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July 24, 2009 5:33 pm
Imagine investing in a start-up in one of the most competitive industries in the world – automaking. Against all odds, your company makes a success of it – not just with any car, but a gorgeous, groundbreaking electric roadster that accelerates from zero to 60mph in 3.9 seconds and emits no carbon dioxide. Film stars and millionaires clamour to get on your waiting list. Daimler, owner of the Mercedes-Benz luxury brand, buys shares in your company during the depths of the industry’s worst crisis in decades. Its chief executive praises you and your crew as “out-of-the-box thinkers”.
Imagine, too, that you left your native South Africa aged 17, made your fortune in Silicon Valley in your twenties and ploughed the money into the unlikely areas of electric cars and space exploration. Imagine your other company, SpaceX, is poised to blast an earth-observation satellite into orbit. Imagine it has also won a $1.6bn Nasa contract to replace the cargo function of the US space shuttle after 2010.
You’ve just imagined yourself into Elon Musk’s shoes. Are you happy?
I meet Tesla Motors’ chairman and chief executive (and largest shareholder) in London at the end of what has been a landmark week for his company: Tesla has secured a $465m loan from the US Department of Energy, earmarked for greener car technology. It was one of just three companies, alongside Ford Motor and Nissan, to have made it through an arduous application process, and will be using the money to build production facilities for electric powertrains and for its planned Model S, a $50,000 battery-powered saloon (or sedan, in US parlance) due to propel the company from the rarefied world of roadsters to the broader mass market. This came barely a month after Daimler agreed to pay $50m for just under 10 per cent of Tesla.
Musk is in Knightsbridge to open Tesla’s first overseas showroom, one of four planned across Europe. Later that evening, bankers, bons vivants and others who can spare the £94,000 the early “signature edition” of the car costs will crowd in, as paparazzi lurk outside. After all, Paris Hilton and Mischa Barton are on the guest list.
As we sit down, I congratulate Musk on his company’s achievements. Credit crunch or not, about 130 of the 200 roadsters Tesla plans to sell in Europe this year are already spoken for. And the car is truly a delight – an elegant squaring of the circle between automotive indulgence and ecological virtue – “performance with a clean conscience”, as Musk put it. Think of a Porsche that picks up not with an obnoxious roar, but a space age hum. On a spin around Hyde Park, I experience the car’s power – enough to push you back in your seat. It looks great, too: a smarter, slightly longer version of the Elise, the curvaceous, classic, low-slung two-seater built by Lotus, on which it is modelled. Even in this swanky part of London, people stare.
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But when the congratulations are over, and I ask Musk what Tesla would have done without the US government’s loan, it’s clear that he is not as happy as he might be – not with the press he’s getting, at least. “There’s a lot of misinformation out there,” he says. “We’ll be profitable in July, and we’re already cash-flow positive. We would not need the loan to survive.”
Musk is by all accounts a brilliant man, but he can be a prickly interlocutor. I remember a phone interview with him last year for a routine business-news story as puzzlingly combative. This spring, when a reporter from The New York Times questioned the wisdom of a taxpayer-funded loan for a company that makes high-end cars, Musk called him a “huge douchebag”. (In fairness to Musk, the reporter’s piece – later corrected – wrongly claimed that Tesla was seeking federal funds for the roadster, not the Model S.) As we are talking, Musk sounds off against another writer who has taken an interest in Tesla’s start-up problems, calling Owen Thomas of the Silicon Valley-focused blog Valleywag “the single most tediously mean-spirited person I have ever encountered”.
