It’s coming up on 10 years since I first interviewed Elon Musk, CEO of Tesla Inc. and SpaceX. At the time he was still chairman of the board, not yet having ditched his third CEO in a year. This interview was originally published on AutoblogGreen in June 2008 when I was a writer there. Musk contacted me after I wrote a story questioning his involvement in the development of the Roadster following a Fox News story where he was referred to as the company founder. We had a nearly hour-long conversation and I interspersed that transcript with some responses from Martin Eberhard that I had solicited by email.
As I re-read this, I noted the words I wrote in the final paragraph of the epilogue and realized that sadly, little of what I wrote has come to pass.
Having met several members of the Tesla team when I visited there in January to drive the Roadster, it’s clear to me that they have tremendous skills and expertise and they are recruiting more people with those qualities. Hopefully, the management team now in place at Tesla has the strength of character to take the knowledge of the engineers and apply the necessary review process to design decisions going forward. That is an absolute must in order to get cars built right, on time and on budget. Certainly the work of the TEAM at Tesla Motors has lit a fire under many other manufacturers to accelerate their own electric car projects.
I’m republishing it here for posterity. Given Musk’s recent tirades against the media, I wanted to have this in more than one place.
Dodge Circuit EV Concept at 2008 Los Angeles Auto Show
Authors note: Back in 2009 when I was still the technical editor of the now defunct GreenFuelsForecast.com, I sat down for lunch with Lou Rhodes and Doug Quigley of Chrysler. At the time, Lou was president of the company’s ENVI divison and Doug was executive engineer for EVs. Over the prior 18 months, ENVI had shown off two sets of electrified concepts and was still hoping to get at least one into production. At the time of this conversation, Chrysler was struggling to survive and barely a month later, the company would go through bankruptcy reorganization before emerging as part of Fiat. While none of the concepts at the time, made it to production, lessons from the project were fed into the Fiat 500e and in 2017 a plug-in hybrid Chrysler minivan finally arrived as the Pacifica.
(Auburn Hills, MI, March 27, 2009) Over the last two years numerous automakers including Nissan, Renault, Mitsubishi and General Motors have garnered attention for efforts to develop commercially viable electric drive vehicles. More recently Chrysler has also publicly jumped into the fray with the creation of its ENVI division, unveiling of several prototypes and the announcement that at least one of those vehicles would go into production in 2010.
Lou Rhodes, President of ENVI and Doug Quigley, Executive engineer spoke with Green Fuels Forecast about Chrysler’s plans for electrification. When ENVI was publicly announced in September 2007, many saw it as a knee-jerk reaction to all the hype that General Motors was getting for the Chevrolet Volt. In fact, the work of ENVI began quietly in late 2005 when the Chrysler Group was still firmly ensconced within DaimlerChrysler.(more…)
As I read this Bloomberg story this morning about Elon Musk closing in on the goals required to get 5.27 million stock options granted to him in 2012, a thought occurred to me. We all know the financial system is absolutely rigged. That much is no secret.
At the current share price of Tesla stock those options are worth about $1.4 billion. Despite many on Wall St acknowledging that the value of the company has nothing to do with its current business fundamentals, they keep pushing the price up based on “future potential.”
What rarely gets talked about is that every time Tesla goes back to the markets to sell shares in order to keep the lights on, Elon himself buys up a big chunk of those shares. There’s absolutely nothing wrong with that and demonstrates Musk’s own confidence in his company while also ensuring that his own substantial stake in the company (currently at more than 22 percent of outstanding shares) isn’t diluted. Again nothing wrong with any of this.
However, keep in mind that relatively little Musk’s net worth which is well over $10 billion is in cash. Like most billionaires that don’t want to give up their stakes in companies he borrows money against those investments. When he wants to buy more Tesla shares, he goes to his bankers, including Morgan Stanley for a loan. As of March 2017, Elon owes more than $624 million.
