Magnifying rather than quelling range anxiety

In the ongoing search for electric car nirvana, the Tesla Motor Company has enjoyed an unusually charmed existence. Perhaps it’s the Silicon Valley mystique, perhaps it’s the Midas touch attributed to its co-founder Elon Musk — who became a centimillionaire from selling PayPal to eBay, and then used his funds to start a car company, a rocket company and a solar company.

After discontinuing its $100k niche toy, the Tesla Roadster, the future of the company depends on producing and selling its $60-100k Model S sedan in volume. The latter effort was dealt a major blow Sunday when the NY Times reported the very real problems in an actual test drive:

Stalled Out on Tesla’s Electric Highway By JOHN M. BRODER

Washington — Having established a fast-charging foothold in California for its electric cars, Tesla Motors has brought its formula east, opening two ultrafast charging stations in December that would, in theory, allow a speedy electric-car road trip between here and Boston.

But as I discovered on a recent test drive of the company’s high-performance Model S sedan, theory can be trumped by reality, especially when Northeast temperatures plunge.

The problem was that — after several close calls — the car ran out of power shy of the next charging station, requiring a complex and time-consuming flatbed tow. Perhaps it was the effect of cold upon the battery life, perhaps it was the power consumed by the heater, perhaps it was bugs in the software or hardware.

Still, there’s no reason to think that the problems didn’t actually happen. In response, one would presume that Tesla would both improve its products and add additional charging stations to enable long-distance recharging.

Instead, the notoriously thin-skinned Musk tried to smear the messenger, both on a CNBC interview and on his twitter account:

@elonmusk: NYTimes article about Tesla range in cold is fake. Vehicle logs tell true story that he didn't actually charge to max & took a long detour.

In responses to major media outlets, the NYT stood by its story:

The Times's February 10 article recounting a reporter's test drive in a Tesla Model S was completely factual, describing the trip in detail exactly as it occurred. Any suggestion that the account was "fake" is, of course, flatly untrue.

Our reporter followed the instructions he was given in multiple conversations with Tesla personnel. He described the entire drive in the story; there was no unreported detour. And he was never told to plug the car in overnight in cold weather, despite repeated contact with Tesla.

Apparently the attack was an effort to prop up the stock price, which fell 4% in response to the NYT story. (That’s about $175 million in market cap — more than any of us mere mortals will ever see in a lifetime).

Despite the stress on the company and its stock, this is a textbook example of how not to handle a PR crisis. But it appears that within a NASDAQ-traded public company, no one can tell the emperor of Tesla to put his clothes on, or to listen to professional advice. As The Atlantic summarized its media report: “Elon Musk's Crusade Against The New York Times Isn't Helping Tesla.” The WSJ wonders whether this sort of concerted effort to intimidate reviewers will discourage coverage in the future.

Of course, this happened the same week that Musk — an expert in all things everywhere — was offering advice on Boeing 787 batteries. As Seeking Alpha dryly put it:

Tesla has burned through $1.25B in free cash flows in order to develop the company, and we expect that terrifying test-drives of electric vehicles from Tesla Motors will continue. We find it amusing that Elon Musk is willing to help out Boeing's Dreamliner due to the battery issue. We would like to remind Elon Musk and his team that they need to first fix their problems with their products before trying to be a superhero with the products of other companies.

Cruising range is an inherent limitation of the current generation of electric cars, and thus “range anxiety” will be a major obstacle to adoption. Musk has done himself — and the industry — no favors by helping to call attention to the article, rather than (as his employees apparently were trying to do) work with the reviewer to understand and correct the problems.

Tesla's big day

Today was a great day for Tesla Motors and its CEO Elon Musk. Both got tons of favorable publicity — opening the NASDAQ market this morning — and wads of badly needed cash as the company enjoyed a wildly successful IPO.

By any measure, the IPO was a huge success:

• The offering was expanded from 11.1 to 13.3 million shares.
• The offering price was raised from the planned $14-16 to $17/share; and
• The stock rose 40% in the first day of trading to close at $23.89, creating a market cap of about $2.2 billion

All this on a day when the Dow fell 2.6% (the NASDAQ 3.8%) as common investors panicked in the face of worsening economic news, and in a year where IPOs are few and far between. (My theory is that the stock defied the market because TSLA stock buyers were a combination of rich environmentalists that buy the cars and hot stock faddists who buy the story.)

(As with most Tesla financial news, the best reporting came from VentureBeat reporter Camille Ricketts.)

