Top electric carmaker struggles with lag in production

As Tesla Motors, a maker of electric cars, burns through cash and misses production targets, it is turning to investors and taxpayers for extra financial help.

On Tuesday, Tesla announced plans to sell five million shares to raise cash. The federal government agreed earlier to waive some conditions of a $465 million loan, easing pressure on the company over the next couple of quarters. The moves raised questions about the long-term viability of the company.

In recent months, Tesla has been ramping up production of its main vehicle, a high-performance sedan called the Model S that goes from zero to 60 miles per hour in 4.4 seconds.

Tesla has started rolling out the first cars, but was four to five weeks behind on delivering the vehicles to customers. In the meantime, it is consuming cash at a rapid rate and cut its revenue forecast on Tuesday.

“Tesla’s story is starting to show some serious cracks,” said an analyst at CapStone Investments.Carter Driscoll. “This shows that capital raising is a necessity, not a luxury, as the company had maintained.”

Tesla’s problems could also spark criticism of the government’s energy loan programme, which has been promoted by the Obama administration. The program came under fire after Solyndra, a solar-panel maker, collapsed in 2011 owing taxpayers $535 million.
In Tesla’s case, the moves suggested that cash was getting tight.

Under the new terms of the loan, Tesla received extra time to make a future payment, and will not have to pass a test this quarter that compares short-term assets with short-term liabilities.

But the Energy Department extracted a concession that by the end of October, Tesla must submit a plan for early repayment of the loan.

Changes in loan

Tesla’s Chief Financial Officer, Deepak Ahuja said the changes to the loan were “purely a normal course of events” because Tesla’s business model had evolved.

Tesla is now entering a critical phase. The company has fully drawn down the government loan, and shareholders may not be happy with additional stock offerings. Its share price fell $3, or 10 percent on Tuesday, to $27.66 a share, down from a 12-month high of $38.01 in April.

Amid the financial pressure, investors will look for signs that sales of the Model S will lead to strong cash flows.

Ahuja said that he expected Tesla’s operations to produce positive cash flows soon. In the first six months of this year, Tesla showed a cash drain of $111 million.
Driscoll, the Capstone analyst, asked: “When do people start to question their ability to execute?”

Tesla will also test customers’ loyalties. Some early customers who have received their Model S cars are extremely pleased. A clinical laboratory scientist in St. Helena, Calif., who got car his earlier this month, said it had exceeded his expectations. “I give more than 10 rides a day,” he said. “I think I’ve sold at least five.”

Buyers are paying a hefty sum to reserve the Model S. The deposit on the basic model, which sells for about $57,400 before tax credits, is $5,000. Souped-up versions require larger deposits.

Such payments have been a big source of cash for the company. At the end of June, Tesla was holding $133.4 million of reservation payments. But if production delays worsen, customers may question the wisdom of making substantial reservation payments to Tesla.

“I wish Tesla could meet the production target, because it’s better for the company,” said a computer engineer John Griswell, from Austin, Tex., who put down $5,000 for a Model S but had not yet received it. “But it’s also important that they get the product right.”

In the end, Tesla’s fortunes will depend on the size of the market beyond the enthusiastic early buyers.

“People are going to want these cars because they’re great,” Griswell said.

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