The banks that are owed money by Elon Musk have a financial incentive to maximize the value of the company and help it reach the lofty goals set by the board of directors when they granted those options in 2012. If Tesla fails to reach those goals, especially the market capitalization, Musk won’t get those shares and may not be able to pay back those loans. On top of that, many of the same banks also own a lot of Tesla shares directly, including Morgan Stanley with 3.7 million shares.
To the best of my knowledge (I’m neither a lawyer or financial expert) none of this is illegal. But it’s worth having some context when listening to any arguments pro or against the value of a company, including my own. For the record, I don’t own any stocks in any company directly aside from funds in my retirement accounts.
The car business is an enormously expensive place to play. Building factories can cost anywhere from hundreds of millions to billions of dollars, especially if you want to mass produce anything. In late 2008 and early 2009 at the height of the financial crash, we saw General Motors go from $16 billion in cash reserves to virtually nothing in a matter of months as they raced toward bankruptcy. Tesla Motors is now standing on the precipice of major investments to grow the company and they have been spending their reserves at such a prodigious rate that they too need to raise more cash.
In the recently released Q2 2015 earnings report, a more troubling aspect than the operating losses which have been typical of the company’s finances from day one, was the cash burn rate. Tesla went from having $1.905 billion on December 31, 2014 to just $1.15 billion on June 30. A good chunk of this went to paying for equipment in the Fremont, California factory for production of the Model X crossover and ongoing construction of the “Gigafactory” battery plant near Reno, Nevada.
However, the outflow is just getting started as the company prepares to start equipping that $5 billion battery factory (although a significant chunk is coming from Panasonic and other suppliers) as well as developing and producing the more affordable Model III. Tesla has publicly stated a goal of expanding production from 50,000 units this year to 500,000 by 2020. While selling half a million cars would raise significant revenue, they have to spend a lot of money before they ever get there.
To help keep things going in the near term, Tesla announced plans today to issue $500 million worth of new common shares in the company. CEO Elon Musk has committed to spending $20 million of his own money to buy new shares. Given the enormous investments that will be required for equipment and engineering in the next five years, $500 million seems like a pittance and it likely won’t be the last time we see Tesla going to either the equity or debt markets to raise more money. In this case, Tesla’s stock price has already taken a hit in the last few weeks dropping from a high of $282 on July 20 to close at just over $238 yesterday. Right now they are probably balancing the need for cash with not overly diluting the stock and sending the price down even faster.
The redesigned 2016 Hyundai Tucson will be hitting dealerships in the next two to three weeks but it won’t remain the smallest crossover in the Hyundai lineup forever. During a regional media preview for the Tucson, Hyundai America President and CEO Dave Zuchowski acknowledged that sales of B-Segment crossovers are growing fast and Hyundai wants to be in the segment. However, the new Creta that just launched in India is not suitable for the American market in its current form. Zuchowski didn’t say if the new U.S.-market CUV would be based on an updated version of the Creta or would be something different. He did say that the small crossover would probably arrive here in two to three years.
As the discussion about a possible entry of Apple in the car business continues, yet another wildly premature question arises. How would Apple go about selling these totally speculative vehicles?
Developing and building a modern car from the ground up is a vastly more complex problem than anything that Apple has previously attempted. Elon Musk, Henrik Fisker and countless others before and since can certainly attest to this. However, that is largely an engineering problem with basic technical issues to address and regulations to adhere to. Aside from scale and the nature of the engineering challenges, it’s an area that Apple is somewhat familiar with.
Retailing cars, at least in the United States can be just as problematic, if not more so. Unlike most industries, the system of selling automobiles is very highly regulated and the rules are set at the state level with each of the 50 states having their own nuances. One common feature across the country is the franchise system.
The Franchise System
The network of independently-owned franchised car dealerships was established in the early years of the industry. In those days, it was hugely beneficial to all of the startup automakers by providing them with an inventory buffer and some extra working capital. With a system of franchises, automakers don’t actually sell product to the end consumers that drive around. Vehicles are purchased by independent dealers who maintain the inventory and sell to end consumers. Even when a customer special orders a vehicle with a particular configuration, it is still sold twice, once by the factory to the dealer and then by the dealer to the consumer.
