By on March 23, 2012

An article in the New York Times Dealbook blog claims that Tesla is using their customer deposits on upcoming models as a major source of cash to finance operations.

The article states that

“Tesla is increasingly using customer down payments to finance operations. Without the deposits, the company’s operations would have consumed $175 million of cash last year instead of $114 million…

But that money could dry up if the company experiences production delays or other bumps in the road. Then Tesla would be more reliant on a clean-energy loan from the government.”

Those loans, as we know from Fisker’s trials and tribulations, are rather fickle and are not a reliable source of incoming for a struggling “green” automaker. While customers generally put down about $5,000 to reserve a Model S, deposits for customized cars can run much higher (one interviewee in the article put down $40,000) – and customers may be unable to get back their money if Tesla tanks.

Tesla apparently does not put their customer deposits aside, and uses the money to finance their operations. If the company goes bust, customers will have to wait until other major creditors, like the federal government, get paid. Customers have yet to sign formal purchase agreements, though that will apparently be happening soon.

Washington state is so far the only location where Tesla uses segregated accounts to hold customers money. California, by far Tesla’s biggest market, does not require this. Tesla has collected about $61 million in deposits in 2011, up from $5 million in 2010. While Tesla’s enthusiastic customer base has no problem forking over cold, hard cash (significant sums, at that) to reserve one of the so-far unreleased models, the idea of it being largely unaccountable once received by Tesla seems a little disconcerting, especially in light of the volatile nature of the “green technology” business and Tesla’s track record for releasing new product.

Get the latest TTAC e-Newsletter!

52 Comments on “Tesla Using Customer Deposits To Finance Operations...”


  • avatar
    moedaman

    The end is near, and it won’t be a happy one.

    • 0 avatar

      I dunno, the headline looked alarming, but if you read the actual blog entry, it looks like this is the same system they used with the Tesla Roadster – and they have been delivering Roadsters. I don’t think I would be comfortable risking $40k like the fellow in the article – why so much, I wonder? – but I’d be confident enough in them to put down $5k if I could afford the car in the first place.

      Of all the companies I know of that have been receiving government money, Tesla’s the only one that strikes me as giving back decent value for it. They are producing cars. The cars are cool. They are using genuine, cutting-edge technology. And they seem well put together, at least compared to their rival Fisker.

      You can get 300 miles on the most expensive Tesla battery, and the top-line Model S is only about $10k more than a comparable Mercedes-Benz CLS-class. I’m sure the environmental street cred is worth that for quite a few people. I would certainly consider it if I were in the market for a new car of that calibre.

      D

      • 0 avatar
        CJinSD

        Tesla has let everyone go that was going to work at the now-shuttered factory in Delaware that was going to build the Model-S. All that’s left is for management to award themselves bonuses and then call in the receiver.

      • 0 avatar
        protomech

        $40k is the deposit for the Signature series, which is the first round of cars to be produced (deliveries to begin mid 2012, Tesla claims).

      • 0 avatar
        Norma

        “I dunno, the headline looked alarming, but if you read the actual blog entry, it looks like this is the same system they used with the Tesla Roadster ”

        I don’t think so.

        According to NYT’s blog: “For most of its nine-year existence, the carmaker, […] has mainly relied on the federal government and stock investors for money.”

      • 0 avatar
        Luke42

        @CJinSD: “Tesla has let everyone go that was going to work at the now-shuttered factory in Delaware that was going to build the Model-S. All that’s left is for management to award themselves bonuses and then call in the receiver.”

        Tesla bought NUMMI, after GM pulled out of the joint venture with Toyota:
        http://en.wikipedia.org/wiki/NUMMI
        They’re redeveloping a massive auto plant. They aren’t exactly getting rid of production-capacity and laying off workers.

        I thought Fiskar was the one operating in Deleware? If Tesla is closing any facilities, it’s only to apply full force to redeveloping the NUMMI plant.