There are, Musk says, a lot of “annoying comments out there”. “Some idiot said I referred to myself as a ‘nanomanager’, when I was joking. How can I be a nanomanager if I’m managing two companies?” His spikiness is understandable, but so is the attention he’s garnered. Tesla’s slender half-decade of history has been a torrid one, its dramas lived out largely in public due to Musk’s own decision to court the press in lieu of spending money on advertising. The company has gone through four chief executives and been party to several lawsuits, the latest an indecorous dispute over who can claim credit for inventing the company. Martin Eberhard, Tesla’s co-founder and first chief executive, sued Musk and the company last month for libel and breach of contract; he claims that from April 2004, when Musk joined Tesla’s board, the South African began a campaign to wrest control of the company and later sought to tarnish Eberhard’s claimed status as the company’s founding visionary. Eberhard also claims that a Tesla employee smashed his long-awaited roadster into the back of a truck during “endurance testing” in 2008, a few months after Musk sacked him as boss.
A few days before I met Musk in Knightsbridge, he published a lengthy blog post rebutting Eberhard’s claims. It ran to more than 4,000 words, not including attachments of six-year-old e-mails. Musk tells me he is also preparing his own legal filing in response. Why, I ask, at a time when Tesla has so much good news to report, is he expending so much energy on a legal spat with a former employee? “What really bothered me was the notion that there would be a DoE announcement without any rebuttal to what he said – it would be tagged with all that mud he slung,” Musk explains. “If people look at Tesla and say, ‘Those are a bunch of bad guys that got a bunch of money,’ that doesn’t sit well. I don’t want there to be a perception that the bad guys won. I wouldn’t like to say that we’re flawless and morally unimpeachable and holier than thou. But we’re pretty good, and we generally try to do the right thing.”
In Musk’s telling, the task of running Tesla is even a burden of sorts. “I’m not trying to do this company because I think this is the easiest way to make a buck – I’d be bloody insane,” he says, with traces of South Africa in his flat vowels. “There are many other things I’d do if maximising my wealth was my objective. The reality is, it’s not fun running a car company and a rocket company at the same time. The amount of work I have is way past the fun point.”
As the past year has shown – not just for Tesla but for the auto industry as a whole – Musk isn’t joking. Even in good times, carmaking is an unrewarding business. The sector is a textbook case of too many players chasing too few profits, turning out cars of ever greater sophistication and quality, but which customers resist paying more for. Automakers devour capital, and take years to get their products on the road. Scale is essential and earnings are modest, even for the industry’s top players. Before the crisis pushed Toyota into a record loss this year, its 6 per cent average operating margin was seen as an industry gold standard.
And yet the rich have long been tempted by the dream of making beautiful cars – often letting this get the better of their business sense. John DeLorean, the high-flying former General Motors executive, made only about 9,000 of the cars that carried his name; by the time the vehicle made its star turn in the film Back to the Future, in 1985, DeLorean’s company was in administration. Other big business minds have bought trophy car brands, only to suffer big losses. Tata Motors, the carmaker owned by Ratan Tata’s industrial group, has poured more than £1bn into Jaguar/Land Rover since paying Ford $2.3bn for the marques last year. And as makers of big-ticket, status-linked products that the public connect with emotionally, carmakers are also vulnerable to unusual amounts of media scrutiny.
These challenges are magnified in the nascent field of battery-powered cars, where big manufacturers have launched models that failed to find a market for reasons of performance, price or practicality – or all three. General Motors’ EV1, introduced in 1996 then withdrawn just a few years later, is the best-known of these flops. Around the same time, Toyota introduced an electric version of its RAV4 sport utility vehicle, also built largely to meet California’s shifting rules on zero-emissions vehicles; it was discontinued.
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Both models were made in numbers too small to recoup their costs, although conspiracy theories involving oil companies and other vested interests sprouted after they pulled the plug.
But over the past two years, carmakers have begun taking a renewed interest in electric and plug-in hybrid petrol-electric cars, driven by last year’s oil price spike, tightening environmental regulations and strides in the development of lithium-ion batteries, which deliver more power for less weight than the bulky batteries used in earlier cars. This makes it that much more remarkable that Tesla has an electric car on the road well before rivals’ planned plug-in models arrive, and that it has managed to break even in what has been an annus horribilis for world carmaking.
