The Tesla saga: delay S, sell drivetrain, deliver Roadster

For those of you that ask about the Tesla, on the blog and privately, here is the low-down. The following is a letter sent by Elon Musk to all customers. I am customer #264, and I am semi-glad to know he cares.

These are extraordinary times. The global financial system has gone through the worst crisis since the Great Depression, and the effects are only beginning to wind their way through every facet of the economy. It’s not an understatement to say that nearly every business will be impacted by what has unfolded in the past weeks, and this is true for Silicon Valley as well.

At Tesla, we have decided that the wise course of action is to focus on our two revenue producing business lines - the Roadster and powertrain sales to other car companies. In the Roadster, Tesla has a unique product with a large order book that continues to grow, despite softness in the automobile sector. Our powertrain business is profitable today and is also growing rapidly.

Our goal as a company is to be cash-flow positive within six to nine months. To do so, we must continue to ramp up our production rate, improve Roadster contribution margin and reduce operating expenses. At the same time, we must maintain high production quality and excellent customer service.

For this critical phase of the company, the scope of my role at Tesla will expand from executive chairman and product architect to CEO. With SpaceX now having reached orbit and about to enter its third year of profitability, I can afford to increase time allocated to Tesla. Ze’ev Drori, who has made extraordinary progress with the company over the last year as CEO, will stay on the board of directors as vice-chairman and continue to help Tesla make the right decisions. It has been and will continue to be a pleasure and an honor working with Ze’ev.

Special Forces Philosophy and Consolidation of Operations

One of the steps I will be taking is raising the performance bar at Tesla to a very high level, which will result in a modest reduction in near term headcount. To be clear, this doesn’t mean that the people that depart Tesla for this reason wouldn’t be considered good performers at most companies – almost all would. However, I believe Tesla must adhere more closely to a special forces philosophy at this stage of its life if we aspire to become one of the great car companies of the 21st century.

There will also be some headcount reduction due to consolidation of operations. In anticipation of moving vehicle engineering to our new HQ in San Jose, we are ramping down and will close our Rochester Hills office near Detroit. Good communication, tightly knit engineering and a common company culture are of paramount importance as Tesla grows.

What Does This Mean for the Model S?

Tesla is absolutely committed to development of our next generation vehicle, to be unveiled early next year. However, we are going to reduce activity on detailed production engineering, tooling and commitments to suppliers until our Department of Energy loan guarantee becomes effective.

The DOE loan guarantee will cover most of the Model S program at a very low cost of capital compared with raising equity financing in what could quaintly be described as a “bear market.” The loan funding can only be drawn down after we receive environmental approval for our new 89-acre consolidated headquarters in the city of San Jose. If all goes reasonably well, we will receive that approval in Q2 next year.

The net result will be a delay in start of production of the Model S of roughly six months to mid-2011. On the plus side, we will spend the extra time refining the vehicle design and powertrain technology, so the car will end up being slightly better.

Financing

The Tesla investors and I are unequivocally dedicated to ensuring the success of Tesla. Please know that I personally stand behind delivering a product that you will love and continuing to develop new models in the future. We are not far from being cash flow positive, but, even if that threshold ends up being further than expected, I will do whatever is needed to ensure that Tesla has more than sufficient capital to get there.

I’d like to thank you, as a loyal customer of Tesla that has stood by us through thick and thin. Beyond delivering a great Roadster, Tesla will find other ways to reward that loyalty, including among other things an exclusive preview of our upcoming Model S sedan.

Should you have any questions about the actions Tesla is taking in these extraordinary times please contact me directly at xxx.

Elon Musk

The bottom line is
0- cash flow negative but getting closer to CF0.
1- I didn't know that selling the drivetrain was a line of business. Good news.
2- waiting for DoE financing. DoE loans are cheaper than private debt (is he talking about equity?), I also believe private equity has evaporated.
3- Focusing on the Roadster, delaying Model S until loan is here, S always felt like a stretch for such a small company.
4- Elon makes promises that capital needed will be there (?), capital needed for what? my roadster, the S?

The model S always worried because it felt like a lack of focus but I didn't mind as long as I got my car. Elon seems to be a controversial figure as a CEO, but I hope he can pull this through. Plus hey, I like controversial founders ;)