By selling almost 909,000 of his own shares, the 39-year-old Musk grossed $15 million, while his remaining shares were worth more than $650 million. Once the lockup is over, this presumably will allow him to pay some of his bills and start to resolve his long-deferred divorce settlement. After going broke, it also amounts to a personal vindication of the vision of the billionaire serial entrepreneur.

In fact, the LA Times found an Edmunds.com analyst who saw this as more of a referendum on the Tesla and Musk star power than its business or the industry at large:

"It's all the hype that's been built up, the first-day craziness," [editor John O'Dell] said of Tuesday's stock surge. "I would not take what's happening as a referendum on the EV market overall. It's unique to Tesla and Elon Musk and his reputation and persona."

Now that they’re a public company, the real scrutiny begins.

Ricketts has a list of 10 key questions for the company and its investors. Some are the obvious ones — when will Tesla stop losing so much money and how will it support the stock (and the balance sheet) when its second product is two years out. Others are less obvious, including how will Tesla balance its two strategic investors — Daimler and Toyota — who gave the company legitimacy, technology and (competing) potential exit strategies.

Others are also asking piercing questions. For example, John Gapper of the Financial Times wonders why investors are (apparently) so sanguine about having a part-time CEO of a multibillion dollar (market cap) company. Yes, Musk apparently fancies himself the greatest entrepreneur (and perhaps greatest tech CEO) of all time, but even Steve Jobs only managed to run two companies (Pixar+NeXT, Pixar+Apple) while Musk has three (Tesla, SpaceX and SolarCity).

One of the other questions Ricketts asks is how Tesla’s planned Model S sedan will compete with rival offerings from Chevy and Nissan — two well-capitalized manufacturers with better distribution. There’s also Fisker, the other major startup EV company, which used $20m of its $529m in stimulus funds to buy GM’s shuttered Delaware plant — part of its plan to help stimulate Finland’s economy.

Right now, electric vehicles are niche products: Tesla has sold 1,100 cars in two years — less than the total number of cars sold every two hours by the incumbent vehicle makers. The Model S and its rivals all hope to be the Camry (or Taurus) of electric cars, albeit at a healthy price premium (even with subsidies).

Into this niche are coming GM and Nissan right away, Fisker and Toyota soon after, and probably Ford, Honda, Chrysler, the Koreans and the Chinese by 2015. So far, the cars are 20-50% more expensive than their internal combustion counterparts. Meanwhile, the economics and green footprint of these vehicles depend on both the cost of gasoline (retail or with externalities) and how that compares to the real cost of grid power.

Meanwhile, sales are flat for the rest of the auto industry (at least in the developed world) with too many companies and factories chasing too few buyers. Even if electric cars increase their share of the market, they’re not going to grow the overall market, and that existing capacity (both manufacturing and distribution) will chase wherever the market goes.
The best case: the EV market grows rapidly and the rivals are slow to enter (unlikely) or are unable to match Tesla’s innovative products. The worst case (pick one): the market grows slowly, the prices remain high, a political shift reduces federal subsidies, or rivals (such as GM or Nissan) reach the mass market first.

I think the Tesla team should celebrate a well-deserved 4th of July weekend. After that, it’s back to work on trying to stay ahead of what will inevitably become a price-sensitive commodity business.

Toyota-Tesla: less than meets the eye

VentureBeat has analyzed the latest Tesla S-1 filing about its recent deal with Toyota, and found some interesting tidbits:

• Toyota has not yet agreed to partner with Tesla to build a car;
• Toyota made only a conditional promise to buy Tesla stock after an IPO;
• Tesla did not buy any NUMMI production equipment.

Some excerpts of the story:

…the newly revised S-1 states very clearly:

“In May 2010, Tesla and Toyota announced their intention to cooperate on the development of electric vehicles. This may involve the production of vehicles or powertrain components. However, we have not yet entered into any agreements, including any purchase orders, with Toyota for such arrangements and we may never do so.”

This is surprising, considering that Musk is already enthusiastically talking about not just one joint Tesla-Toyota vehicle — due out in the next four to five years, he says — but multiple tandem projects using Tesla’s powertrain technology and Toyota’s components.

and

For now, all that is tying the major Japanese automaker to the venture-backed startup is an agreement to buy a $50 million stake in the latter if and when it goes public.… [However,] if Tesla doesn’t have a successful IPO by Dec. 31 of this year, Toyota is no longer obligated to the buy these shares. This puts even more pressure on the company to make it to an IPO at all costs.

The conclusion of reporter Camille Ricketts:

Tesla and [CEO Elon] Musk have a history of making announcements that sound sweeter than they really are upon closer inspection. Last July, when the company declared profitability — with a margin of just $1 million — a number of reports said the claim was all smoke and mirrors. And when Tesla first filed to go public at the end of January, it conveniently provided financial reports only through the end of 2009’s third quarter, omitting the fourth quarter’s dismal sales. That data has since been included, but there’s a trend here.

