By on January 23, 2009

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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39 Comments on “Tesla to Angry Customers: It’s All About Us...”

  • avatar

    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.

    And pissing off your most loyal customers does that how?

    I think Musk’s ego has finally exceeded his pay grade.

  • avatar

    Most car companies don’t get started making their first and only product very expensive relative to the competition, and then not deliver for years, finally asking pre paid customers to ante up another 30k for the deal.

  • avatar
    Nicholas Weaver

    I guess being able to charge your electric car in less than 36 hours is considered an option?!?

  • avatar

    I’d LOVE to see the same email from Rick Wagoner! I wonder what the Volt will “really” cost per unit?

    Still, I’m divided over who to feel less sorry for here – the investment bankers who have $50k lying around to put a deposit on a toy made by a dilletante bunch of Silicon Valley teenagers , or the arrogant internet billionaire who thought that, given his brilliance, “just HOW HARD can it be to start a car company?”

  • avatar

    I’m going to play devil’s advocate here. While it’s certainly true that it really sucks to have to pay quite a bit more than you originally contracted for, Who, exactly, does it serve if the company goes bankrupt? Musk is right in that a CEO has a primary responsibility to the shareholders of Tesla.

    Yes, he was arrogant thinking that a car company is as easy to build as a software company. But it actually looks as if Tesla is finally delivering cars, something that damned few automotive startups ever accomplish. And those are new-technology electric cars at that.

  • avatar

    Buildin’ cars is hard™!

  • avatar

    “…observers will note that Tesla has transformed from having a senior team with very little automotive experience to one with deep automotive bench strength.” So when you started this car company no value was placed on hiring leaders with automotive experience?? If this is how entrepreneurs think no wonder I’m still at my job.

  • avatar

    Are the customers down payments in escrow or did the company spend it?

    Is there enough to give back if a lot of customers cancel?

  • avatar

    I’m not sure where I stand on this issue …

    On the one hand, a customer should have no sympathy for a company that must up its prices due to extremely poor management. I mean, expecting something to cost 65k and having end up at ~140k is entirely unacceptable. Seeing as this roadster is currently Tesla’s only product (and therefore only source of revenue), I don’t see how the company should endure. If I had a deposit on the car, I would be taking the money back.

    On the other hand, I agree with bunkie.

  • avatar
    tesla deathwatcher

    Tesla’s whole point when it was first starting out was that it was going to show the carmaking industry how we Silicon Valley people do it. Guess Musk really showed them, huh. Overbudget by $75,000 per car and they didn’t even know it! Until an investor did an audit. Unbelievable.

    Nonetheless, as Bunkie and Rob say, there’s not much a prospective buyer can do at this point but pay the extra money. Or see their toymaker (oh, sorry) carmaker go under.

  • avatar

    I never get tired of saying I told you so with regard to these clowns.

  • avatar

    dejalma : Good question, they’ve claimed int he past that the deposits were refundable but I haven’t heard of anyone testing that yet.

  • avatar

    bunkie : I would wager that most small car companies have managed to put out 100 cars.

  • avatar

    Yeah, Mr Musk’s hubris tends to make him a hard guy to defend, but I gotta agree with bunkie and RetardedSparks here…He’s being honest, even though he knows it makes him look bad. Not just about who he hired, but he’s fessing up about some bad design decisions and openly/realistically trying to show ‘viability’ for federal loan guarantees. A bit more self-realization might benefit a few other CEO’s in this business.

  • avatar

    The only thing Tesla can produce well is a press release. How many millions have they spent to transplant company A’s electric motor, company B’s control module, into company C’s chassis? It took them this long to realize that it cost them 40% more to produce than they were selling it for?

    And their solution is to try to cheat their existing customers out of $6000, which won’t come close to the extra $40,000 they are losing per car?

    Tesla’s death is near.

  • avatar
    John Horner

    Musk’s net worth has typically been reported as north of $300 million. If he cared about the success of the company AND integrity, he would pitch in the price increase himself for the contracts already on the books and only have price increases for new customers.

