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Is Tesla a Good Bet for Taxpayer Dollars?

has defied skeptics by delivering an electric sports car many said would never see a showroom. But to develop a sedan with broader appeal and get a battery plant up and running, Tesla says, it needs $450 million in loans from the Obama Administration. That raises a thorny question: Are taxpayer dollars earmarked for green technology best gambled on small startups such as Tesla or big but troubled players including General Motors ( (GM)) and Ford ( (F))? Tesla deserves some credit. The Silicon Valley upstart has raised some $195 million in capital—albeit more than a third of it from Chairman and CEO Elon Musk—and has built the first car that runs on cutting-edge lithium ion batteries. Technologically, Tesla's Roadster is a winner. It travels 240 miles on a charge before it needs to plug in—more than twice as far as BMW's soon-to-debut Mini E. After initially losing $40,000 apiece on the sports car, Musk says he's now making money on each Roadster. Eager to build a sedan, Musk is pinning his hopes on the U.S. Energy Dept. The DOE is offering two kinds of credit lines: one for companies working on alternative energy projects and one for carmakers developing green vehicles. Automakers may apply for both kinds of credit, which they can access as a project hits key milestones. To qualify for DOE money, Musk needs to prove Tesla is viable. "We'll be profitable in five months," he says. He also needs to raise tens of millions of dollars in matching funds. Given the business environment, that won't be easy. In what some industry watchers deem an act of desperation, Musk aims to ask potential buyers of the new sedan to pay a big chunk of the $50,000 sticker price up front. Yet the car won't be ready until 2011, and that's only if the government gives him credit. Musk acknowledges that customers would be putting "their money at risk." Can Tesla Motors Scale? Policymakers will need to decide whether Tesla can survive in a cutthroat marketplace. Being small makes the company nimble but not necessarily scalable. Big parts makers typically won't even look at a car that doesn't sell in the tens of thousands. So Tesla has had trouble getting competitive rates from its suppliers. Mike Donoughe, Tesla's chief of product development, says his expanded supplier base could bring down costs. Even big automakers struggle to make money on cars that sell 20,000 units a year, and so far Tesla has sold 140 Roadsters. "There's a lot more risk for the government with an unknown quantity," says Michael Robinet, vice-president of auto consulting firm . "[Tesla lacks] the global sales of mass-market players." GM—battered as it is—has an advantage over Tesla. The auto giant plans to make up to 10,000 Chevrolet Volt electric cars. That mass-market volume helps GM push down battery costs. What's more, the Volt is built on the chassis of the Chevy Cruze compact. The Cruze should easily sell half a million units a year around the world, so GM can amortize its development costs. Plus, the Volt's high-tech guts will end up in several cars. "We can get scale much faster," says , GM's global engineering chief. Tesla got a boost on Jan. 13, when Germany's Daimler ( (DAI)) announced that it would buy Tesla's batteries and recharging system for its niche electric Smart car. That will help. But even if Musk gets federal aid, the rest of the industry could pass him by.
Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.

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