Encore: Tesla vs Detroit | Motor City Fights Back | 3

0:00This series originally aired in 2022.

0:14May 2013. It's just after midnight in Detroit. I have to admit, this is one hell of a car. General Motors Chief Executive Dan Ackerson is on a covert mission under the cover of darkness. He doesn't want anyone to see what he's doing on the cold, deserted streets of the Motor City. He's driving a Tesla. GM Vice Chairman Steve Gursky is riding shotgun. The car hits 100 miles per hour with a whisper, like it's barely trying. Good Lord, this thing pushes you back in your seat. I do miss the roar of the engine, though. That's weird. Both men are obsessed with the Model S, from mechanics to marketing.

1:04Gursky looks at the large computer screen embedded in the elegant dashboard. This is one hell of a car. No wonder people are going nuts over this. It's like a hot date. Yeah, I drive a Volt and it's a good car, but this thing's so sweet. I feel like I'm being unfaithful. Ackerson smiles as the car smoothly rounds a curve in the road at a fast clip. He's a focused, analytical man with an engineering degree from the Naval Academy. He's worked in telecom and knows about fast-paced technology. He's become increasingly frustrated with a lack of fresh thinking in research and development at GM. Ackerson pulls the car to a stop in his driveway.

1:50Both men get out to examine the EV. Ackerson points at the back seat. Look at the back seat, Steve. What do you see? Room and plenty of it. Exactly. Just like the Volt had when we were placing the battery pack under the frame. Now Tesla does the same thing. For some damn reason, we've moved the battery between the seats. Now the interior's cramped as hell. Why aren't we using our own innovations? Good question. And the range for the Model S is up there with the volts, even when the volt has maxed out the electric and it's running on gas. Well, Dan, what's your play? I think we get a crack team to dissect what Tesla's doing.

2:36Every aspect. You know, a young crew of engineers, planners, salespeople. GM needs to catch up with Tesla before it's too damn late. The two men shake their heads and head their separate ways. Ackerson gets back into the Model S, grips the steering wheel harder, and guns the car into the night without a sound.

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4:46From Wondery, I'm David Brown, and this is Business Wars.

5:14In our last episode, Tesla grew from a Silicon Valley boutique shop to a potential threat to Detroit. EVs still make up a small percentage of cars sold, but the trend line tells the story. Tesla's market value is way up, around$20 billion. That's over 400 % from last year. GM is up by 25%. At this rate, Tesla could wipe the floor with GM in a decade. And other major automakers, Ford, Toyota, Nissan, Honda, and Chevy, are taking notes. No one wants to be bringing up the rear. The battle to dominate the EV market is on. After near-devastating financial and production issues, Tesla is finally churning out hundreds of its Model S cars every week from its newly acquired 5-acre factory.

6:13The facility is on par with any plant in Detroit. But despite the trappings of success, Tesla has serious problems to solve, like how to get cars to the people who want to buy them. And that's something that the traditional automakers with their vast network of dealerships does very, very well. And it will do everything it can to keep that advantage to overtake Tesla in the EV market. This is Episode 3, Motor City Fights Back.

6:53It's May 2013 at the Tesla offices in Palo Alto, California. Mr. Walters, come in. Elon Musk telegraphs disinterest the second he extends his hand to 70-year-old Bill Walters. He's chairman of the Texas Automobile Dealers Association, representing 1 ,400 dealers throughout the state. Walters is a gracious Texan, a veteran lobbyist who's seen his share of battles. Mr. Musk, well, I'm here to say we want to work with you in Texas. You can do things just as you like, as long as it's legal. You need dealerships. Tesla sells direct using high-tech interactive showrooms. Customers order their cars online, making dealers irrelevant.

7:40When Tesla arrived on the scene in 2009, Detroit's thousands of franchise dealers laughed. The tiny company posed no threat. Now, that's changed. Tesla has temporarily sidestepped Texas' anti-direct sales law and plans to do the same in other states. And now here's Walters wanting to talk about dealerships. Musk shakes his head at Walters dismissively. Sorry, but that's not going to work for us. Excuse me? No one wants to buy from a price-gouging dealer. It's a terrible experience. We're eliminating that. I beg to differ, Mr. Musk. We had almost three million dealer sales in Texas last year. Now, listen, I'm unaware...