        Fiskar isn’t doing as well as Tesla. Tesla has delivered thousands of cars already. Tesla started out making the supercar that Elon Musk and his friends wanted to drive to the golf course on weekends — and they’re rapidly moving downmarket. Fiskar, on the other hand, delivered their first car a month or so ago, only to have one of their first few cars break down in the parking lot of Consumer Reports, before they even started evaluating it. If I had to bet, my money would be on the Tesla folks — the ones who have delivered thousands of cars.

    • 0 avatar
      healthy skeptic

      @CJinSD

      >> All that’s left is for management to award themselves bonuses and then call in the receiver.

      Ya know, they have a big factory in Fremont, CA, and maybe a couple thousand employees, and a tooled-up assembly line where they’re about to churn out thousands of cars. Maybe they won’t make it in the end, but I hardly think they’re at death’s door.

  • avatar
    GS650G

    It’s nice to see Bernie Madoff found a company to work for while he is in the clink.

    • 0 avatar
      Luke42

      Not quite. I guess you’re trying to say that using the money customers have paid you to build an actual business is a pyramid scheme. Whatever.

      Tesla was founded by a billionaire geek playboy, who made a fortune by building some of the early e-commerce services that are widely used the Internet. Now he’s spending it to build space-rocket and electric-car businesses. This could either make him a far richer — or just let him piss away his massive fortune doing cool stuff. If only I faced the same choice!

      http://en.wikipedia.org/wiki/Elon_Musk

      He’s pretty far from Bernie Madoff.

  • avatar
    ...m...

    …tesla have operated under this business model since day one that they began taking deposits for their elise-based roadster: how is this news?..

    • 0 avatar
      APaGttH

      Because the Roadster versus The Model S and the Model X are very, VERY different.

      Tesla bought complete sleds from Lotus. The only risk they had was Lotus not being able to deliver, and at the time the Roadster was being built, Lotus had a very steady business selling Elise models with a gasoline Toyota engine.

      Tesla then took off-the-shelf, readily available Lithium-Ion cells. The same cells used in portable electric tools and laptop computers, ganged them together, developed a cooling system to keep it from becoming hotter than the sun (the true engineering feat) and attached it to electric motors.

      For $60,000 extra dollars over an Elise would could buy a heavier version, that was ill-handling, and absolutely unsuited for track/performance driving. Tesla found 2,000 people to bite.

      The Model S and Model X they are building for the first time with no prior chassis experience. There are bright and garish warning signs that all but the most ardent fan can’t ignore. The lead engineer and chassis engineer quit just months before the S goes to market, and is still being refined. The decision that the first 2,000 units of the S won’t be the affordable $57,000 version, but the loaded out $87,000 version (so the “$49.9K Model S still does not exist on anything but paper). The latest warning sign is the decision not to let the press touch a Model S before its release.

      It is one thing to take a respected company’s sleds and electrify them using stock off the shelf available Li cells that cost you and me about $5 each (do a search). It’s a whole different game when you’re building a car from the ground up. A lot more can go wrong (look at the issues Nissan and General Motors have had, with vastly more resources) and all it takes is a few complaints about product quality, one fire (even if its not legit), or a few pictures of dead Model S’s in the HOV lane and Tesla is toast.

      Funding your business by tapping future product deposits (like the Model X) to survive today is very, very, bad accounting practice, and as noted, in some states – illegal.

      • 0 avatar
        kenzter

        Didn’t Tucker get into some trouble for doing something like this?

      • 0 avatar
        protomech

        “The latest warning sign is the decision not to let the press touch a Model S before its release.”

        Wasn’t there a round of customer and journalist ride-alongs just a few months ago? I didn’t track that closely, maybe you’re referring to the final production version?

      • 0 avatar
        APaGttH

        Correct, the final production versions. The ones that the press was given very limited access to did not have the instrumentation or interiors of production, and many in the press observed a lot of build issues.

      • 0 avatar
        joeaverage

        In some cases a smaller company can be much more agile than a big dinosaur like General Motors so don’t give up on Tesla yet. The gov’t paperwork is probably more daunting than building the car. I say that as someone who has built several custom cars over the years.

  • avatar
    spinjack

    Much venom and hatred toward Fisker and Tesla in TTAC these days.