    Integrity, remember that word?

  • avatar

    What Mr. Musk is describing in his letter is the process of going from handmade prototypes to production. I wouldn’t call it mass-production – the term “mass” implies large numbers. This process is what every large scale product goes through in the normal development process. But you are usually not selling those hand made prototypes. Marketing realities probably require selling a few for promotion. Unfortunately, Tesla went into production before they had their process worked out so the costs weren’t nailed down. The difference between the “boys” and the “men” in the successful company world will be the factors in determining their fate.

    If they are losing $31K per unit, how does the $6.5K price increase discussed yesterday help them? If these production cost improvements save them $25K then I guess they will be breaking even.

  • avatar

    Tesla and Customers in the same sentence…I’m still laughing!!!!!

  • avatar
    tesla deathwatcher

    Remember, John Horner, it’s not the money, it’s the margin. Tesla only saves about $2.7 million by doing this. But Tesla changes its margin from a loss to a profit on each car. That’s got to be the motivation for this.

    You are right that Elon Musk does not have any integrity. He has stabbed people in the back many times at Zip2, PayPal, Space X, Solar City and now Tesla.

    But Musk has also been very successful. One of his strengths is that he tells it like it is and does the dirty work that most will shy away from. As HeBeGB says, a lot of other CEOs have trouble with that.

  • avatar
    John Horner

    “it’s not the money, it’s the margin.”

    Only if you believe Musk’s spin of the day.

    His successes has been at separating people from their money. By that measure, most drug lords and mob bosses are successful too.

  • avatar

    I find the defense of Musk in this case completely shocking (Tesla employees or investors posting, perhaps?).

    What he is saying is not that the company will fold if they don’t jack up prices… but that he would have to get more investment. IE, he would either have to pony up the cash himself, or hit up his existing investors and/or find new ones. That is, he would have to dilute his existing investors.

    As a consumer of his product, I don’t give a crap about his wealthy investors being diluted. It is not my problem. They can put on their big-boy pants and plunk down a little more (unless, of course, they think it is a poor investment and that the company is a sinkhole.)

    Have we become so beaten-down as consumers that this point no longer resonates?

  • avatar

    Elon is the cave man visionary that saw the supermarket, brilliant!

    The farm however, was a foreign concept to him, DOH!

  • avatar

    Tesla – Son of DeLorean…

    The name changes, but the song remains the same…. Remember DeLorean built 8,500 cars before he tripped over the white lines.

  • avatar

    The real measure of his arrogance will be the number of depositors now seeking to cancel their orders. If the market will bear these even higher prices (which I doubt) then so be it. If not, they may have exceeded the tipping point where many customers will decide to save their money and wait for a plug-in from a major manufacturer.

    I have to imagine that the economic situation has already resulted in a lot of deposit refunds… even wealthy Silicon Valley “friends of Elon” have to prioritize their spending in tough times.

  • avatar

    golf4me- “Tesla and Customers in the same sentence…I’m still laughing!!!!!”

    Walking home last night I saw 2, yes TWO Tesla roadsters with license plates parked across the street within 30 yard of each other. The $6k increase won’t bother people buying it as a status symbol (primary market). Still a bargain compared to say, an F430 (which saw it’s sales cannibalized by the california since most buyers only wanted the cheapest ferrari – noted by TTAC).

    By the time real consumers are interested (fozone, was that you parked on San Vicente last night?) the bad press of screwing a few LA millionaires will be forgotten or the company will have folded.

  • avatar

    stevelovescars- I’d imagine the tipping point for someone who can throw a $50k deposit on a 2 seater w/o a roof that won’t arrive for a year is more than $6k. But I agree. The market will decide.

  • avatar

    CKB, you are right about the money… for some it’s a drop in the bucket. I think the tipping point is defined beyond the price and has to do with feelings of risk, annoyance, and distrust.

    One of the reasons consumers spend a premium for luxury goods is the treatment they receive for being a customer. People who ruitinely spend >$100k on cars aren’t used to having their time wasted or being jerked around over $6k.