8:29I'm going to spend a f***ing billion dollars to beat the U.S. franchise laws. That includes Texas. Walters is shocked. The safety of everyone in Texas depends on the quality control of a dealership network. That's 28 million people. Now this is a system that works. As Walters waits uncomfortably for a response, Musk doesn't even bother to reply. He pulls out his phone and starts texting. Finally, Walters speaks. So, this is all just about you then. Now it's Musk's turn to be shocked. Few people get in his face like this. Musk stomps out of the room, shouting to an assistant. Hey, get this guy the f*** out of here.

9:20Musk can walk out on a meeting, but Tesla is headed for legal confrontations that are more difficult to dodge. Independent franchise dealers around the country are fighting back. North Carolina is vetting a bill to ban Tesla's online sales. Dealers in New York and Massachusetts are threatening to do the same. Virginia won't allow Tesla to open stores, period. And if you can't sell your cars, well, you've got a serious problem.

9:55It's July 2013. GM's Detroit corporate headquarters. Listen up, people. We're chasing Tesla here, and we've got a job ahead of us. They're already proving to be a big disruptor. Dan Ackerson stands before the cream of the crop of General Motors' young talent. The task force he's assembled to dissect Tesla includes everybody from engineers to managers to salespeople. A manager speaks up. Tesla's definitely pushing the envelope with a Model S, but is it actually a threat to GM? I mean, it's still essentially a niche company, right? The Model S costs around$100 ,000. Now that's a car for rich green tech lovers.

10:40Is Joe Sixpack going to buy that? Akerson stares at the manager. I don't want to make the mistakes GM made by underestimating Toyota and Honda. They came up with efficient cars that caught on while we looked the other way. Now guess what? Toyota's the biggest carmaker in the world. That used to be us. Well, what about safety? Those lithium-ion batteries are highly susceptible to fire, and that 17-inch computer touchscreen mounted there in the dash, that's just an accident waiting to happen. It's like driving around with a laptop. Tesla's screen is not only a web browser. It controls every element of the car, from media to energy consumption to navigation.

11:23It's pure Silicon Valley technology. And think about this. Tesla says their next model in 2016 will have a driving range of well over 200 miles on a single charge. And it'll sell for under$35 ,000. The room is silent. The thread is clear. So, I'm asking you, is that even possible? I don't see how. It's way too costly to build an EV with those capabilities. But that's exactly what we need to do. Create an EV with a 200-mile range for around$30 ,000. We make that, and we can kill Tesla. Ackerson pauses and scans the room. We're going to do this. GM is budgeting$7 billion for research and development this year.

12:17Let's get our money's worth.

12:24It's November 2013 in Washington, D.C. Oh, s***, dude. That's a brand new car. Oh, that's a Tesla, dude. Oh, s***. Deep within the National Highway Traffic Safety Administration offices, two officials are examining cell phone footage of a Model S in flames on a highway outside of Seattle. That thing is really blazing. Oh yeah, the firemen are having a tough time with it. Those lithium-ion batteries are flammable as hell. Well, apparently it ran over some kind of metal debris and the battery pack exploded. Same as the ones in Tennessee and Mexico. Tesla's worst nightmare has come true. And it's going viral.

13:10The company thought it had eliminated the fire danger of the thousands of batteries packed into a Model S. They were wrong. It's lucky no one was hurt in any of these incidents. We need to conduct a formal investigation before that happens. Well, Elon Musk has already tweeted about all that. He's inviting us to examine the cars. Like we need his invitation. Who's this guy think he is? Since the first fire in October, Musk is deep into damage control mode, strongly defending his cars on social media. In his blog, he writes that There have been over 400 deaths and 1 ,200 serious injuries in the United States alone due to gasoline car fires compared to zero deaths and zero injuries due to Tesla fires.

