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A Stark Contrast to Fisker as Tesla Pays Loans Early

The difference between Tesla and Fisker? Tesla acted like a real car company.

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Electric car company Tesla paid back a controversial loan to the Department of Energy on Wednesday, a feat that sets it apart from other fledgling electric car start-ups and programs.

The repayment of nearly half a billion dollars comes nine years ahead of schedule and will net U.S. taxpayers $12 million, according to Bloomberg. The early payday comes after Tesla announced its first profit ever for the quarter ended March 31--$11 million. While just months ago Tesla endured plenty of criticism for being a money loser, its share price has almost tripled since the start of the year, reaching $89 before noon on Thursday and increasing the company's market capitalization to $10 billion.

Tesla's turnaround is a testament to the power of a solid, well-coordinated business plan--a must for any start-up--but something that's particularly true for a nascent product like the electric car, which is capital intensive and requires a leap of faith from consumers.

Tesla's sudden change in fortune stands in marked contrast to Fisker Automotive, a competing alternative car company now on the verge of bankruptcy and at the center of controversy over $192 million in federal funding that it's unlikely to pay back. The funding comes from the same loan program that Tesla used, called the Advanced Technology Vehicles Manufacturing Loan program.

"Tesla understood what it takes and organized itself in such a way as to be a real car company" with a truly integrated supply chain, says Alan Baum, principal of Baum and Associates, a fuel and energy consultant in West Bloomfield, Michigan.

Among the things Tesla did to properly organize, besides having a great idea, Baum says, is to actually produce the cars it promised to buyers, hire people with a specialty in the automotive industry, build strong supplier relationships, and develop manufacturing specialty and marketing expertise, Baum says. Fisker, on the other hand, outsourced development of certain key parts, like the battery.

"All of these count," Baum says, adding that it also helps to have a highly successful, savvy entrepreneur such as Elon Musk, who's been active creating industry-changing start-ups as diverse as Paypal and SpaceX, at the helm.

Although Republicans have tried to paint recipients of the federal loans as incorrigible wasters of taxpayer money, a number of established blue chip firms also received much more financing from the same program to advance their own electric vehicle technology, among them Ford and Nissan, which got $6 billion and $1.4 billion respectively. Both are still in repayment.

Fisker stumbled right out of the gate. After drawing down $192 million of nearly $500 million in potential financing, it triggered loan covenants when it botched production deadlines, failing to deliver cars on time. The rest of its funds were then frozen.

Fisker then suffered a series of mishaps, including a battery flaw that caused at least one of its vehicles to burst into flames, and a lurid episode with Consumer Reports, when its test Karma sedan failed to run at all, a first in the history of that publication. (By contrast, Tesla scored 99 out of a possible 100 points for its Model S.)

It didn't help matters that Fisker's battery manufacturer A123, which also borrowed from the same DOE loan program, filed for bankruptcy earlier this year. Wangxian Group, a Chinese automobile parts company, acquired its assets in May. Wangxian and former General Motors vice chairman Bob Lutz, a legend in auto circles, are currently negotiating a deal to buy Fisker out of a negotiated bankruptcy.

Although both electric vehicle companies started offering cars with hefty price tags beginning at nearly $100,000, Tesla has been able to produce less expensive vehicles more quickly. Its model S, available since 2012, retails for $70,000 and Its Model X, which Tesla says will be available in 2014, will retail for around $30,000.

One reason for Tesla's ability to produce cars on schedule is that it manufactures them in California, not too far from its Palo Alto headquarters. That's a contrast to Fisker, based in Anaheim, California, which outsourced a major part of its operations to Finland.

Design differences also mattered. Tesla has a patented battery that uses 6,000 or more individual cells that prevent it from failing all at once, a danger for Fisker's single cell battery. Tesla's all-electric design allowed it to collect carbon emission credits worth $70 million in the past year, adding to its bottom line this quarter. (Fisker's car uses both battery and gas, so it collected far fewer credit dollars.)

That's not to say it's going to be all smooth sailing for Tesla. Industry analyst Menahem Anderman, president of Advanced Automotive Batteries, which produces research on electric batteries for vehicles, says Tesla has yet to turn a profit solely from operations.

And then there's the hurdle of consumer acceptance. Mike Omotoso, a senior manager at LMC Automotive in Troy, Mich., says demand for all electric vehicles remains weak. LMV forecasts 40,000 electric vehicles will be sold in 2013 in the U.S. While that’s up significantly from 14,000 in 2012, its still only about one quarter of one percent of all expected car sales this year.

"Electric vehicle sales will be miniscule for at least the next seven to 10 years," Omotoso says.

Last updated: May 23, 2013

JEREMY QUITTNER is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.
@JeremyQuittner




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