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Autos October 23, 2008, 5:00PM EST

Electric Carmaker Tesla Downshifts

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

They were to streamline engineering, make Tesla's far-flung manufacturing operations more efficient, and get spending under control.

The Detroit hands had left flailing domestic carmakers for a startup that was promising to reinvent the industry. What they got instead was, well, more of what they were used to back in Motor City. Instead of planning research and development budgets and doling out money to add staff and produce tomorrow's electric cars, Tesla Chief Financial Officer Deepak Ahuja, the former Ford finance guy, has to swing the budget ax and say "no" more often than he thought he would. "I didn't anticipate that," Ahuja says. "We have to react as fast as we can to changing business conditions."

So far the cost cuts are prosaic and piecemeal—moving the shrinking staff into one office, delaying the Model S until the loan guarantees from the Energy Dept. are available and investors loosen up, replacing the transmission handle with a button. But Tesla will need further-reaching structural changes. For example, it gets car bodies and chassis from British sports car builder Lotus, builds electric motors in Taiwan, and does final assembly in California. Given the shipping and exchange rates, the cost per car is "scary," says Musk. He would consider shifting everything to the U.S., but he can't move body production there until 2010, when the Lotus contract expires.

Of course, cost-cutting will take Tesla only so far. Given the array of electric and hybrid vehicles hitting the roads soon, the company needs to find a way to stand out. Musk is focusing on style. He wants to be the Apple of electric vehicles. He's hired Franz von Holzhausen, who, as Mazda's chief designer for North America, had a big hand in that company's celebrated new look. Musk hopes he'll bring a sophisticated, sporty look to Tesla vehicles.

Musk insists Tesla's next models will be irresistible. The Model S will go up against formidable competition—cars such as the Lexus GS 450h hybrid, the diesel Mercedes E-class, and the Chevrolet Volt. Not that those cars feature Tesla's neck-snapping acceleration and running cost of 4 cents a mile. "Our sedan will crush everything out there," Musk says.

You have to give the man marks for confidence. But the challenges are steep—and not just because a recession looms. Past executives say Musk is a micromanager and shares blame for last year's missteps. Marks acknowledges that developing the Roadster for $150 million was a real feat, but notes Musk isn't an auto guy. "They underestimated what it took to get here, and what it takes going ahead."

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Oil Shock for Plug-Ins?

Is there a future for electric cars? According to an Oct. 20 story in The Washington Post, the combination of rapidly falling oil prices and the credit crunch may well kill off an assortment of plug-in hybrids in the development stage. It's a debatable point, the Post acknowledges. Some industry insiders are betting the appetite for these pricey vehicles won't wane, thanks to growing awareness about the downside of oil dependency.

To read The Washington Post article go to http://bx.businessweek.com/electric-cars/reference

Welch is BusinessWeek's Detroit bureau chief.

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