  • avatar
    Sgt Beavis

    Dear Mr Musk,

    Please get the hell out of the car business and stick with Rockets. You’re pretty damn good at that.

  • avatar
    gslippy

    So they use a murky accounting practice, which only matters ‘if Tesla tanks’, but you’ve provided no evidence that they will.

    As for ‘Tesla’s track record for releasing new product’, they’re soon on to their second product, which is pretty good for a startup.

    Even ‘established’ Mahindra can’t seem to sell product here.

    • 0 avatar
      doctor olds

      “…soon on to their second product…”
      The first was a simple modification of an existing car.

      This is their first real car, and is sure good looking.

      They are undoubtedly learning what it takes to be in the car business, and scrambling for every penny, like startups in yesteryear who relied on customer deposits to build a factory house of cards.

      Tesla has a leg up on those guys, but faces immense challenges.

      • 0 avatar
        gslippy

        I wouldn’t call electrification of a Lotus a ‘simple modification’.

        Wiring 7000 18650 lithium ion cells together, distributing and controlling that power, figuring out how to recharge it, getting it to pass safety regulations, and selling it for a semi-reasonable price isn’t so simple.

      • 0 avatar
        doctor olds

        “Simple” is relative to designing and developing an entire vehicle and all of its systems.

      • 0 avatar
        joeaverage

        ““Simple” is relative to designing and developing an entire vehicle and all of its systems.”

        Depends on how much of what the Tesla S has that interchanges with existing cars on the road. You know the hubs and brakes could be Brembo or Borg-Warner parts. FAG bearings. Timken bearings. Off the shelf, out of a component manufacturer’s catalog.

        Building something like the Tesla S isn’t that much different from building a very well designed kit car or a street rod. I don’t mean the box of parts somebody hacks together aka MG look alikes with Beetle chassis under them. I mean like the Lambo kits a friend builds where the he uses the kit skin and then redesigns the door hinges, chassis, and dozens of other details so they actually work.

        Back to the Tesla S – choose the suspension design, choose the parts, assemble. What I don’t know is how much of the Tesla is a clean sheet design.

        I’m very impressed with the car and would not think less of them if underneath it was assembled with parts interchangeable with the more common Corvette and Porsche parts.

        Pick a bearing with the right specs and design the hub around it using 3-D CAD, then locate the optimum suspension mounting points. Adjust the drawing to account for that. Pick suspension joints like bushings and balljoints and incorporate them into the design model. Add brakes from catalog parts. When everything look like it works (using 3D CAD testing), send it off to the shop to be built. Order the parts. Assemble. Build a test mule using these components. Fine tune it, wear it out, improve what needs to be improved. Just takes time, money and patience. I do this every day in some capacity and as a hobby too.

  • avatar
    RobAllen

    If you put in a potentially non-refundable (or not likely to be refunded as the case may be) deposit on a car like the S, isn’t it in your best interest that Tesla use every penny at its disposal to bring that car to fruition?

    No product, no company. I’m personally rooting for them to succeed here and for that they need cash.

    • 0 avatar
      stuki

      They should be able to borrow, or sell stock, based on all the customer deposits they have taken. That way, return seeking investors, not some dudes wanting a car, is taking the risk.

      Sad thing is, in the dystopian era we live in, the mere fact that so many of Tesla’s customers are well connected and influential, and running in the same crowds as our current top thugs; probably means the general taxpayer will take a hit before depositors do so. Ensuring his donors have access to politically correct expensive toys, on the theory that the technology behind them will eventually become cheap enough to save the planet or some such is, after all, the current administration’s version of Reagan’s old trickle down.

  • avatar
    mcarr

    This is pretty much standard operating procedure for “deposits”. The people that think there deposit is sitting in a secure account somewhere and gathering interest are delusional. Any deposits are being used to fund operations and the company is hoping against hope that some bad news causes a “run on the bank”, so to speak as that money is gone.

