Will Tesla Succeed Like Apple, Or Vanish Like Altair?

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Tesla Motors, Palo Alto, California

Tesla Motors, Palo Alto, California

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Of every 10 companies started by entrepreneurs, half or more fail.

Some are sold for the parts or the people, a couple of lucky ones may be bought by larger companies, and only the very lucky ones survive as independent companies over the long term.

Tesla: Apple or Altair?

For every Apple, in other words, there are hundreds of companies that have vanished from the computer business, from Altair, Altos, Amdahl, and Apollo to Wang, Xerox, and Zeos.

Every venture capitalist knows this, and the most successful VCs hope to have a home run and a base hit out of every 10 companies they fund. The rest? Collateral damage.

Debating whether Tesla Motors (and its charismatic CEO Elon Musk) will be an Apple or an Altair is part of the excitement around the nascent electric car business.

Now Fortune senior editor-at-large Alex Taylor III has weighed in. You might deduce that he's a skeptic about Tesla's chances by the title of his article: "Tesla's business plan: Riding on fumes."

No economies of scale

His basic theory is that Tesla plans to price its upcoming, all-new 2012 Model S sport sedan to compete head-to-head with similarly sized luxury sedans from much larger companies that benefit from huge economies of scale.

He notes that the $57,400 price for the base Model S with a 160-mile electric range is roughly equivalent to that of a 2012 Audi A6, for instance. But Tesla will build less than 50,000  Model S and related cars each year, versus the huge cost advantages Audi enjoys as part of the Volkswagen Group, which builds many millions of vehicles each year.

Tesla Motors, Palo Alto, California

Tesla Motors, Palo Alto, California

Enlarge Photo

And he writes that despite the company's questionable economics, "bullish securities analysts" have promoted Tesla as having the potential to "turn the Detroit Three [sic] and create the Big Four."

Not so much

We disagree with that last statement. While there's been plenty of hype about Tesla Motors [NSDQ:TSLA] since its undeniably successful initial public offering a year ago, most auto-industry analysts have a different view.

The majority of them feel Tesla has two possible outcomes: either the company fails to generate enough cash to fund ongoing operations, or its board will sell the company to a larger automaker.

Tesla Model S Alpha build

Tesla Model S Alpha build

Enlarge Photo

This article, from earlier this year, goes into more detail: Elon Musk Says Tesla Won't Be Sold, But Elon Musk Is Wrong.

Understanding venture capital

Because High Gear Media is backed by venture capitalists, we get the chance to talk to VCs here and there. And it's important to understand how venture firms finance companies: First they invest, and if they're quite lucky the company IPOs (as Tesla did), and then they cash out or radically reduce their holdings.

Tesla Motors CEO Elon Musk with Tesla Roadster

Tesla Motors CEO Elon Musk with Tesla Roadster

Enlarge Photo

Tesla has already beaten the odds by being one of the rare startups to have a successful IPO.

But once again, we return to the question that best sets the context for Tesla: What's the last car company founded in the U.S. from scratch, by entrepreneurs, that's still with us?

The answer is Chrysler, and the year was 1924. No one's succeeded since, and given the billion-dollar-plus cost of any new vehicle platform, it's one of the most cash-intensive businesses short of the oil or aircraft industries.

Tough timing

The timing of Taylor's article is tough for Tesla Motors. It still says confidently that it will start building production versions of the Model S during the second half of 2012.

Starting tomorrow night, the company will spend four days showing off the latest version of its 2012 Tesla Model S all-electric sports sedan as it moves closer to launch. GreenCarReports will be there, reporting on the events as they happen.

Tesla Model S Alpha build

Tesla Model S Alpha build

Enlarge Photo

But we're still betting that five years hence, the Tesla brand will be owned by a larger, global car company. That said, what do you think?

What will happen to Tesla: Will it crater? Will it be bought relatively soon after the Model S launches, when the company is being hailed in the media as a pioneer and a savior of the car industry? Or will it actually remain independent over the long haul (10 years, say)?

Leave us your thoughts in the Comments below.


