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The Real Reason Tesla Is Still Alive (And Other Green Car Companies Aren't)
Say goodbye to another green car start-up. Vehicle Production Group, which planned to build thousands of wheelchair-accessible vans powered by natural gas, has called it quits. According to Bloomberg, the company ran out of money and couldn’t pay its 100 employees anymore.
Add VPG to the growing list of recent green car failures: Bright Automotive (electric delivery vans) , Carbon Motors (clean diesel-powered police cars), Aptera Motors (three-wheeled electric cars), Coda Automotive (inexpensive electric sedans) and, arguably the most infamous, Fisker Automotive (plug-in hybrid sports cars).
All had applied for financing under a $25 billion U.S. Energy Department loan program to promote development of cleaner cars, but only Fisker and VPG managed to draw the lucky tickets. Fisker was awarded $529 million (but received only $193 million before the DOE cut them off because of missed milestones) and VPG received $50 million. But now, they’re all dead, or almost dead. (One exception: tiny Wheego Electric of Atlanta, an EV start-up that started out making glorified golf carts and now sells a handful of bubble-shaped two-seaters with a top speed of 65 mph. The company is talking about introducing a $44,000 electric SUV next, but I wouldn’t hold my breath.)
That leaves only Tesla Motors TSLA -4.03%, maker of the plug-in Tesla roadster and the new Model S sedan, still standing. Which begs the question: why has Tesla made it when so many others have not?
One reason, of course, is that Tesla’s new Model S sedan — which followed the introductory Roadster — is a very impressive vehicle. Motor Trend and Automobile have showered it with accolades and Consumer Reports just this week issued a rave review, calling it the best vehicle they’ve ever tested. The influential magazine gave the Model S a rating of 99 out of 100 and said it “is brimming with innovation, delivers world-class performance, and is interwoven throughout with impressive attention to detail.”
Depending on price, which ranges from $62,400 to $87,400 (including a $7,500 federal tax credit), the Model S has a driving range of between 208 and 265 miles. A full charge takes about six hours from an ordinary 240 volt outlet. The interior is lush, with an enormous 17-inch video touchscreen dominating the center console. “It’s what Marty McFly might have brought back in place of his DeLorean in ‘Back to the Future’,” wrote Consumer Reports.
The Fisker Karma is sophisticated, too — perhaps more so, because its range-extended EV powertrain is more complex than a simple electric car. It runs on battery power for about 40 miles, after which a small gasoline engine kicks in to power an electric motor that extends the EV range for up to 300 miles. It’s the same technology in General Motors GM -0.16%‘ Chevrolet Volt.
Unfortunately for Fisker, the Karma was plagued with quality issues from the start, mostly due to battery problems from its supplier, A123 Systems.
Tesla had early quality problems, too. The $109,000 Roadster was recalled at least twice after it was introduced in 2008, including once to fix electrical problems that caused a fire. But Tesla always saw the Roadster as a way to test out its concept and prove that electric cars could be cool, so those problems weren’t fatal to the larger business plan. The company managed to work through them and so far, the Model S has had no major quality glitches.
Tesla’s launch of the more mainstream Model S got off to a very slow start, causing the company to miss its 2012 sales targets, but production picked up significantly in the first quarter. Tesla now aims to sell 21,000 vehicles in the U.S. this year, up from a previous goal of 20,000. That would have it outselling the Audi A6 and nearly matching the Lexus GS350. It’s aiming for 10,000 more in Europe. Meanwhile, it’s making plans for the next car in its lineup, the Model X SUV.
So what’s different about Tesla?
Experience, for one thing. While most of the other green car start-ups were founded by traditional car guys with a dream but little experience running a company, Tesla founder Elon Musk, with degrees in physics and business, had already built and sold one successful company, PayPal, (to eBay in 2002 for $1.5 billion) and also runs SpaceX, a maker of rockets and spacecraft. He had the stomach to push through difficult times, and the chutzpah to twist the arms of reluctant investors.
Having good partners is also important. Musk knew the company wouldn’t stay alive for long just by selling a couple thousand electric sports cars to rich guys. So he looked to bring in more income by selling battery packs to other automakers. Daimler AG of Germany not only bought Tesla batteries for an electric version of its Smart minicar and for its big Freightliner trucks. It also invested $50 million in the company. Likewise, Toyota teamed up with Tesla to develop the next-generation Rav4 plug-in and invested $50 million in Musk’s company as well.
Tesla has been clever in other ways, too. It sells credits it receives from the state of California for producing zero emissions vehicles to other automakers that aren’t so clean. At up to $35,000 per vehicle, it’s a windfall that has helped keep the company alive, according to Gartner analyst Thilo Koslowski. “At the end of the day, other carmakers are subsidizing Tesla,” Koslowski told the Los Angeles Times.
While true until now, Tesla says those credits will decline as sales spread beyond California and into Europe. In the first quarter, Tesla said credits sold to other automakers amounted to approximately $68 million or 12% of its revenues.
Timing is important, too. While the Tesla Roadster was merely a Lotus retrofitted with an electric powertrain, the mainstream Model S needed a legitimate manufacturing site. As luck would have it, the auto industry was retrenching in 2009. GM had pulled out of a joint venture with Toyota in Fremont, Calif., after filing bankruptcy and the Japanese carmaker, with huge problems of its own, was cutting U.S. production. Musk was able to snag the massive factory, once valued at $1 billion, for a mere $42 million.
No doubt, it also helps to be incredibly rich. Starting a car company is capital-intensive, which is why history is littered with the failed visions of automobile impresarios like Preston Tucker, John DeLorean and Malcolm Bricklin. Like the current crop of entrepreneurs, they didn’t have the money to keep their start-ups going.
Musk, luckily, is a billionaire. He pocketed roughly $180 million as a cofounder of PayPal, and helped get Tesla off the ground in 2004 with an initial investment of $6.3 million. He put in another $20 million in 2007, and then in fall of 2008, with the company on the verge of collapse as the economy seized to a halt, Musk was virtually broke. He spent his last $20 million trying to keep the company afloat, while living off personal loans from friends.
The $465 million government loan helped, as did Tesla’s initial public offering in 2010, which raised $226 million.
Today, Musk is worth almost $3.8 billion — $1 billion more than Forbes estimated less than three months ago. Tesla stock has surged 40 percent this week alone, following the positive earnings report and the Consumer Reports review.
That’s not to say Tesla is a certified success. While the company doesn’t have any of the pension, healthcare or other legacy costs that burden large entrenched automakers, it still has a lot to prove when it comes to execution, notes J. P. Morgan’s automotive analyst, Ryan Brinkman. “Tesla simply has yet to demonstrate it can produce Model S vehicles at the combination of volume and margin assumed in its business plan,” he wrote in a note to investors. The company has a gross margin target of 25 percent by year end, not counting the income from selling zero-emission credits to other automakers. But in the first quarter, its gross margin, when adjusted for those credits, was just 5.7 percent. That seems like an awfully steep climb.
Musk could well make it happen because unlike those other green car companies, he has things you can’t get from the government: huge skin in the game, passion and talent.
You may read the full article here: http://www.forbes.com/sites/joannmuller/2013/05/11/the-real-reason-tesla...