Tesla Motors has built a great story around excellent technology. Now, it has to prove that it can build great cars, en masse.
It already built one, the Roadster, which it released in 2008. It's a slick, fast automobile, in line with Tesla's (TSLA) strategy to tap into a niche market-luxury electric vehicles. As of the beginning of this year, Tesla had sold 1,500 of them. Now, it needs to prove that it can sell great cars on a scale that will make the company profitable. That's going to be challenging, even though Tesla is mostly on track for the rollouts it outlined after it went public in 2010.
On Tuesday, Tesla issued a press release on its full year earnings, ahead of filing its first annual report as a publica company. Its losses grew -- Tesla reported a net loss of $51.4 million for the fourth quarter of 2010 compared to a loss of $24.2 million for the same time last year, when it was still a private company.
On the upside, it boosted revenue by 95%. Tesla's fourth quarter revenue grew to $36.3 million from $18.6 million in 2009.
That pleased the market. Many analysts rated the company a hold or a buy, heartened by the fact that the company's revenue is up and that Tesla seems on track to launch its Model S sedan when it says it will, in the middle of 2012.
But the market may be overlooking some of the major challenges that Tesla could face in getting all the way home. Car production takes a tremendous amount of capital, notes Carter Driscoll, a senior alternative energy analyst with Capstone Investments.
Tesla has enough cash now, Driscoll says, much of it from the $465 million in low-interest government loans that the company received from the US Department of Energy back in June 2009. But going forward, Tesla will have less of a cash cushion than competitors. In the process of rolling out new cars, there are often speed bumps.
"They need to execute on this model perfectly to get Tesla on the radar screen," says Driscoll. "It's just so much harder than people recognize," for several reasons, one of which is that Tesla won't get volume purchasing discounts for the parts it doesn't manufacture.
Tesla plans to release 20,000 vehicles for the entire year in 2012, which isn't very many. "That's a good month at a suburban facility in Flint or in Lancing," Driscoll says.
And unlike the Detroit and foreign companies entering the EV market, Tesla will have some manufacturing disadvantages. The main one is lack of access to the kind of capital that huge auto manufacturers have on hand.
Those auto manufacturers are getting in on the EV market. GM's (GM) Chevy Volt and Nissan's Leaf are both scheduled to go online around the same time as the Tesla Model-S. GM and Nissan are power players in the automotive world, both with market caps around fifty billions dollars. Tesla, in comparison, was estimated to have a market around a couple billion when it went public.
The company targets the niche consumers who want luxury electric vehicles. Compared to the Leaf, which will cost $25,280 after the tax savings and the Volt, which will cost over $32,000 after tax savings, Tesla's model S will cost right under $50,000.
"There's a segment of the population that wants to be green and wants to be in a very sexy car," says Driscoll. "It doesn't outweigh the tremendous amount of capital you have to put into one car. If that car doesn't succeed, even if that time frame gets delayed by a couple of quarters, you're talking a big shortfall in cash flow."
New models of cars get delayed all the time, especially with safety reviews, he says, and the electric vehicle market is particularly volatile.
It's difficult to predict consumer demand for EVs, especially since there are other forms of green cars out there for consumers, such as hybrid cars and plug-in electric vehicles.
Tesla's main strength has been stellar technology for electric car batteries and powertrains-the portion of the car that actually transfers energy from the engine and transmission to the wheels. Tesla's tech for these parts is some of the best in the business, according to Driscoll. Other car companies are accessing that technology too. For example, Telsa partnered with Toyota, the plan being for Tesla to develop the powertrain for Toyota's new Rav4 car.
The partnership is great for Tesla as a company, but carmakers such as Toyota that are capitalizing off of Tesla's battery tech are also pushing products that could potentially compete. For example, Toyota is still building another family of its hybrid car the Prius, set to hit the market between summer of 2011 and 2012. One of which is a Prius plug-in hybrid, which, unlike an electric car, doesn't require a special charging station. The plug-in hybrid and could tide Toyota over until the electric vehicle market becomes big enough to profit off of it.
Not that Tesla can't become profitable, it can, Driscoll says. But it's working with a tighter margin of error than competitors. If the demand for electric vehicles switches a bit, or if there are production delays, Tesla could get slammed.
"They're a long way away from profitability," says Driscoll. "Until they produce vehicle number one on a commercial scale, they're essentially a design shop."
COMMENTARY: Tesla Motors has been one of my favorite electric car startups. I have given Tesla Motors a bad rap at times, but this article confirms what I have saying all along. Tesla cannot afford to make any major mistakes, like running out of capital, experiencing design and production problems and delays in meeting its scheduled release date of 2012 for the new Tesla Model S sedan.
