Toyota: Tesla's Savior

Toyota Motor (NYSE: TM), a company in the midst of saving its own image and financial health, will extend a lifeline to a small and struggling car company–Tesla NASDAQ: TSLA), which recently went public.

The Tesla IPO got off to a promising state, rising to $30.24 in the early days of trading. It has dropped close to half since then to about $17. It has occurred to investors that the company’s electric  cars are expensive to build, hold a tiny niche market at best, and lack a dealer network or quality track record that helps sell cars in any volume.Tesla’s lifeline may be to develop new electric versions of Toyota cars. Reuters reports that the two companies have signed a letter of understanding to cover joint development of two or three new vehicles for the world’s largest car company. On July 10, Tesla stated “Toyota will receive two prototypes this month.” The didn’t elaborate further on what this entails. Tesla saidwithout elaborating. While Toyota also aims to test an electric Corolla, the RAV4 and RX are better suited to the weight of Tesla’s battery pack.”

Tesla is probably not a viable standalone company because of its size and losses. It would, however, be a near-perfect partner to much bigger car companies that do not want to lag behind their competitors in the race to launch commercially viable electric cars. The industry has hailed the technology as a worthy successor to current hybrid models that run on a combination of electricity, gasoline, and in some cases ethanol. Despite their successes as “green” products, they still need some fossil fuels to operate.

The notion that electric cars have a bright future may be completely wrong. No one knows how much the vehicles will tax the electric grid as tens of thousands of people hook up their engines to be refueled. No one knows how people will react if they cannot drive their cars hundreds of miles without a break. There is certainly no large network of “gas stations” for electric cars which makes them less convenient than the rare diesel cars that are on the highways.

Tesla may make money from a Toyota joint venture, but a broad market for electric cars may be a dream that is unattainable.

Douglas A. McIntyre