  • avatar
    tesla deathwatcher

    “The market will decide.”

    That sums it up nicely. And I, for one, have no problem with the market deciding one way or the other. The nickname I have chosen tells what I predict for Tesla. But I may be wrong. If so, more power to Tesla.

    My hope, though, is that the government does not step in. Then the market does not decide, government regulators do. I fear that Elon Musk will get his money from the Department of Energy and we’ll all be paying for Tesla’s cars.

    Worked for Elon Musk’s Space X. It’s funded by NASA.

  • avatar

    Customers should not have bought a Tesla unless they have money to burn.

    For the merely well off there is the Elise.

    Anyway, as a customer if Tesla goes under before you get your car you are an unsecured creditor to the tune of $50K, and if it goes under afterward you have no parts or re-sale value.

    However, things like:

    “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.”

    make me wonder what kind of idiots are running the company. Really, despite your claims to the contrary you’re really making an electric Lotus Elise, you didn’t think that starting with the Lotus body panel supplier would be a good idea?

  • avatar

    They’re going to get sued out of existence.

    If you read between the lines, what Tesla is saying is that they completely made up the cost of the car, without having actually priced the materials or parts. They DESERVE to fail.

  • avatar

    This is the kind of “bad news, but we’re on top of it” letter that Rick Wagoner is incapable of writing. I’m not a Tesla customer, but I think Elton Musk took a calculated risk here, and it was an intelligent one.

  • avatar

    So, its sugar-time on Department of Energy grants and bail-out-palooza for Tesla, and Elon also has the COTS/ISS Re-Supply contract from NASA.

    It seems the government loves funding Elon-toys that cost more than thought, are years late, and don’t quite live up to what was advertised.

    How do you get in on this kind of racket? I’m in the wrong line of work, obviously.

  • avatar

    Ya, building cars is hard.

    Criticizing is easy.

    They hired seasoned pros from Detroit to show ’em how to make ’em after they ran into trouble.

    Yes, yes, yes, go ahead and laugh. it’s still true.

  • avatar

    That musk smells real bad. Didn’t musk flame out in the early 90’s? Last time I used it, I believe it was in my Mennen Speed Stick (Deodorant only, not Anti-Perspirant/Deodorant).

  • avatar

    Whether you like him or not, Clarkson made a good point when reviewing the Tesla. He pointed out that while roadster was faster in a straight line than an Elise, and costs pennies to “fill up”, it also happens to cost (x) times more (from my Canadian perspective, it’s 2x more than a base model Elise). That difference in price pays for a LOT of gas, many years worth. And you can walk out and buy an Elise off the lot right now, and get rock-solid Toyota reliability and world class handling without the smell of Musk. And the Elise is not exactly a fuel drinker in the first place, is it?

    Based on logic and reason (and an analysis of management), the Tesla should not have gotten beyond the prototype stage. But symbolic value is a powerful rose-tinted lens through which the most polished turd can seem very appealing to a greenwashed market, despite all odds.

  • avatar
    law stud

    It’s all about how the audit reported the numbers. For instance when the government pays $1,000 for a hammer, the next hammer is $0.01 because all the administrative costs are added into the first hammer.

    The company is taking a long time to get their cars out on the road to customers so the delay is making the margins thinner on the cars. This isn’t oversight but a company floundering in the water. If they were to delay anymore in such a capital intensive market they’d be done.

    The first cars are always much more expensive to make, the amortization of the costs of tooling will take a long time to show profits.

    Musk did this also because he knows customers now get a tax break. They are just swallowing the federal tax break for themselves.

    The audit doesn’t mean they were stupid going in, just that they were slow to realize that costs add up and margins thinned when you’re slow to get to market.

  • avatar

    “JEC: Based on logic and reason (and an analysis of management), the Tesla should not have gotten beyond the prototype stage.”

    I think the argument can be made that it hasn’t yet made it out of the prototype stage, it’s undergone a couple major revisions already.

  • avatar

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

  • avatar

    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.

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