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Questions About Electric Cars as a Manufacturer Struggles

New York Times, 25 September 2012

As Tesla Motors, 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 also agreed to waive some conditions of a $465 million loan, easing pressure on the company over the next couple of quarters.

Such moves are raising questions about the long-term viability of the market for electric cars.

In recent months, Tesla has been ramping up production of its main vehicle, a high-performance sedan called the Model S, and has started rolling out the first cars. But the company, which cut its revenue forecast, was four to five weeks behind on delivering the cars to customers and is consuming cash at a rapid rate.

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

The situation was weighing on the stock. Shares of Tesla, which have been volatile this year, slumped 9.78 percent on Tuesday.

Tesla’s problems could also spark criticism of the government’s energy loan program, which has been heavily 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 coming payment, and will not have to pass a test this quarter that compares short-term assets with short-term liabilities.

But Tesla must submit a plan to the Energy Department by the end of October for early repayment of the loan.

Deepak Ahuja, Tesla’s chief financial officer, 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. Amid the financial pressure, investors will look for signs that sales of the Model S will lead to strong cash flows.

Mr. 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.

“When do people start to question their ability to execute?” Mr. Driscoll said.

Tesla will also test customers loyalty. Some early customers who have received their Model S cars are extremely pleased. Rob Stelling, a clinical laboratory scientist in St. Helena, Calif., who got car his earlier this month, said it had exceeded expectations.

“I give more than 10 rides a day,” Mr. Stelling said. “I think I’ve sold at least five.”

Buyers are paying a hefty sum to reserve the Model S, which can go from 0 to 60 miles per hour in as little as 4.4 seconds. 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 still waiting to get their cars may grow impatient.

“I wish Tesla could meet the production target, because it’s better for the company,” said John Griswell, a computer engineer 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,” Mr. Griswell said.