Can Tesla Become a Real Automaker?

Once again, the federal government is handing billions of dollars to auto companies. The last round of loans raised the question of whether General Motors and Chrysler could shake off their creaky ways and survive to pay the money back. The question this time: Can Tesla Motors become enough like one of those old car companies?

The latest round of handouts is coming from U.S. Energy Dept. funds to boost development of greener vehicles. The department issued $8 billion in loans on June 23, granting Ford Motor (F) $6 billion, Nissan Motor (NSANY) $1.6 billion, and tiny electric-car startup Tesla $465 million. While it's fair to say that Ford and Nissan have staying power, Tesla is a riskier bet.

The Silicon Valley company faces a massive challenge to generate the kind of cash needed to develop new cars that will sell in sufficient volume to make real money eventually. While Tesla is racing to lower costs and hone the development of its first-generation Roadster—along with a fleet of less expensive, more mainstream cars—it's tough for any company to make a significant profit on low-volume cars.

"The business model is wrong," says James N. Hall, principal of 2953 Analytics, a Detroit-area auto consultancy. "The prices of their cars are too low for the kind of technology they want to sell. You have to sell a lot of them. As production goes up, they will realize how undercapitalized they are."

Greenbacks to Help Create Green Jobs

Tesla plans to use $365 million of its loans to develop the Model S, a five-passenger, $50,000 sedan that is scheduled to go on sale in late 2011. The rest of the money will be used to build an electric-battery plant to sell Tesla's electric-drive technology to other carmakers.

For their parts, Nissan says it will build an electric car in Tennessee and Ford will use the money to help fund a $14 billion push into advanced-technology vehicles.

The financing fits the Obama Administration's goal of creating green jobs. "We have an historic opportunity to help ensure that the next generation of fuel-efficient cars and trucks are made in America," said President Barack Obama in a statement.

Tesla's final loan repayment to taxpayers would be made in 2022, CEO Elon Musk said in a conference call with journalists. Musk says the company has lowered the cost of its $101,500 roadster to $80,000 per car, not including overhead. He says Tesla should start making money in July.

The margins will be scant—even when the Model S comes out or if Tesla manages to realize Musk's dream of selling an affordable third-generation electric car that will sell more than 100,000 units annually. "The goal is to make margins relatively lean to make the price of the cars as affordable as possible," Musk said.

A Scramble for Money and Management

Tesla's technology is impressive. From scratch—on less than $200 million in investment capital—the company delivered the Roadster, a battery-powered sports car with a body based on the Lotus Elise that's capable of going from zero to 60 mph in 3.9 seconds. The company claims to have sold 1,200 of them, and Tesla Chief Financial Officer Deepak Ahuja says the company has taken deposits for 1,200 Model S sedans.

But since opening its doors in 2004, Tesla has been woefully unstable. The company has gone through four chief executives. The first, now-deposed Martin Eberhard, sued Tesla on June 11 for breach of contract and libel. Musk has spent the last year scrambling for cash. Late last summer the credit crunch undercut Tesla's attempts at a new round of private funding, so Musk had to pony up more of his own funds. As the company kept burning cash, it sold a 10% stake to German carmaker Daimler (DAI) for $50 million.

Another challenge is the unpredictability of demand for electric cars. After 10 years, even such hybrid-electric cars as Toyota's (TM) Prius make up less than 5% of the U.S. car market. And when Tesla's Model S hits the market, Nissan, GM, Chrysler, and Toyota will either be selling electric cars or plug-in hybrids that appeal to the same tech-savvy, green buyers. "Tesla will find more and more competition," Hall says.

If Tesla does come up with hit technology, a big player like Toyota could use its financial strength and technological prowess to develop a competing car very quickly, Hall points out.

Having Daimler as a partner helps. Musk says Daimler can assist in developing big mechanical systems such as suspensions and can use its purchasing muscle to lower costs. Tesla also has a deal to supply electric-drive systems for Daimler's tiny Smart cars. If Tesla can sell other carmakers on the electric-drive systems from its planned battery-pack plant, it would gain an additional revenue stream to help defray its investment costs.

But it won't be an easy road for the startup—and it's far from a sure thing for taxpayers. Return to the Auto Bailout Special Report Table of Contents

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