Tesla's Tightrope: Making Electric Cars for the Masses
Tesla Motors, the most prominent electric-car start-up in the field, is fighting to survive as an independent company. That's pretty much what's behind its drive to raise more money for its new-car programs. Without a more diverse and profitable product line, including cheaper -- and cheaper to make -- cars, Tesla will get swallowed up by a bigger player, and probably soon.
Does that matter? Only if you think it's good that a flagship automotive startup survives to continue taking on the Big Three. Tesla goads the mainstream industry to be better, but its challenges are shared across the electric-vehicle (EV) space. If Telsa can't make it, Fisker Automotive (which makes a soon-to-be-launched plug-in hybrid) probably won't either -- to say nothing of a bunch of smaller EV startups.
The Tesla challenge
Tesla has been focused on one critical goal -- launching its second and vitally important car, the $57,400 Model S sedan -- at about half the price of its high-end Roadster. But now that the sedan is on track for a debut in the middle of next year, Tesla is shifting gears with a mainstream strategy aimed at finally taking the company to profitability.
To survive in a competitive market, Tesla has had to some of the Big Three's money-saving tricks. So Tesla is saying that the Model S is more than a car, it's a base that we can use to build an affordable family of vehicles. That's an essentially conservative move for this risk-taking company, but it has the virtue of being tried and true -- automakers do it all the time. Toyota's Prius V, a new wagon, is just the latest green example.
Downmarket risks
If it can finally bring in some serious money from selling cars (instead of taking in cash from co-founder Elon Musk, a big government loan and the recent IPO), then maybe people will believe Musk when he says Tesla isn't for sale. Tesla's long-term strategy, which involves moving increasingly down market with cheaper but higher-volume cars, is risky -- the company jeopardizes its Roadster-built brand exclusivity -- so the rumors continue to swirl.
The Model S gets the company closer to having a profit-making product line, but it's the third car out the factory gates, the crossover SUV Model X, that could finally be Tesla's moneymaker. Why? Because it will cost very little to develop. The Big Three printed money in the 1980s and 1990s by dropping their quickly produced SUVs on top of existing truck frames. The Model X repeats that model.
Tesla's Ricardo Reyes told me:
It would be a waste of the resources we put into the Model S to not develop a small family of options.Tesla should be able to develop the Model X quickly, by 2013, and gain sales that are gravy on top of the Model S. The X, which will have three rows of seats, is pitched at luxury SUVs like the Porsche Cayenne or Audi Q7.
It was widely reported that the Model X will sell for $30,000, and that it's the mass-market car that Tesla has long-planned. That's wrong. It will sell for the same approximate price as the Model S, because it basically is the Model S.
The company needs the cash
Tesla's strategy has been to finance its new cars with the proceeds from existing models, but with Roadster sales stalled it's not going to work that way. Tesla's IPO and federal loan were eaten up by the cash-intensive S, leaving the company with little left to develop the Model X. So Tesla is going back into the financial markets to raise up to $214 million, through a $55 million private placement to Musk himself and part-owner Daimler's Blackstar Investco, plus a six-million-share public offering that could bring in $158 million.
Not all of the money will go into the Model X. According to Tesla's SEC filing, some of that cash will go to finish up the Model S. Roadster sales are at 1,650 and relatively static, so it's not a major source of revenue.
Losing its cachet
The danger is that Tesla has built its reputation on Ferrari-like cachet, as reflected in its high-end showrooms. The Models S and X, by putting a lot of Teslas on the road, could dilute that. A down market strategy proved disastrous for Maserati when it introduced its Biturbo in 1981 -- it was like a BMW 3-Series with a nicer interior. According to Phil Gott, an auto analyst with IHS Global Insight:
The weakest part of the strategy is to move beyond premium luxury cars and keep a broad range of dealerships happy with a less-exclusive product line.The ultimate end point of putting too many cars on one platform is "badge engineering," or simply slapping a nameplate on somebody else's car. Tesla could do this with the electric RAV4 it's developing with Toyota, but the result would be a badly diminished nameplate. Cadillac barely recovered from similar strategies.
The first in the family
The Model X is just the first family member likely to spin off from the S. Also at least in designer sketches are a coupe and a convertible (see the picture). Tesla's strategy is to reach profitability with 20,000 units of Model S production in the second year, then spin off more variations that will lay the groundwork (and help pay for) the big prize -- the Gen 3 $30,000 mass-market car, due in four years. But 20,000 cars a year is a goal nearly all the start-ups have set and none have yet achieved.
The safest route for Tesla would be to sell a controlling interest, probably to Daimler or Toyota, and become a premium division of a major automaker. Both companies are betting heavily on Tesla's battery expertise. Musk could go back to making rockets at Space X, and everybody would be happy. But Musk is adamant that he won't do that, telling Bloomberg:
I don't think it's a good idea to plan to sell a company. I don't personally have any interest in selling. I think there's a lot of innovation we can bring to the car business.Musk could change his mind, or maybe he already has. But if he is going to stay independent, he's got to walk a tightrope that ensures higher-volume sales while maintaining the brand, and increasingly partner with outside companies -- without letting them have control. As Gott puts it, "It's a question of how alone is alone. To stand truly alone and be independent is very difficult."
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Photo: Tesla Motors