When Tesla partnered with the major automakers: coopetition with Toyota and Daimler [Book Excerpt]

Posted on December 10, 2017 by Charles Morris

A favorite trope of Tesla skeptics is the idea that, sooner or later, the legacy automakers will get serious about electric vehicles, and use their economies of scale and marketing clout to bury the Silicon Valley upstart. The media has run away with this story - every new plug-in vehicle is now labelled a “Tesla-killer,” and every announcement by an automaker that has anything to do with electric (or autonomous) cars is described as a move to compete with Tesla. 

 

Above: Elon Musk with the Tesla-powered Toyota RAV4 EV at the LA Auto Show in 2010 (Image: Detroit Bureau)

Of course, Elon Musk and his merry men see things in a very different light - Elon has said many times that he welcomes competition from other automakers, and that Tesla’s raison d’etre is to electrify the entire auto industry.

Many of the “Tesla is doomed” pundits might be surprised to learn that Tesla’s founders expected from the first that the major automakers would quickly move into the EV space once the Roadster showed them what was possible. In fact, when they founded the company in 2003, the team imagined that Tesla might become a supplier of electric powertrains to the majors, and this scenario did come true for a time.

Marc Tarpenning told me the story when I interviewed him for my book, Tesla Motors: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries, which I have recently revised and updated. The following is adapted from the book.

Tarpenning and his partner Martin Eberhard developed a business plan that was based on building an electric powertrain with help from a company called AC Propulsion, and outsourcing most of the rest of the vehicle. They then started making the rounds of venture capitalists and other investors to raise money, a game at which the two Silicon Valley entrepreneurs were already old hands.

Above: Recently revised and updated book, Tesla: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries, edition 3.0 (Source: Charles Morris)

“One of the questions we were asked in our pitches was, ‘What’s your competitive advantage? How could you possibly think that you could have a competitive advantage against GM?’” Tarpenning told me. “Remember that the auto companies had all said that there was no future in electric cars and they had no interest in it [just a few months earlier, GM had callously crushed all of its EV1 electric cars]. It wasn’t like we were out there doing battle with Ford on a daily basis because they weren’t in the game. They had specifically said they were never going to be in the game. And that was one of the things that we would pitch in our business plan. We have some number of years where we have the field to ourselves, and when we show the world that [we can] make compelling cars, the big guys are going to care, and we will have been years ahead of them at that point.”

“Now, we believed (quite naively), that once the Roadster was out and people saw that you could make a compelling electric car, all the car companies would jump on this idea and they would all spend a ton of money with R&D teams,” Tarpenning continued. “And we would have more experience and more electrically driven miles than anyone on the planet at that point, so even if the stand-alone company becomes questionable, it’s okay because there’ll be ten car companies around the planet that will want us, the whole world will be wanting to build these cars and we’ll be the world’s experts on the drivetrain, which is the only thing that they don’t have. And of course what has shocked me is that the big car companies are still screwing around with nothing. They are still lamely trying to figure out what to do.”

Tarpenning told me that in 2013. Today, 11 years after Tesla unveiled the Roadster, we’re still waiting for the auto giants to offer any serious competition to the Californians. With the exception of GM, which has begun to show intriguing signs of a new direction, the major OEMs continue to announce big plans for new EVs far in the future, while diligently working behind the scenes to eliminate the government incentives that more or less forced them to produce EVs in the first place.

However, there was a time when at least two of the majors saw Tesla not as a competitor, but as a partner in developing their own EVs.

 

Above: Elon Musk pictured with Daimler executives with the Tesla Roadster and all-electric Smart car (Image: Tesla Updates)

In 2007, Elon Musk met with Daimler to discuss a deal under which Tesla would provide battery packs and charging electronics for an electric version of the smart fortwo (originally invented by Nicolas Hayek, the mastermind of the Swatch). However, his presentation failed to convince the pragmatic Germans, so the California cowboys decided to retrofit a smart car with Tesla’s electric powertrain, and to present it to the Daimler execs as a surprise.

This turned out to be quite a project. The first snag was that the smart wasn’t even available in the US at the time. After a bit of research, JB Straubel learned that it was sold in Mexico, and found one for sale at a dealership in Tijuana. He pressed a Spanish-speaking friend into service, and told the finance department to get him $20,000 in cash in a bag. Whatever the bean counters thought about such a shady scenario, they got the money, the dude made a run for the border, and he returned a couple of days later with a brand-new smart.

