Tesla's wild ride

Building the world's first electric supercar was never going to be easy -
even without the hubris, infighting, and mismanagement that nearly
sent Tesla spinning off the road.
By Michael V. Copeland. (Fortune Magazine)

For Martin Eberhard, there were many obstacles on the path to building the ultimate electric sports car.
There was the scientific challenge of creating a lithium ion battery pack stable enough to power a 2,650-pound vehicle.
There was the belief that Americans would stick with their gas-guzzlers, no matter what the price of oil. And there was,
of course, the considerable resistance in the venture capital community to funding heavy industry.

But for Eberhard, the ultimate indignity came in early June of this year. Just days before he was finally supposed to take
possession of his Tesla Roadster : The "most advanced car on the planet" had rear-ended a truck.

Instead of sweeping triumphantly into Eberhard's driveway, the Roadster was towed back to Tesla headquarters
south of San Francisco where, under the exacting eye of the company's chairman and financial backer, Elon Musk,\
it would be rehabilitated.

Even with its carbon-fiber front end shattered, the car was something to behold. 400 volts of electric potential wrapped
in a carbon-fiber body - is styled like the cars you used to see only in cartoons but charged by a high-powered outlet in
your garage. Stomp the accelerator, and thick cables connecting the liquid-cooled lithium ion battery pack to a printed
circuit board send all that current into a series of silicon transistors the size of your little fingernail. They are capable of
switching as much as 850 amps, which drive the AC motor as high as 14,000 rpm and send the rear-wheel-drive
Roadster screeching off the line, with a theoretical range of 220 miles on a single charge.
Acceleration is so fast (0 to 60 in 3.9 seconds) that you get pushed back in your seat for as long as you dare to keep
your foot on the aluminium pedal.

That the Tesla exists at all is a small miracle. There was a flurry of EV development during the energy crisis of the 1970s,
and again in the early '90s because of a series of regulatory guidelines governing emissions. But by the late '90s, California
had defanged the electric-vehicle portion of its zero-emissions mandate and soon after, GM, Toyota, Honda and Ford
all shut down their EV programs. The most dramatic end would come for GM's EV1, when the Detroit automaker famously
ripped the cars away from ecstatic owners and sent them to the crusher, as detailed in the film Who Killed the Electric Car?

That backdrop makes the story of the Tesla all the more remarkable. The car was conceived by Eberhard, an engineer, serial
entrepreneur, and inventor (his name is on battery-cooling, electric motor, and power electronics patents filed by Tesla Motors).
He was convinced that if he could outfit an existing sports car chassis with loads of laptop batteries, it would be feasible to build
and he'd find plenty of buyers among the speed-loving, planet-conscious Silicon Valley set and beyond. But given that he had
zero experience in the auto world and that gas was at a relatively cheap $1.50 a gallon, Eberhard, 48, couldn't find a VC firm
willing to give him enough to build the car. Which is how he came to Elon Musk.

The 37-year-old Musk had co-founded PayPal, was forced out of the online-payment company, but cashed in when it was sold
to eBay (EBAY, Fortune 500), giving him more than enough money to launch SpaceX, a private rocket company that aims to
start shuttling people to the International Space Station by 2011. Big ideas, in other words, are Musk's specialty.
After a two-hour meeting in February 2004, Musk agreed to plow $6.3 million into Tesla. He would become the company's
chairman; Eberhard would be CEO.

In one sense, the duo's timing couldn't have been better. Tesla has begun trying to deliver cars just as gas prices and fears about
global warming have shot to all-time highs. All those automakers that shelved plans have since restarted them. Nissan,
Mitsubishi, Daimler, Subaru, and boutique firms like Fisker Automotive are furiously working on new models - some all-electric,
others range-extended EVs - but won't get to market till 2009-13. GM's Bob Lutz even credited his company's relaunch to Tesla.

But somewhere between the elegant plan and the rear-ender on the 101, things went terribly wrong.

