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Tesla: As Model S Rolls Into Daylight, a Tough Road Ahead

teslamodelsteaserTesla Motors’ Model S sedan has had a long and bumpy ride. On Thursday afternoon, the all-electric car with the $57,400 price tag will be unveiled in prototype at a launch party to be held at the Southern California headquarters of CEO Elon Musk’s other startup, SpaceX. A slick design for the Model S is virtually guaranteed.

But whether the startup — which set out to shake up Detroit with a Silicon Valley approach to automaking and eventually deliver affordable electric cars to the mass market — will be able to deliver on many of its promises is less certain. Tesla, with deposits from more than 1,000 customers and significant overhead, has discussed three main sources of revenue: Roadster sales, a component supply business and the planned Model S, but each presents major hurdles for the company.

The Roadster: Tesla said in mid-January it was producing 15 Roadsters per week and had delivered more than 160 of them. About a month later, it said more than 200 cars had been delivered, with north of 1,000 waitlisted orders on the books (each with a $5,000 refundable reservation and most with an additional $55,000 deposit to “lock in a production slot and delivery time frame”). Last week Tesla said production had reached 20 per week, and that it had delivered its 250th Roadster.

But if Tesla delivered its 160th Roadster in mid-January, and here we are more than nine weeks later, and the company says it has ramped up to 20 per week, but delivered only 250 cars, then that’s suggesting there was something of a lull over the last few months: At a rate of 15 cars per week for at least nine weeks, Tesla should have been closer to Roadster No. 295 by now.

Regardless, ramping up production of the Roadster is a double-edged sword for Tesla. The company has limited capital — it had little as $9 million in the bank last October before raising $40 million in convertible debt the following month — and low margins. And Musk said in January that the initial production costs estimate of $65,000 “turned out to be wrong by a very large margin.” Even if the company has since brought costs down to around that original estimate, manufacturing 1,000 Roadsters will require tens of millions of dollars and hefty payments to suppliers (Tesla sources the Roadster’s rolling chassis from Lotus and the cells for its battery pack from “Japanese manufacturers,” likely Sanyo and Sony).

Components: Elon Musk has said Tesla’s powertrain supply unit is already profitable. So far, however, the company has announced one contract: providing 1,000 battery packs for a Daimler AG pilot project. The project represents a big coup for Tesla — it got its foot in the door with a major automaker — but not reliable income. Further, Daimler set up a joint venture late last year to develop lithium-ion batteries in partnership with Evonik (Daimler holds a 90 percent stake), and has given every indication that it intends to build batteries in-house. Last week the company unveiled plans to bring another battery developer into the JV with Evonik and to open an R&D center for vehicle propulsion systems in Michigan.

Of course, Daimler is only one customer, but as we’ve noted before, a growing number of automakers, including Nissan and Toyota, are seeking extra cash in batteries. General Motors (s GM) plans to build its own battery pack (for the Chevy Volt) using cells from LG Chem, and Ford (s F) has tapped Johnson Controls-Saft to supply lithium-ion batteries. So even as more companies get in gear to produce electric cars (increasing demand for powertrain technology like Tesla’s), the startup’s potential components customers appear to be dwindling.

Model S: The car in the spotlight at today’s big bash is a prototype of what Tesla wants to build as its second model. The company has set a $57,400 price tag, but at this early stage it’s very much a ballpark figure: The Roadster was originally priced at $92,000, and the latest models are up to $109,000, plus a $1,950 “destination charge” and as much as $9,300 more for previously standard features.

Tesla plans to set up manufacturing with $350 million in low-interest loans from the Department of Energy under the much-delayed Advanced Technology Vehicles Manufacturing program. Musk considers the loans a done deal — he’s described approval as a “when not an if” and implied that the DOE had greenlighted funds while Tesla’s application was still being evaluated for financial and technical viability. If Tesla does get funding to build the Model S factory, it still faces the challenge of taking a concept car to market in record time.

Overhead: Tesla’s overhead is small relative to that of Detroit’s Big Three, but its burn rate is not insignificant. Tesla reportedly has some 300 employees, plus two showrooms on prime real estate (sited for proximity to deep-pocketed customers): one on LA’s Santa Monica Boulevard and another in Menlo Park near Sand Hill Road and Stanford University. A third store is scheduled to open in Chicago this spring, and Tesla says it plans to open six more by year’s end in Manhattan, Seattle, Miami, and Washington, D.C., as well as London and Munich. (Rival startup Fisker Automotive is taking the more conventional route, signing up independent dealers to carry its first plug-in hybrid vehicle, the Fisker Karma.)

Deposits: At this point, Tesla seems to be relying heavily on deposits for the Roadster and Roadster Sport (the company has said a “shockingly high-performance” version of the inaugural model is set to be delivered starting in late June at a base price of $128,500), a likely factor in its decision to begin taking orders from Canada and Europe. As for the Model S, Roadster customers were allowed to start forking over $40,000 deposits to nab spots at the head of the sedan line last month. After today’s launch, Tesla will begin taking orders — and $10,000 deposits — from all comers.

Roadster customers have had to wait patiently through the delays and price hikes of Tesla’s first model. Those lining up to plunk down deposits for the Model S amid Tesla’s known troubles will likely be of a similar stripe: either true believers, awash with money, or both.

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