Tesla’s Chairman and New CEO Talk Transmission Snags and Raising Another $40M

The two people most responsible for helping Tesla get its first car to its customers look and sound a bit overwhelmed. Chairman Elon Musk calls into an interview with Earth2Tech from his home, sick enough that he says he held meetings the day before with an ice pack held to his forehead. Ze’ev Drori, Tesla’s new CEO, only two weeks into the job, describes his first weeks to us as “a lot of activity, and a lot of things to be done.”

It’s not surprising that the Silicon Valley electric car company’s executives are working like Santa’s elves on Christmas Eve. They’ve set a goal of getting the company’s first vehicle -– the Roadster -– to a limited amount of customers in the first quarter of 2008. To meet that deadline they are overcoming a technology snag: the transmission. Two suppliers failed to make Tesla’s transmission up to snuff, the executives say, and the company is now working with new companies in the hopes of figuring out a fix fast. The first cars they ship will actually have an interim, one-speed transmission, which the company will swap out for a two-speed transmission.

It’s not a hiccup without a financial consequence, either. Musk tells us that Tesla is raising an internal round from himself and other current investors of $40 million that will close next month. (The company has already raised over $100 million in funding). And Musk tells us to think of the early limited Tesla’s with the interim transmission as the software version of “public beta.” The company hopes that it will move into full production in the second half of 2008.

And that’s not to mention that Drori is the third CEO in the last several months. He replaced the interim CEO, who in turn replaced founder Martin Eberhard, who wasn’t exactly happy about the abrupt transition. But the craziness is all to get the flashy, sleek, electric sports car into the hands of its first celebrity customers. Here’s an edited excerpt of our interview with Tesla’s Elon Musk and Ze’ev Drori:

Q. You’ve been the CEO for two weeks, what’s your first impression?

Ze’ev: There is a lot of activity, and a lot of things to be done. And we are doing it. We will get the car out there into the hands of our customers.

Q. So you guys are on schedule with the car, first quarter of 2008?

Ze’ev: Yes.

Elon: The primary schedule driver is the transmission. We had two suppliers in a row fail to deliver and so we are on our third now, actually we are running multiple paths, so that is driving our schedule. We will have limited production of cars in the first half of next year, but it will be quite limited, a very small trickle of cars, and then full production in the later half of the year.

Q. What is limited vs. full production?

Elon: It is a little too early to say, but it will not be a large number. Those cars will have a transmission which is not the final transmission. It will have an interim transmission. It will still be safe, but it won’t have the performance characteristics that we promised. And there may be some durability issues, not something that is made to last 10 years, but it should be fine for several months.

We’ll have to swap that out, and we don’t want to make a whole bunch of cars with that transmission. But it will give us some good feedback for real-world driving conditions. All the crash tests and safety tests are done. One might think of this as a public beta, if it were software.

Q. Will that swapping out those transmissions take a significant amount of investment that wasn’t planned on?

Elon: It will require more investment than expected, yes. And so myself and other current investors are doing a substantial internal round right now. It will be $40 million dollars. It will close next month.

Q. It was big news that the CEO left and you joined Tesla. What was your reasoning to join?

Ze’ev: I decided to join because I think Tesla is one of the most exciting startups that I’ve seen in recent memory. Imagine being on the forefront of technology, serving both the nation and the world in fact, with an environmentally friendly vehicle that can free ourselves from the dependency of foreign oil. I can’t think of anything more exciting than that.

Q. Do you have a comment on the CEO transition process?

Ze’ev: It is not unusual for CEOs to leave in the lifespan of the company. CEOs are very good at the start-up, but not good at the middle stage or as the company becomes much larger. Very seldom you find a CEO who is good for all three phases. The founder of the company was a very talented engineer and he served very well.

Q. If there is an exit for an alternative car startup like Tesla, what would it be?

Elon: I wouldn’t call it an exit, but from the standpoint of achieving liquidity the plan is to do an IPO at some point. But I would expect to sell a very limited number of shares at this point. This is very much a long-term effort.

Q. What kind of sales down the line does the company need to reach profitability?

Elon: For the profitability on the Roadster, I would say 2009, so not very far away. But bear in mind, we will be doing additional products, in particular the Sedan, which we are working on right now. That will be an order of magnitude more cars and higher production than the Roadster. The Roadster will be 2,000 a year when we reach mass production and the Sedan will be on the order of 10,000 to 20,000 units per year.

So from a profitability standpoint for the company, we’d have to think of the first full year of production of when WhiteStar took place. And that is dependent on the WhiteStar schedule. Perhaps on the order of three years or four years from now. But for Roadster, 2009 probably.

Q. Were you surprised that the car would be delayed by technical issues to such an extent?

Elon: Well, it is pretty normal I suppose for new technology, particularly for things that are pretty revolutionary, to get delayed. And I guess it didn’t come as a huge surprise. It is delayed more than I would like. So maybe it is more of a surprise than I would like.

Overall I think where we are right now, is that we have a handle on the fundamental technologies. We have the vexing problem with the transmission, it is not an inherently difficult item, but if you have two suppliers screw the pooch on you…

We’ve got to solve this transmission problem, we’ve got to make sure that we’re keeping our costs under control and that we’re tackling the various challenges to get into production.

Ze’ev: When you develop a new technology, you do expect some delays. The surprise was that the relatively simple thing is the thing that really tripped us in terms of the delivery time. Not the complicated thing, the technology that we control, we have that mastered and are OK. But the transmission is the thing that tripped us.

Q. Do you see yourself as overthrowing Detroit? How does Tesla fit into the traditional auto industry?

Elon: Well, it is not really overthrowing Detroit, but to help steer Detroit in the direction of electric cars. If our goal was to overthrow Detroit, we wouldn’t be talking to them about supplying them with electric drive trains. We really want to be helpful with Detroit. Anything we can do to accelerate the number of electric miles driven and make that revolution to happen faster.

But we don’t expect that we are going to be a serious competitive threat to the major car companies certainly for a very long time. Just consider the scale that we are at. There are 17 million cars bought in North America a year, and how many will Tesla be making a year even with the WhiteStar volume? Maybe 20,000 a year. Maybe with our third car maybe we’ll be at 300,000 to a half a million, which would be pretty incredible. That is still a small percentage of the cars sold in the country.