With just hundreds of cars on the road and with the auto industry still struggling to recover from the global economic crisis, Tesla Motors took a bold move by filing for an initial public offering that could make or break the company’s future (see article).
The decision is rumoured to mark the end of the Tesla Roadster, the company’s only highway-ready product to date, with the company still ravaged by debt.
The harsh reality behind Tesla’s finances
In February 2009, Tesla Motors CEO Elon Musk spoke to Tesla enthusiasts through a newsletter in which he indicated that the company would reach profitability by the second half of the same year, thanks in large to a $40million investment in December, 2008. By August, Musk declared that the company had reached profitability and reported that it earned $1million on $20million in revenue during the month.
However, Tesla’s filing for an initial public offering has revealed some harsh truths about the company’s position. According to reports in the Wall Street Journal, the company came nowhere close to profitability during most of the year with a $31.5million loss for the first nine months of 2009. While this is an improvement on its losses of $57.2million in 2008 and $78million in 2007, the company is expected to continue to reap losses for the foreseeable future.
Perhaps even more worrying for potential investors is that a reading of the fine print by Wired Autopia’s blog uncovered some interesting planning news. It reports that there are no plans to sell the current generation Tesla Roadster after 2011 (the second generation is due out this summer) due to tooling changes at one of its suppliers. As a result it states: “we anticipate that we may generate limited, if any, revenue from selling electric vehicles after 2011 until the launch of the planned Model S.”
It seems all of Tesla’s marbles, for now at least lie with the Tesla Model S saloon car, which is not expected out of the door until 2012.
Hope for the future
On the positive side, Tesla’s sales have grown quickly – it brought in $93.4million in the first nine months of 2009 with the cost of the sales at $85.6million; by contrast, Tesla reaped just $580,000 in sales in 2008 when it first began selling the Roadster.
The Tesla Roadster sells for $109,000 before tax incentives and 937 of the models had been sold by December 31, 2009. While this figure doesn’t look outstanding – and indeed at the end of the year the company only had a further 220 outstanding orders for the Roadster – the future appears bright for the Model S with 2,000 of the vehicles already reserved. The hope is to sell 20,000 per year by 2012 at an effective price of $49,000 once a tax credit of $7,500 is taken into account.
Clearly, Tesla needs large amounts of capital and this has been partially addressed as the US Department of Energy recently finalised a $465million loan to the company (see article). The money will be put towards a manufacturing facility in southern California that will assemble electric vehicle battery packs, electric motors and other components not only for use in Tesla’s own vehicles but for sale to other manufacturers too. The DOE will get 9.3million shares of Tesla’s common stock and has been assured that 50 per cent of the net proceeds will be set aside to fund a dedicated account under the loan facility to fund project costs.
The company also appears to have strong backers. Though Elon Musk is himself by the far largest shareholder, other backers include Blackstar Investco, which is 60 per cent owned by Daimler AG, and 40 per cent owned by Abu Dhabi’s Aabar Blackstar Holdings; as well as VantagePoint Venture Partners; Valor Equity Partners and Abu Dhabi’s Al Wahada Capital Investment.
So can Tesla make it?
In the papers filed to the SEC, Tesla stated that “incumbent automobile manufacturers are at a crossroads and face significant industry-wide challenges… investments made by incumbent automobile manufacturers in manufacturing and technology related to the internal combustion engine have to date inhibited rapid innovation in alternative-fuel powertrain technologies.”
So it seems much hinges on the electric cachet catching the eye of investors. Much of Tesla’s success then will likely depend on strong government backing and implementation of electric car infrastructure to give the company a real chance of breaking into the black.
However, unprofitable ventures haven’t been well received in the past and with the US auto industry still teetering and strong competition emerging from China and India, Tesla’s offering may test investors’ appetite for risk to an unpalatable level.
Faye Sunderland