    • 0 avatar
      JMII

      I worked at cruise line and they went under using similar practices. The problem is your betting on the future using today’s money and tomorrow is almost always more expensive then today. If the deposits dry up then your entire operation fails before the product can gain traction in the market place. Tesla seems like a combination of the Osborne Effect and Vaporware. Tomorrows car will be great so give us some money now. Normally that’s what investors are for… not customers.

      • 0 avatar
        Luke42

        I see why that would be a bad idea for a cruise line. They don’t have an expectation of fundamentally new products that will huge growth.

        Bringing out a new product is different. The closest cruise line analogy would be using the deposits from people who wanted to ride on a new ship to help buy it. That is, assuming that there will be demand for the ship’s services in the future.

        In a world with declining oil supplies, EVs likely will be a growing market in the long term.

    • 0 avatar
      aristurtle

      Yeah, when I plop down my five bucks for a preorder deposit at Gamestop or whatever, I’ve never thought that they were keeping it safe in an escrow account. But then, that’s $5, not $40,000.

    • 0 avatar
      APaGttH

      This is not standard operating procedure, and in some states a very illegal business practice.

      If a customer puts a $5,000 deposit down on a Model S that won’t be built until 2013, standard operating procedure and safe accounting says that money is held in escrow, it is “unrealized income,” and is not booked until that car is rolling down the assembly line in 2013.

      For people who have plopped down money for a Model X – the vehicle doesn’t even exist yet, let alone a production date. Booking that as revenue and spending it is slimy business accounting at best – a dangerous pyramid scheme at the worst.

      These kinds of practices are generally not accepted because using deposits to prop up the balance sheets has a way of turning exactly into a Ponsi scheme. We’ll get deposits for 20,000 units, which enables us to fund the building of 10,000 units. But that’s OK, because all we need is funding for 20,000 MORE units, and we can build 10,000 more, and as long as we keep getting more deposits the lights stay on. But if the lights go out, you’ve got 10,000 customers with no deposit, no delivery and no resource.

      It is a shady accounting practice.

      • 0 avatar
        Luke42

        Did anyone say they were booking it as revenue? That would be shady, since the economic activity hasn’t occurred yet.

        But, perhaps they they put it on the books as an asset without booking it as revenue, or something like that.

        They’re a public company now, though, so maybe the IPO filings will tell us what’s really going on. Or we can just wait for the annual report.

  • avatar
    redav

    What is Tesla’s sales history? I know they stopped selling their previous model because Lotus stopped making the platform, but how many were made? What about their deal with Toyota to provide technology? Do they have any similar deals with any other manufacturers?

    • 0 avatar
      salhany

      Wiki says they’ve sold 2100 roadsters. They bought a total of 2500 glider chassis from Lotus, after which the production will stop. So they’ve got 400 left to sell every one they were capable of selling.

    • 0 avatar
      Pch101

      “I know they stopped selling their previous model because Lotus stopped making the platform”

      The roadster sales have ended in the US because Tesla’s airbag “hardship” exemption ended. They are still being sold abroad, where airbags aren’t being required for this model.

      “What about their deal with Toyota to provide technology?”

      I suspect that the Tesla-TMC deal had more to do with TMC wanting to unload the NUMMI plant without environmental liability (and Tesla wanting to use the deal in order to obtain federal loans) than it was about building anything for TMC. Getting rid of the Fremont plant was going to be a large expensive headache, and TMC was able to reduce their cost exposure by paying Tesla to take it.

      • 0 avatar
        joeaverage

        How about we petition the US gov’t to open the car markets to cars like the Tesla roadster and Ariel Atom and so forth whether they have airbags or crash test certification or not. Sign a waver and your good. Not like motorcycles are safe (and I ride).

  • avatar
    Lokki

    I don’t think of Tesla as a car of the future or even as a very successful “car”. However it IS an excellent car-TOY, and I think that is the criteria by which it, and the company, should be be judged.