In the early years of the industry, this system benefited manufacturers because they sold franchises to aspiring retailers and them sold them the product shortly after it came off the assembly line. It also benefited the dealers that could charge a healthy markup and also make money selling parts and service. Finally, the system benefited the consumer because with so many independent dealers that could charge whatever they liked, there was an opportunity to shop around for the best price or to find the exact car they wanted.
However, as dealers became more wealthy, they would increasingly wield their influence over state legislators to get laws passed to prevent automakers from competing by selling directly to consumers. Until the import brands started arriving in force in the 1960s, this all worked well with dealers only competing with each other for sales. However, the imports seeing the thousands of dealers selling the cars at a discount had a different idea.
While they didn’t try to go against the franchise laws, they also realized that by selling fewer franchises, their dealers wouldn’t be undercutting each other as much, selling more vehicles per store and earning higher profits. Until GM and Chrysler went through bankruptcy in 2009, all efforts by the Detroit automakers to cull their dealer networks or compete directly had been firmly rebuffed. Even now with 20-25 percent of their dealers shut down during the bankruptcy process, the Detroit three still have several times the number of franchises of their import brand competitors.
Tesla and the company store
Having seen the success that Apple had with its company owned retail outlets since the first opened in 2001, Tesla decided to eschew the franchise model for its fledgling lineup of battery powered vehicles. Starting in California and a few other states with more lenient regulations that allowed carmakers without any existing dealer network to sell direct to consumers, Tesla has opened several dozen stores modelled on the Apple boutique concept.
Unfortunately, Tesla’s attempts to expand beyond that initial retail footprint have been largely rebuffed by the legislatures and courts. In fact laws against automakers selling direct to consumers have been made even more strict in a number of states including Texas and Michigan.
So what might Apple do?
As with everything else about a potential car program, we can only speculate at this point but Apple’s history and some emerging technology provide some clues. Prior to the opening of the first Apple Store in April 2001, Apple’s products had been sold through third-party retailers including CompUSA, Best Buy and a range of independent stores. In the larger stores, Apple products were often relegated to a remote corner and rarely given much support.
Automotive retail is a very different environment where the vast majority of stores are dedicated to a single brand. However, because they are independently owned and operated, automakers have very limited control over what the stores look like or how they are configured. Automakers have resorted to a carrot and stick approach to getting dealers to follow certain guidelines, such as providing support payments to remodel or withholding allocations of certain models if dealers don’t tow the line.
In lieu of a franchise system for the computer business, Apple just went into direct competition with their third-party resellers. By providing a halo experience for customers where they could show off their latest products, Apple was able to grow their sales dramatically. While many independent resellers went out of business, most of the larger chains like Wal-Mart, Target and BestBuy saw the increasing attention that Apple brought to its products as a boon. By advertising that they had the same products, they were able to draw in consumers that also needed other products.
There was one significant distinction here from the auto industry. Apple has always sold its products at premium prices and virtually never discounted anything, thus avoiding one of the major concerns from franchised car dealers. They also discouraged third-party retailers from discounting Apple products. In this way, they avoided the appearance of undercutting third-parties and competed on providing a better retail experience.
With its huge cash horde and influence, if Apple chose to take on established car dealers to set up their own retail network, the tech company could potentially lobby and win over state legislators that have so far done the bidding of dealers. Apple already has nearly 300 stores in the U.S. and has shown a record of playing nice with those third-parties which could help if it does go after changes in franchise laws. Apple would likely have a better chance of success with its polite and well-mannered CEO Tim Cook than the outspoken Tesla CEO Elon Musk.
It’s also entirely possible that Apple could go the traditional franchise route. There is probably no shortage of potential dealers willing to put up a multi-million dollar franchise fee to give the brand a shot.
