When Tesla co-founded Martin Eberhard was ousted as CEO in 2007, the reasons for his departure were not entirely clear. Elon Musk, the principle owner and current CEO of Tesla, has finally shed light on the matter. In an e-mail to customers explaining price increases, Musk said an audit by investors in 2007 found the cost to make the Roadster as planned would be a whopping $140,000. With a planned selling price of $92,000, it’s easy to see the potential problem.
“An audit by one of the Series D investors in the summer of 2007 found that the true cost was closer to $140k, which was obviously an extremely alarming discovery and ultimately led to a near complete change in the makeup of the senior management team,” Musk wrote in the letter.
Musk further noted the current cost of making the car is between $90,000 and $100,000. Although the Roadster’s base price is currently $109,000, Tesla is fulfilling orders for customers who signed on when the base price was $92,000 or $98,000, meaning profitability is still slightly out of reach.
To help bridge the gap, Tesla has made the turbine-blade wheels a $3,000 option, even though they were originally supposed to come standard. The high-performance charger, which allows a 3.5 hour home recharge, is also a $3,000 option now.
From $140,000 to $90,000
So how did Tesla cut costs of $40,000 or $50,000 per unit? Musk explains:
“To bring the cost of the car down, we have reengineered the entire drivetrain. The body supplier was also switched out from a little company that was charging us nutty money and had a max production of three per week to Sotira, who supplies high paint quality body panels to Lotus , Aston Martin and others,” he wrote.
“In the process, we had to pay several million dollars for a whole new set of body tooling, as the old tooling had been made incorrectly. The old HVAC system was unreliable and cost almost as much as a new compact car, so also had to be replaced. The wiring harness, seats, navigation system and instrument panel also had to be modified or replaced.”
Profitability near
Musk said thanks to “a lot of additional effort by the Tesla team,” the cost of making the Roadster model should be $80,000 or less by summer. By then, the company will be delivering orders for customers who agreed to pay $109,000 from the start.
With Tesla beginning to fulfill these orders, it’s “realistic” to expect profitability in the middle of 2009, Musk said. He further stated the company will be building at least 30 cars per week by that point.
Musk said profitability is a requirement of the $350 million in government loans the company is seeking. Tesla needs the loans in order to bring its $60,000 Model S sedan to market on schedule. Otherwise, it will be delayed by 6 to 12 months.
“A key requirement is that any company applying be able to show that it is viable without the loans,” he explained. “If we allow ourselves to lose money on the cars we are shipping today, we place those loans at risk.”
“Mass market electric cars have been my goal from the beginning of Tesla. I don’t want and I don’t think the vast majority of Tesla customers want us to do anything to jeopardize that objective.”
Musk was the founder of PayPal, which eBay acquired for $1.5 billion in 2002. He also founded SpaceX, which recently received a multi-billion-dollar contract with NASA, and SolarCity, which continues to be profitable. As it turns out, turning a profit in the automobile industry is no easy task, even for an extremely successful entrepreneur like Musk.
A fair balance?
Musk expressed disappointment over having to charge early customers extra for options, but said he ultimately feels Tesla was able to strike a “reasonable compromise between being fair to early customers and ensuring the viability of Tesla.”
He said Tesla’s success is “obviously in the best interests of all customers.”
While some customers will end up paying $6,000 more than they planned, they will also receive a $7,500 federal tax credit, thanks to a lobbying effort by Tesla.
“We made the pricing changes to ensure the viability of Tesla in the long term, regardless of government incentives, but we hope the credit will offset the increase for most customers,” he concluded.
