Tesla Drives Toward Profitability

February 18, 2009 – Vol.13 No.48

TESLA DRIVES TOWARD PROFITABILITY.
by Bruce Mulliken, Green Energy News

Tesla is America’s newest car producer, and soon it could be the only one turning a profit.

Though the builder of all-electric cars is light years away from being a major player in the automotive market, the company could have a business model for success that other companies should follow. That model is fairly simple: Produce extremely environmentally friendly automobiles and target them to specific markets. Don’t try to make cars for every market segment.

Tesla’s only production model right now, the Roadster, at $109,000, is not an everyman’s car. Nor will be the Model S when it’s produced. Still the company knows that even in a slow market there’s plenty of wealth out there that can afford the sports car or the upcoming sedan. With 200 Roadsters already built and another 1000 on order, the company predicts it will achieve profitability in the second half of this year.

An injection of cash to the tune of $40 million in financing helped the company ramp up production and reduce costs that are assisting on the profit end.

The company hasn’t had to offer discounts for its cars like the big boys. According to the company newsletter, one customer paid a premium price of $160,000, $51,000 more than list just to own a Roadster. Other customers have signed up for their second car, they like the first one so much.

Tesla knows how to keep customers loyal as well. When the Model S goes on sale in 2011 Roadster owners will get a $10,000 discount as well as be at the top of the list to receive the cars.

Seed money will help the company too. At what could turn out to the best injection of taxpayer dollars in creating jobs (green jobs at that) the Obama Administration has put a $350 million loan to Tesla on fast track. The company will be getting the funds from the Department of Energy’s Advanced Technology Vehicles Manufacturing loan program within 4 - 5 months. The funds, which eventually Tesla will have to pay back, will be used to move production of the Model S forward. 2011 is not so far away.

The Model S is now primping for its public debut on March 26.

Looking into the future and the value of its cars as they age, the company has initiated a battery replacement program for the Roadster. The description of the program in the Company newsletter offers considerable insight into the vehicle’s most important component:

“Customers may pay $12,000, EUR 10,000 or GBP 9,000 up front and in return receive a replacement battery pack after seven years. Customers will also have the option of replacing the pack earlier at a premium or later for a partial refund. With the low production volume of the Tesla Roadster, the current replacement price of the pack is almost three times that number. The main reason for the relatively low cost up front -- and why this is a smart purchase -- is that we are arbitraging the relative cost of capital between Tesla and our typical customer.”

Because of the above paragraph we have now learned that the Roadster battery pack is expected to last 7 years. (Tesla says it should last 7 years or 100,000 miles.) And, that the current cost of the battery pack is around $36,000. (Yikes.)

The word “arbitraging” can be translated into a lot of things. For instance, with this program Tesla feasibly could invest the upfront $12,000, earning enough return to cover the cost of the new battery. Or, the company could be gambling that the cost of the battery will drop during the seven years. Or, the company is considering the resale value of Teslas in 7 years. A car with a dead battery would have little resale value. A car with a brand new one, ready for another 7 years or 100,000 miles, would have considerable value. For the owner, the investment of $12,000 now may seem cheap. (Better $12,000 now than a big loss later on.) For Tesla, cars with high resale value will keep old customers coming back and new ones arriving in showrooms.

A guess is that Tesla’s “arbitrage” math includes all the above.

The company also now has an extended warranty – but it doesn’t cover the battery.

Right now GM and Chrysler are seeking additional billions to stay alive. Maybe it’s time for them to go, but like an old car, be parted out with certain models saved for production by brand new companies created by a new generation of forward thinking automotive entrepreneurs. A few more Tesla-like companies out there wouldn’t hurt.

Links:

Tesla Motors
http://www.teslamotors.com

--- Tesla Motors Receives $40 Million Financing Commitment.

--- Tesla to Produce All-Electric Luxury Sedan in California’s Silicon Valley.