(June 23, 2009) Following the announcement by the Department of Energy that Tesla Motors' loan application under the Advanced Technology Vehicle Manufacturing (ATVM) program had been approved Elon Musk, CEO of Tesla held a conference call to answer questions from the press.
The approval of the loan means that Tesla now has the financing needed to proceed with bringing its second product the Model S sport sedan to production. While design and development work has been proceeding since Tesla ran into cash flow problems in fall 2008, some of the production engineering work was put on hold pending the approval of the loan. Tesla can move ahead with its plans to acquire a factory and tool it up to build the Model S. Musk hopes to launch the car in late 2011.
A significant amount of work remains to be completed on the car over the next two years. One area that Musk does not plan to change before production is the basic battery technology. When development of the Roadster began in 2003, no battery manufacturers were building large format lithium ion cells specifically for automotive applications. Thus the engineers at Tesla chose to follow the path of AC Propulsion and use commodity cells designed for laptop computers.
The Roadster battery pack contains 6,831 lithium-cobalt-oxide cells in the 18650 cylindrical format. While these cells have good energy density, some computer makers have had issues with thermal instability. To ensure the safety of the cells, Tesla developed a modular assembly system with liquid cooling. At nearly 1,000 pounds, the 53 kWh pack is bulky and expensive. Estimates place the cost of the pack for the Roadster at nearly $30,000.
Over the last several years, battery manufacturers have been developing larger format cells with new chemistries better suited to automotive applications. The larger cells require few connections, which should result in improved reliability and durability over the life of the vehicle. The new chemistries are also designed to withstand far more charge cycles and exhibit better thermal stability.
The first of these larger format cells are now starting to appear in low volumes on the Mitsubishi iMiEV that just went into production with others coming in 2010 on Nissan's new global electric vehicle along with the Chevrolet Volt. When asked about using these new cell types, Musk indicated that although Tesla was talking several cell suppliers, he didn't foresee making the change until Tesla's third product, a higher volume less expensive car arrives sometime after the Model S.
Musk told the call, "I think the laptop format cell, is the right choice for the next few years. In order to go beyond the laptop form factor you want to have economies of scale that approach the size of the laptop industry and we won't be there with the Model S and the current version of the powertrain factory."
"We are going to be doing some experimental work on large form factor cells to make sure we understand how they perform, what the energy density is, what the cost per kWh is." In spite of several manufacturers including Nissan, A123 Systems, LG Chem and EnerDel preparing to launch large scale US production of large format cells, Musk still believes the laptop cells are a better approach right now.
That may well be true for Tesla who are trying to maximize the range of the Model S. The lithium-cobalt-oxide cells provide better energy density at this time. However, over the life of the vehicle these may prove problematic due to the limited number of charge cycles those cells can sustain and complexity of the pack assembly. Other automakers seem to be willing to sacrifice some capacity and range on early vehicles in exchange for the long term durability of other formats.
Musk was also asked about the loans and the repayment terms. The ATVM loan program requires that the manufacturers start paying back the principal one year after production begins on the products that the loans were used fund. In this case Tesla would have to start paying back the $365 million loan for the Model S in 2012 and complete repayment by 2022. There is apparently no penalty for early repayment.
While Tesla now has some breathing room with regard to funding the Model S program, it may soon run into other difficulties with revenue. Musk was announced in post on the Tesla Motors blog earlier this week "Combined with a steady production volume of 20 to 30 per week in the third quarter this year and a good take up rate of the higher priced Roadster Sport, we expect to cross over into profitability next month."
Tesla has brought down the cost of building the Roadster to $80,000 from a high of $140,000 prior to production launch in 2008. Unfortunately, Sales of the Roadster seem to be lagging. When production started in 2008 the company had approximately 1,300 orders for the electric sports car. Earlier in June 2009, Tesla delivered Roadster #500 to a customer, and is generating revenue with every delivery. However, when asked during today's call, Musk acknowledged that the order backlog for the Roadster currently stands at about 700-800 units which puts total sales at about 1,200-1,300 units.
In spite of launching sales in Canada and Europe over the last year, the pace of new orders does not appear to be exceeding the cancellations. When Musk spoke to Green Fuels Forecast in January, he acknowledged that the global recession had caused some customers affected by the financial meltdown to cancel orders as they approached the build date. That situation does not appear to have changed in the past six months.
Musk did say the company expects to maintain a sales pace of approximately 1,000 Roadsters annually for the next several years. Unless the economy turns around soon, that could be a difficult goal to achieve.
Sales of electric powertrain components to Daimler and possibly other automakers could offset lost revenue from the Roadster, but it's not known at this point how much that will amount to. Asked about the specifics of the companies finances, Musk declined to give details and said the closely held company does not plan to report financial results any time soon.
Tesla will definitely have to keep a tight reign on costs as it completes development and production of Model S as well as growing its powertrain business if it hopes to remain viable over the next several years.