    By those standards, Tesla has to be counted a success as they’ve already cranked out quite a few. ( How many blower-Bentlys were made? )

    The company is doomed to fail but all the sports car / toy-car companies fail. I’m sitting here trying to think of an exotic car maker who has lasted over 20 years under the same ownership. Ferrari did, from the 50’s to the 70’s (?). Who else? Oh – *Morgan* now’s there’s an exact parallel (lol!)! The promise of the introduction of the second model has been the death song of many a fine car-maker. I think it will be the case here. Still, my hat is off to Elton Musk. He made it happen and there will be Tesla’s in car musuems in 100 years. That’s as nice a legacy as any man could want.

    • 0 avatar
      Luke42

      Their strategy is to build the toy-car first, and use the profits to expand downmarket (and up-volume).

      So far, they’ve built a super-sports car, and they’re building a high-end luxury car. They’ve announce plans to build a luxury crossover, and they will presumably build a low-end luxury car next. Their strategy seems to be working so far, but time will tell.

      I’m hoping they do eventually produce a car that I can afford that is the people’s car of the future. As you point out, just surviving the toy-car stage is a gamble that has been lost by most.

  • avatar
    lilpoindexter

    HMMM…could we say the money is being “VAPORIZED”…by the vapor ware??

    • 0 avatar
      gslippy

      What vaporware? That’s a cheap term to throw around, but the Roadster is/was real, and the Model S has had prototypes running around for quite a while now.

  • avatar
    Landcrusher

    Never give a non escrowed deposit unless it’s money you feel like gambling.

  • avatar
    nikita

    When I put down $300 to order a $15,000 Chevy (in ’93) wasnt it kind of the same thing? I’m sure the dealer didnt escrow the money and if they went bust before the car was delivered, I would have been out the money. Granted, this is not an identical situation, in that the chance that GM wouldnt build my truck was essentially zero, but the financial aspect is the same.

    • 0 avatar
      doctor olds

      “When I put down $300 to order a $15,000 Chevy (in ’93) wasnt it kind of the same thing?”

      No. You gave a deposit to the dealer, a completely separate business from GM. GM would never see a penny of that money.

      Tesla is taking deposits as the manufacturer.

    • 0 avatar
      Landcrusher

      Exactly what Doc said. The dealer could burn you, but another dealer or GM would likely give you some relief. Still, what I said applies. I don’t think the story is about 300 dollar deposits though. I suspect these are 4 or 5 digit deposits. That sort of thing is something wealthy people see as a small investment in getting someone to build something that otherwise might never come to market. People who need that money to buy a car shouldn’t apply.

  • avatar
    tekdemon

    The people buying these cars have more than enough money to feel comfortable risking a $5000 deposit. These cars *start* at 57K but will average much higher, especially early units since Tesla is delivering the more expensive vehicles first. Someone buying a $75,000 car is likely in a financial situation where they wouldn’t be too distraught losing a $5000 deposit.

    I know someone who plunked down a deposit for one and they’re a single person making a low six figure income, they might not be a millionaire (yet) but they’re clearly financially comfortable enough that losing $5000 wouldn’t be the end of the world. Of course the person I know ended up retracting their deposit (without issue) to go lease a Volt to go electric ASAP (he loves the Volt btw, though I think a lot of that has to do with the fact that his employer installed special reserved parking spots with electric chargers so you automatically get a sweet parking spot and pay nothing for fuel if you go electric).

    And as for Tesla, I wouldn’t worry too much about their finances. Toyota felt comfortable enough with them to blow $100 million so it’s not like they’re some fly by night operation.

    • 0 avatar
      APaGttH

      The rich get rich because they are cheap. Yes, $5,000 or $10,000 is chump change if you’re a multi-millionare but the typical one-percenter would sue their own grandmother over $5,000 if they felt screwed.


Back to TopLeave a Reply

You must be logged in to post a comment.

Subscribe without commenting

Recent Comments

New Car Research

Get a Free Dealer Quote

Staff

  • Contributing Writers

  • Jack Baruth, United States
  • Brendan McAleer, Canada
  • Marcelo De Vasconcellos, Brazil
  • Vojta Dobes, Czech Republic
  • Matthias Gasnier, Australia
  • W. Christian 'Mental' Ward, Abu Dhabi
  • Mark Stevenson, Canada
  • Cameron Aubernon, United States
  • J Emerson, United States