Says Eberhard, looking back: "I should have been more careful. I shouldn't have let [Musk] take a disproportionate control of
the board." He adds, "I have no issues with Tesla Motors as a company. I do have problems with Elon and the way he treats
people." Indeed, it was poetic that Eberhard wasn't behind the wheel when his Tesla crashed - he had been booted from the
driver's seat and forced out of the company seven months earlier.

In the past four years, Musk has sunk $55 million of his personal fortune into the company, the ousted Eberhard has started a
tell-all blog to air his grievances, and 1,000 customers - many of whom long ago laid out nearly $100,000 - are still waiting for
cars that are unquestionably cool but now a year overdue. The only thing anyone can agree on is that men, not machines,
are largely to blame for Tesla's struggles.

You need to be a little nuts to start a car company. And by most accounts Martin Eberhard always was. In his early career,
he launched a series of startups, including an electronic-book company he co-founded called NuvoMedia, which he sold to
Gemstar in a deal valued at $187 million in 2000. By 2003 he was looking for his next project. Driving the streets of Palo Alto
that year, he began to notice that the same driveways that held a Prius (or "dork mobile," as he liked to call it) often also had
a Porsche 911 or other luxury sports car.

"It was clear that people weren't buying a Prius to save money on gas - gas was selling close to inflation-adjusted all-time lows,"
says Eberhard, a tall, thin man with a mop of graying hair and a nervous, foot-tapping energy. "They were buying them to make
a statement about the environment." So why not, he reasoned, allow this deep-pocketed clientele to make that statement driving
a car that exceeded the performance of a Porsche?

Eberhard, who has an undergraduate degree in computer engineering and a master's in electrical engineering from the
University of Illinois at Urbana-Champaign, spent almost a year doing an analysis of what energy source was most efficient for
his imagined eco-supercar. He examined and dismissed hydrogen fuel cells, natural-gas-powered cars, hybrid technologies,
and diesel. The energy source that offered the highest efficiency and performance, he concluded, was pure electric.

So Eberhard decided to build a car by licensing electric-drive-train technology from AC Propulsion and using an existing
carmaker to do the manufacturing, just as semiconductor manufacturers had done with their "fab-less" model. In Eberhard's
view, that would make building the car better, cheaper, and faster.

Elon Musk, an imposing South African with a yen for high-tech gadgets and designer clothes, had taken his sizable fortune
and set up SpaceX in Hawthorne, Calif. Shuttles to space were the first goal, but Musk's really big idea was that by making
space travel cheap, people could start moving off earth and onto other planets.

It took Eberhard only two hours during a February 2004 meeting to get Musk onboard. The meeting ended with Musk
saying simply, "Okay, I'll do it." On the street outside SpaceX, Eberhard and Wright high-fived.
"I think we just got our funding," Eberhard said.

There were, however, a few catches. Musk saw the franchise-dealership arrangements that U.S. car companies had tangled
themselves up in as an increasingly expensive, margin-killing model. He wanted to own and operate Tesla dealerships rather
than franchise them. He wanted final say over all decisions - which he would get by naming himself chairman. And finally, Musk
demanded that they close the deal in two weeks.

Tesla now had funding, a business plan, and even a chassis. The first prototype of Tesla's car, dubbed the Roadster, would be
based on a $45,000 fiberglass-skinned sports car that Lotus sold, called the Elise. Lotus made fast, light cars and also had the
virtue of being the only sports car manufacturer that would give Tesla management the time of day.

Despite their differences, the two men initially worked well together. Both are technical guys who attack problems relentlessly.
Eberhard's style is to question every engineering assumption. He'd corner people in the hall and debate them on the merits of
air-cooled vs. liquid-cooled battery packs. The team was solving huge technical problems, from battery cooling and load balancing
to the power electronics.

At the time, Musk's primary job was running SpaceX, but he and Eberhard talked practically every day. On some weekends
both men would continue the conversation over dinner at one or the other's home with their families. Using what he was learning
about rockets, Musk would constantly suggest materials that could shave a few pounds from the chassis or the body.

