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Electric Sportscar Maker Deals With Market 'Freefall'

Written by Jennifer Kho

Just a few months ago, Tesla Motors was touting its plans to build a $250 million factory for its second model, while boasting that it would reach production of up to 50,000 vehicles a year and go public.

"Tesla has amazing momentum right now. The excitement within the company is palpable," Tesla Chairman Elon Musk said in a written statement in September.

Then last week, things changed. The company announced layoffs, the second CEO switch in less than a year -- putting Musk in the top position -- and the delay of its second model, the Model S sedan.

Tesla Motors has clearly had a tough year, said Jeffrey Ball, news editor of The Wall Street Journal, at a conference in Redwood City, Calif., Tuesday.

New CEO Musk, who fielded questions from Ball at the Dow Jones Alternative Energy Innovations conference, said that market conditions led to those decisions.

"We were very bullish four to six weeks ago, as was the market," he said. "Then the market went into freefall."

Tesla Motors needed to raise $100 million, but the weakening economy made it unlikely the company would be able to get a good deal, said Musk, who also is the chairman of Tesla and of solar-installer SolarCity, as well as the CEO of spaceflight startup SpaceX and a co-founder of PayPal [a division of <b>eBay</b> <span class=" TICKERFLAT">(<a href="/quote/EBAY.html">EBAY</a> - <a href=";ticker=EBAY">Get Report</a><a class=" arrow" href="/quote/EBAY.html"><span class=" tickerChange" id="story_EBAY"></span></a>)</span>].

For the last four or five weeks, the company had had several major potential investors promise term sheets "next week," then postpone another week, he said.

"Changing circumstances, such as the market right now, made it impossible to raise money at advantageous terms," he said. "In order to go full force with our development we would need to raise something like $100 million. In today's environment, that's going to [result in] a very low price. Rather than [take that dilution], it made sense to reduce the head count and wait for a loan guarantee."

Still, Musk said that Tesla did make some mistakes -- "primarily people and some technology issues and supplier issues" -- that, had they been avoided, would have left Tesla in better condition to weather the financial storm.

The company had experienced powertrain setbacks that delayed the delivery of its electric sportscar, the Roadster, and slowed production.
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