Tough six months ahead for Tesla

The next six months could be one of the hardest times in the life of eight-year-old electric car company Tesla Motors. Tesla CEO Elon Musk admitted as much at the National Clean Energy Summit last week in Las Vegas, and said:

The challenge that Tesla faces over the next few months is scaling production enough to achieve a certain gross margin on our product so we can be cash flow positive. That’s extremely important. If we’re unable to do that, we’ll enter the grave yard with all the other car company startups of the last 90 years.

Tesla just started delivering its electric sedan, the Model S, in late June to its first customers and it’s got about 12,200 reservations for the Model S. But Tesla plans to produce and deliver 5,000 of these cars before the end of the year. The plan is to ship roughly 500 of the cars in the third quarter of this year, with the remaining thousands of cars to be delivered in the fourth quarter.

That’s like the Monster Truck version of ramp ups: totally extreme. And Tesla has to do that dramatic ramp up without making any major production mistakes — major recalls on the cars could be a killer. The Roadster had a few part recalls, and Fisker suffered similar problems with production of its Karma car. It’s not uncommon for startup automakers (or even large automakers) to face such production glitches.

Ramping up more slowly could mean delays for deliveries of the Model S, which in turn could deliver a drop off in the reservations. Tesla did see a significant amount of cancellations when it delayed delivery of its first car, the Roadster, by many months.

Tesla also has to do this production ramp up and, like Musk said, also achieve a gross margin on the cars to reach profitability in 2013. Tesla’s business plan rests on breaking even on the Model S.

Musk said at the summit:

It’ll definitely be a very tough road over the next 6 months. We can’t afford to make a lot of mistakes. If we don’t make too many mistakes then we’ll get to that period and we’ll be able to bring out larger volume cars that are more affordable.

Musk isn’t unfamiliar with tough times at Tesla. When Tesla was getting the Roadster out the door, there was a point where Musk had to personally fund the company and Tesla was dangerously close to being out of money. This time around, Musk has more access to funds (his own and investors) and experience, so if he made it through the first time, odds are he’ll be able to pull it off this time around. But still, the electric car pioneer has a rough time ahead for the rest of 2012.

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