Toyota's Tesla stake heats up the electric car race

(Fortune) -- Toyota's announcement that it is making a $50 million investment in upstart electric car maker Tesla got the auto industry's attention this week.

If the world's largest and most successful automaker, despite its recent troubles, saw the need to diversify its electric car portfolio then either Tesla founder Elon Musk is a fabulous salesman or there is real promise in battery-powered cars.

The Thursday announcement was particularly noteworthy coming just one day after a top Honda executive reiterated his company's skepticism about batteries in cars.

"We lack confidence in the electric-vehicle business," Tomohiko Kawanabe, president of Honda's research and development unit, said in comments reported by Bloomberg.

"It's questionable whether consumers will accept the annoyances of limited driving range and having to spend time charging them."

Honda plans to sell electric cars in the U.S., but Kawanabe said the automaker's priority is to improve the fuel efficiency of existing models. "We are definitely conducting research on electric cars," he noted, "but I can't say I can wholeheartedly recommend them."

More cold water was thrown on electric cars at a German conference on "the new automobile" earlier in May. Wolfgang Lohbeck, transportation expert at Greenpeace Germany, was reported in Automotive News of reminding his audience that electric cars run mostly on power derived from coal and nuclear power. And that's not environmentally friendly.

Until now, Renault-Nissan CEO Carlos Ghosn was seen as the most prominent proponent of battery-powered vehicles -- and something of a maverick -- with his high-volume expectations for his company's electric Leaf and his bullish market-share projections for electric cars in general.

Aggressive pricing has stirred early interest in the Leaf, and competitors have taken notice. Ghosn believes that electric vehicles will represent 10% of the global car market by 2020. That's as much as ten times more than the forecasts of independent analysts.

Toyota (TM) was already planning to introduce its own electric car in 2012, and the Tesla deal gives it a chance to hedge its bets.

Palo Alto-based Tesla, after some early start-up woes, has sold more than a thousand $100,000 roadsters and is developing plans to make a four-door. The Model S will have a base price of about $50,000 and go on the market in 2012. Tesla hopes to sell 20,000 a year.

All this electric car activity threatens to overshadow General Motors' much heralded efforts to build the Chevrolet Volt.

The Volt, which goes on sale in limited quantities at the end of this year, is more hybrid than pure electric. Its batteries are only good for 40 miles of driving (the Leaf claims a range of 100 miles) before an auxiliary gasoline motor kicks in.

Of course, the auto industry has shown spurts of enthusiasm for new technologies before, only to back off in the face of market response, infrastructure and economics.

At the Frankfurt auto show in 1999, automakers tried to one-up each other by promising the early introduction of electric cars powered by fuel cells. When then-Daimler CEO Juergen Schrempp heard that his Japanese competitors were planning to launch in 2005, he insisted that Daimler would have a fuel cell car on the market in 2004.

Eleven years later, fuel cell cars are further away from production now than they were then. The challenges of developing a hydrogen infrastructure to feed the fuel cells have proved insoluble.

Developing an infrastructure of electric charging stations for battery-powered cars could yet turn out to be the biggest barrier to adoption. Except for Nissan, few car companies are yet clamoring for that business opportunity.