Ground Control to Tesla: Commence Transformation Countdown

Tesla soared to new heights earlier this week when one of its original Roadster electric vehicles blasted into space aboard a SpaceX rocket (with a “Starman” dummy at the wheel and David Bowie’s “Space Oddity” playing on the sound system) on a journey that promises to take the car past Mars and into a solar orbit that could last a billion years.

Back on Earth, Tesla is strapping in for a bumpy ride as it takes on more immediate—and grounded—goals and challenges: ramping up production and making a profit.

On Wednesday, Tesla announced its 2017 financial results. The 15-year-old company, which has yet to post an annual profit, lost nearly $2 billion last year—nearly tripling its $675 million of red ink from 2016. Operating expenses surged by two-thirds to $1.4 billion last year, mostly because of costs associated with the delayed launch of the highly anticipated Model 3 compact sedan.

On the plus side, Tesla’s consolidated revenue jumped by two-thirds to $11.8 billion in 2017. The company beat financial projections in the fourth quarter, posting both higher revenues and lower expenses than what had been forecast.

Tesla ended 2017 with $3.4 billion in cash on hand after spending $787 million on capital expenditures. But with a burn rate that averaged $8,000 per minute last year, analyst say the company will need to raise at least $2 billion in new capital over the next six months to fund its aggressive expansion plans.

Tesla sold some 102,800 vehicles last year, up more than one-third on the combined gains of its Model S sedan and Model X crossover models. But the rollout of the Model 3 fell far short of its 5,000-unit per week target by the end of the year, with deliveries totaling just 1,550 units for the entire fourth quarter.

The company has pushed back the 5,000-unit target to the end of June so it can focus on improving efficiency and quality at its assembly plant in Fremont, Calif., and massive battery facility near Las Vegas. With about 500,000 orders for the $35,000 car, some buyers could have to wait until mid-2019 to take delivery.

As Tesla’s mercurial leader, CEO Elon Musk paints a rosy if somewhat cautious outlook. Describing 2018 as a “transformative year,” Musk aims to lower the Model 3’s production costs to equal those of a comparable piston-powered car by mid-year and to generate sustained positive operating income “at some point” later this year.

At the same time, Tesla is moving forward with plans for several new vehicles and is on the hunt for a second U.S. manufacturing plant as well as one in China. The product rollout calls for an all-new Roadster supercar and the all-electric Semi” Class 8 truck in 2019, followed by the Model Y crossover vehicle and a full-size pickup truck early next decade.

Other projects on Tesla’s to-do list include expanding the company’s network of charging stations, improving the semi-autonomous Autopilot function, opening service centers and lobbying to change state laws to allow for direct-to-consumer distribution without traditional dealerships. The upstart EV-maker also is fighting several labor lawsuits and is working through the departure of top executives poached by rivals.

Musk’s attention is becoming more divided with other ventures, including Tesla’s SolarCity unit and independent startups such as SpaceX, Neuralink and The Boring Co. To keep Musk engaged, Tesla has proposed a unique stock-based compensation deal. Instead of a salary and bonus, Musk would be paid through a series of 12 phased stock options tied to extremely aggressive targets for growing the company’s revenue and overall market value over the next 10 years. If Tesla’s value hits $650 billion—more than 12 times its current worth—Musk stands to nearly quadruple his net worth to about $77 billion.

Public excitement hasn’t been a problem. In addition to the unheard of line of Model 3 pre-orders, owners of the current Model S and Model X EVs have been resolute in their brand commitment despite several quality glitches. Tesla owners view themselves as technology pioneers and have formed a strong emotional connection to their cars, market research firm J.D. Power noted in a special report last year.  Another analyst opined that Tesla “engenders optimism, freedom (and) defiance” that other companies can’t replicate.

Such unwavering passion will be difficult to maintain with the launch of the Model 3 and other high-volume vehicles. Meanwhile, competition is intensifying with a wave of new “Tesla-fighters” due to launch in coming years.  

To be sure, a lot of work needs to be done for Tesla to make the grade in its transformation. But you can be sure that Major Elon is poised to step through the door and lead the company into the future.