Why Tesla's Elon Musk is begging other carmakers to go electric

Companies that break ground with new technology usually protect their competitive edge as long as possible. Yet electric-car maker Tesla (TSLA) is practically begging other automakers to go electric and even offering its technology free of charge.

Tesla CEO Elon Musk reiterated his plea at this week’s Detroit auto show. “Invest in electric vehicles," he urged his fellow automotive CEOs. "You won't regret it." Musk’s hour-long speech and Q&A session was one of the auto show’s top draws this year, yet in a way it backfired for Tesla.

Musk declined to report December sales numbers, as he did last year around this time, generating speculation that the numbers must be weak. He also said Tesla won’t be fully profitable until 2020, several years later than some analysts had been expecting. The company’s stock fell by more than 6% following Musk’s remarks.

Tesla’s shareholders typically believe Musk when he insists that electrification is the future of the automobile industry. But most other experts aren’t convinced. All the big automakers are experimenting with electric vehicles, but they’re also testing cars powered by hydrogen and other alternative fuels, while perfecting the internal-combustion engine that’s been around for well over a century. Electrics such as the Tesla Model S account for less than 0.5% of the market today, and forecasting firm IHS Automotive predicts EV market share will be just 1.8% in 2020. If oil and gas prices stay low, there will be even less reason for consumers to buy EVs, and automakers to build them.

That tiny market penetration helps explain why Musk wants to see more electrics on the road, even if they don't bear the Tesla badge. “He needs volumes to increase, he needs more research and development and I don’t think he can do it alone,” says analyst Dave Sullivan of consulting firm AutoPacific.

The slow evolution of battery technology

One big problem for electrics is that battery technology — unlike semiconductors, which have seen enormous gains in processing power and a corresponding plunge in costs — is evolving slowly, with no huge breakthroughs on the horizon. Putting enough juice in a battery to power a car remains so expensive that the segment still depends on a $7,500 federal tax credit per vehicle. Even then, it’s difficult for automakers to turn a profit on electrics. Most technology becomes more cost-efficient as production ramps up, but it’s still not clear if batteries will ever become cost-competitive with other forms of fuel, absent subsidies.

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