their doors?

I'm not saying it's wrong (yet). I'm just saying it doesn't pass the initial smell test. Still open to the idea but nowhere near convionced.

[hatchethead]

Thank you, Mr. Calacanis, for calling out Mr. Stross on his attempt to leverage popular sentiment to elevate his stature as a 'journalist' at the expense of the public good. At worst, this work of his appears to be sophistry. At best it appears to be bullshit as defined by the good Harry G. Frankfurt.