(Detroit, January 12, 2009) 2008 was a year of peaks and valleys for Tesla Motors. On the positive side, after five years of development the Silicon Valley start finally started delivering production cars to paying customers. By the end of the year, over 150 Roadsters were on the streets, mainly in California.

However, the first 40 cars were built with an interim powertrain that fell short of the original performance specifications. The company promised that these early cars would ultimately be retrofitted with a new design. Two abortive attempts to design and build a two-speed transmission had failed. For the first six months of production, shipments were agonizingly slow.

Ultimately the engineers developed and validated an upgraded power electronics module, motor and new single speed gearbox which combined to allow the Roadster to meet its sub-4 second 0-60 mph claims and 125 mph top speed.

While all of this was going on, the company was also preparing to raise additional capital through a combination of borrowing and an initial public offering late in 2008. That money was largely earmarked for development of a second car, a lower cost electric sport sedan dubbed the Model S.

As all too often happens, the best laid plans came to naught. On the way to the bank, the financial markets collapsed and turmoil ensued around the world including at Bing Rd in San Carlos, home to Tesla. By October, those slow deliveries and a failure to raise the planned $100 million left Tesla with only $9 million in the bank. Chairman and chief investor Elon Musk decided it was time to take a more hands-on role and took on the role of CEO.

That made Musk the fourth CEO in twelve months following the ouster of co-founder Martin Eberhard in late 2007. The most recent CEO Ze-ev Drori moved over to become vice-chairman before leaving entirely. At the time that he took over day to day control, Musk raised an additional $40 million investment from existing investors which is expected to keep the company solvent at least through spring 2009.

In order to bring Tesla to profitability, Musk immediately put a hold on almost all non-revenue generating activities including development of the Model S sedan. The only significant revenue generators Tesla has currently are sales of the Roadster and sales of powertrain systems to other OEMs. During our discussion, Musk revealed that his company would be supplying lithium ion battery packs and charging systems for a fleet of 1,000 electric Smart EDs being built by Daimler.

The collapse of the financial markets has resonated throughout the economy hitting sales of cars at all price levels. Even premium brands such as Bentley and Ferrari have reportedly seen significant declines in sales. Tesla is not immune to this as Musk tells GFF that there is "certainly a slow down in new orders and the financial turmoil was a hardship on a lot of people so there was some cancellations." Musk declined to specific about the precise number of cancellations. He did reiterate that "we're sold out through November" of 2009. "Even if we didn't have a sales department we wouldn't have an issue until right at the end of the year."

At the time production launched last year Tesla was reported to have over a thousand orders and currently claims a back order of approximately 1,200-1,300 Roadsters. As of the time of our discussion in mid-January, Tesla had delivered approximately 160 cars. It's likely that at least some of the customers further down the order list have delayed canceling orders until closer to delivery time in order to see if the economy recovers. If the situation does not change significantly over the next 6-8 months the number of cancellations is likely to increase perhaps at a faster right than new orders.

Nonetheless, Musk remains publicly optimistic. "I'm still confident of reaching profitability in the middle of this year. Obviously I could be wrong about that prediction but I think I'll be right. We're relatively speaking in great shape. We're continuing to sell cars, we've barely tapped the European market. Only ten percent of our sales are to Europe where it should be about 50 percent." That will be the task of Michael van der Sande, the new SVP of Global Sales, Marketing, and Service who recently joined the company from Harley Davidson where he ran European, Middle East and African operations.

Musk also highlighted the importance of word of mouth in promoting the Roadster. With the number of delivered cars now at 160 and growing, Musk points out, "every customer we deliver to becomes a sales person." Many of the early customers such as Jason Calacanis, Ben Rosen, and Chris Paine are regularly blogging and speaking out about their experiences. "The biggest source of new sales is our customers, as we deliver a car the first thing is they call up their friends and say come check out my awesome car."

However, some customers that are still waiting on cars are less happy right now and some are blogging about new price increases. As Tesla strives to reach a cash-flow positive position, the company has increased the base price of the Roadster in hopes of reaching a positive margin on sales. Most recently in the days following our discussion, Tesla sent out a notice to customers on the wait list alerting them of new pricing on options.

Part of the reason that co-founder Martin Eberhard was pushed out of the company, was that the cost of the Roadster had climbed well above the list price. In mid-2007, the cost of the Roadster was estimated at $140,000 while the list price was only $92,000. Since that time the company has made significant progress in reducing costs. Assembly of battery packs has been moved from Thailand to California and batteries and powertrains are installed in the chassis when they arrive in California.

Musk claims the Roadster is at "slightly positive margin at $93,000" and that will improve going forward as the company completes delivery of early cars that were sold at a lower price point. As with every other carmaker, "the margin is helped by the options." That is where the latest price increase came into effect irritating some customers.

Because of the lead times in procuring some special parts such as interiors and preparing for special paint jobs, customers have been required to lock in their final option selections three months prior to the build date. At that point the "final" price is set based on the options selected in addition to whatever the original base price was at the time of ordering the car.