My own personal guess is that we’d actually see a mix of both independent dealers, stand-alone Apple car stores and some support from the existing Apple store network. Given that existing Apple stores largely live in malls and are often overcrowded as it is, Apple could provide a virtual reality introduction to its vehicles from the existing stores.
Imagine walking into your local Apple store, walking over to the car section across from the new watch counter and slipping on a set of Oculus Rift goggles. You could sit down in a mock driver’s seat and reach out to experience the entire Apple automotive user interface. When you are done, one of the Apple geniuses could set up an appointment for a physical test drive at a nearby Apple car store or third-party store or even pull up the loan application on an iPad and arrange for your new car to delivered right to your driveway.
If anything, Apple taking on the car buying experience may end up being far more disruptive to the industry than any Apple-branded car. As the old curse says, “may you live in interesting times.”
In an interview on Bloomberg, Matt DeLorenzo is only somewhat right that the new Tesla Model S P85D is counter to the mission of converting the world to battery electric cars.
On the surface, Matt is correct that to really fulfill Elon Musk’s goal of transforming personal transportation, Tesla needs to build huge volumes of cars that people who aren’t living off silicon valley stock options can afford to buy. However, in order to do that, Tesla actually needs a sustainable business model and so far, 11 years after being founded, the company has yet to turn a profit from building and selling cars.
That’s where machines like the P85D come in. Sure, the world doesn’t really need a 691, battery-powered sedan (not that I wouldn’t seriously consider one if I had the cash but that’s another story). But to get to the promised land of building a mainstream car, Tesla (or any other car manufacturer) needs to have sufficient cash flow to pay it’s own bills which means that margins need to go up significantly.
Developing and building cars is a hugely capital intensive undertaking. In addition, to keeping the current Model S up to date, Tesla is developing the Model X, Model 3 and whatever else it has in the pipeline. The Model X shares a platform and most hardware with the S but the Model 3 will have to be all-new in order to hit its price targets. All of this will require investment in tooling and let’s not forget the billions that will have to be spent on the vaunted Gigafactory.
So lowering cash outflow in the near term is pretty much off the table.
All of which brings us back to the P85D. With a base sticker price of $120,170, the AWD S adds nearly $27,000 to the starting price of the P85. A conservative estimate would put somewhere between $10,000 and $15,000 of that incremental cost as pure extra margin after subtracting the added equipment for the P85D.
If Tesla can move 5,000 of these high-end cars a year, it won’t have any notable impact on greenhouse gas emissions but it will add $50-75 million (and maybe a lot more) to the company’s bottom line and that’s what Tesla really needs right now in order to keep its momentum going and help fund the new products that will support Musk’s vision.
Evolution is a funny thing. One basic set of DNA can mutate and adapt to changing environmental conditions to spawn an almost infinite number of organisms. Such is also the case in automotive landscape where few people would consider that there is much common DNA between a Dodge Grand Caravan and a Ford Mustang and yet there is.
1981 Dodge Aries that served as the basis for the first Dodge Caravan
1960 Ford Falcon
2014 marks 30 years of production for Chrysler’s minivans that debuted as the Dodge Caravan and Plymouth Voyager while the Mustang debuted 50 years ago. While the Caravan and pony car seem to lie at opposite ends of the automotive spectrum, each was derived from the affordable, compact family sedans their respective manufacturers had debuted a few years earlier and each was the progenitor of an entirely new market segment that didn’t really exist before. The Mustang was an offshoot of the Ford Falcon while the original Caravan shared its roots with the Dodge Aries K-car.
Strangely enough, the parallels extend further as both vehicles were conceived by many of the same people and for many of the same reasons, in particular Hal Sperlich and Lee Iacocca. In the early 1960s, Iacocca was president and general manager of the Ford division at Ford Motor Company while Sperlich was a product planner. Both were members of the Fairlane Committee which got together define a car that would appeal to the growing ranks of baby boomers that were then reaching driving age. The resulting product was Mustang and it inspired similar vehicles from each of the Detroit manufacturers.
