Tesla at Turning Point

Tesla Motors
Tesla Motors

The company said in its quarterly earnings announcement that it has achieved a “fundamental turning point” as it transitions itself from a small volume maker of niche electric cars to a company with mass production capacity, able to build and sell 20,000 or more vehicles each year.

This is very optimistic and it remains as a company production target of the company. This is a great jump, as it would be two orders larger than the whole third quarter production of the company. In that same period, the company was able to build just 350 Model S and sell just 250 as well as sell 68 of its Roadsters. All these resulted in gross revenues totaling U.S.$50 million.

The numbers remain small with the production compacted in the last two weeks of the quarter. Tesla in its defense says it is able to build 200 cars per week and at that rate, it would be able to build 10,000 cars in a year. This is the number to make the company cash flow positive and it assumes it sells all those sedans at the projected price of U.S.$57,400. The current price of the Model S is pegged at U.S.$95,400.

The company has spent a great deal of last year upgrading its main factory located in Fremont, California. The former Toyota plant’s retooling is a slow and arduous process and is funded in part by a U.S.$465 million loan from the US Department of Energy and another U.S.$222 million on its follow on offering after the company initially went public.  Another major issue is the multiple suits it is facing claiming that its manufacturer owned showrooms are violative of current U.S. law.

These suits were filed by the auto dealers of America and their respective state associations. Tesla is currently selling its electric cars online and not through franchised independent business dealers. Once bought, the factory delivers the cars directly to the buyer.

In undertaking this practice, two deigned aspects of car purchases are removed, mainly haggling and the buying. The Tesla Stores are educational showrooms where no cars are sold. The dealer groups do not believe this and have lobbied to change state laws as well as prevent the company from opening its stores. The Tesla Stores are viewed as dire threats and the movement has grown to suits filed in four different states.

A different view is being taken by Tesla CEO Elon Musk. He wrote on the Tesla website, “In many respects, it would be easier to pursue the traditional franchise dealership model.” This he said would save the company money and thus broaden its distribution coverage. There is a fundamental problem though, he observed, as the dealers would explain the advantages of battery electric cars while relying on conventional vehicles for their profits and sales.

The purpose of the Tesla stores is to let the public learn about the Model S from product specialists no on commission and learn about electric cars in general. The Model S is very different from any other vehicle that it requires a great amount of education before considering a purchase.  Musk added, “Their goal and the sole metric of their success is to have you enjoy the experience of visiting so much that you look forward to returning again. “

As for laws, Musk adds, “We do not seek to change those rules and we have taken great care not to act in a manner contrary to those rules. “ He views the lawsuits filed as ‘starkly contrary to the spirit and the letter of the law.” One case was filed by a Fisker dealer while the other suit is “an auto group that has repeatedly demanded that it be granted a Tesla franchise.”