8-14-13 6:35 AM EDT | Email Article

By John Shinal


SAN FRANCISCO (MarketWatch) -- During Tesla Motors Inc.'s quarterly conference call with stock analysts last week, Chief Executive Elon Musk was frank about one of the primary challenges to the company's long-term success.


"We're supply-constrained, not demand-constrained," Musk said, referring to the fact that the capacity of the electric car-battery industry is behind the needs of Tesla (TSLA) , which has forecast it will deliver 20,000 cars in North America this year.


To achieve its long-term goal of producing 500,000 vehicles per year, Tesla would need more battery production capacity than is used today by the entire PC industry, said Musk.


"Clearly, new cell factories need to be built," he said.


Read "10 glimpses into Elon Musk's Hyperloop dream."


Read "L.A. to S.F. in 35 minutes for $20: Elon Musk."


Tesla's challenge is the same one faced by every technology company that's first to find success in a new market: it faces a business ecosystem that's not immediately conducive to support it.


This so-called first-mover "advantage" is much discussed by venture capitalists when evaluating startup investments, but its recent track record suggests the advantage has faded as the technology industry has matured.


While Microsoft Corp. (MSFT) , Cisco Systems (CSCO) and Oracle Corp. (ORCL) still dominate markets they helped pioneer, Google Inc.'s (GOOG) success came only after about 10 other Internet search companies had already gone public.


And Facebook (FB) wasn't the first social network to achieve success. It was either second or third, depending on whether you count both MySpace AND Friendster.


Sometimes, this first-mover disadvantage surfaces on the demand side, when a company gets ahead of consumer behavior.


People had to get used to posting their life stories online or clicking on sponsored search results instead of free ones -- two online behaviors that helped Facebook and Google, respectively, succeed.


Tesla faces the same type of obstacle, because drivers aren't used to pulling into electric battery recharging stations at this point -- not enough to make the company's sales anything more than a tiny niche of the auto industry's billions of dollars in annual revenue.


Yet Tesla also faces an infrastructure hurdle on the supply sides of its business, as Musk reiterated on last week's call.


To meet its long-term forecasts, Tesla needs to build (or have built by suppliers) not only a lot more charging stations, but also an entire PC-industry's worth of electric battery production.


"When you do the math, it's quite a large number to find enough (factory capacity) to get to half a million vehicles per year," he said.


Musk added that the company is working with Panasonic, its primary supplier of batteries, to improve the non-cell parts of batteries and, in turn, improve efficiency.


"That's going well," he said.


In the short term, Tesla took a huge step toward re-assuring investors about its sky-high valuation by reporting that it generated almost $26 million in operating cash flow during the first six months of this year.


That's a huge reversal from the $127.6 million dollar operating loss Tesla posted for the same period in 2012.


The company also made progress on its goal of achieving a gross margin of 25% in its automotive business (excluding the benefit of the federal tax credit for electric-car buyers) by the end of this year -- a target it re-iterated to Wall Street last week.


"We feel pretty confident about the 25% number," Musk said on the call.


Longer term, however, the company will need some help to grow into its market cap, which at $17.5 billion is now more than nine times the $1.9 billion in expected 2013 revenue.


That's especially true now that almost every major car company has an electric car either in development or on the market already.


If demand for electric batteries goes up and production capacity doesn't keep pace, the cost of a key Tesla component may face upward pressure.


And if Tesla is leaving business on the table because it's constrained by battery capacity, and not consumer demand, the company now has a growing list of rivals ready to fill the demand that it can't.


In other words: Tesla bulls should be rooting for Panasonic (and others) to get much better at making electric car batteries, and to vastly expand their capacity.


Without those advances, history may show that Tesla's first-mover startup position was not an advantage.

-John Shinal; 415-439-6400; AskNewswires@dowjones.com


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(END) Dow Jones Newswires

08-14-13 0635ET

Copyright (c) 2013 Dow Jones & Company, Inc.
Copyright 2014 MarketWatch
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