• Jan 22, 2009
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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