smart fortwo Gets Tesla Technology: Tesla teaming with Daimler on EV project

After clandestinely working with Daimler for more than a year, Tesla CEO, Chairman and Product Architect Elon Musk says he now can reveal plans to supply components and battery technology to build 1000 smart fortwo EVs by 2010.

The German automaker and the Silicon Valley-based manufacturer of electric vehicles began the collaboration in late 2007, according to Musk, exploring the possibilities with the smart car line.

Speaking at the Society of Automotive Analysts annual meeting in Detroit, Musk said Tesla is collaborating to produce a micro car as an EV in "beta" that will involve leasing an initial thousand vehicles and gathering feedback. If the economics are successful, it could expand to tens of thousands of vehicles, Musk said.

When asked if the Daimler program was an exclusive partnership, Musk says Daimler never asked for an exclusive arrangement. "Hopefully we will do it (partner) with a few other companies as well. We are not interested in marketing stunts. We want to build a compelling car at a compelling price at high volume," he said.

Could that include Detroit? "The media have played this up to be Silicone Valley vs. Detroit, and nothing is further from the truth," he said. Talks with a Detroit automaker broke off late last year, he said, and he isn't sure exactly why. Musk did not rule out the possibility of future collaborations.

"I view this as a national security issue," he said, speaking of the need for electric cars. He believes gas prices will go higher - to the $6 or $7 a gallon range. "What is going to happen in the next four years, we have only one direction (to go)."

Speaking earlier at the conference, economist Emily Kolinksi Morris from Ford Motor Company showed data that suggested every $1 decrease in cost of gasoline per gallon frees up 100 billion dollars of discretionary spending for the US economy. Increasing fuel prices leaves fewer people with the discretionary money to buy cars, and the money spent on gasoline does not all re-circulate in the U.S. economy.

Rod Lache, an analyst with Deutsche Bank suggests the auto industry could be on the verge of a new business model, if government officials support policy measures that will help with the adoption of electric cars. A collaboration with electric companies could allow people to sign a contract for a car like they do now with a cell phone - get a free electric car for a with two-year contract for 12,000 miles worth of electricity per year. Automakers could get a percent of the fuel revenue - hypothetically two cents a mile.

Like the cell phone market, automakers and electricity suppliers would draw circles around cities to target the first recharging stations. Denmark and Israel are already looking at the model and making investments according to Lache. Big cities and closed island environments like Hawaii could potentially be first adopters.

Finbarr O’Neill, President of J.D. Powers said the key question is "Will there be a strategic energy policy," a sentiment echoed by Lache, who said the government's energy security strategy could make or break the domestic automakers. "In the next five years, we will see more dramatic of a technical shift (in the auto industry) than the last 50 to 100 years."

Growth could eventually be fueled by electrification, the analysts say. Otherwise, brace yourself for an extended period of decline.