Credit gridlock prompts Tesla to delay next model, cut workers
The credit crisis has hit the country’s leading electric car maker.
Citing “extraordinary times,” Tesla Motors, maker of the battery-powered, $109,000 Roadster, said Wednesday that difficult market conditions were forcing it to delay production of its next-generation vehicle, close two offices, lay off an unspecified number of employees and replace its chief executive.
For now, the San Carlos, Calif.-based company will focus on cutting costs and making its current vehicle profitable, said Darryl Siri, Tesla’s head of sales and marketing. “Because of the fundraising environment and capital markets, we’re going to focus on making the Roadster a positive cash flow, core product,” he said.
Effective immediately, the company’s chairman, Elon Musk, is taking on the chief executive’s post, while the outgoing chief executive, Ze’ev Drori, will stay on as vice chairman.
Tesla has been held up as a leading light in the clean technology start-up world, with its product (the Roadster) appearing on dozens of magazine covers and its chairman, Musk, appearing on “60 Minutes” less than two weeks ago. As a start-up, however, Tesla is particularly vulnerable to the vicissitudes of increasingly tight credit markets.
“Tesla and about a million other companies are in the same place,” said Alexander Cappello, chairman and chief executive of Cappello Capital Corp., an investment bank specializing in high-growth companies. “There’s virtually no money available from banks. There’s no money for buyouts. There’s no money for issuing debt. There’s just no money.”
Before delivering its first production Roadster in February, Tesla raised about $140 million, mostly from venture capital firms such as VantagePoint Venture Partners. To help finance its next project -- a $60,000, four-door electric car called the Model S that it plans to build in San Jose -- Tesla once again looked to capital firms for an additional $100 million or so.
Wednesday’s announcement seems to indicate Tesla is having difficulty reaching those goals. “It’s not an understatement to say that nearly every business will be impacted by what has unfolded in the past weeks,” Musk said in a statement on Tesla’s website Wednesday. “This is true for Silicon Valley as well.”
Venture capitalists need access to credit to finance the companies they invest in. They also depend on credit markets to lubricate the mergers and acquisitions that allow them to profit from their investments. Those options are practically nonexistent now.
And with the stock market in disarray, the favorite start-up option to raise capital -- going public -- is nearly dead. According to a study released this month by the National Venture Capital Assn., only six start-ups had initial public stock offerings through the third quarter of this year. In the first nine months of 2007, 55 start-ups went public.
“When a firm can’t go public or get acquired, the venture capital firm has to decide whether to continue investing in that firm,” said Mark Cannice, a business professor at the University of San Francisco who compiles a quarterly measure of confidence among venture capitalists. His latest poll, released Wednesday, pegged that confidence at an all-time low, down 30% from a year ago. “It’s a tremendous fall-off in willingness to invest in this market.”
Alan Salzman, chief executive and managing partner at VantagePoint, said Wednesday that he and his firm “fully support the mission Tesla is on.”
“The electric vehicle is clearly the future of transportation,” he said. “We at VantagePoint are committed to the sector.”
Tesla maintains that it will be able to fund its Model S project by relying on up to $250 million in loans guaranteed by the Department of Energy, as well as on tax exemptions offered by California worth up to $9 million.
Nevertheless, Tesla said it would delay that project, slated to begin production in 2010, until 2011. It is also closing its office in Rochester Hills, Mich., which employs about 30 people working on the Model S.
San Jose Mayor Chuck Reed said Tesla contacted his office Wednesday with the news and that the carmaker “is committed to continuing to make their factory for the S model sedan in San Jose.” A spokesman for the California treasurer said Tesla would still be eligible for the tax exclusions in the event of a delayed production start.
Tesla has not determined how many of its roughly 250 employees will be laid off, Siri said, but he added that it would be fewer than 100. In addition to the Michigan office, the company’s office in London will be closed, he said.
According to Musk’s statement, the company’s goal is to “be cash-flow positive within six to nine months,” a target he said it would reach by ramping up annual production of the two-seat Roadsters to 1,800 units, and by increasing profit margins on each vehicle by reducing overhead. To date, Tesla has delivered about 50 Roadsters.
Musk, a co-founder of PayPal Inc. who is also CEO of rocket ship company SpaceX, will serve as Tesla’s fourth chief executive in 14 months. In August 2007, founder Martin Eberhard left the post and was replaced by an interim CEO, Michael Marks. In December, Drori was hired to run the company’s day-to-day operations.
Neither Drori nor Musk could be reached for comment.
Tesla is the largest and best-funded electric car start-up, but is hardly alone. There are at least a dozen other firms working on such vehicles.
Last month, Irvine-based Fisker Automotive, which is developing a plug-in hybrid sedan, successfully completed a $65-million round of funding. And in July, Carlsbad’s Aptera Motors, maker of a $30,000 three-wheel electric car, said it had raised $24 million from investors including Google Inc.
A spokeswoman for Gov. Arnold Schwarzenegger, who played a key role in recruiting the Model S project to the state -- it had been planned for New Mexico -- was unsure of Tesla’s future.
“We can’t predict the fate of any one company,” said Camille Anderson. “But clean technology in California is here to stay.”
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