A decade after the Mustang, as those same boomers were starting to get married and have kids, Sperlich and Iacocca began pushing the idea of a smaller car-based van within Ford but for various reasons it never came to fruition. Several years later, Sperlich and Iacocca had both landed at a Chrysler that had barely avoided bankruptcy. As the perennial scrappy, third-place brand in Detroit, Chrysler seemed willing to try different things and as Sperlich and Iacocca looked to expand the lineup beyond the original K-cars, the minivan concept was revived.
Much like Mustang, the minivans were a runaway success and soon inspired copy cats from Detroit and elsewhere. In yet another parallel to the pony car, the minivan market bloomed and then waned as customers eventually moved on to SUVs and crossovers. After peaking at nearly 1.4 million units in 2000, minivan sales are less than 500,000 annually. Similarly, the pony car segment reached its peak in late-1960s and early-1970s before settling down with current sales of about 250,000 examples per year.
Over the decades, the Chrysler minivans and the Ford Mustang have each stayed surprisingly true to their creators original visions over time although both have also grown bigger, heavier and more sophisticated. While Mustang has now reached the 50 year production milestone in continuous production, the Caravan is entering what will likely be its last year on the market despite still being the second-best seller in the segment behind its Chrysler-badged sibling, the Town & Country.
When Chrysler announced its 2014 five-year plan earlier this year, the Caravan missing from the Dodge brand roadmap. Instead, Chrysler has opted to consolidate down to a single minivan nameplate under the Chrysler umbrella once the new generation debuts about a year from now. Similarly, Ford long ago discontinued Mustang offshoots, the Mercury Cougar and Capri.
Although neither the minivan or the pony car are the stars they once were, both still have a spot in the automotive firmament and attract enough customers into their respective showrooms to justify ongoing development. The creators should be proud that they conceived of something so lasting.
Never heard or it? I certainly hadn’t until watching a marathon of the original Bob Newhart Show on the Hallmark Channel.
Latisse is a prime example of why America spends more on health care than any other country in the world while not having any improved outcomes to show for it. We aren’t healthier, we don’t live longer and we’re generally not any happier than people in other developed countries.
So what is Latisse? It’s a prescription drug to treat thin or insufficient lashes. Yes eye-lashes, those little hairs that emerge from the edge of your eye-lids. There are countless diseases that kill or disable hundreds of millions of people every year but I’ve never heard of anyone dying from thin eye-lashes.
So what? you might say, insurance companies probably don’t pay for it (mine doesn’t) so it’s not costing me anything. Despite patients paying for it out of pocket it still costs all of us.
We have limited financial and intellectual resources and developing new drugs typically costs well over $1 billion and occupies thousands of scientists. Even if we give Allergan, the company that makes Latisse, the benefit of the doubt and assume that Latisse was discovered by accident while looking for something actually useful, it still requires at least hundreds of millions of dollars and the time of FDA officials to run clinical trials before approvals. Those are resources that would be far better utilized elsewhere.
So why do we have drugs like Latisse on the market even though they don’t serve any useful purpose in improving human health? I think it’s because we allow companies to patent this stuff and then turn around and market directly to consumers on mass media. The entire fashion and cosmetics industry thrives on making women feel bad about the way they look. Drugs like this drive women to doctors to ask for these drugs, wasting the time of medical professionals and driving up costs for everyone.
As with most other modern drugs, the ads for Latisse outline a litany of potential side effects, any or all of which can lead to additional medical expenses. We have more than 50 million Americans without health insurance and yet we are squandering resources ridiculous drugs like Latisse.
One first step might be to require pharmaceutical companies to shoulder all of the costs of proving the safety of drugs like Latisse and Viagra that do nothing to improve health.
If we actually want to make any real progress on making health care more affordable while improving outcomes, we need to make changes to the drug patent system, get rid of direct to consumer advertising, refocus on health rather than cosmetic medicine.