What a week for Tesla Motors.
It started on Monday with the Palo Alto-based luxury electric sedan maker acing government crash tests for its Model S sedan. On Wednesday it announced it was taking pre-orders in China. On Thursday it announced the opening of its second manufacturing facility, this one in Tilburg, Netherlands. On Friday, Bloomberg reported that Telsa is beginning to deliver more than 300 cars to customers in Hong Kong ahead of its entry to the Mainland.
So it's no wonder why CEO Elon Musk told CNBC this week that he’s “tired.” Building a capital-intensive and innovative company is not easy. And it’s not going to get any easier for the founder of the critically acclaimed Model S -- history is littered with failed auto startups that began with buzzes and ended with whimpers.
Musk is betting that the Tesla, essentially the Apple of the auto industry, will be able to rely on a cult-like following for those seeking a brilliantly designed product -- and that there are enough people in the world willing to pay a premium for the status that can’t be bought from the likes of a Ford Focus electric or a Toyota Prius.
Musk said this week he plans to deliver 100,000 units a year by 2016, up from the 10,055 the company sold in the first half of 2013. Leaping to 100,000 units in 2016 seems ambitious, especially since its more affordable $35,000 Tesla sedan -- possibly named the Model E, a trademark the company filed earlier this month – isn’t expected to be on the market until 2017. The sexy looking Model X SUV won’t even begin production until late 2014, which means the 2016 sales goal will depend largely on S sedan growth between then and now, which will largely hinge on its success in Asia and Europe. The sales target also depends on the expansion of the U.S. network of quick-charge and battery swap stations, which encourage long-distance driving.
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At the same time, Musk will have to maintain the expectations of an excited market of investors. For now they’re not focused on gains, but that won't last long before they'll begin to expect real, solid profit growth based on auto sales. Some investors may even be betting on an eventual buyout from Toyota or Mercedes-Benz -- both are large investors in the company. And Musk isn’t going to be able to depend on non-GAAP manipulations to report profit, as his company did in the last quarter, or the on the revenue generated by the sale of California carbon-offset credits. At some point investors will start paying more attention to the fundamentals: Tesla’s ability to profit from selling cars at ideal margins.
That will not be easy, but capital-intensive startups are not easy. Nay-saying aside, only the curmudgeonliest miser would want to see Tesla -- which is wholly devoted to low-emission, well designed, made in the U.S.A. technology -- go the way of the DeLorean.
Here are five ways Tesla could avoid that fate:
Get That “Gen 3” Sedan Out ASAP
Expedite that $35,000 electric sedan. Musk says one will be out by 2017, which means he is aiming to deliver 100,000 luxury (electric!) cars -- the Model S and the Model X -- a year before the arrival of the cheaper sedan. A recent research note from Goldman Sachs concluded the company’s stock was overvalued. All three scenarios assume the Model S, Model X, and the so-called “Gen 3” sedan (probably the Model E) would sell at least 104,000 units by 2017. Without the Gen 3, those sales would have to come from sales in the luxury segment class. Reaching the goal of selling 100,000 cars, each with a base price of $72,000 (excluding any green car government incentives) and a fully loaded price of more than six figures, is indeed a tiring endeavor. Musk could scale up to and drop the price of his cars while maintaining expected margins, but that would be a tough task without a Tesla vehicle in the EV market that could compete against the Ford Focus electric, Nissan Leaf or other more modestly priced EVs that a wider audience of consumers could afford.
Make A Tesla City Car
Take a cue from Honda and make it a priority to build a small all-electric car for urban fleet sales. You can’t buy an electric Honda Fit (it can be leased), but it’s popping up in rental fleets in the U.S. While fleet sales aren’t as profitable as retail sales, they boost volume. Targeting the hipper car-sharing marketplace would raise brand awareness in urban centers. Honda has traditionally been adverse to courting fleet sales (i.e., car-rental companies) for business, believing it diminishes brand value, but it has decided to put the Fit in the hands of Zipcar and other car-share customers.
Build In An Emerging Market To Lower Operating Costs
Open a factory in an emerging market to help offset operating costs of assembly in California and The Netherlands. Learn from other automakers and look to Mexico, whose workers have proven to be highly skilled at auto assembly.
Become The Innovator Of EV Range Extension
Tesla should take ownership of the range-concern issue and make sure to lead by example. Tesla already has broken the 200-mile psychological barrier that many believe is where customers overcome their electric-car-range anxiety. General Motors recently said it’s committed to increasing the electric-only range of its Chevrolet Volt plug-in hybrid -- already the segment leader in the hybrid electric-only range -- by 20 percent for its next generation. Tesla needs to maintain a similar pace of range extension in the electric-only market.
Become The Volvo Of The 21st Century
Tesla's government crash-test record is phenomenal. It should promote this as heavily -- ASAP -- as Volvo did in the 80s. “Boxy, but good” become an informal Volvo slogan (thanks to the film “Crazy People,” starring Daryl Hannah and Dudley Moore) and it took the lead in the 90s in offering the latest in safety features. As Tesla unveils cars for the middle class, it should simultaneously build a safety-themed brand identity, similar to the one that worked so well for Volvo, to attract safety-conscious middle class families.