The highlight of board meetings for the tech-obsessed group were the show-and-tell portions, with little focus on the bottom line.

When it came to design, Musk's vision - building the Next Great American Car Company - soon came into conflict with Eberhard's
goal of getting a cool electric sports car to market quickly and relatively cheaply. The Lotus Elise chassis on which the Roadster
was based had a high doorsill, a feature that makes entering the car tricky if you are not careful. Getting out is even harder.
It took several attempts for Musk's wife to get out of an early Roadster prototype while wearing a dress. So Musk ordered the
engineers to lower the doorsill two inches, thereby losing much of the cost savings that come from using a crash-tested
off-the-rack chassis.

And rather than use the fiberglass body panels from the Elise that Eberhard had suggested, Musk insisted on carbon fiber,
a lighter, stronger, and "cooler" material, in his opinion. He then went on to redesign the headlights and the door latches.
After riding for a weekend in an early Roadster model and taking a beating in the standard Lotus seats, he insisted that
custom seats be developed. Every change meant additional cost and time.

But Musk got his way, in large part because he was putting more and more of his own money into Tesla.
He led Tesla's $12 million second round of financing in the fall of 2005, and also convinced some of his high-powered friends,
including Google founders Sergey Brin and Larry Page and eBay employee No. 2, Jeff Skoll, to invest in later rounds.
To date, he has personally put in $55 million of the $145 million Tesla has raised.

Two months before the car was set to debut in the summer of 2006, it still didn't have a production-ready transmission.

As Hollywood heavy hitters like Michael Eisner and Governor Arnold Schwarzenegger mingled with well-heeled car buffs
at the Roadster's public unveiling at the Santa Monica Airport in July 2006, it looked like a slam-dunk for Tesla. But behind the
scenes company execs were sweating. Electric motors have the advantage of being lightning fast from a standing start.
But to get to the top speed that Tesla had promised (125 mph), they needed either a more powerful drive train or a second
gear that could send the car speeding beyond 100 mph.

Problem was, Tesla's engineering team didn't yet have the experience to build a more powerful drive train, and no one had
come up with a two-speed transmission that could go from 13,000 rpm to 7,000 rpm and survive for more than a few thousand
miles before it wore out. Eberhard was inclined to stay on schedule, get cars on the road by sticking with one gear, and offer
a Roadster that topped out at 110 mph.

Instead Musk launched the search for a supplier that could deliver a two-speed transmission. "Why did DeLorean fail?" Musk asks.
"Because it was a shitty sports car. It may have looked cool, but it had the acceleration of a Honda Civic.
That's what our car would have been with the motor we had and the power electronics we had connected to a single speed."

Meanwhile Eberhard was spending more and more time basking in the glow of the clean-tech crowd. He was the face of Tesla,
the voice on its blog. He became a regular on the conference circuit and even starred in his own BlackBerry "innovators" ad.
But at least four board members, including Musk, were growing concerned that Eberhard didn't have a firm grasp of the company's
increasingly complex finances and supply chain. At an executive staff meeting at Tesla's San Carlos headquarters in June 2007,
Eberhard grew visibly agitated, according to Straubel and others, as Tom Colson, head of manufacturing, went through a cost
analysis of the Roadster put together by one of the company's VC backers.

In Tesla's own prospectus for its most recent round of funding, dated April 12, 2007, it had estimated the cost of building the car
at $65,000, dropping as production ramped up. But just two months later, the VCs now believed the average cost was going to
be well north of $100,000 for the first 50 cars and would decrease only slightly as more cars were built.
"If this is true," Eberhard told Colson and the room, "you and I are both fired."

Eberhard doesn't dispute that things seemed to be heading south, but he says that for months he had been asking the board
to hire a CFO and a COO and it wouldn't approve his choices. "I raised my hand and said, 'I am drowning, please help me,'"
he recalls.