Musk says his interest in the technology dates back to his time at university. He left South Africa as a teenager, in apartheid’s waning days, to avoid military service, enrolling at college in Canada, then earning a scholarship to study at the University of Pennsylvania’s Wharton School, where he earned undergraduate degrees in economics and physics. According to his blog, he then worked briefly on ultracapacitors (electronic components that store electric charge) in Silicon Valley, and planned to write a thesis on their potential use in cars for a graduate physics degree at Stanford. Instead of doing graduate work, however, in 1995 he left school to “start a couple of internet companies”.
Musk and his brother first co-founded a company called Zip2, which built online publishing software for news organisations. They sold the group to Compaq for more than $300m in 1999. But if that accounts for his first million, Musk made his fortune with X.com, an online payments venture that in 2000 merged with another company to become PayPal. Ebay bought PayPal in 2002 for $1.5bn of stock. Musk won’t disclose what his exact stake in the company was.
Musk founded SpaceX in 2002, and again turned to electric cars. In 2003, he says he heard of a company called AC Propulsion that had developed the Tzero, a prototype electric sports car with a driving range of 300 miles. Through that company, he says, he connected with Tesla Motors, then a start-up interested in developing the car commercially. Eberhard, an electrical engineer and entrepreneur, had founded Tesla in June 2003 with partners Marc Tarpenning and Ian Wright.
Since leaving the group in 2007, Eberhard has been a thorn in Musk’s side, weighing in on the company’s problems in his blog and the media. When I e-mailed him seeking an interview, Eberhard responded quickly and we talked for more than an hour.
The conflicting accounts of Tesla’s early days might seem arcane to anyone outside Silicon Valley, petty in their differences or beside the point now that the company is a viable concern. But they shed some light on Musk’s qualities as an entrepreneur and manager. And Tesla’s founding narrative matters perhaps more, not less, now that the company increasingly looks like a success. According to Eberhard, he began studying electric cars early this decade – long before Musk invested in Tesla – when GM was pulling its failed EV1 model off the road, oil was at a record low and George W. Bush’s administration was denying the existence of global warming. He began collecting brochures on Ebay of early electric vehicles – “goofy little cars”, he calls them, with style and performance little better than golf carts. Eberhard acknowledges Tesla’s debt to AC Propulsion, with which he made contact as he searched for electric cars in use. “The company was about to go out of business,” he says. “When I saw them, they had five employees left and were not paying salaries. I paid their rent and commissioned them to build a car.”
After incorporating Tesla, Eberhard and Tarpenning contacted Lotus – a good match for an electric car company because of its expertise in lightweight construction. The partners went scouting for funds and pitched their project to Musk in 2004, at SpaceX’s Los Angeles headquarters. “Cleantech” was not yet a buzzword among California’s venture capital funds, but Musk bit.
“He liked the idea and peppered us with questions,” says Tarpenning. “We went again, and he said, ‘I’m in, you convinced me.’” Musk invested $6.35m of Tesla’s initial $6.5m Series A financing. (In his blog, Musk described Tesla at the time as three partners with an unfunded business plan and no trademarks, assets or offices to their name.)
The company was now up and running, with Eberhard as chief executive and Musk as chairman. The business model rested on starting with a highly visible, top-end car with a big enough price tag to defray start-up costs. Customers began to line up for the planned roadster. Tesla began collecting deposits and talking to the media – to great effect. A breathless Vanity Fair profile in May 2007 said Musk wanted the company to be the next Ford, “liberating the world, at last, from the internal-combustion engine”.
According to Musk, he left most of the day-to-day management to Eberhard. Others tell a different story. “You had a CEO who was technically your boss, but then a chairman who had to approve everything,” says one former employee, who asked to remain anonymous for fear of potential legal action by Tesla. (Last year, the company brought and lost a lawsuit against Fisker Automotive, a company that consulted on the roadster. Tesla claimed it stole trade secrets and did substandard work.) Musk acknowledges that he took an interest in the car’s styling, incorporating design elements from McLaren and Porsche F1 cars.