Update 9pm: If that’s not enough, Venture Beat reporter Owen Thomas also reports Thursday that due to personal liquidity problems — tied in part to his inability to stay married — Musk has been broke for more than six months. Musk once used his personal fortune to keep the company afloat for the first five years, but now it appears he no longer cover a negative cash flow exceeding $100 million/year. Thomas concludes that even with government loans, the Model S is unlikely to begin production unless Tesla completes a successful IPO in the next seven months.

(Most of the divorce story is already several weeks old, having been covered by Edmunds, Divorce Saloon and Musk’s ex-wife herself May 6 and May 8.)

The upshot of both stories suggests that Toyota seems to be first in line to acquire Tesla and its technology if it runs out of cash, but has no financial obligation to bail it out if it doesn’t like the terms.

Runaway Bride

Thursday night, Palo Alto-based Tesla Motors announced that its long-promised Model S electric sedan would be built using a portion of the closed NUMMI plant here in Fremont. The announcement came with a $50 million investment from Toyota.

Given the 25-year NUMMI joint venture between Toyota and GM had established infrastructure, and its April 1 closing was a source of great embarrassment to Toyota, this seems like a no-brainer. However, apparently it only dates to an April meeting between the Toyota CEO Akio Toyoda and Tesla CEO Elon Musk, who made the joint announcement Thursday.

When I heard this, however, it reminded me of all the previous places that Tesla had promised to build a factory:

• Albuquerque: promised 2007, abandoned 2008
• San José: a greenfield site, promised 2008, abandoned January 2009
• Palo Alto: a former HP factory, promised August 2009 — and apparently still on

This reminded me of the Julia Roberts movie “Runaway Bride,” about a woman who kept planning weddings but then abandoning them at the last minute.

Most recently, the company had been negotiating with Long Beach (the former Douglas Aircraft plant for making DC-9s) and Downey (a former NASA site) in the LA area:

"It's gonna be a tough decision, because I think frankly both Long Beach and Downey would be great locations," Musk said.

Downey officials had approved nearly $9 million in incentives to attract the factory. The facility had been once listed in Tesla’s proposal for a $465 million “advanced technology” federal loan. Needless to say, city officials were upset:

"We are shocked, upset and betrayed. We can see why the public is so upset with corporate America," said Downey City Councilman Mario Guerra, adding that Tesla had told the city it would sign the lease for the Downey plant on Friday.

According to proponents, the Fremont plant will create 1,000 jobs. The company has cumulative losses exceeding $200 million on sales of about 1,000 cars and total revenues around $100 million. For such a tiny car company — selling a niche product — it has been tremendously successful getting publicity and promises of subsidies from local governments.

Or as a Downey city official put it:

“I couldn’t be more disappointed. I feel like I was stabbed in the back,” Councilman Mario Guerra said yesterday. “We were promised all along that we weren’t being used and this is what happens.”

“Elon Musk personally gave me his word that we weren’t being used,” Guerra continued. “Somebody is a very good poker player and I guess that’s how you become a billionaire.”

Tesla had also been promised as the salvation of the American auto industry, which has lost 100,000s of jobs in the past three years. Now, with the strategic investment by Toyota, there is an increased possibility that its exit strategy will be to become a subsidiary of Japan’s (and the world’s) largest auto company.

Don't get fooled again

Despite a promise less than a year ago to build a new factory in San Jose, and false hopes raised in April that the plant was back on, Tesla will be moving its HQ and factory to an abandoned Agilent (i.e. HP) factory in Palo Alto.

Tesla got the federal money it needed to build its sedan, which San Jose politicians thought was going to be built at the north end of the city, but was put on hold less than a month later and cancelled in January. The April promise from CEO Elon Musk was only

"I can say, definitively, the power-train engineering will remain in the Bay Area," Musk said. "Silicon Valley has the best electrical engineers in the world, and I'm a big believer in keeping some of the production here in the Bay Area."

If you’re going to pay the high Bay Area housing costs, you might as well have the high status address almost on campus at Stanford. (The San Jose location in Aliso was a long way from anywhere).

Still, I have to wonder whether the San José politicians were either premature in their big announcement or wrote bad contracts.. They won’t make that mistake again, and hopefully thier PV manufacturing bets will turn out better.

It certainly seems that my skepticism 11 months ago was justified:

The idea that the Bay Area will become a hub of manufacturing high-tech cars is just laughable. Because of labor, land, taxes and all the other costs, by the end of the year Intel won’t even have make semiconductors here — and they have a much higher technology content and value per pound.

