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Electric Sportscar Maker Deals With Market 'Freefall'

Elon Musk, new CEO at startup Tesla Motors, says things are looking up for the company, which he claims was 'overstaffed.'

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


, as well as the CEO of spaceflight startup


and a co-founder of


a division of




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.

Late last year, the company was in terrible shape, Musk said, adding that Tesla had made some unwise decisions about suppliers and had overstaffed itself.

But things are looking up, he said.

The company is shipping 10 cars per week and has solved its powertrain issues. It also still has the hottest car on Earth, Musk said. "I don't think it's an exaggeration to say that."

And Musk said he still believes electric cars are the transportation of the future.

"The physicals are so overwhelmingly in favor of electric cars, it's almost silly to look at anything else," he said. "Electricity will

be able to smack down everything else. I have zero doubt."

He said he believes

General Motors Corp.


"is barking up the wrong tree" with plug-in hybrids. Tesla had previously considered and rejected the idea of making one.

Musk also said he's not concerned about


plans to roll out electric cars, including an all-electric Dodge sports car.

"I wouldn't put too much stock in the announcement," he said. "They have a long way to go before they get a car on the road."

The company said it would deliver one of three planned models in 2010 -- including the sports car, a Jeep and a minivan -- but didn't say which model it would be. Musk said he doesn't think it will be the sports car, but thinks it's more likely to be the minivan.

"I don't expect them to deliver a Tesla competitor," he said.

Responding to T. Boone Pickens' plan to put natural-gas cars on the roads, Musk said that -- while natural-gas cars are better than gasoline cars -- it would be more efficient to use methane at a power plant, then use the resulting electricity to charge electric cars -- even with all the transmission losses.

"It's going to be more than twice as good as using natural gas directly in the car," he said.

Electric cars still face some challenges, however.

Aside from the high cost of batteries, the infrastructure to recharge electric-car batteries is an important issue, and Musk said he doesn't know if people will prefer to swap their battery packs or fast-charge their batteries.

But he said he believes the "inflection point" at which mainstream drivers will be willing to make the switch will come when batteries can be charged in about an hour.

That would allow people driving from San Francisco to Los Angeles to make the trip with just a single stop for lunch, he said. With electric cars that can drive 300 miles on a single charge, it would mean that drivers could simply stop at



to recharge, he said.

And if even a coffee break is too much of a hassle, drivers will hopefully be able to stop and get their batteries changed out in three to four minutes, he said.

Tesla's range has been growing and has reached 244 miles, in combined highway and city driving, with the air conditioning on, Musk said.

Batteries are still expensive, however. To deliver the Model S at the expected $60,000, Tesla plans to offer a 165-mile range, then charge premiums for batteries with 230-mile and 300-mile ranges, Musk said.

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