Tesla Motors Inc (NASDAQ:TSLA)’s Model S may be ultra-expensive, but so far, it’s the only all-electric vehicle Morgan Stanley analysts think isn’t a failure. Adam Jonas and his team put together a report on the auto industry as a whole and said that sales of electric vehicles have come up short of what many were expecting so far.

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Long Live, Tesla!

In a report dated May 28, 2014, analysts Adam Jonas, Ravi Shanker and Paresh Jain said that for now anyway, electric vehicles are dead. However, they say Tesla Motors Inc (NASDAQ:TSLA) has a bright future ahead of it while competitors struggle to move their electric vehicles.

The Morgan Stanley team notes that not too many years ago, many were projecting penetration of electric vehicles to be 5% to 10% by 2020. However, they think that a 1% penetration will end up being the real story by then.

EV makers lose money

Currently Tesla Motors Inc (NASDAQ:TSLA) is the only automaker to turn a profit on its electric cars. Sergio Marchionne, CEO of Fiat S.p.A. (ADR) (OTCMKTS:FIATY) (BIT:F) / Chrysler, said they lose $14,000 on every Fiat 500e they sell. In fact, he actually asked consumers not to buy it.

Sales of General Motors Company (NYSE:GM)’s Chevy Volt declined 7% year over year even though the automaker set up very attractive leases for the vehicle. Ford Motor Company (NYSE:F)’s Focus EV was just .07% of its first quarter U.S. volume. Other automakers like Renault-Nissan Motor Co., Ltd. (ADR) (OTCMKTS:NSANY) (TYO:7201), Toyota Motor Corp (ADR) (NYSE:TM) (TYO:7203) and PSA have been scaling back their targets for electric car sales and de-emphasizing them because of a lack o success.

CARB rules coming up fast

Jonas and his team said the auto industry’s incumbent players won’t even come close to meeting the new U.S. rules for zero emission vehicles. At this point, ten states other than California have adopted the California Air Resources Board (CARB)’s rules for zero emission vehicles. Together, those states account for about 30% of U.S. auto sales. The rules call for zero emission vehicle credits to step up “dramatically” from 2018.

In fact, the rules could require that about 16% of total vehicle sales be sales of zero emissions vehicles and transitional zero emissions vehicle by 2025. The agency could also start phasing out the partial credit automakers receive for selling hybrid vehicles after 2018.

Jonas said in all the auto shows he and his team have attended recently, the focus appears to be shifting from electric vehicles to those with hydrogen fuel cells. He believes automakers are doing this in an attempt to slow down regulators’ expectations regarding electric vehicles.

ICE engine cars to rule—for now

The Morgan Stanley analyst said they’re “bullish” on internal combustion engine (ICE) technology through the next ten years. He notes that automakers have been making progress in reducing emissions and improving fuel economy in a number of ways, like through software and reducing the weight of vehicles.

He also said that “mild-hybridization, high-speed transmissions,” turbo and better injection systems are helping in this area. In addition, he believes that autonomous technology will take fuel efficiency “to entirely new levels, ultimately making a 100mpg ICE vehicle an attainable goal.”

Tesla only happens to make EVs

Jonas believes that Tesla Motors Inc (NASDAQ:TSLA)’s success has been because it simply makes great cars that “just happen to be EVs.” He thinks that even when the automaker’s gigafactory is built, it won’t make much of a difference for the electric car industry as a whole.

The analyst also believes that even if Tesla Motors Inc (NASDAQ:TSLA)’s Model S had double the range but wasn’t fun to drive, it would be even less successful than it is currently. He said if the automaker is going to make the Gen III a success, then it’s got to be fun to drive. He believes that electric range is not going to be as big of a factor as how fun it is to drive the car.