Tesla’s money problems are no surprise — David R. Keith

MIT Sloan Assistant Professor David Keith

MIT Sloan Assistant Professor David Keith

From MIT Technology Review

Such has been the remarkable success of Tesla Motors that news of its production and financing challenges came as a surprise for some. Tesla plans to raise an additional $640 million from capital markets, and downgraded its 2015 delivery forecast by up to 5,000 vehicles, citing potential complications with supplier qualification and the ramp up of manufacturing for the Model X SUV.

This news serves as a timely reminder of the enormity of the challenge that Tesla is pursuing in bringing its high-performance electric vehicles to market. Basically, building cars is a very expensive business. A new vehicle costs at least $1 billion in development and tooling, and Tesla is developing two new vehicles concurrently (the Model X SUV and the smaller Model 3).

However, Tesla isn’t just building cars; it is also building a vertically integrated supply chain and a proprietary recharging network. A consequence of this strategy is that greater investment is required by Tesla to build these multiple businesses simultaneously. Tesla is making a profit on each vehicle it sells today, but is burning cash as a company to make these major investments.

Tesla’s path to profitability relies on harnessing the multiple reinforcing feedbacks to bring down battery costs rapidly and grow the global market for electric vehicles. Growth in Tesla sales will accelerate the accumulation of production experience, realize economies of scale in manufacturing (see “Does Musk’s Gigafactory Make Sense?”), and provide revenue to invest in R&D, driving down battery and vehicle costs, resulting in yet more sales of Tesla vehicles. Increasing revenues should also allow Tesla to expand its product portfolio, and continue to expand the network of Supercharger recharging stations that enhance the appeal of Tesla vehicles, delivering further sales.

Read the full post at MIT Technology Review.

David R. Keith is an Assistant Professor of System Dynamics at the MIT Sloan School of Management. 

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