In this latest round of increases however, some customers had their orders unlocked after they believed them to be finalized. Options had to be reselected many at a new higher price. For example the original forged alloy wheel design was replaced by a new lower cost wheel with the original design now costing an extra $3,000. Tom Saxton is one customer who was not happy about the price increase and wrote about it on his blog.

Tesla spokeswoman Rachel Konrad commented on the changes. "We didn't make the decision to increase options prices lightly. This was a difficult but necessary decision that affected almost 400 customers who ordered 2008 model-year vehicles but have not yet taken ownership of their cars. It does not affect subsequent model-year customers or anyone in the EU."

Tesla needs to increase the margins on its cars in order to cover not only the bill of materials costs of the Roadster but also to cover it's overhead expenses. As Konrad explains "Some of our early-adopter customers are huge evangelists for EVs generally and Tesla in particular, and we hope they remain so. Elon reached out Tuesday to all customers affected by the pricing changes, explaining in an e-mail that increased margins help ensure the long-term viability of Tesla -- ultimately, creating a profitable company that's around for the next 5, 10 and 50 years or more is how Tesla can best serve its customers. Although some customers are still upset, many others understand why Tesla did this and continue to support the company's vision."

Further, in a letter sent to customers this week Musk went on to explain that "When the initial base price, for cars after the Signature 100 series, of $92k was approved by the board a few years ago, it was based on an estimated vehicle cost of roughly $65k provided by management at the time. This turned out to be wrong by a very large margin."

"An audit by one of the Series D investors in the summer of 2007 found that the true cost was closer to $140k, which was obviously an extremely alarming discovery and ultimately led to a near complete change in the makeup of the senior management team. Over the past 18 months, observers will note that Tesla has transformed from having a senior team with very little automotive experience to one with deep automotive bench strength. We now have executives with world class track records running everything from design to engineering to production to finance."

Without the extra revenue Tesla will have a difficult time becoming profitable enough to stay in business. Moving forward with the Model S will require far more capital than they are likely to generate simply from sales of the Roadster. For that Tesla is applying for up to $350 million in loans from the US Department of Energy. That money would be used to fund the continuing development of the Model S as well as a factory in northern California to build it.

The program requires applicants to raise an extra matching equity of at least 20 percent of the loan amount. Depending on the level of risk that the DOE assess, the actual matching equity amount may in fact be even higher. This could be problematic for privately held Tesla which has a significant amount of venture capital investment. According to Musk "all of the venture investors in Tesla are very supportive of the DOE loans, it does lower the cost of capital. There is a 20-30 percent equity match. That's OK, it just means that we need to raise some additional matching capital which could come from a strategic partner or a financial investor. I don't think we'll have any trouble raising that despite the tough environment." That last statement could be difficult given the company's inability to close a $100 million investment round late last summer just as the markets went into complete chaos.

It's possible that investors may look more favorably on putting in more money if the company is set to receive low cost loans from the government. The flip-side is that the loans come with increased government oversight of company operations that could in fact scare off some investors. Either way there is no gaurantee that the Tesla will get the loans.

With numerous other carmakers now pursuing either pure electric or extended range-electric vehicles, Musk might be concerned that Tesla won't be able to compete but in fact he wants to move past the rivalry. "The whole reason that I put so much time and effort into helping create Tesla, and so much of my personal net worth into it as well, is because I believe in the electric car revolution. We have to move that forward and because the full price, the true impact of gasoline is not captured at the pump in terms of the CO2 production."

"You have a tragedy of the commons problem and the only way to bridge that gap of incorrectly pricing gasoline is with innovation. That's the purpose of Tesla. When I see other companies coming out with electric cars, even plug-in hybrids I think that's great. I'm not saddened by that, I'm not dismayed, I'm happy, I always expected that the biggest effect that Tesla would have would be showing other car companies that it could be done and that people would want to buy electric cars and so serving as a good example and draw the other car companies faster into producing electric cars."

The deal to supply components to Daimler is both a part of Musk's overall vision for expanding the EV universe and a means of generating extra revenue. Musk describes it as "an honor to work with Daimler, they invented the internal combustion engine, they have outstanding engineering, they have a very strong focus on quality and reliability and that's an endorsement for Tesla." Obviously Musk would like to see the deal extended beyond the initial 1,000 unit test fleet. However, with Daimler's recent investment in Evonik to bring battery making in-house, it seems unlikely that it will remain a customer for Tesla.

Nonetheless if the program is successful, it could serve a d launch pad for Tesla to grab other business. Tesla wants to have strategic collaborative relationships with other OEMs that it deals with. That means sharing engineering resources and data. Given the small size of Tesla such relationships with other companies could provide it with extra knowledge about its own systems that would otherwise take much longer to learn.

Even if Tesla does manage to get other supply contracts for electric drive systems, the company still faces a very difficult road ahead. Raising the matching capital for the DOE loans will likely be far more difficult than Musk lets on. Unless the overall economy picks up dramatically in the coming months the combination of price increases and the continuing economic malaise will likely see many more order cancellations and a further slow down in new orders.

Even as Tesla ramps its production rate from 10 to 30 cars per week, it could soon see its order backlog evaporate. In a time when even wealthy people are seeing a significant portion of their net worth evaporate, the need for a green but expensive sports car, may find itself to be a victim of the tragedy of the commons.