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Welfare-Case Companies: Tesla and Electric Car Makers


Before holding its high-profile IPO, the electric car maker received a jolt of government funding.

The 111th Congress is one of the most divisive and balky in history, battling tooth and nail on everything from health care to the stimulus to financial regulatory reform to (among the more radical) whether or not Supreme Court nominee Elena Kagan is a closet Muslim. That's why something must have been in the Capitol Hill water recently when our political leaders managed to relax their rabid bipartisanship and agree to reduce our dependence on foreign oil.

On July 21, the Senate Energy and Natural Resources Committee approved a bill that will commit $2 billion to bolster electric car infrastructure with a goal of making half of the vehicles on America's roads electric by 2030. The subsidies offered in the legislation are on top of billions Congress has already doled out to electric-car programs. Nissan and General Motors are among the welfare recipients preparing to release electric cars despite concerns the final product will lack a market.

From the Wall Street Journal:

"We have to acknowledge that there's a little bit of a 'Field of Dreams' here, that if we just build the technology that the consumer will buy them," said Gloria Bergquist of the Alliance of Automobile Manufacturers, a trade group whose members include the Detroit three auto makers and Toyota Motor Corp. (TM). "We hope that's so, but we also need to look at all parts of the equation."

Perhaps the least usual suspect receiving hundreds of millions in Energy Department monies for its upcoming battery-powered contributions is the luxury and unprofitable car maker Tesla Motors (TSLA). Tesla's crowning glory is its extravagant $109,000 Roadster electric sports car -- of which the company has sold less than 1,000.

Since its founding in 2003, Tesla has never posted an annual profit. Its CEO, eccentric entrepreneur and industrialist Elon Musk, who served as inspiration for Robert Downey Jr.'s character in Iron Man, sank his personal fortune (from the sale of his previous businesses Zip2 and PayPal) into creating Tesla. Musk conceded in a February 2010 divorce filing that he was broke and, in the first quarter of 2010, the company was reporting a net loss of $29.5 million. This apparently hasn't failed to inspire confidence in lawmakers hoping for a return on the American taxpayer's $465 million investment in Musk's firm.

The funds were awarded to Tesla to help the company build its all-electric sedan, the Model S. The base price of the Model S is $56,500 but, after taxpayers pay an additional $7,500 per car in tax credits, the actual price for consumers comes out to $49,000. Not exactly the people's sedan. The company is currently taking reservations with a $5,000 deposit.

But the release of the Model S is shrouded in doubt. Originally set to debut next year, Musk now says the Model S won't be on the road until 2012. Tesla designer Franz von Holzhausen admitted the car "is only about 90% there on the outside and about 40% there on the inside."

Still, hope does remain for the little electric-car company that could. Tesla's recent initial public offering (the first by an American automaker since Ford's (F) debut in 1956) allowed the company to raise $226.1 million, selling 13.3 million shares at $17 each. Toyota's recent $50 million investment in Tesla could also help get company on the road to success.

In March, the company announced that it had produced its 1,000th Roadster, the first car the company introduced to the market. Its base price was $109,000 though some states offered buyers time-limited tax credits, including California and Colorado.

One thing seems clear: Musk hasn't achieved this level of fame by taking baby steps. If not for the risks Musk has taken with his business ventures, Iron Man's Tony Stark may not have the courage to live by the motto: "Sometimes you gotta run before you can walk." Then again, Tony Stark wasn't running on the taxpayer's dime.
No positions in stocks mentioned.

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