In the past year, electric vehicle maker Tesla Motors has posted its first quarterly profit, quintupled its stock price, and won a near-perfect score from Consumer Reports for the Model S sedan.
Now comes the hard part.
Tesla founder and CEO Elon Musk wants the company's estimated 2013 U.S. volume of 20,000 units to soar to 250,000 -- and to 500,000 globally -- by the end of the decade. Such rapid growth would be unprecedented in the history of the automobile.
In an exclusive interview with Automotive News, Musk candidly acknowledged the challenges facing Tesla. He spoke with less bluster than normally heard in his public statements.
"We have a lot of work to do. We'll do our best to make it happen," Musk said. "I think we will, but this is not a bold assertion we unequivocally will. There is a possibility we may not."
Its initial order bank sated by true believers and early adopters, and its quarterly profit reports pocked with asterisks, Tesla now must win customers away from established luxury brands. To grow to its hoped-for volumes when its $35,000 Gen III cars arrive in a few years, it must transform from an automotive boutique to a volume automaker.
It will have to:
- Convince skeptical mainstream shoppers that its electric-car technology won't leave them stranded on the roadside.
- Finance a vehicle platform housing several variants, with a price tag likely to top $800 million.
- Expand its sales and service capacity vastly.
- Scale up its manufacturing output by a factor of 20.
"If Tesla wants to sell 250,000 cars a year here, Elon will have to heavily invest in infrastructure and in running a big, big company," said a veteran executive who has worked for Detroit 3 and Japanese automakers.
"That's a lot different than what he's doing in niche volumes right now."
In interviews with Automotive News, top automotive executives dispassionately analyzed Tesla's enormous strategic and tactical hurdles. Speaking on condition of anonymity, because they were commenting as individuals and not as representatives of their companies, the executives pieced together what Tesla would have to do to succeed.
These executives don't wish to see Tesla fail. They respect and admire what Musk has done. But each expressed concern that the auto-maker's ambitions may overreach its abilities.
"To go from 2,000 to 20,000 units is already pretty impressive," said one executive at a German brand. "We are clearly seeing high professionalism behind it. It's a nice product. It's a nice story.
"Now the question is how strong do you need to be to continue telling that story, to move from 20,000 to 200,000."
Here's an analysis of the challenges Tesla faces.
| Tesla Motors' earnings reports show a profit but use nonstandard accounting principles. Using generally accepted accounting principles, Tesla's bottom line is less promising. | ||
| Non-GAAP | 3rd quarter 2013 in millions | 2nd quarter 2013 in millions |
| Total revenue | $603 | $551 |
| Gross profit | $103 | $100 |
| Net income | $16 | $26 |
| GAAP | ||
| Total revenue | $431 | $405 |
| Operating loss | ($31) | ($12) |
| Net loss | ($38) | ($31) |
Tesla was on pace to sell about 20,000 Model S sedans in 2013, and expects to double that figure this year as it expands further into global markets from its initial inroads in Western Europe. China sales begin this year.
And when the Model X crossover arrives in volume in early 2015, Tesla believes it will reach a global annual pace of 80,000 sales.
Tesla wants the Gen III sedan, expected to go on sale in 2016 or 2017, to push total U.S. volume to 250,000 units a year -- putting Tesla in the same volume ballpark as Mercedes-Benz, BMW and Lexus, and selling nearly six times as many cars as Porsche.
Musk downplays the goal, saying that a rise to 250,000 units is "not exactly running away with all the money." But Tesla's established rivals will fight passionately to keep their market shares.
Efraim Levy, an analyst with Standard & Poor's, sees increased competition as a major challenge to Tesla's ambitions. Luxury brands such as BMW and Mercedes as well as volume brands are offering capable electric vehicles of their own. Tesla won't be the only choice for long-range zero-emission transportation.
"They're not going to have the market to themselves," Levy said. "There's a lot that has to go right."
Tesla's product capability has won respect in the industry and among consumers. Consumer Reports last year awarded the Model S a score of 99 out of a possible 100 in its tests. It said that the Model S "performed better, or just as well overall, as any other vehicle -- of any kind -- ever tested by Consumer Reports."
But now, in venture capital parlance, Tesla is "crossing the chasm." In his book of the same name, Silicon Valley management consultant Geoffrey Moore describes "the early-adopter play" of startup companies, which have a high failure rate in trying to grow from a niche brand to mass-market stature. Moore places Tesla firmly in that category.
"The product has to have mass-market appeal. While the Tesla is stunning, there are a lot of things that it is missing," Moore said in an interview, citing a lack of infrastructure, large-scale charging networks and mass-market appeal. "Inertia is against them. It's not like selling iPods."
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