It was not going to be easy to fit Tesla’s battery, motor, power electronics and charger into the tiny smart, and they had only six weeks to do it. “We didn’t have much time at all...we prepared for battle, and set up a war room in the shop,” said Straubel. His engineering team worked 24/7, sometimes grabbing naps on the factory floor. They finally got the job done at one o’clock one morning, and Straubel hopped in for a test drive. When he punched the pedal, the little hot-rod smart popped a wheelie and peeled out of the parking lot.

The Daimler executives showed up at Tesla headquarters in January 2008 with a skeptical attitude, expecting to see another unconvincing PowerPoint presentation. “We’ve actually got something to show you,” Musk said, and led them to the garage, where they saw a smart car that appeared exactly like any other. One of Daimler’s VPs got behind the wheel and zipped out into the street. Fifteen minutes later, he was back, the skeptical look on his face replaced by a big smile. Shortly thereafter, Daimler signed a $70-million contract for Tesla to supply batteries for what became the smart electric drive (this swashbuckling story was originally reported by Wired in 2010).

 

Above: Daimler's Mercedes B-Class and Smart electric cars powered by Tesla (Image: Charged)

Daimler acquired a 10% equity stake in Tesla for a reported $50 million, a deal that was a lifesaver for the cash-strapped startup. A few years later, Tesla also provided the electric drivetrain for the Mercedes B-Class Electric Drive, a compliance car that Daimler sold in low volume and discontinued in 2017. However, as Tesla grew, Daimler apparently began to see it as a competitor, and quietly ended its cooperation. Daimler sold its ownership stake in Tesla in 2014 (at a reported profit of $780 million).  By 2016, Daimler had developed its own battery technology, and terminated all ties with Tesla.

In 2010, Tesla and Toyota made a pact similar to the earlier Daimler deal. After taking a Roadster for a spin around Silicon Valley, Toyota President Akio Toyoda (himself an experienced racing driver) said, “I felt the wind, the wind of the future.”

Tesla agreed to provide the Japanese automaker with battery packs for its upcoming RAV4 EV, and Toyota purchased a 10% chunk of the California company. However, like Daimler, Toyota eventually lost interest - it discontinued the RAV4 EV in 2014, and sold its stake in Tesla in 2017.

Tesla learned a lot of valuable lessons from its giant partner. “Toyota’s been quite helpful as we ramp up production in terms of operations and supplier quality issues,” said JB Straubel. “They’re among the best companies in the world in running a large-scale manufacturing enterprise. They have it down to a science and know what the pitfalls are. They’ve helped us with many different parts of that.”

 

Above: A look at the Toyota RAV4 EV (Image: Car and Driver)

The Japanese giant also bestowed a princely gift on the California startup. Toyota owned a defunct auto manufacturing plant that happened to be located in the heart of Silicon Valley, and it sold it to Tesla for a song. The New United Motor Manufacturing, Inc. (NUMMI) facility in Fremont, California, was the site of a GM/Toyota joint venture that was established in 1984. The plant produced eight million cars and trucks over its lifetime but, in 2009, bankrupt GM pulled out of the joint venture, and the plant closed down. As part of their deal, Toyota sold it to Tesla for a reported $42 million (one source had valued the plant at $1 billion).

The coopetition arrangements between Tesla and its elders didn’t last long, but they ended up delivering huge benefits to all parties. Tesla got some much-needed funding, expertise in large-scale manufacturing, and a beautiful new home. Daimler and Toyota gained some insights into electric powertrain tech (to say nothing of some hipster cred), and each realized a fat profit on their TSLA stock.

Elon Musk later commented on the relationships in an interview with the German magazine Handelsblatt: “The problem that we found with programs we did with Toyota and with Daimler was that they ended up being too small. They basically just calculated the amount they needed to keep the regulators happy and made the program as small as possible. We don’t want to do programs like that. We want to do programs that are going to change the world.”

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Written by: Charles Morris; Book Excerpt: Tesla: How Elon Musk and Company Made Electric Cars Cool, and Remade the Automotive and Energy Industries

Posted in Electric Vehicles, Elon Musk, Mercedes, Tesla, tesla news, tesla roadster, Toyota, TSLA


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