Tesla's wild ride (pg. 4)

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.

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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.

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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 isn't.  

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