Electric Carmaker Tesla Downshifts

Funding gaps have put some of the Silicon Valley carmaker's plans on hold

By David Welch

Browse Issues

Browse the BusinessWeek Archive

Chief designer von Holzhausen with a prototype of the Model S ALANLEVENSON.COM

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

Chairman Musk (with Tesla's Roadster) wants the company to be the Apple of electric cars Thomas Michael Alleman/Wonderful Machine

Since its founding in 2003, Elon Musk's Tesla Motors has been a proud creature of Silicon Valley. That's to say a startup with outsize ambitions and a public disdain for business as usual—or at least as practiced by the dinosaurs in Detroit. On a tight budget, Tesla built an electric car, the Roadster, that's acclaimed for its harmonious balance of greenness, beauty, and performance. Tesla has 1,200 back orders for the $100,000 sports car, mostly from wealthy trendsetters.

But Musk, a software entrepreneur who made millions with PayPal (EBAY), has bigger aspirations: He dreams of one day producing a line of electric vehicles for every purse and purpose. A few weeks ago, Tesla seemed to be on the road to making that happen. Musk had verbal commitments for $100 million in private capital, federal loan guarantees geared at jump-starting development of alternative vehicles, and thoughts of going public next year.

TROUBLE AHEAD?

Then the world changed. On Oct. 11 Musk's financial advisers at Goldman Sachs (GS) called with bad news. Investors, fazed by the credit crunch, were suddenly demanding tougher terms. Musk organized bridge financing and poured more of his own money into Tesla. With $55 million-plus at stake, Musk, who is chairman, asked the CEO to step aside, and he took over that role. He began retrenching, laying off 80 of 380 people, cutting costs, and postponing Tesla's second model, the $60,000 Model S sedan. "We're taking action before we're forced to," Musk says.

But delays and tight funds could undercut Musk's long-term vision of selling affordable electric cars to the masses. If oil prices continue their fall and stay below $80 a barrel, Tesla, which currently spends nothing on marketing, could lose some of its buzz. Plus, the startup could lose its first-mover advantage: By 2010, everyone from General Motors (GM) to Toyota Motor (TM), Nissan Motor (NSANY), and Daimler (DAI) expects to launch their own electrified vehicles. James N. Hall, who runs the auto consulting firm 2953 Analytics, sees trouble ahead. "If the market wants [electric cars] in the number Tesla is talking about," he says, "a larger auto company will bury them on cost."

The financing crunch is the second crisis Tesla has endured in the past 12 months. Last year it found that its much hyped $100,000 Roadster was over budget by some $40,000 per car. Tesla had to delay the launch by six months while it looked for a way to make the car profitably. Musk fired founding CEO Martin Eberhard and brought in as interim chief Michael Marks, an executive at electronics maker Flextronics International (FLEX).

A LOT LIKE MOTOR CITY

The crisis was chastening for the Valleyites. With Marks and Musk more involved, Tesla ditched specialty suppliers, one of which had never made parts for mass-market cars before, and brought in established parts makers, some from Detroit. That cut costs by thousands of dollars per car. (Musk says the Roadster now makes money.)

Marks, who left the interim post in December, also urged Tesla to hire more people with auto industry experience. This summer, Tesla recruited engineering and factory veterans from Chrysler, a finance guy from Ford Motor (F), and a design chief from Mazda Motor (F).