Starting a Car Company and Turning A Profit: Tesla Under The CarEnvy Electron Microscope [Part II]


[Read Part I first!]


We’ve now arrived at the impetus for this scathing two-part editorial, the magazine article nestled under my wrists this entire time! It’s the October 2011 Top Gear Magazine with Sam Philip reviewing the BAC Mono, a bizarrely perfect single-seat road car that seems to blend a KTM X-Bow with a Formula Ford car into a bangers-and-mash-flavoured high-impact smoothie. Except instead of being disgusting, it’s amazing. All of which got me thinking: How much does it cost to start-up a new car company and how many units do they have to sell to turn a profit?

Obviously, there would have to be some kind of curve or graph that would be able to clearly present this data graphically, but even just talking out a few points could give us an idea of what that graph might look like. This question is what immediately drew my mind to thoughts of Tesla and Fisker, the two most publicized start-ups in recent years, both of whom are promising much and delivering only heartache and woe to their investors. Since Tesla is publicly traded on the NASDAQ, and therefore has detailed financial statements readily available, let’s take a closer look at Elon Musk’s Palo Alto firm.

Tesla, meet the Electron Microscope.

As of June 30, 2011 Tesla had delivered 1,840 all-electric Roadsters to customers, with plans to deliver a total of 2500 by early 2012. After selling the whole batch of Roadsters, Tesla will have received somewhere in the order of $250 million in vehicle sales revenue, plus revenue for development services to Toyota and Mercedes-Benz. The most recent data, released just yesterday for the company’s third financial quarter, shows that Tesla had revenues of $58 million from June 30 to August 31, 2011. That’s up an impressive 85% but still amounts to a loss of $57 million dollars in only 3 months. So Tesla brought in $58 million, but spent $115 million in only 3 months!

The company currently has $574 million, over half a billion, in cash on hand between $334 million of their own cash and $240 million US Government loans, but that won’t stretch as far as you might think. That seems like an enormous amount of money, but at this rate, it’ll only last 10 more quarters, or two-and-a-half years. And that’s “at this rate”, which is in no way, shape, or form sustainable. It’s actually going to get worse before it gets better.

Tesla is about to finish production of its Roadster and tool-up for the Model S sedan and Model X SUV, but there’ll be a gap of at least 6 months in 2012 where they won’t be seeing a dime of revenue from delivering cars. Their current revenue stream is drying up and they’re about to brace themselves for their biggest gamble yet: a $60,000+ electric family sedan. Yes, the Model S has a wicked pair of rear-facing harness seats for little ones (see below), but Tesla will need to convince people that their frail dealer network and unproven technology will be more tempting than a pedigreed 5-series of A6. As we discussed in Part I, pedigree is, like, so hot right now.

Then there’s the Model X, Tesla’s electric SUV, lurking somewhere in the deep, dark reaches of their laboratories. With an unbelievably straight face, Tesla says they can go from starting sales of the Model X in 2013 to pumping out 10,000-15,000 units in 2014. I just called my Vegas bookie, and even he’s not crazy enough to give me anything better than even money against that happening. If they can produce 500 units in 2013 and 5,000 in 2014, scaling up to 10,000 in 2015 and 15,000 in 2016, that would be a very tall and very optimistic order.

The graphs below have been compiled with a healthy optimism, but a more subdued forecast that Tesla’s own acid-tripping projections. Predicting the outcome of any given hockey game is challenging enough, but predicting sales, production capacity, market conditions, costs, and efficiency of an entire start-up car company using nothing more than intuition, “business sense”, and a reasonable understanding of the industry is akin to predicting 100 consecutive hockey games correctly. Anyone who says otherwise either wants something from you or is hiding something from you. But that doesn’t make it a worthwhile, and intriguing, exercise. So let’s get to it!

As you’ve undoubtedly already noticed, average transaction prices for Tesla’s cars have been included above to provide a revenue model. The Model S and Model X may start at $57,400, but tick a box for the 17″ touch screen centre console or 100 miles more range and the price grows quickly. An average transaction price of $65,000 seems reasonable, before government rebates. R&D costs will continue to increase in the coming years as Tesla sorts out the scalability of its technology, and “Admin” costs will also climb as Tesla broadens its dealer network.

Development Services will form an increasingly significant part of Tesla’s business model. They’ve invested heavily in an electric car technology that provides a driving range unmatchable by the competition. Toyota and Mercedes-Benz are already clients, and I expect the size of those contracts to increase and for other automakers to hop aboard as well. By 2016, and not a moment sooner, I can forsee Tesla developing a replacement for the Roadster, just not before they’ve sorted the Model S and Model X.

So what do all these revenues and expenditures mean for Tesla’s 2013 profitability target?

They mean that, like nearly everything else the company has done, it’ll be behind schedule. This model shows 2015 as the first fiscal year of profitability. The most fascinating thing about these projections is the amount of capital investment and time needed to start a new car company based on a new powertrain technology. It’s not just 2-3 years and a few hundred million bucks, or even 5-6 years and a billion dollars. The original AC Propulsion T-Zero prototype that ultimately became the Tesla Roadster was developed in 2003, meaning that it will have taken Tesla 12 years and $4.5B in investments to return $320 million in profit, based on this model. To pay off the entirety of the initial investment could take until 2018 with even the rosiest of projections, and that’s with 30k Model S/X sold annually, a few hundred Roadsters, a full 15 years, and nearly $10B in lifetime expenditures.

These numbers are so much bigger than I could’ve imagined, they warrant a moment of reflection and very bold letters.

If accurately predicting revenues and expenditures is as tough as predicting 100 consecutive hockey games, then starting up a car company is like putting a man on the moon. It’s a perilous journey fraught with untold hurdles, each of which will stress Tesla’s executives, employees, investors, consumers, and analysts alike. Elon Musk, Tesla’s current CEO, is nothing less than the bravest and most courageous man in the automotive industry today – and likely the one sleeping the fewest hours and finding the most stray gray hairs.

No one else is taking anywhere near the risks that he is with his company, except for maybe Shai Agassi and Henrik Fisker. But Fisker is at least 5 years behind Tesla today, and Shai’s Better Place is taking an entirely different approach, but the point is that they’re all trying something different! As Tim Harford explains in his recent TED talk, success comes from trying a variety of different approaches, using the trial and error process, and appreciating that incredibly complex problems don’t have very simple-to-understand solutions.

In the context of history, Elon Musk, Shai Agassi, and Henrik Fisker are the Henry Ford, Dodge Brothers, and Henry Leland of our generation. These men are the risk takers. They may succeed, they may fail, but the world will feel their impact no matter what.

As we continue to mourn the recent passing of Steve Jobs, we would do well to remember his legendary vision, fearless risk taking, and passion for progress. These are the qualities that will help Tesla, Better Place, and Fisker succeed, thereby propelling the automobile forward into the 21st century and beyond.

Starting a car company is one thing, turning a profit is another, but changing the world is all that really matters.

[Photo credits: Brett Berk, AutoblogGreen]