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Comments (11)
  1. What happened to the opinion that Tesla would be a technology company? Are they now so loaded with debt from the Model S exercise that if the model S fails, then Tesla goes down completely?

  2. The record shows that innovative car companies, like Nissan, expect to actually loss money on their first attempts to market disruptive technology, like their BEV. The Leaf proves the point. Nissan needs ten years or more to recoup their investment in the Leaf...it will never happen because the technology is a changing target as batteries continue to be improved. But, Nissan has a ICE cash flow from it's other excellent cars to offset the cost of building and selling BEVs.
    Tesla does not and cannot afford to finance their "S" model unless it can go into full scale production and they sell every car. It will be up to Toyota to bail them out by merger. Watch it happen when Tesla announces their mass market, less-expensive BEV.

  3. The author is correct. I base my reasons on 40 years in the auto business. I worked both for a large OEM and for Tier 1 suppliers to the OEM's. I have an EV company & envy Musk for all of his money & other's he has used including DOE (our $'s).
    Based on today's thinking, it takes very large amounts of capital to design, test, validate & manufacturer every part on an automobile and then assemble it.
    But that is not all; there are three types of knowlegde to do anything right. The things you know, you know (90%), the things you know, you don't know & will figure out (9+%) and the things you don't know, you don't know. The last are the killers & why so many start-ups fail. Tesla still is at 20% on the last category & that will kill them.

  4. The problem with an analysis by an auto analyst is that they realy don't know anything about the EV field and its rules. Some have even listed the Leaf as a Model S competitor, so we know that they don't know what we know. They should be asking us the questions, not trying to supply answers. One wonders at the strange wondrous claims they make about "economies of scale."
    I note that Rawlings mentioned that several parts of the suspension were designed in house "even though Toyota's parts bin
    could have been used." That tells me all I need to know about the importance of those "economies of scale." There obviously is none, or at least very little here. It all depends upon labor rates,initial design costs, etc. not just numbers produced.

  5. Only time will tell, they've done ok so far let's hope they can keep it going.

  6. Tesla's start up since its IPO has been remarkably trouble free and so far they have pretty much kept with their original schedule. This contrasts with Nissan, Fisker and others who have had numerous setbacks and delays. I also own a roadster and am very impressed with it.
    I think what the skeptics are missing is that at least in theory, the EV is a lot simpler than a conventional vehicle. The big cost elements in the roadster are the batteries and the composite material body (Note that the S will be made of cheaper aluminum)
    As the owner of a roadster who drives it almost everyday, count me as a believer; whether Elon Musk eventually sells the company or chooses to go the distance!

  7. The stupidity of these predicitions is that these back-seat experts don't know anything about the economics of the company. They are intentionally seeking a mix of vehicles where the higher-range models will carry higher gross margins.

    If the blended gross margin is $10K per vehicle -- and, yes, I admit that's a guess -- they are going to make $500MM a year in gross margin selling "only" 50K vehicles a year. If it's "only" 5K per vehicle, they still pull $250MM gross margin annually at "only" 50K vehicles per year. There's a good chance it's actually going to wind up on the higher end of that scale. so why are they doomed before Model S ships? Oh, right, they aren't.

  8. If anyone is going to buy Tesla, that would be Toyota

  9. Actually, TM will buy Toyota in a reverse takeover the next time the Japanese market craters. ;)

    The problem with experts is that they know what has happened, but ignore the dismal record of expert predictions. If there's anyone likely to be sabotaged by what they "don't know they don't know" ...

  10. I'm seeing this 50k model S sales / year figure, but I'm thinking even the Leaf will end up selling only 20k, roughly, worldwide its first year. At $58k+ for model S, wouldn't 1k units / month globally be more realistic than 4k / month? 1k units / month is 33 model S off the line per day. That is a massive venture from scratch.

  11. Nissan Leaf sales during 2011 will be roughly 20,000, correct. The 50K/year figure is for Model S and (I believe) a theoretical maximum under existing tooling plans for all platform derivatives (Model X, etc.) once full production is achieved. It certainly will not happen in the first year of production.

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