In fact, there was another search going on at the same time. Tesla was moving from its development stage to an operational
stage, where costs and schedules were taking precedence. According to board members (all venture capitalists at the time,
except for Musk's brother), that wasn't a good fit for Eberhard. Even his old friend Tarpenning saw the problem.
"You reach a point where the same people who are running the company when it has three people are not the same people
who are running the company when it has 300," he says. "Both of us had been around the Valley long enough where we knew
that to be the case."

But according to Darryl Siry, Tesla's head of sales, marketing and service, that wasn't going to happen. In June, he says,
Lotus factory officials began warning that the late-August launch wasn't realistic. Eberhard persisted, saying in staff meetings
that "we're dead if we miss that launch," Siry says. Yet Tesla hadn't even released all the car's specs to the parts suppliers.
Two suppliers, Xtrac and then Magna, failed to get the two-speed transmission to work. Still, Tesla was ramping up spending
as if it was going to start production in late August, putting $469,696, for example, into stereo and navigation gear that never
made it into the cars and instead was sold back to the distributors at a loss. "Elon was pushing for early shipping all the time
 - it wasn't me," says Eberhard. "I resisted that spending, but Elon insisted."

Even though the Roadster project was wildly off course, between January and June 2007 there were monthly board meetings
about designs for showrooms and a parallel project to find a site - they picked Albuquerque - to build a factory for Tesla's
second model car, a $59,000 sedan code-named Whitestar. "Either senior management just wasn't paying attention,
or they were hoping it would work itself out and they could fix it later," says one board member. "They were running line
items on cost, irrespective of where milestones were on development of the car and the supply chain, as if they were not related."

With more-financially-minded investors like Valor Equity Partners and Technology Partners now backing the company, board
meetings became focused on the numbers, and according to Musk and three other board members, Eberhard simply didn't have
the answers. "In any other company it's the CFO that provides those numbers," Eberhard says in his defense. "I'm an engineer,
not a finance guy." During the July 2007 board meeting, Eberhard took a grilling. "You can't tell me the car is going to cost
$65,000 to make when just the battery pack is well over $20,000," recalls the board member. "This CEO would not admit the
problems and ask for help. You must develop commitments from data and set them in reality, not just hope it works out.
We did not believe that this registered with him, and the board felt compelled to take action."

A month later Eberhard was removed as CEO and demoted to president of technology.

In August 2007, Tesla finally got its priorities straight with what became known as the "Marks list." It was put together by
Michael Marks, former CEO of Flextronics and a minority investor in Tesla, whom Musk handpicked as interim CEO to replace
Eberhard. It contained about a dozen items in order of importance, each of which had the potential to delay the car.
At the top: battery pack, battery cooling, and transmission.

Whereas Eberhard was the high-concept visionary, Marks was a manufacturing whiz with no tolerance for any gray areas in
schedule or cost. He quickly realized there was no way to hit the late-August launch and ordered a minimum six-month delay.
"I postponed anything that wasn't aimed directly at getting the Roadster out the door," Marks says. That meant mothballing plans
for the factory in Albuquerque and shuttering a side business that would have produced battery packs in Thailand for other
automotive customers. "If we didn't get that car out," he says, "there wasn't going to be a business."

Eberhard had cut a deal with Lotus for production of the Roadsters that included penalties if production didn't begin on schedule.
It didn't. In October, Lotus hit Tesla with a bill for $4 million. That was just the start of the company's cash-flow problems.
"We had bought 80% of the parts for hundreds of cars, but since we didn't have the remaining 20% of the parts (including a
working transmission), we couldn't ship [the cars] and get paid for it," said Musk.

Marks had been keeping Eberhard temporarily busy on power-supply electronics problems and public appearances, but in
December 2007, Musk orchestrated his ouster from the board. Over the next month 10% of Tesla's employees, most
considered Eberhard loyalists, were also let go.

Eberhard was furious, believing he had just been following Musk's orders. "Either he was a passive investor or he was involved,"
says Eberhard, "and I can tell you, Elon was involved every step of the way." Though he had lost control of the company, Eberhard
could still fight a PR war. He launched "The Tesla's Founders Blog" detailing what he called the "Stealth Bloodbath" and soliciting
comments from current and ex-employees. A typical post: "The company has changed so tremendously since I started.
It's very secretive and cold now. It's like they're trying to root out and destroy any of its heart that might still be beating."