Most of the parts for an electric car are shared in common with fossil fuel cars, and so if EVs catch on, nearly all of the electric cars in North America will be made in factories owned by the major world automakers (in Michigan, Ohio, Kentucky or wherever). Perhaps the Prius will someday be made at NUMMI in Fremont — and even the 2010 plug-in version — but today NUMMI is the only remaining auto plant in North America west of Texas.

As it turns out, Monday’s Tesla announcement came on the same day that the NUMMI plant produced its last GM car after 40+ years of production. Rumor has it that Toyota also plans to leave — ending more than 4,000 jobs.

Tesla is a highly visible symbol of the next generation of passenger vehicles. Whether it will ever be a major employer — or in a century of open innovation, just a supplier of key subsystems — remains to be seen.

More good news for Tesla

Tesla has landed $465m in a federal loans for its electric car development; the other winners with Ford ($5.9b) and Nissan ($1.6b). The award was prominently played in the FT — curious whether it will become a trade issue (as French and German subsidies for Airbus have become).

It’s been part of a string of good news for Tesla and CEO Elon Musk recently, which includes favorable reviews for the Roadster in the FT. Tesla says it’s getting production costs for its $109k roadster down to $80k, from the former $140k (losing money on every unit, making it up on volume).

It still has an ongoing lawsuit with founder Martin Eberhard. The WSJ (blog) said

Eberhard unfurls a long list of grievances against Tesla and Musk in the complaint, accusing Musk of trying to “appropriate control of Tesla…and Eberhard’s legacy as the company’s founder and visionary” from the moment he became involved in the company as a first-round investor in 2004.

He claims that Musk caused the delay of the launch of the Roadster, Tesla’s two-seater, luxury sports car, compromised the company’s finances and engineered his ousting in November 2007. The lawsuit also lists a number of occasions in which Musk is portrayed publicly in the media as the founder of the company and doesn’t try to rectify that, and another number of instances when Musk says that Eberhard was to blame for the Roadster’s delay and the company’s financial difficulties.

Musk counters on his blog. The WSJ summarized it as

Much of the dispute with Eberhard centers on delays in getting Tesla’s cars on the road. Eberhard blames Musk’s ambitions, while Musk cites Eberhard’s unrealistic business plan (which he said foresaw a $65,000 price tag for the Roadster after 25 units produced) and ill-chosen suppliers.

The reason the Roadster cost so much to develop is that Tesla had to spend development money twice, Musk said. After Eberhard was asked to leave two years ago, the company had to redesign or retool many of the cars’ vital parts, including the body and power electronics, he said.

As always, Musk is not lacking in confidence:

"We don't need to raise more money; we may choose to, but we're not out there beating the bushes to find other investors." And he predicted "the entire automotive market will eventually become fully electric, mark my word. It's just a question of how long."

Asked why he was so sure, Musk offered Tesla's recent sales as proof. "We sold 1,000 cars in a month and a half without having the money secured from the DOE, in the worst economy since the Great Depression, and with no advertising. What more do you need?"

At the time of Daimler’s ≈10% investment in Tesla last month, one estimate placed a post-money valuation of Tesla at $550m. With $700m in VC funding, the VCs will still want another 10x-20x increase in the market cap before they sell Tesla to Daimler (or another car company).

Despite the good news, the Merc quoted one analyst as remaining skeptical about Tesla’s ability to reach adequate scale.

Automobile analyst Philip Gott with IHS Global Insight welcomed Tuesday's announcement, but he wondered whether a niche company like Tesla, despite its innovative prowess, was the best place to put government money. …

"This will be a very tough global race for technological superiority over the next decade," he said. "It's about time we got started. But with all due respect to Tesla, and I admire their entrepreneurial zeal and perseverance, my view is their business model works only in a very specialized premium market. And I wonder if our tax money would be better spent on a more mainstream player."

Tesla back in San Jose?

The unpredictable Tesla saga continues unabated.

The Merc and the Chronicle are reporting that Tesla will build the power-trains for its Model S sedan in the Bay Area. As the latter said:

"I can say, definitively, the power-train engineering will remain in the Bay Area," Musk said. "Silicon Valley has the best electrical engineers in the world, and I'm a big believer in keeping some of the production here in the Bay Area."

In September, Tesla announced plans to build a Model S factory in San Jose, and the next month postponed plans to make the Model S.

In January of 2009, it cancelled plans for the San Jose factory, while in March it said it planned to build its factory in a brownfield site in Los Angeles. Earlier this week, it unveiled the Model S for customers in its Menlo Park showroom.

