After many years as a very high-risk company, electric car maker Tesla Motors has hit many of its initial milestones. It made a beloved electric car, the Model S; it’s shipped the number of cars it said it would; and it’s delivered on the planned gross margin for its cars. But
Tesla will have to continue to take major risks with its business if it wants to make electric cars a mainstream product. That’s the burden that Tesla and CEO Elon Musk has taken on in his attempt to create a new market.
If you’ve forgotten just how risky Tesla once was, check out Musk’s interview on 60 Minutes Sunday night. The interviewer asks him: “How did you figure you were going to start a car company and be successful at it?” His response:
“Well, I didn’t really think Tesla would be successful. I thought we would most likely fail. But I thought that we at least could address the false perception that people have that an electric car had to be ugly and slow and boring like a golf cart.”
As we’ve covered over the years, Tesla was out of cash in late 2008 and had trouble raising more funding following the credit crunch that year. Tesla also saw long delays and technical problems with its first car, the luxury electric Roadster. Tesla then faced another risky period in late summer 2012 as it attempted to scale up production of its Model S car.
Tesla’s fortunes gradually changed as the company secured more funding from investors (including key cash from Daimler early on), got a loan from the Department of Energy, went public, and then made a great car and delivered it on time and on budget. Now its stock is trading at over $200 per share and Tesla is making 600 Model S cars per week, with a plan to ramp that up to 1,000 per week by the end of the year. The company had almost 6,000 employees at the end of 2013.
But Tesla hasn’t met Musk’s long-term goal of making electric cars mainstream. That could happen with its third-generation car, which could cost $30,000 to $40,000 and is supposed to be out around 2016 or 2017. In order to produce that car at a low enough point, Tesla is building a massive battery factory in the U.S. that could lower the cost of its batteries by 30 percent.
With this battery factory, Tesla is again introducing considerable risk into its business: The sheer huge scale is risky, and the cost projections and plans are risky. Tesla wants its long time battery supplier Panasonic to partner with it on the battery factory (and share some of the costs), but Panasonic President Kazuhiro Tsuga told Bloomberg that it’s still hesitant to commit to the factory because of its elevated risk:
“Elon plans to produce more affordable models besides Model S, and I understand his thinking and would like to cooperate as much as we can. But the investment risk is definitely larger.”
Some analysts also see Tesla’s battery factory as a risky move. Wedbush analyst Craig Irwin recently reduced Tesla’s price target by $20 to $275 per share because of increased risk from the battery factory.
It’s not only the factory that will add risk in the coming years. Tesla is just starting the initial designs on its third-gen car now. It needs to design and manufacture that car (which will be smaller and higher volume) and make it as successful as the Model S has been, but for a wider audience. The third-gen car will be built on an entirely new platform.
Continuing to take big risks is what Tesla needs to do to get an electric car into the mainstream. So far, the Roadster and the Model S are still luxury cars. More mainstream electric cars like Nissan’s LEAF have seen mixed results — the LEAF has a much smaller battery range (less than half that of the Model S) and many owners consider it a secondary or urban-only car. GM’s Volt, which is a hybrid, has had its price slashed in recent months in an attempt to boost demand.
Tesla’s Musk is uniquely suited to lead the company during these times of increased risk. One of his execs once described him to me as having a jaw-dropping appetite for risk (remember he also runs a rocket ship company and chairs a solar firm). Musk is essentially bound to the company for the next few years as it transitions through this period.
It’s this ability to continue to take risks that could enable Tesla to actually innovate enough to produce an electric car that can do the impossible: break out and become a mainstream, widely embraced vehicle. The strategy is not unlike Steve Job’s constant attention to reinvention, taking risks and paving new markets, first in personal computing, then with MP3 players, then with cell phones.