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He also asked for a touchpad door latch, although Eberhard says he warned this would increase costs and delay the car’s launch. “He was pot-shotting – he would become obsessed,” Eberhard claims. “He couldn’t have a conversation without it being about the door latch.” Musk wanted the car to be made from carbon fibre, a lightweight and sleek material that is much more expensive and difficult to paint than metal. He also asked for a lower door sill – a costly adjustment, though one that would be endorsed by anyone who has ever negotiated the tricky stooping and straightening required to enter a Lotus Elise. Eberhard now blames Musk’s design tweaks for the cost overruns and launch delays.
With the car’s planned September 2007 launch date approaching, the problems came to a head as the company struggled to find a transmission that would allow the car to accelerate from zero to 60 in less than four seconds. Musk felt this was a crucial performance parameter that had to be met to justify the car’s high price. When two vendors failed, the car’s launch was delayed. By now, customers who had paid deposits were growing impatient and the buzz around Tesla was souring into its first bad press.
In August 2007 Eberhard says that Musk sacked him over the phone, without notice, demoting him to president. Musk, however, blames the cost overruns on Eberhard, saying that almost every major system in the car had to be redesigned, retooled or switched to a new supplier after he left. The fact that the roadster cost so much more than planned owes not to “typical entrepreneurial hubris”, Musk says, but the fact “that we essentially had to spend the development money twice”.
In his blog posting, Musk accused Eberhard of using the example of the touchpad door latch as an excuse for why it cost more than $140m to bring the roadster to market instead of the $25m that he estimated in the 2004 business plan. “That would have to be one hell of a door latch!” he wrote. He also accused his former chief executive of playing “to a common archetype – that of the noble inventor who is usurped by the rich and powerful businessman”. In an e-mail after our interview, Musk described Eberhard’s lawsuit as “insane”. “This is not a typical case of one person’s opinion vs another’s where ‘the truth lies somewhere in the middle’,” he wrote.
Tarpenning says the tussle over Tesla’s founding “blows me away, especially because he [Musk] is so accomplished”. Tarpenning points out that reporters, bloggers and others have devoted scant attention to Musk’s arguably bigger achievements at SpaceX, while focusing on every problem at Tesla. “He has been successful getting things into orbit and nobody cares – yet because of his involvement in an electric car company, he’s getting called twice a week by the media,” says Tarpenning. “SpaceX is such an amazing achievement – I think it drives him a little bit insane!”
After sacking Eberhard, Musk installed Michael Marks, a former chief executive of Flextronics and early investor in Tesla, as interim chief executive. Marks assembled a new management team and wrote a list on a whiteboard of the factors preventing Tesla from shipping cars, assigning executives to tackle each of them. “There was a lack of knowledge about how long it takes to get a car through tests and manufacturing bugs – this is a very regulated industry,” Marks now says. “And there was a real lack of recognition of how much it was going to cost.” Nevertheless, one by one, the problems were solved. Meanwhile, Musk drafted as a new chief executive, Ze’ev Drori, a former Israeli army officer and founder of a semiconductor company, and hired executives from other carmakers to prepare for the roadster’s launch.
Musk took delivery of the first roadster in early 2008. The company spoke about doing an initial public offering (IPO) and expanding into Europe. It firmed up plans for the Model S, announced its intention to build a factory in California and appointed Goldman Sachs to raise $100m of financing. Then the credit crunch hit, sending Tesla back to existing investors, led by Musk, for a smaller $40m. (Musk says he has put about $74m into Tesla, and $100m into SpaceX.) The company delayed the launch of the Model S, made about a quarter of its staff redundant and closed its engineering office in Michigan. Musk also said he was taking over as chief executive. This, says Marks, made sense because “Elon was making all the major decisions anyway”. (Marks and Drori have both left the company) Musk now says he gave “serious thought” to the notion of pulling the plug on the company. “I was faced with the decision last year: do I let Tesla die, or do I make it live, with a lot of pain and grief?”
