Tesla Hits Wall But Says EV Production Will Continue Amid CEO Ouster, Layoffs
By John O'Dell October 16, 2008
By John O'Dell, Senior Editor
Has it been a story that was, indeed, too good to be true?
Tesla Motors, the pioneering electric roadster maker that recently survived a rough road potholed with financial and management turmoil , appears to have suffered substantial damage in a collision with the global economic mess.
The full extent won't be known for months, but the early outcome of the crash is ugly, with layoffs and downsizing in the works and yet another top management change already accomplished.
The privately held company's chairman and top financier, Silicon Valley multi-millionaire Elon Musk, said Wednesday that he has taken over the role of chief executive officer, bouncing recently-hired CEO Ze'ev Drori into the job of vice chairman and member of the board.
In a posting on the Tesla blog , Musk - who last year fired Tesla co-founder Martin Eberhard in what was widely seen as a contest of egos - said in his posting that Tesla still is not generating positive cash flow and predicted that it will take six to nine months under an austerity regime to achieve that goal.
Musk said that for the duration of what he called "extraordinary times" that have impacted businesses everywhere, Tesla will focus on its two revenue-producing lines -sales of its battery-electric powertrain products to other companies and sales of its $109,000 Roadster to anyone who can still afford it after assessing the damage a collapsing market has done to their stock portfolios.
Work on a much-hyped "Model S" electric luxury sedan will be slowed until cash flow improves, he said.
The company will "reduce activity on detailed production engineering, tooling and commitments to suppliers," Musk wrote.
It was Tesla's agreement to build the $60,000 battery-electric "family" car in California and to locate its plant in San Jose that won it a $9-million tax incentive package from the state and a rent and tax incentives package from the city of San Jose worth at least $15 million.
Tesla marketing vice president and chief spokesman Darryl Siry could not be reached for comment late Wednesday and it could not be determined whether the delays could jeopardize the incentives deals.
But Musk (right)
seemed to be saying that wouldn't happen as he promised that Tesla remains "unequivocally committed" to the project.Work on the Model S would largely be financed with the proceeds of low-interest loans Tesla can receive with the $150 million federal loan guarantee it recently received.
To get that loan, work on its new, 89-acre office and factory complex in San Jose, Calif., will continue despite the company's cash-flow woes. The project is critical because without a U.S. factory Tesla cannot begin drawing on the federal loan guarantee.
Musk said Tesla won't have to wait for completion of the complex - scheduled for late 2010 or early 2011 - but must at least receive required environmental approvals to build the facility before it can begin participating in the federal program.
That should occur in the second quarter of 2009, and will delay the planned start of production of the Model S "for roughly six months," until mid 2011, he said.
Meantime, Musk said, Tesla's powertrain business is profitable and "growing rapidly" and sales of the Tesla roadster are strong.
But cash-flow has been hampered by the slow place of production of the largely hand-built car.
To stanch the outflow of cash, he said, Tesla must "continue to ramp up our production rate, improve roadster contribution margin and reduce operating expenses."
That means, among other things, "headcount reduction," he said.
While the company has not released any information on how many of its 250 employees will get the ax, a number of Tesla watchers have speculated that as many as half might be laid off.
Musk wrote in his blog, however, that the number of Tesla layoffs would be "modest" and would result from his decision as the new CEO to raise "the performance bar at Tesla to a very high level."
Departing employees would be "considered good performers at most companies," he said, but will be people who don't fit with his judgment of the kind of workforce needed by a company that must adopt "a special forces philosophy at this stage of its life."
The reference is to the image of the U.S. Army's Special Forces personnel as lean, mean and super-dedicated to the mission at hand to the exclusion of all else.
Musk said additional "headcount reduction" would occur as a normal part of the company's plan to consolidate operations when its new headquarters complex is completed.
Among other things, the company's 30-employee engineering office in Rochester Hills, Mich., will be closed at that time, he said.
Remarking on his decision to take over daily direction of the company as CEO, Musk said that Drori "has made extraordinary progress with the company over the past year."
Apparently not extraordinary enough, though.
Drori, who founded and sold both a semiconductor company and an automotive alarm systems company, was recruited last year to replace the ousted Eberhard.
Musk, who co-founded on-line payment services provider PayPal , ended his message with a plea to Tesla customers and fans to remain loyal and with a pledge to use his personal fortune, if need be, to keep the company going.
"If you have bought a car from Tesla, or are thinking of doing so," he wrote, please know that I personally stand behind delivering a product that you will love and continuing to develop new models in the future."
Even if it takes longer than the six- to nine months he has predicted for Tesla to stop hemorrhaging cash, Musk said, "I will do whatever it takes to ensure that Tesla has more than sufficient capital to get there."
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