Tesla’s Model 3 Could Destroy Elon Musk’s Company

April 01, 2016

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by Edward Niedermeyer (The Daily Beast) It won’t hit the road for two years, it won’t be as cheap as promised, and it will be plagued with problems. Worst of all, the firm may run out of money before the car takes the road.

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With Tesla’s cash reserves falling below $1 billion and dwindling fast, the company might not survive long enough to launch the car people are currently lined up for.

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Two plausible explanations come to mind. First, Tesla is racing to beat competing electric vehicles to the market.

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But there’s another, more troubling explanation for Tesla’s rush: The company needs more cash to actually complete development of the Model 3 and bring it to market. Tesla has been burning cash at a remarkable rate over the last year in order to ramp up Model X production and develop the Model 3: As of the end of last year, it was down to its last $1 billion in cash (maybe $1.2 billion, rounding up). Given its deep operating losses (it burned nearly $1 billion in cash in 2015 alone), that burn rate is too high to survive until 2018 while completing development work on the Model 3 and ramping up the sales, service, and Supercharger infrastructure needed to handle the expected new influx of customers. Even the $115 million in deposits collected won’t make a dent in Tesla’s capital requirements.

But the spectacle of hundreds of thousands of preorders for car that’s still years away from delivery will almost certainly boost Tesla’s volatile share price high enough to support a secondary equity offering without causing an exodus of existing investors. If the next 48 hours turn into the media circus everyone seems to expect, Tesla will be able to raise the billions it needs from an investor base that will be more convinced than ever that Tesla has built the brand power to make itself the Apple of automobiles, with corresponding Apple-like profits to come.

No automobile manufacturer will ever deliver the kinds of eye-popping margins Apple has achieved, though. Just because Tesla is based in Silicon Valley does not mean it is exempt from the capital-intensive, low-margin reality of the automobile manufacturing business.

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This cynically exploitative strategy may come as a surprise to anyone who has bought into Tesla's remarkably durable media halo, but behind the “save the world” headlines and unabashed Elon Musk worship there have long been signs that Tesla is not living up to its “save the world” image.

The company has failed to deliver on some of its biggest promises, such as the promise that all Tesla Superchargers would be solar-powered and zero-emission net energy generators. Behind the gushing praise for the Model S (which is undoubtedly an impressive car in many respects), massive quality problems lurk. Surveys and feedback at forums show that the majority of Model S drive units have already needed to be replaced, and some like Edmunds.com have had to replace the drive unit on their Model S multiple times. Problems with sunroofs, door handles, window seals, and other issues fill Tesla owner forums but go largely unreported by the fawning press corps. READ MORE includes VIDEOs