Reports about Tesla’s squeezed finances hit the media, despite Musk’s efforts to stop staff from leaking. (In one instance, the company rooted out an offender by sending several employees slightly altered versions of the same e-mail.) The bad news continued. Darryl Siry, Tesla’s head of sales and marketing, resigned, saying he was uncomfortable with the extent to which the company was relying on deposits for the Model S to fund its operations. “I felt the company was chronically underfunded and undercapitalised,” says Siry. In March, Tesla unveiled a prototype of the Model S that prompted sceptical notices from some motoring scribes, who described it as having more style than substance and being nowhere near ready for series production.
And yet in May, when things were ostensibly looking the bleakest, Daimler announced its investment in the company. It was the vote of confidence Tesla needed. In June, the news came that two years of painstaking work by Tesla’s Washington representative had borne fruit in the shape of the Department of Energy loan.
However the legal dispute with Eberhard plays out, Musk’s ability to pilot Tesla through the car industry’s current crisis now seems to vindicate his decision to seize control of management two years ago. His sweating of details on the roadster has resulted in an unimpeachably beautiful maiden model. The company’s immediate survival is no longer in question. In addition to the new funds, the company now also has other “people who want to invest”, Musk says, but there is no current need for additional capital. If Tesla turns a profit in July, as he says it will, Musk will have accomplished something extraordinary in a business where the odds are stacked solidly in favour of incumbents.
While some of the claims Musk and others made for Tesla in its early days now sound grandiose, the company has succeeded in beating steep odds and getting an electric car on the road. Even Valleywag, which has chronicled Musk’s problems in gleeful detail, has acknowledged it is time to “give him his due”, recently referring to Musk as the founder of Tesla. Silicon Valley has a history of building paradigm-shifting businesses, and much as we like to laugh at the folly of the Elon Musks of this world, their drive creates products that improve our lives.
The real challenges for Tesla – and the true test of Musk’s mettle – will come over the next three years, as it makes the risky transition from a niche producer of about 1,000 cars a year priced at $100,000 to a high-volume manufacturer of about 20 times that many cars, selling at half that price and destined for a much more crowded middle-premium market. The company’s main concern will not be breakthrough propulsion technology, but the more routinely brutal demands of the car business. From a quirky start-up whose growing pains were chronicled in excruciating detail, Tesla is taking a much bigger step into the public eye as a mass-market carmaker benefiting from a taxpayer-funded loan for closely watched new technology. The status may put new demands on the amount of transparency and accountability required of the company – and on the gravitas demanded of its straight-talking CEO. “Tesla’s not a private company any more if they’re taking public funds,” says Siry. “It’s a big leap,” Musk acknowledges in Knightsbridge. But “every company goes through transformations”.
Rival electric or plug-in cars produced by Renault/Nissan, Toyota, GM and other carmakers will have hit the road by 2011, when Tesla’s Model S saloon launches. The biggest question – and not just for Tesla – will be whether consumers with less money than the rich first-adopters are ready to buy. Like other carmakers, the company will need to persuade people that the higher price tag of a plug-in car will be recouped in the lower running costs of petrol-free driving. But Tesla’s saloon will also be competing against petrol-engined luxury cars of similar quality that cost about half as much. Daimler will be taking a seat on Tesla’s board, and helping it in areas like supply, production and vehicle engineering. Musk says that he still plans an IPO, “probably a couple of years from now”.
As Tesla aims to enter the big leagues, Musk shows few signs of softening his harder edges, as evidenced by his counterclaims against Eberhard. Tarpenning, still a Tesla shareholder, left the company in January – a company very different from the one he founded. “Elon has a much bigger vision for Tesla than I had when we started,” he says. “He really wants to be a big, grown-up car company – making cars and driving trains and everything else. It’s a big vision, and it’s a much more capital-intensive vision.
“That said, it could be a valuable vision. Elon swings for the fences. He makes big bets, and wants a big outcome.”
John Reed is the FT’s motor industry correspondent
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