Is Tesla Motors a "Loser" Like Solyndra?
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the election just weeks away, Mitt Romney decided to use President Obama's green jobs program as an example of government overreach and poorly planned spending. When Romney dubbed Solyndra and Ener1 "losers," it was hardly a surprise. People may debate the merits of the attempts to make these companies viable through government loans, but financially speaking, these companies were both failures. But then Romney questionably lumped another company into this "loser" category -- Tesla Motors (NASDAQ: TSLA).
For anyone just looking at a few points of the company, it could be easy to believe that Tesla is just an automotive Solyndra. After all, the company has never turned a profit, has had escalating losses, and recently completed a secondary stock offering. But further research into Tesla reveals that these conditions don't mean imminent bankruptcy.
Both Tesla and Solyndra have introduced a new technology with a high price tag that must compete with still-functional existing technology. When a technology so far from an average consumer's wallet is introduced, the company producing it still needs to make money, or at least remain solvent. These businesses initially need massive funding ito stay afloat while they whittle down input costs over the long term.
For Solyndra, the massive funding happened -- but the input cost reduction never materialized. Instead, silicon prices dropped, destroying a key Solyndra selling point and flooding the market with cheap Chinese solar panels. Ironically enough, the Chinese solar panel makers were being subsidized by the Chinese government even as they finished off Solyndra.
Contrary to popular belief, Solyndra's product was not bad -- just prohibitively expensive to produce. In solar, customers care mainly about cost per watt and Solyndra could not afford to match prices with the imports. In the end, the company had good technology; it was just too expensive.
Tesla's already dealt with the problems that Solyndra faced. Considering the overwhelmingly positive reviews for Tesla's Model S, input prices on the vehicle's batteries would seem to be the company's biggest hurdle. But Tesla's industry makes passing on input prices to customers far easier than in the solar industry. Unlike solar panels, automotive competition is not based on sheer cost reduction. Luxury automakers abound, allowing Tesla to price its car the way it wants to, rather than focusing on becoming as econoboxy as possible. When Tesla has added costs (batteries), the automaker can price its car higher without seeming out of place among its more expensive rivals.
Also unlike Solyndra, Tesla does not have a demand problem. The company has more than 10,000 reservations for its Model S, and many other reservations for its next vehicle, the Model X. Tesla cannot build cars fast enough to satisfy the demand and even with some cancellations, new orders are continuing to arrive to increase the total waiting list. And all of this is accomplished with virtually no advertising, signaling demand is strong even with many people unaware of Tesla's products or even the company's existence. The automaker has big names lining up for a partnership including Toyota (NYSE: TM) who Tesla is supplying parts to, and Daimler who acquired a 10% stake and the right to first refusal in addition to purchasing supplies from Tesla.
Is Tesla a winner?
Just because Tesla is not a loser does not necessarily make the automaker a winner. As production ramps up, we will find out whether Tesla can survive and thrive. Major automakers have already placed bets on Tesla's success, and customers are lining up to place $5,000 deposits for their cars.
At this point, Tesla is an execution story. If it can execute well it will thrive. if it cannot, it will fail. Tesla's story is far from over; calling the company a loser now is premature, and will quite possibly be proven wrong.
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