13:57You think it could beat effective batteries? Too soon to tell. The Model S, meanwhile, is getting hugely positive reviews, including an excellent crash rating from the NHTSA itself. But the one-two punch of the viral fire video and the announcement of the NHTSA probe hits Tesla hard. Tesla's stocks plummet by 6%. During crash tests two years ago, the Chevy Volt had a similar situation. Though the NHTSA ultimately stated the hybrid was safe as any gas car, sales took a nosedive. The main selling point of the Model S has been its high-tech, problem-free design. With that reputation in question, Tesla faces a dilemma that could sink the Model S.

14:49Tesla engineers quickly dive into making the Model S work. The car rides lower than most vehicles, so road debris could impact the motors underneath the car. The solution isn't cheap, but it is relatively simple. Raise the body and add a titanium shield underneath the car to further protect the thousands of lithium-ion batteries. It works. Tesla sales stay steady and roadside fires disappear. The NHTSA closes its investigation. Musk tweets to his ever-growing army of followers that the Model S is the safest car in America. At the end of 2013, Tesla is on track to sell 23 ,000 Model S sedans. That's 20 ,000 more than Musk had promised.

15:44But he wants to increase that to half a million in a single year. The company has weathered scrutiny from the National Highway Traffic Safety Administration, but the litigious specter of the franchise dealerships isn't going away. Especially Tesla's test case enemy, Bill Walters and the Texas Automobile Dealers Association. Backed by a team of eight lobbyists, Musk travels to the state capitol in Austin. But Walters' team far outnumbers Tesla's. Worse yet, the Dealers Association has donated about$2.5 million to politicians during the 2012 elections. That buys a lot of goodwill. Musk announces plans to come back fighting in 2015, but right now, he's facing a battle that could cripple Model S production and plans for the third-generation EV.

16:44As Tesla loses speed, Detroit takes the lead. It's a war over the silent, beating heart of the electric machine, the batteries, and that provides just the kind of opening Detroit is looking to exploit.

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19:11It's December 2013 at Tesla headquarters in Palo Alto, California. Hello, gentlemen. Elon Musk walks into the meeting room smiling. He's anticipating good news about battery prices. A handful of executives from Panasonic have come in from Japan. The company has been Tesla's battery supplier since 2006. Hello, Elon. I guess we don't need to ask how you're doing. The Model S is enjoying tremendous success. Congratulations. Damn right. It's been good for us and good for Panasonic, I think. Two years ago, Panasonic was undercut by cheaper Chinese competitors and lost billions on flat-screen televisions and mobile phones.

19:57It's been rough. We've laid off over 10 ,000 workers, but we're restructuring our focus toward battery production, which is why renewing and growing our partnership with Tesla makes so much sense. All good. We'll sell 50 ,000 a year and the same for the Model X in 2015. And there's going to be huge demand for the Model 3 when it debuts in 2017. I'm looking at half a million a year. As usual, Musk is dreaming big. But if interest and demand keep rising, he may not be far off. It all hinges on having millions of lithium-ion batteries on hand to keep assembly lines moving around the clock. Without the cells, Tesla can't compete with Detroit.

20:47Musk looks at the Panasonic reps and waits for the good news. No doubt they'll offer a price cut to reflect this huge increase in orders. This is an exciting growth period, Elon. Panasonic will be happy to accommodate Tesla's needs. I'm sure we can work out the price increase. Excuse me, price increase? Musk is so shocked, he's not even yelling. That's right. Is there a problem? Musk smiles. A problem? No, nothing we can't deal with. Thanks for your time, gentlemen.

21:23The minute the Panasonic executives leave, Musk turns to his manager. He's strangely calm. Okay, here's the plan. We're building our own battery factory. The manager just stares at him and musters up a nod. It's a daunting, maybe even crazy idea, but that's the way Musk operates. Making lithium-ion cells is not easy, and building a factory for such a task is not cheap. To create millions of batteries, Tesla engineers estimate they'll need a structure more than four times the size of Disneyland. It will be populated by some 6 ,500 workers, and it will cost around$5 billion. But the benefits are enormous.

