Tesla to Angry Customers: It's All About Us

Robert Farago
by Robert Farago
tesla to angry customers it s all about us

Tesla Motors recently caused a kerfuffle amongst its earliest and most faithful supporters by raising the price of its Roadster. More precisely, the Silicon Valley automaker turned some of the car’s standard features into options, and then raised the prices on those (e.g. the fast charge power cord). Customers who’d provided Tesla with hefty deposits– up to $50k– were none-too-pleased to discover that their “locked-in price guarantee” wasn’t worth the paper it was printed on. Uh, it was printed, yes? Anyway, to quell the ensuing PR shit-storm, self-appointed (anointed?) Tesla CEO and Product Architect Elon Musk has emailed an explanation to his rapidly aging customers [full text after the jump]. Musk has also scheduled a town hall-style meeting for the 26th and 27th. In short, to ensure federal teat suckling for the WhiteElephant sedan, Tesla has to prove that it’s “viable” (there’s that word again). As Tesla was losing $31k per car, something had to change. In other words, take a hit for the team guys, Oh, and Musk points out that there’s a $7500 tax credit for customers who take delivery of their Roadster between January 2009 and March 2027. Just kidding. I think.

Email to Tesla buyers:

“A much fuller account of the history of Tesla is worth telling at some point, but for now I will just talk about the essentials of why we needed to raise prices on options. Fundamentally, it boils down to taking the tough steps that are difficult but necessary for Tesla to be a healthy company and not fall prey to the recession.

When the initial base price, for cars after the Signature 100 series, of $92k was approved by the board a few years ago, it was based on an estimated vehicle cost of roughly $65k provided by management at the time. This turned out to be wrong by a very large margin.

An audit by one of the Series D investors in the summer of 2007 found that the true cost was closer to $140k, which was obviously an extremely alarming discovery and ultimately led to a near complete change in the makeup of the senior management team. Over the past 18 months, observers will note that Tesla has transformed from having a senior team with very little automotive experience to one with deep automotive bench strength. We now have executives with world class track records running everything from design to engineering to production to finance.

To bring the cost of the car down, we have reengineered the entire drivetrain, which is now at version 1.5 and will be at version 2 by June. The body supplier was also switched out from a little company that was charging us nutty money and had a max production of three per week to Sotira, who supplies high paint quality body panels to Lotus, Aston Martin and others. In the process, we had to pay several million dollars for a whole new set of body tooling, as the old tooling had been made incorrectly. The old HVAC system was unreliable and cost almost as much as a new compact car, so also had to be replaced. The wiring harness, seats, navigation system and instrument panel also had to be modified or replaced.

After reengineering and retooling virtually the entire Roadster and completely restructuring our supply chain, we are now finally coming to the point where the variable cost of the car (to be clear, this excludes fixed cost allocation) is between $90k to $100k. With a lot of additional effort by the Tesla team and the help of our suppliers, we should be at or below $80k by this summer. There is some variability here due to exchange rate shifts. Although we gain an automatic currency hedge by selling in both Europe and the US, we are still vulnerable to the Yen, which is very strong right now.

Obviously, this still creates a serious problem for Tesla in the first half of 2009, given the $92k to $98k price of most cars delivered over this time period. The board and I did not want to do a retroactive increase of the base vehicle price, as that would create an unavoidable hardship for customers. Instead, apart from a $1k destination charge increase to match our true cost of logistics, we only raised the price of the optional elements and provided new options and a new model (Roadster Sport) to help improve the average margin per car.

The plan as currently projected, and which I believe is now realistic, shows a high likelihood of reaching profitability on the Roadster business this summer. By that time, we will be delivering cars that have a base price of $109k plus about $20k or so of options (having worked our way through the $92k to $98k early buyers) at a rate of 30 per week. We are fortunately in the position, rare among carmakers, of not having to worry too much about meeting 2009 sales targets, as we are already sold out through October and have barely touched the European market.

My paramount duty is to ensure that we get from here to there without needing to raise more money in this capital scarce environment, even if things don’t go as well as expected. I firmly believe that the plan above will achieve that goal and that it strikes a reasonable compromise between being fair to early customers and ensuring the viability of Tesla, which is obviously in the best interests of all customers. It’s also important to note that the price increases will affect 400 customers, all of whom will take delivery after Jan. 1 and receive a $7,500 federal tax credit. We made the pricing changes to ensure the viability of Tesla in the long term, regardless of government incentives, but we hope the credit will offset the increase for most customers.

There is one additional point that relates to the government loans that Tesla is seeking for the Model S program, a much more affordable sedan that we are trying to bring to market as soon as possible. A key requirement is that any company applying be able to show that it is viable without the loans. If we allow ourselves to lose money on the cars we are shipping today, we place those loans at risk. Mass market electric cars have been my goal from the beginning of Tesla. I don’t want and I don’t think the vast majority of Tesla customers want us to do anything to jeopardize that objective.”

Elon Musk

CEO & Product Architect

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2 of 39 comments
  • Erik Erik on Jan 26, 2009

    I doubt we will see any cancelations or even flippers on ebay until a cooler electric comes along.

  • Tauronmaikar Tauronmaikar on Jan 31, 2009

    Funny, I turned to a friend of mine who happens to be a very knowledgeable car guy and said: "look, some silicon valley millionaires think they can build a car company to sell electric cars." His response, after reading about the Tesla was: "glorified golf cart for $92k? You gotta be kidding me. It will never work and if it does these holywood celebrities are even more stupid than I think." This conversation took place 1 year ago.

  • Tassos VW's EV program losses have already been horrific, and with (guess, Caveman!) the Berlin-Brandenburg Gigafactory growing with leaps and bounds, the future was already quite grim for VW and the VW Group.THis shutdown will not be so temporary.The German Government may have to reach in its deep pockets, no matter how much it hates to spend $, and bail it out."too big to fail"?
  • Billccm I had a 1980 TC3 Horizon and that car was as reliable as the sun. Underappreciated for sure.
  • Inside Looking Out I did not notice, did they mention climate change? How they are going to fight climate change, racism and gender discrimination. I mean collective Big 3.
  • Lou_BC I'm not too picky about gloves. If I'm concerned about heavy oil or grease contamination, I'll donn nitrile gloves. Heavier work and I'll use "old school" leather gloves, fake leather, synthetic or whatever is available.
  • Dusterdude Getting the popcorn ready . May be a good plan for strikers to make sure they own good winter jackets for future pickets .