Silicon Valley Watcher - Former FT journalist Tom Foremski reporting from the intersection of technology and media

State considering $20m subsidy to Tesla

Posted by Richard Koman - February 7, 2007

Far and away the hottest car in the world is a Tesla, which boasts Google's Larry Page and Sergey Brin as investors. The Tesla Roadster is an all-electric two-seater that does 0 to 60 in four seconds and delivers the equivalent of 135mpg. This baby goes for a cool hundred grand.

Tesla Motors is ready to dive into a more affordable part of the electric market - a four-door sedan that will sell for only $50,000. The company is considering locating the assembly plant for "Whitestar" project in California, New Mexico and Michigan.

To help Tesla choose California, Assemblyman Kevin DeLeon (D-Los Angeles) introduced a bill to fund a clean technology fund by adding $4 to the auto registration fee, which would produce $45 million in tax revenue. Politicians want to give $20 million of that to Tesla as an incentive to build in California, probably in Pittsburg.

That public investment comes on top of an investment by the state's big pension funds - CalPERS, CalSTRS and CalCEF - into venture capital firms. One of the funds that receives pension fund money is VantagePoint Venture Partners, and one of VantagePoint's investments is Tesla.

Mercury News reporter Vindu Goel complained in his blog about investing so much money in one company:

As promising as Tesla seems to be, it’s a lot of taxpayer money to give to one company–especially one that could raise the extra $20 million from VCs in, oh, about four seconds, if it wanted to.

A state clean technology fund is best used to fund research. Once a product becomes viable (and Tesla has already taken deposits on 270 cars to be built in England and delivered starting this fall), it’s time for the private investors to step in.

And at VentureBeat, Matt Marshall worries that the state is playing fast and loose with taxpayer dollars.

Ironically, while green companies are sprouting up everywhere as a result, the state is now considering having to pay them to stay in California, now that the companies are actually about to create jobs.

I talked to Daryl Siry, Tesla's VP of marketing, to straighten out what's going on here.

First, Siry said, taxpayers are not directly investing in Tesla through the pension funds. The funds, which invest retirement funds for public employees, are investing in VC firms like VantagePoint. "If CalSTRS is invested in VantagePoint, that's CALSTRS' business, and if VantagePoint is investing in Tesla, that's a good business investment for VantagePoint," Siry said. To say that the funds are investing in Tesla is like saying they invest in McDonalds, he said. They invest in many funds that are in turn invested in many, many businesses - all with the goal of maximizing returns for the pensioners.

Indeed, a VentureBeat commenter, Max, points out:

"CALPRERS and CALTRF are not taxpayer’s money. They are the property of pension owners like school teachers. We teachers trust venture capitalists like Vantage Point to invest our money in order to make our retirement funds grow. Many of the top-shelf VCs invest retirement fund monies."

Marshall points out that taxpayers could foot the bill if the pension managers make bad investment decisions. That's not the same as the funds being public money and it certainly doesn't give the state oversight power over VantagePoint's investments.

More important is the $20 million that Sacramento is thinking about raising. The total cost of the project will probably run to $100 million and create 300 jobs.

"Locating a plant is a very important decision where we have to take into account a number of factors: labor pool, labor costs, housing costs, logistics costs, since our supply chain exists around the world)," Siry explained. "We look a wide range of characteristics. If you look at any major capital expenditure, you will find the governments of most states want to bring those projects to their states ... and they provide incentives to the companies."

"It's not my job or anyone at Tesla's job to do the math for the people in Sacramento or Albequerque to figure out the cost-benefit analysis. Is it fair for taxpayers to fund this? That's a calculation made by the lawmakers."

At least some lawmakers think so, not just for the 300 jobs that would be created but for the long-term prospect of a major cleantech car company being based in California.

``If they want to grow to the scale they're talking about, the government will be very supportive of them,'' Assemblyman Mark DeSaulnier, D-Martinez, said. ``If we can put thousands of electric cars on the road, the government will want to support the subsidies.''

So what kind of scale are we talking about? Tesla has taken 325 preorders for the Roadster sportscar and has a goal of selling 1,000 cars in 2008, although Siry said he expects to sell more than that next year. The Whitestar project is a $50,000 five-seat, four-door sedan - still kinda a lot for any car, much less a family sedan. Is Tesla an elite car company or will they eventually get to a real middle-class price point?

"We would love to," he said. It's a question of creating enough scale to make mass production economically viable. "When cell phones came out they were a new technology and expensive. Today everyone has a cellphone. No one has developed to date an viable electric vehicle. "We've developled a unique technology around our drivetrain. In order to succeed in the long term, we need to start at the top and work down the pyramid. You need to start at a high price point and develop volume. Frankly the technology is expensive today. When we have the volume we'll be able to compete at lower prices."

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