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How Tesla Pulled Ahead of the Electric-Car Pack

TSLA -3.85% has had a very good year. First came an announcement that the California-based maker of electric cars had, in the first quarter of 2013, turned a profit for the first time. Then came news that the Tesla Model S sedan had earned Consumer Reports’ highest rating. With a base price of $62,400 (after a $7,500 federal tax credit) the Model S even outsold similarly priced luxury BMW BMW.XE -4.83% and Mercedes models in the first quarter.

Tesla has come on so strong that auto dealerships across the country, threatened by the electric-car company’s model of selling directly to customers, have mounted a legal and political campaign to force Tesla to change course. The company’s market capitalization is now more than $11 billion, nearly triple where it stood two months ago, and roughly a quarter of General Motors’ GM -3.27% $44.8 billion market cap.

Yet despite all the excitement, Tesla is not yet in an open lane to success. Tesla has been able to do well so far in substantial part because it is a small and focused company. It isn’t saddled with outsize legacy costs like the Big Three auto makers are. Another reason for Tesla’s success is founder and CEO Elon Musk’s skill at partnering with other companies and developing new technology for them. Toyota and Daimler AG, DAI.XE -4.58% for instance, teamed up with Tesla to help develop batteries for their electric cars, and both invested in Tesla.

Enlarge Image
Associated Press

In this May 2, 2013 photo, a Tesla car is shown outside of Tesla motors in Fremont, Calif.

For a company of Tesla’s size (under 3,000 employees), delivery of roughly 4,750 Model S sedans in the first quarter of this year was an impressive feat, the sort of accomplishment that attracts the resources and management attention that are necessary for a new product to thrive. It would be much tougher for a fledgling electric vehicle with that level of sales to attract the same attention at an established auto maker, like Ford or Honda, that sells millions of vehicles every year.

But Tesla’s small size also presents big challenges. A major safety incident or large-scale recall could present formidable challenges, both financially and logistically.


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