• Jan 22nd 2009 at 3:22PM
  • 16
It seems that even a new explanatory email from CEO Elon Musk has had little calming effect on the firestorm ignited by the increasing of prices for locked-in Tesla buyers. To avoid further damage from what is fast turning into a PR nightmare, the company is turning to a previously-successful approach and has announced a set of town hall meetings. Scheduled for the 26th and 27th at the Los Angeles and Menlo, CA stores respectively and hosted by Elon and other staff, the events can be attended in person or by phone. What, no internet hookup?

The ineffective email attempted to explain the price increases by linking the need for Tesla Motors to show they can make a profit (so they can get loans to advance the making of the Tesla "S"), with the cost of building the Roadsters originally costing far more than they would be sold for. An audit in the summer of 2007 revealed to them that their $92,000 car was going to cost $140,000 to build. Thus the eventual change of top management and the slew of other cost cutting measures that followed. Hopefully, the story will be more compelling when told in person. Don't forget to tune in next week for another episode of "As the Tesla Turns." Hit the jump now to read the email for yourself.

[Source: Tesla Motors Club]

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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    • 1 Second Ago
      • 6 Years Ago
      Further proof that it's not easy to build vehicles profitably. Everybody was so high on the company before they had even sold many units or before the products had been used for a significant amount of time/miles. Like I said in response to this post,


      they haven't proven anything yet. I hope they figure out how to reduce their costs soon. Regardless this PR nightmare will not go away.

      • 6 Years Ago
      Very interesting read, the Email. I hope there will be an mp3 or video of the townhall meeting available afterwards. I think we had one last time and it was VERY interesting to listen to!
      • 6 Years Ago
      Wow -- Elon Musk is painting us a pretty good picture of what's going on at Tesla. He's kind of caught between a rock and a hard place. On one hand, he can't raise the price of the Tesla because then he can't prove that he could build the sedan for $60,000. On the other hand, he's probably losing close to $100,000 on each roadster that he sells for $92,000.
      In his recent e-mail to Tesla buyers, Musk stated that audit in the summer of 2007 showed that the true vehicle cost was close to $140,000. Interestingly, during that same approximate time in 2007, Martin Eberhard stated in the crash test video that the cars were $350,000 each to build. Estimating the costs of individual components, it is more probable that the the truth is closer to the Eberhard's statement.
      He really wants to weed out the people who have deposits to purchase the roadster for only $92,000 since the new price is now $109,000. He has increased the price of the options several thousands of dollars and probably hopes some of the people at the lower price will back out.
      No one with a purchase option at $92,000 should cancel their order. They should buy the car and then immediately resell it for more -- on E-bay or through one of the Tesla blogs.
      If potential buyers are disappointed, angry, disturbed, frustrated or annoyed with Tesla and feel like cancelling their orders to put Elon Musk out of business, that thinking is counter-productive. Since each roadster is being sold for much less than it costs to manufacture, every completed sale is actually a financial detriment to Tesla.
      By the way, Ed Musk is a liar so nothing he says can be believed. He can't just pull the plug on Tesla and lose the $200,000,000 + that he and his buddies have invested. He is trying to deceive the government into believing that he can build the sedan to sell for $60,000 with nearly the same range as the roadster. Even a superficial cost analysis of the components, labor, batteries, chassis and overhead leads to the obvious conclusion that this cannot be accomplished. After all, the high-power charging cord alone is $3,000.......................Tesla claims repeatedly that the cost per mile in electricity is one cent. Pro-rating the charging cord cost over 100,000 miles, that alone is 3 cents per mile.
      I predict that Musk will need another $40,000,000 somewhere between delivery of the 350th and 400th roadster.
      In conclusion, please BUY your $92,000 roadster, sell it for a quick profit. You will have some cash and done your part to stop Tesla from stealing millions of government dollars (i.e. your tax money). So, if this all works out for you, feel free to e-mail me and we can discuss the value ($) of your appreciation for this tip!
      Dave Cloud
      • 6 Years Ago
      This fiasco may be the Kiss of death, and to think it is a self inflicted wound. You know, people just hate to get ripped off!
      Fiskar is probably giggling all the way to the bank!
      • 6 Years Ago
      Measure twice, cut once Mr. Musk. This is a pretty irresponsible mistake.
      • 6 Years Ago
      It's an odd e-mail for an after the fact change in price on vehicles 400 people had already put deposits thinking they'd locked their prices in.

      Not conciliatory at all. He should have said we screwed up in this and offer these customers something.

      This is how you make customer's for your competitor, Fisker - and apparently don't even realize you're doing it. Musk isn't cut out to be CEO of a company that needs to respect its customers (and probably its employees too) - as he just doesn't get it - obviously.
      • 6 Years Ago
      If it doesn't make dollars, it doesn't make sense.
        • 6 Years Ago
        uh hmm... ha ha... *sigh*


        Today's lesson: History Repeats Itself.
        -It's ironic that Nikola Tesla's own misleadings with business and entrepreneurial tact would reflect so kindly upon a company bearing his name half a century later.

        Don't Quit Your Day Job
        -Elon Musk should stick to his physics degree and just keeping shooting things into space, because as everyone knows "what goes up, must come down," and this (ASS)tronomical failure in his part as a businessman displays the realities of why not all of us are fit to lead and how easy it is to destroy the hope of so many (cue Martin's return a-la Steve Jobs post-firing).

        And A Personal Opinion
        -The Roadster is a proof-of-concept. The company proved they could build it. They should not try to immortalize it as the saving grace of the electric car industry forever remembered by its features and trim-options, but instead move on to a Second Generation Roadster as an up-sale, not that silly Sports version that's a spit-ball faster than the original.

        ...it's time for someone to register TeslaSucks.com

        "Let the future tell the truth, and evaluate each one according to his work and accomplishments. The present is theirs; the future, for which I have really worked, is mine."
        -Nikola Tesla
        • 6 Years Ago
        MUSK MUST GO!

        MUSK MUST GO!



        MUSK MUST GO!

        MUSK MUST GO!


      • 6 Years Ago
      Some of us should picket the stores during this meeting with signs that read "Tesla Bait and Switch"

      I hope someone has called and placed a complaint with the DMV for them to investigate this VERY SHADY move on Tesla's part.
      • 6 Years Ago
      Regardless of whether or not they are losing money on each sale, it seems quite clear that the right thing to do is to honor the price of any "locked down" customers who have paid a substantial deposit. Anyone else will have to deal with the increase.

      Claiming that any Federal Tax Rebate will offset any price gains is petty at best.

      Bad-will generated by this stunt will cost Tesla much, much more in the long run.
      • 6 Years Ago
      Dear Lord, didn't they do their homework before getting in to automotive? Seems to me an error of that magnitude in price is just a wee bit extreme. Of course GM did predict they would sell many more Aztecs in one year than they did for the entire run of the model.
      • 6 Years Ago
      Don't quite see the point of the email. People are getting ripped off. The last thing they want is to be reminded why they are getting ripped off. This won't apease anything. Rich or poor, nobody likes the feeling of having the carpet (in this case, almost literally ;) ) pulled out from under one's feet. First law of survival: never saw off the branch you are sitting on...
        • 6 Years Ago
        Especially when the reason for getting ripped off is, "We want to make more profit."

        "You see, we thought we were making $27k a car profit from you people, but unfortunately we're not. Sorry! Now we're taking means to correct that mistake. We appreciate your understanding and your money."
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