Case 14 

Tesla Motors 

Melissa A. Schilling 

In 2013, Tesla Motors was a 4500-person company on track to set history. It had created two cars that most people agreed were remarkable. It had posted its  rst quarterly pro t in 2013, and had repaid its government loans ahead of the major auto conglomerates. Most im- portantly, it looked like it might survive. Perhaps even thrive. This was astonishing as there had been no other successful auto manufacturing start up in the U.S. since the 1920s.

The road leading up to Tesla’s position in 2013 had not always been smooth, and there were many doubts that still lingered. Tesla had bene ted from the enthu- siasm of the “eco-wealthy”—a rather narrow portion of the market. How would Tesla fare when it was in direct competition with General Motors, Ford, and Nissan for the mass market? Would it be able to turn a sustainable pro t on its automaking operations? Furthermore, some questioned whether Tesla’s goals to sell to the mass market even made sense. In the niche market, it had a privileged position with customers that were relatively price-insensitive and were seeking a stylish, high per- formance car that made an environmental statement. To compete for the mass market, the car would have to pro- vide good value for the money (involving trade-offs that might con ict with Chairman Elon Musk’s ideals), and the obstacles to charging would have to be overcome.

History of tesla

In the year 2003, an engineer named Martin Eberhard was looking for his next big project. A tall, slim man with a mop of gray hair, Eberhard was a serial entrepre- neur who had launched a number of start-ups, including a company called NuvoMedia, which he sold to Gemstar

in a $187 million deal. Eberhard was also looking for a sports car that would be environmentally friendly—he had concerns about global warming and U.S. depen- dence on the Middle East for oil. When he didn’t  nd the car of his dreams on the market he began contem- plating building one himself, even though he had zero experience in the auto industry. Eberhard noticed that many of the driveways that had a Toyota Prius hybrid electric vehicle (or “dork mobile” as he called it) also had expensive sports cars in them—making Eberhard speculate that there could be a market for a high per- formance environmentally friendly car. As explained by Eberhard, “It was clear that people weren’t buying a Prius to save money on gas—gas was selling close to in ation-adjusted all-time lows. They were buying them to make a statement about the environment.”i

Eberhard began to consider a range of alternative fuel options for his car: hydrogen fuel cells, natural gas, die- sel. However he soon concluded the highest ef ciency and performance would come from a pure electric ve- hicle. Luckily for Eberhard, Al Cocconi (founder of AC Propulsion and one of the original engineers for GM’s ill-fated EV-1) had concluded the same thing, and had produced a car called the tzero. The tzero could go from zero to 60 miles per hour in 4.1 seconds, but it was pow- ered with extremely heavy lead-acid batteries, limiting its range to about 60 miles between charges. Eberhard approached Cocconi with the idea of using the lighter lithium ion batteries, which offered six times more en- ergy per pound. Cocconi was eager to try out the idea (he had, in fact, been experimenting with lithium ion batter- ies himself), and the resulting lithium ion based tzero accelerated to 60 miles per hour in 3.6 seconds, and could travel more than 300 miles. Eberhard licensed the electric-drive-train technology from AC Propulsion, and

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Case 14 Tesla Motors

 

founded his company, Tesla Motors (named after Nikola Tesla, a late 19th century and early 20th century inven- tor who developed, among other things, the AC electrical systems used in the U.S. today).ii

Meanwhile, there was another entrepreneur—one with much deeper pockets—also interested in developing electric vehicles based on the tzero: Elon Musk. In 2002, Elon Musk was a 31-year-old South African living in California, who had founded a company that ultimately became PayPal. After selling PayPal to eBay in 2002 for $1.5 billion, he started a company called SpaceX with the ambitious goal of developing cheap, consumer space travel. (SpaceX’s Dragon spacecraft ultimately made history in May of 2012 by becoming the  rst com- mercial vehicle to launch and dock at the International Space Station.iii) Musk was also the chairman of a high pro le clean tech venture in Northern California called Solar City. Musk’s glamorous and assertive style, and his astonishing record of high-tech entrepreneurship, made him one of the inspirations for the Tony Stark character in Jon Favreau’s Iron Man movies.

Like Eberhard, Musk thought electric cars were the key to the U.S. achieving energy independence, and he approached Cocconi about buying the tzero. Tom Gage, who was then AC Propulsion’s CEO, suggested that Musk collaborate with Eberhard. After a two hour meet- ing in February of 2004, Musk agreed to fund Eberhard’s plan with $6.3 million. He would be the company’s chairman and Eberhard would serve as CEO.

