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Electric Connection: Tesla, Daimler


Electric car startup Tesla Motors has a new partner: German giant Daimler (DAI). On May 19, at the fashionable Hay-Adams Hotel in Washington, Daimler announced it has taken a 10% stake, worth about $50 million, in the San Carlos (Calif.) auto pioneer.

The two companies had already been working together. Daimler was planning to build 1,000 all-electric versions of its small Smartcar using Tesla's battery technology. But Daimler wanted more than just a simple supplier-customer relationship, explains Dieter Zetsche, chairman of the board of management of Daimler and head of Mercedes-Benz Cars. "We are in a time of change," he says. "This industry is going through a kind of paradigm shift, and has to reinvent itself ultimately to be independent of petroleum and without CO2 emissions. We need fast technology change."

Making changes fast is hard for big companies. So more than just looking to Tesla for new technology, Daimler wants an infusion of entrepreneurial spirit. "We want to think out of the box," says Zetsche. "We want to go down new paths, and we believe the combination of such a young, very ingenious company and a very experienced, longtime successful company is a good one in order to find new approaches fast."

Selling New Shares to Daimler

The deal brings credibility as well as money to five-year-old Tesla, which has garnered headlines for both its speedy Roadster as well as for its recent stumbles. "It validates the effort Tesla has made in pushing the electric vehicle," says Jeff Schuster, executive director for forecasting for J.D. Power & Associates (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP)). "It certainly is a boost to that company to have a company like Daimler investing."

Indeed, Tesla CEO Elon Musk says Daimler's prestige and technology were major factors in the deal, which involves selling new shares to Daimler. "We actually could have gotten a higher price from another investor, but we would have done so without the strategic advantages," Musk says. "It gives everyone a higher confidence in our plan."

That confidence has been shaken a bit recently. The Roadster had cost overruns and delays, and the company has suffered through layoffs and the firing of its first CEO. Now, Tesla has a plan to offer a less expensive but still speedy electric sedan, the Model S, for $49,900. But Musk needs $400 million more to put the car into production. He hopes to get much of that from two federal Energy Dept. programs to support green technologies. But he hasn't snared the funding yet, and some auto experts and ex-Tesla employees doubt the company can pull it all off. "There are lot more steps to go before Tesla is a viable car company," says George Peterson, president of automotive consulting firm AutoPacific.

Tapping Daimler's Expertise

Musk hopes that the deal with Daimler will help put some of the doubts to rest. "It's important to recognize Daimler is very meticulous," he says. "A huge part of their commitment is due to the Model S. They've gone through the Model S development costs line by line."

As part of the deal, Daimler will help Tesla with the new car's engineering. "Tesla is interested in some components, some knowhow, and some technology to add to their vibrant, very energetic startup approach," says Zetsche. In particular, Musk anticipates tapping into Daimler's expertise in areas like noise and vibration reduction, plus safety and quality. "They are very interested in helping us. They see us an important test case for market acceptance of electric cars," says Musk.

Tesla launched the Model S on Mar. 26. It claims to have more than 1,000 reservations for the all-electric sedan, which can carry seven people and travel 300 miles on a single charge. Tesla is asking for $5,000 deposits (or $40,000 for a special collectors' edition). The car won't be delivered until late 2011 at the earliest. "If they can get that thing on the road, they'll have a winner on their hands," says AutoPacific's Peterson. "The challenge will be to make an aluminum body at that price."

Daimler Investing in Batteries

There are questions as well for the whole auto industry as to which technologies will win out as it tries to respond to the demand for more efficient cars. Daimler is expecting that diesel-powered cars will be a major component of its strategy for meeting President Obama's tough new fuel economy standards. The company is working on hybrid gas-electric vehicles as well. But electric vehicles offer the potential for the greatest reduction in emissions. That's why Daimler has already invested in German battery maker Li-Tec, and has founded a joint venture with Evonik Industries to make its own batteries.

Zetsche says that Tesla's battery approach was "the fast one," but that he expects Li-Tec's version of the same basic lithium-ion technology to be more efficient. In the long-term, he expects, Tesla might consider using the Li-Tec batteries as well.

So Teslas may pick up a bit of a German accent. But don't expect the cars to be sold at Mercedes dealerships anytime soon. "In major markets, I want to control that customer experience," says Musk.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. Carey is a senior correspondent for BusinessWeek in Washington.

Palmeri is a reporter for Bloomberg News and Bloomberg Businessweek in Los Angeles.
John_carey
Carey is a senior correspondent for BusinessWeek in Washington.

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