22:17Making batteries under its own roof will bring down costs on shipping alone. Tesla can finally mass produce an affordable EV for under$35 ,000. If they can pull it off, Tesla could compete as a major automaker, and the move would allow EVs to climb out of a niche market that no company, big or small, from Tesla to Nissan to Chevy, has been able to do. The only problem is the$5 billion price tag. Tesla has roughly$800 million to spend. But Panasonic isn't going away. Yoshi Yamada is a veteran Panasonic vice president with a keen knowledge of Western business practices. When word of Musk's plans reaches him, he steps in to calm things down and maintain relations.

23:16He reaches out to Tesla asking what he can do. He's going to get an answer.

23:27It's January 2014 in Palo Alto, California. Elon Musk and Tesla's chief technical officer, co-founder J.B. Straubel, are taking a drive to clear their heads. J.B., where are we going to get the funds for this factory? It's a question that Musk and Straubel have been ruminating on. The answer is the key to Tesla's future. Well, here's what I'm thinking. We hit up Panasonic for probably half the funding. Yeah, Yamada's desperate to do business, that's for sure. And whichever state we end up building in, we get them to give us major incentives and, say, 10 % of construction costs. Right, we'd be bringing in thousands of jobs.

24:15It's an excellent gambit. California would be good, close to home. Sure, but what about Sparks, Nevada? It's cheap and they'll jump at the idea, if we can get that going. We can have Yamada come out for a visit. He can watch a few bulldozers at work and it'll sell the idea we're moving forward. With or without Panasonic? Hell yes! The men know that secrecy is important. If the site is publicized, it will appear that Tesla is already good to go. Nevada will have no reason to kick in funding and incentives. It's risky, but if it pays off, the company's problems are solved. A month later, Yamada makes the trip to Nevada.

25:03Straubel guides him around the site as bulldozers shift around massive amounts of dirt. The place is a hive of activity. It's pure theater, but it looks like a major project is underway. Yamada buys the ruse. He tells his bosses they need to team up with Tesla or be left in the cold. In July, the union between Tesla and Panasonic to create a large-scale battery factory hits the press. Musk calls it the Gigafactory. It'll reduce battery costs, in turn reducing the sticker price for any Tesla EV. In the coming weeks, the Sparks Nevada site will become official. There's nothing standing in the way of Tesla taking on Detroit for EV dominance and pushing electric vehicles beyond a niche market.

25:58But Musk isn't waiting to see whether that will go his way. No, he has his eyes set on going to war with Detroit over the biggest car market on the planet, China. In 2009, China pushed aside the United States as the world's leading auto market. It's held that position ever since. General Motors alone sold 3 million vehicles annually in China in the last three years. The company has over 40 models and 7 brands on sale in the country, with luxury SUVs being a huge draw to the growing middle class. But GM is hardly alone. Top sellers in 2014 include models by Hyundai, Volkswagen, and Nissan. But China is choking on its own pollution, which helps to make it the largest market for electric cars on the planet.

26:59In April, Musk personally delivers the first nine Model S sedans in Beijing. The recipients pay about$122 ,000 each for the EVs. They're part of China's growing wealthy demographic who flaunt luxury cars. Just the people Musk wants.

27:24October 22nd, 2014. Tesla headquarters in Palo Alto, California. Two Tesla sales representatives are hunched over their laptops, nervously scanning news sites. Wow, Michigan screwed us. We're completely shut down from directly selling in their state. No surprise given that Michigan is Motor City's home state. Republican Governor Rick Snyder quietly signs Bill 5606, barring direct auto sales to consumers. What do you expect? Governor Snyder's up for re-election. The last thing he wants to do is upset Michigan's cartel of dealers. Right. But what ticks me off is that now we can't even display cars, not even in a Tesla gallery.

28:08This could set a nasty precedent. The company's high-tech interactive galleries and shopping malls have helped skirt the direct sales bans in Texas and other states. But it's not going to work in Michigan. The Tesla sales rep points to his screen and rolls his eyes. Have you read GM's response? Mary Barra is saying GM isn't afraid of competition. They just want a level playing field. The anti-Tesla bill is not the first time that General Motors has backed a legislative kneecapping of Tesla. Seven months ago, Ohio's legislature planned to let the company sell cars directly. GM pulled no punches, sending a letter to Ohio Governor John Kasich complaining that the bill would allow Tesla to compete under a different set of rules.