In a previous blog post dated February 1, 2010, I estimated that Tesla Motors had to sell between 10,000 to 12,000 cars just to breakeven. It's future is with the Model S, not the Roadster. The market for the Roadster is much too narrow and he will be competing with the likes of Ferrari, Porsche, Mercedes-Benz and BMW, and Fisker Automotive to name a few, who plan on releasing hight-end hybrids and electric cars of their own.
Tesla has no control over how consumers will adopt electric automobiles. However, the price of gasoline is predicted to hit $5.00 by 2012 (if not sooner) as the world enters the era of peak oil, and making car owner's think serioiusly about purchasing an EV. Whether they will purchase Tesla's premium priced Model S sedan, when there are less costly options, remains to be seen. From what I have seen, Tesla's Model S is the jewel of EV and hybrid sedans. The problem is going to be capital, and I don't believe that the government loans and funds Tesla raised from its mid-2010 IPO will be sufficient to meet the 2012 market deadline for the Model S.
There is already evidence that the market has lost some of the confidence it had back in 2010 after its IPO. It's stock price has gone from a high of $35.00+ to $23.00.
If you are not familiar with Tesla, you might wish to read my past blog posts:
- January 2, 2011 - "Tesla Motors Plans Aggressive Timeline For Production Of 2012 All-Electric Model S"
- December 13, 2010 - "Electric Vehicle Manufacturer's Will Flood The Market in 2012, Casualties Will Be High"
- November 29, 2010 - "Tesla Motors Stock Price Grew by 41% Since The IPO in June, Analysts Say It Is Way Over-Valued, Cause For Concern?"
- October 25, 2010 - "GTM Test Drives Tesla Motors' Roadster Electric Sports Car, Kicks Butt At 3.7 Seconds in 0-60 Tests"
- June 30, 2010 - "Tesla Motors First Day IPO Is A Resounding Success"
- June 24, 2010 - "Tesla Motors Sales Come To A Halt During First Quarter 2010, Will This Hurt Their IPO?"
- June 12, 2010 - "Electric Car Makers Fisker Automotive And Tesla Partner With Detroit And Japanese Automakers"
- February 1, 2010 - "Tesla Motors Tests IPO Market, Files SEC Form S-1 To Raise $100 Million"
Courtesy of an article dated February 18, 2011 appearing in CNN Money's Fortune
Thanks Blueandgold63, I completely agree with you about the volt and leaf. they are both me-too EV's. I think people have forgotten that design, engineering and functionality are very important to the consumer. I like both Tesla and Fisker, but their high-end cars the Sporster and Karma are competing in the very narrow luxury market. Yes, Tesla has differentiated itself with the unique design of their battery technology. Apparently Toyota thought so too, and is licensing that technology for their own EV's. The future of Tesla and Fisker lies in the mainstream sedan market. Both Tesla (Model S) and Fisker are pushing for production and delivery in 2012. However, competition is going to be tough. There are 40 other automakers both large and startups entering the EV market. So there will be some fallout. All the factors mentioned above will become very important. In terms of looks, Tesla really knows what they are doing. The Volt and Leak are such ugly cars. Priced lower, but I think consumers are willing to pay a bit more for a luxury look and better engineering.
Posted by: Tommy | 02/23/2011 at 07:20 AM
Driscoll is making the mistake of appplying the rules of ICE automaking to the new world of electric cars. He also obviously doesn't understand the new technology. Calling the Leaf and even more incompehensibly, the Chevy Volt, as competitors of the Tesla Model S indicates a
severe lack of knowledge of the territory. And neither is the ultra expensive Fisker hybrid any competitor of the Model S. And as for Driscoll's continual harping about the importance of capital, what I see is a big company (GM) with plenty of capital spending years to produce a car (the Volt) which is practically obsolete as it leaves the assembly line. The cost of developing the Volt : three times what Tesla will spend on the Model S, which is, for all intents and purposes, a completed car, and I fail to comprehend Driscoll's prediction of likely "safety" issues. Any important safety issues would likely involve the battery packs, and Tesla, as everyone familiar with teh EV scene knows, understands more about that than all the battery departments in all the other "major" automakers combined. The problem the potential big competitors face is a lack of knowledge and talent and that will kill you faster than a lack of money. Explain, if you will, how it's possible for GM to spend all that money on the Volt an still produce an ugly, unattractive vehicle whose batteries might last as little as 25 miles, and which, incredibly, cannot be recharged rapidly?
Posted by: Blueandgold63 | 02/22/2011 at 01:56 PM