Against all odds Tesla is still in business — here's why (TSLA)

• The auto industry has a history of quickly eliminating competitive threats.

• Tesla still isn't perceived as a threat, although it's widely admired.

• Automakers remain happy to let Tesla take on all the electric-car risk.

Elon Musk is so charismatic and Tesla is so cool that it's easy to overlook how unlikely the automaker's success is.

After a brush with bankruptcy in 2008, the company has thrived, minting a $60-billion market capitalization (surpassing all three of the Detroit Big Three at one juncture) and becoming the carmaker that everyone is obsessed with.

How did this happen? There hasn't been a significant new American car company in decades. True, over the course of the 20th century, dozens of automakers rose and fell, started up and were swallowed whole. But since the 1980s, the US has been home to the Big Three and that's it. The rest of the US market is served by Japanese, German, South Korean, and Italian brands (and lately with Volvo, a Chinese-owned company).

It's popular to now argue that Tesla's success on Wall Street and it's captivating media tale means that Musk and his company will take over the world. The worst offender is Gene Munster, a former tech analyst who has moved into venture capital. With a straight face, he predicted that Tesla could control over 60 percent of the US market (a feat even General Motors at its pre-war peak couldn't manage).

Why is Tesla still around?

Tesla Model 3

If that threat is real, then why hasn't unprofitable Tesla, dependent on Wall Street for frequent capital raises, been run out of business by the rest of the auto industry? After all, there's precedence: throughout the 20th century, big auto used all of its power and political leverage to beat back or eliminate challenges.

The answer is simple: Tesla isn't seen as a threat.

And even though 500,000 advance orders for the Model 3 is astonishing, the traditional automakers still aren't impressed. They know that Tesla's Achilles' heel is production. Unmet demand in the hundreds of thousands isn't a boon, in this context — in a potentially ruinous burden.

This doesn't mean that Tesla won't become a threat. We're starting to hear a lot of chatter about how governments are going to mandate that half of all vehicles sold in ten or 20 years are electric. Tesla would benefit enormously from such a shift (but it would still have to build the cars).

And nobody in the industry wants to lose out on the immense branding and marketing opportunity that EVs represent. Electric-car concepts have become the new "dream cars" at worldwide auto shows. They lose nothing by showcasing these designs and gain plenty if they convince consumers to buy or lease an existing gas-powered or hybrid vehicle.

No good reason to get rid of Tesla

Chevrolet Bolt 2

It would be harder to put Tesla out of business than it might have been a few years ago. GM could have done it, as I once argued. But it still wouldn't be impossible.

There's no good reason to do it. For one thing, although Tesla and Musk have lots of critics — some of these with substantial short positions in the stock — the auto industry is largely Tesla-positive. Executives, knowing the industry's history, are impressed with what Tesla has pulled off, and have welcomed the competition because they know Tesla's success will force them to improve their own EV design and engineering.

For another, Tesla and Musk are happy to front-run all the risk.

The industry remembers well what happened to Ford. With the Model T in the early 20th century, Henry Ford created a mass auto market and sold millions of cars. But GM still knocked Ford off the number-one spot by offering more choice. After GM became number one, Ford never got back to the top of the mountain.

What's novel about Tesla isn't the cars — they look great and have innovative features, but anyone can duplicate the technology. It's the story. It's what investors are buying, given Tesla legacy of losing money. It's what customers are buying — the chance to join the future ahead of schedule, especially in Silicon Valley. It's what even the automotive indifferent are buying — Tesla is taking on global warming and helping us shed our dependence on fossil fuels.

Other people's money subsidizes the risk

Tesla Detroit sales vs market cap

Tesla risk of failing completely continues to be far higher than any traditional carmaker. With enough cash on hand to operate for a year, Tesla is farther from Chapter 11 than it was in 2008, but not that much farther. If a sales downturn arrives in the next two years (it's overdue), Tesla's business will suffer along with everyone else's. And if government end EV incentive and subsidies, Tesla's vehicles will instantly become more expensive.

It's useful for the auto industry to have a member that's willing to spend all its time on this knife edge. Tesla takes all the heat and absorbs all the risk. If it validates a market or a technology, the major players emulate it or duplicate it. And with electric cars making up only about 1% of global sales, it's cheap to follow Tesla because there aren't that many truly profitable sales to be had.

The risk itself is essentially free. A GM, Ford, VW, or Toyota doesn't have to spend a dime to have Tesla do all the heavy lifting. Tesla investors provide all the capital, funding a risk-innovation lab of sorts in Palo Alto, Tesla's HQ, and big carmakers get all the benefits. Governments/taxpayers further sweeten the post by supporting the EV market.

It's a perfect scenario. And Tesla has perfected its role in it. The auto industry would be crazy to get rid one of the best things that's ever happened to the business.

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