Tesla (TSLA) Is In A Race To Avoid Getting Crowded Out In A Segment It Currently Dominates

Is Tesla an eye-popping doozy or a modern day Duesenberg?

There are some correlations between the Des Moines, Iowa-based automaker from the early years of the 20th century and the luxury electric car of the early years of the 21st century. Tesla makes a beautiful, innovative and pricey luxury sedan. Duesenberg (from where the idiom “it’s a doozy” originates) made a beautiful, innovative, pricey luxury sedan.

Duesenberg Automobile & Motors Company, Inc. made the first American passenger vehicle with hydraulic brakes and a straight-8 engine, whose elongated, smoother-running configuration led to an era of long and elegant luxury cars. Tesla has made the first mass-produced electric car battery that breaks the 200-mile range and packaged it in what is widely viewed as a beautiful driving machine.

Despite winning accolades for three victories at the Indianapolis 500, Duesenberg went out of business after 24 years, in 1937, in large part because the car was just too expensive -- the Great Depression didn't help create more rich people who could afford it, either. Simply put, there wasn’t enough demand for Duesenberg cars, of which only a few hundred of four models were ever made. At the time, a boring old Ford Model T, which was being produced at a rate of about 2 million every year in the 20s, cost less than $300, or about $5,100 in today's dollars. According to "American Horsepower: 100 Years of Great Car Engines," by Mike Mueller, the Duesenberg was priced above $6,000 in the 20s. In today's dollars that's $102,000, or about the same price as a Tesla Model S if you buy it with the best battery and numerous options.

What Duesenberg's story proves is that in a capital-intensive industry such as automobiles, a great car doesn't secured a win. And the competition doesn't sit idle and watch a great product succeed; it learns, adapts and innovates to build a better car, or at least an adequate car accessible to a wider pool of consumers.

Which is what General Motors (NYSE:GM) and other mass producers are trying to do right now.

On Monday, Doug Parks, GM’s vice president of global products, told a group of journalists touring the company’s car battery laboratory and testing facility in Warren, Mich., that North America’s largest car company has the technology now to build an electric car that matches the 200-plus-mile range of Tesla’s Model S, and that it’s working on the technology and scale to get the price down to $30,000.

“If General Motors can meet the price and performance target of a $30,000 electric car with a 200-mile range, it could be the first real mainstream, volume-selling electric car,” said Karl Brauer, senior analyst at Kelley Blue Book. “The success of Tesla suggests that while a 100-mile driving range is insufficient, a 200-mile range can satisfy the needs of most consumers. Everybody agrees the technology and cost structure will eventually make such a car possible. If GM can be the first to offer it, it will enhance both their market share and their image.”

Tesla Motors Inc. (NASDAQ:TSLA) currently has one car, the Model S, which starts at $70,000 without the pricey add-ons that can send the car into six-figure territory. Its efforts to lure customers to this hefty price tag got the company slapped on Monday with accusations from California car dealers that it’s inflating claims in its advertising.

Meanwhile other car manufacturers, including Nissan Motor Co. (TYO:7201), which leads the world in electric car sales with its LEAF, and GM are working hard to boost range (the distance an electric car can travel on one charge before it stalls) while offering that below-$40,000 price tag that would make the first mainstream electric vehicle. Last week Germany’s Volkswagen AG (FRA:VOW3) announced its intention to become the world’s top electric-car seller by 2018.

Right now Tesla is a leader in the luxury electric car segment precisely because it has also been unable to develop a more affordable battery system. In other words, just as Duesenberg had to charge over $6,000 for a boutique car to deliver the desired performance at the time, Tesla is a luxury carmaker because the technology and scale prevents a cheaper, longer-range electric car from getting to the market.

The Model E, also known as the “Gen 3,” Tesla’s touted cheaper electric sedan, is not expected to be available for another two years. This gives auto giant GM time to develop, for example, an all-electric Chevy Volt.

Meanwhile, currently exhibiting at the Frankfurt auto show are a number of electric and electric hybrids with better all-electric ranges. While they aren’t hitting Tesla’s sweet spot of over 200 miles, these ranges will be getting longer in the coming years. The new i3 5-door hatchback by Bayerische Motoren Werke AG (FRA:BMW), the world’s top luxury carmaker, boasts a maximum range of 118 miles, which is just adequate for drivers in densely populated urban environments.

For its part Tesla successfully patented in July an extended range hybrid battery pack system that it claims will increase range by about 40 percent and boost battery life by 30 percent. On Monday, Global Equities analyst Trip Chowdhry estimated that this new technology could be in Tesla cars by 2015.

What we’re seeing here is a race between Tesla and its competitors to make electric vehicles mainstream. But like all auto company startups of the past century, Tesla is facing incredible odds. Ford was able to help drive Duesenberg into insolvency by simply being able to sell a lot of cars at a significantly lower price, even if they weren’t as pretty and didn‘t perform as well.

Duesenberg lasted 24 years building beautiful, well-performing cars. Tesla’s ability to be around on its 24^th birthday in 2027 will depend largely on it ability to avoid making similar mistakes, such as relying solely on deep-pocketed enthusiasts rather than the mainstream buyer.