The  rst Tesla prototype, named the Roadster, was based on the $45,000 Lotus Elise, a fast and light sports car that seemed perfect for the creation of Eberhard and Musk’s grand idea (see Figure 1a). The car would have 400 volts of electric potential, liquid-cooled lithium ion batteries, and a series of silicon transistors that would give the car acceleration so powerful the driver would be pressed back against their seat.iv It would be about as fast as a Porsche 911 Turbo, would not create a single emis- sion, and would get about 220 miles on a single charge from the kind of outlet you would use to power a wash- ing machine.v

While the men at  rst worked well together, person- ality clashes soon began to emerge. Both were techni- cally savvy and vigorously addressed problems within the company. As described by Laurie Yoler, Eberhard was “just brilliant, and he has this tenacity that is unbe- lievable . . . He is the guy you want around in those early days when you have naysayers all around.” However, Eberhard could also be abrasive and critical. Musk, in turn, was not content to just  nancially back the company—he

began to get intimately involved in decisions about the car’s design and the operation of the company. Soon Musk and Eberhard were at odds over decisions such as the body panels (Eberhard preferred to stick with the  berglass panels used in the original Elise; Musk wanted to use the lighter, stronger—and more expensive—carbon  ber), marketing (Eberhard had approved the hiring of PR professionals to build publicity for the car before its launch; Musk  red them, believing his own involvement and the car itself would generate enough publicity), and even the chassis (Eberhard wanted to reap the cost sav- ings of sticking with the Elise’s original crash-tested, off-the-rack chassis; Musk wanted to lower the door- sills by two inches to make the car easier to enter and exit). Musk also wanted to redesign the headlights and door latches, and replace the Elise’s seats with more comfortable—and expensive—custom seats.vi

In each case, Musk’s preference prevailed. As Musk insisted, “you can’t sell a $100,000 car that looks like crap,” and Musk’s views were hard to ignore given that he was putting more and more of his personal wealth into the company. By 2007 he had put in $55 million of his own money into the company, and had also raised money from his other wealthy entrepreneur friends (that in- cluded eBay’s second employee, Jeff Skoll, and Google founders Sergey Brin and Larry Page).

Musk’s insistence on the best materials and parts, however, combined with Eberhard’s inexperience as the manager of a major  rm, resulted in delays and runaway costs. At a staff meeting in June 2007, Tom Colson, head of manufacturing, revealed a cost analysis suggesting

 

Figure 1a 

 

Tesla Roadster 

 

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© Darren Brode/Shutterstock.com

 

that the average cost of the cars would be over $100,000 for the  rst 50, and would decline only slightly with in- creased volume. Eberhard could not answer the  nancial questions of the venture capitalists on Tesla’s board, and their con dence in him was eroded even further by his defense of “In any other company it’s the CFO that pro- vides those numbers . . . I’m an engineer, not a  nance guy.” In August of 2007, the board removed him as CEO and demoted him to president of technology. Then in October of 2007, Musk arranged for Eberhard to be ousted from the company entirely. Furious, Eberhard started a blog detailing what he called the “Stealth Bloodbath” going on at Tesla, and he would later sue Musk for libel, slander, and breach of contract.vii

Meanwhile, Eberhard’s temporary replacement was Michael Marks, former CEO of Flextronics. Marks im- mediately created a priority list that identi ed items with potential to delay the car. He mothballed any plans for side projects and focused the entire business on stream- lining costs and getting the Roadster out. Despite his efforts, the Roadster missed its deadline for beginning production at the Lotus facility, triggering a penalty built into the manufacturing contract Eberhard had signed with Lotus: a $4 million fee.

By the beginning of 2008 morale was at an all-time low. In March, however, production began on the Road- ster, and by July of 2008, most of the production prob- lems had been forgotten as the  rst seven Roadsters (the “Founder’s Series”) hit the road. Enthusiasm for the cars was astonishing—the cars boasted an all-star list of celebrities with reservations to buy a car, and everywhere the Roadster drove, people (albeit mostly men) stopped to stare.viii

Musk’s ambitions did not stop at a niche high-end car, however. He wanted to build a major U.S. auto company—a feat that had not been successfully accom- plished since the 1920s. To do so, he knew he needed to introduce a less expensive car that could attract a higher volume of sales, if not quite the mass market. In June of 2008, Tesla announced the Model S—a high per- formance all-electric sedan that would sell for a price ranging from $57,400 to $77,400, and compete against cars like the BMW 5-series (see Figure 1b). The car would have an all-aluminum body, and a range of up to 300 miles per charge.ix The Model S cost $500 million to develop,x however offsetting that cost was a $465 million loan Tesla received from the U.S. government to build the car, as part of the U.S. government’s initiative to pro- mote the development of technologies that would help the U.S. to achieve energy independence.