The board went nuts, and Yoler pleaded with Eberhard to stop (he eventually toned it down). Nancy Pfund, who sits in on board
meetings on behalf of Tesla backer J.P. Morgan, says that Eberhard's "bloodbath" was really just getting costs under control.
 "We had to reduce the burn rate of the company," she says. "It's always painful, but that doesn't mean we didn't have to do it."

Morale plummeted for those who remained, especially since the car was still nowhere near ready. "We knew things were not
going to get better until we had cars out there, so that is what we focused on," says CTO Straubel. Musk began spending two
to three days a week at headquarters. The board found a permanent replacement for interim CEO Marks in Ze'ev Drori, an
operations-focused Silicon Valley veteran who came out of retirement. Meanwhile CTO Straubel took the car apart on the
shop floor in San Carlos, looking at every printed circuit board and every bracket to see where the company could cut costs.
Since no supplier could provide the two-speed transmission Tesla wanted, Straubel's team continued to work on the
one-speed version, seeing whether it could eke more power from the motor and the electric drive. In March 2008, with a
clear path to costs below the sticker price by the end of the year, Tesla decided it could wait no longer and began
production of the Roadster. The transmission on the first 40 Teslas, however, will need to be replaced by the end of the
year to get the promised performance.

Seven Teslas - part of the so-called Founder's Series - have been completed. (The lucky owners: Musk, his brother, board
member Antonio Gracias, investor Skoll, Google's Larry Page and Sergey Brin, and of course Eberhard.) The company hopes
to ship several hundred more by the end of the year. Musk has set his sights on delivering Tesla's next car sometime in 2010.
Called the Model S, it's an all-electric $60,000 family sedan with four doors and a hatchback, which he now plans to build in
the Bay Area. He'll need to raise $250 million to $300 million, and he knows it's a long shot that Tesla can grow up and
become a real car company. For all the difficulty of getting a few cars built, scaling to thousands and tens of thousands of
cars is exponentially harder. Tesla is turning to automotive veterans like former Chrysler executive Mike Donoughe, recently
hired as executive vice president of vehicle engineering and manufacturing, to help crack that code.
But before it can get to the next car, Tesla needs to make sure the Roadster is a success.

And there are a whole lot of auto buffs and professionals waiting to see what will happen when these cars hit the road for real.
Though you can get insurance for a Tesla, a big concern is the amount of heat generated by 6,831 battery cells lashed together.
"Never mind whether they will burst into flames," says Bruce Belzowski, assistant research scientist at the University of Michigan's
Transportation Research Institute, of the Tesla batteries. "What if they plain don't work? There is real uncertainty about these battery technologies, because there is nothing to compare it with - it's so new there aren't even regulations in place yet."
Tesla says the batteries have been tested for an equivalent of 40,000 miles with no safety or durability issues.

Tesla's customers don't seem particularly concerned. During all the turmoil, only about 30 of almost 1,000 asked for their deposits
back, and those spots were quickly filled. Engineer Earl Cox (who is buying a Tesla, as is his dad, Stanford professor Don Cox)
says he has a great deal of respect for Eberhard. "But I would still love Tesla to win," he says. "I would love if Elon Musk went
down in history alongside Henry Ford for doing this thing. It is a great car - I don't have any hesitancy about that - and I can't get
it soon enough."

Same goes for Stephen Casner, a software engineer who worked with Eberhard and Tarpenning at networking technology
company Packet Design. It was because he trusted and believed in his two former colleagues that he put down $100,000 for
his radiant red Roadster. What he didn't do is ask for his money back after Eberhard was shown the door and Tarpenning quit.
"I guess I just want the car too much," Casner says.

Startups, after all, are always chaotic. The people who found them are often arrogant or overbearing or both.
But in a way Musk was right: The bumps along the road are forgettable, as long as the car won't be.