It’s unclear what the next step in the saga will be — let alone the final outcome — but it seems very unlikely that Tesla will be driving a straight line from here to there.

Plugin without the hybrid

Tesla’s Model S sedan is back on again, after Tesla delayed the sedan and cancelled its San José factory.

In Friday’s paper, the LA Times reports that Tesla claims to be close to negotiating a deal for a factory in the LA region. Apparently the government subsidies prompted the move 300 miles south:

The company has applied for $400 million in government loans, which it says it needs to get the plant off the ground and the Model S fully developed. But because the competitive federal programs favor projects situated on previously used industrial sites (so-called brownfields) rather than new construction, Musk said it would be in the company's best interest to find such a location.

"We did a review, and we just don't have a 500,000-square-foot empty building with 24-foot ceilings," said Reed, pointing out that Southern California, with its glut of abandoned aircraft factories, is rife with such spaces.

The hope is that the $57k Model S — derived from the $109k Roadster — will ship in 2011. However, the LAT points out that Tesla has backed out of other earlier deals.

The first version I heard of the story — on the radio — noted that plug-in hybrids are due next year from a number of vendors, including GM and Toyota. Tesla founder Elon Musk has diss’d the plugins before, although they have the advantage of working with gasoline for longer range trips.

Tesla: yet another troubled car company

Facing trouble raising money (and other problems), Tesla Motors today confirmed cancellation of its planned San José factory. The factory was only announced four months ago, and — in the light of the high government subsidies and deteriorating US economy — seemed dubious even then.

The scoop was researched Wednesday and reported Thursday by the San Jose Business Journal.

As also reported by the Merc this afternoon, the nominal reason for the cancellation was government loan conditions, although the company earlier announced (and then cancelled) plans for a New Mexico factory.

Tesla today still has two dealerships, one in Menlo Park (for Silicon Valley gazillionaires) and Santa Monica (for eco-conscious movie stars). While normally a good strategy for cutting-edge technology — let alone cool sports cars — nowadays California is a bad basket to put all your eggs in. The Merc also reported that 2008 new car sales in our state fell 23% in one year, to the lowest levels seen in 15 years.

Tesla praying for its own bailout

Tesla delivered their 100th car Tuesday, of 1200 cars on their backlog. The (presold) delivery took place at their Menlo Park dealership to a minor celebrity best known for standing next to Oprah.

However, the big news is that Tesla is seeking $350 million in low interest loans to develop its (currently on hold) plans for a mass market ($58k) four-door sedan. The parallels to the bailout of the Detroit three are unavoidable.

Despite such parallels, CEO Elon Musk rejects the analogy. As KCBS radio summarized

Tesla needs government capital, but the federal loan the electric car manufacturer wants to use to finance production on a battery-powered sedan does not come from the auto industry bailout now being debated in Congress.

The San Carlos-based company is awaiting a $350 million loan from the Department of Energy under a program Congress approved last year to encourage the development of energy- efficient vehicles.

Tesla CEO Elon Musk said that money would finance a plant in San Jose where the Model S—to be priced just under $60,000—will be developed.

He was quick to clarify the money would go towards future development rather than existing day-to-day operating costs, a crucial difference between the DOE program and the bailout of the Big Three.

So it’s coming from a different pot of money, and (perhaps) the plan predated the recent collapse of demand for consumer durables.

Certainly the Tesla funding is more consonant with existing DOE policy to encourage alternative fuel vehicles, rather than the recent tendency of Washington politicians to offer (as both left and right deride it) a “bridge loan to nowhere.”

Tesla's bump in the road

The Merc reports that Tesla has killed (or at least postponed) its sedan, laid off the engineering workers designing the car, and is delaying its planned San Jose plant.

The announcement was made on the blog of founder (and now CEO) Elon Musk, who’s giving up his SpaceX hobby to come back to Tesla. He blames the financial crisis, which the Merc interprets as meaning a “credit crunch” but I see as meaning “rich people with plummeting stock portfolios can’t afford a $100,000 toy.”

No mention was made in either story of the Dodge EV, although Scientific American notes that Tesla’s woes come as the big three are getting a $25 billion subsidy to develop alternative fuel vehicles.

I don’t see how the Dodge news could do anything but hurt Tesla’s business. The overpowered, overpriced, grid-powered 2-seat toy market isn’t all that big to begin with, and splitting it in half is even worse. About the only way to brush it off is to assume Chrysler will be incompetent, and given they’ve produced some good hot-rods in the past 50+ years, that seems like a bad bet.