On February 26, at an event hosted by Secretary of Energy Steven Chu, Elon Musk announced Tesla will pay off our Department of Energy (DOE) loan five years early, twice as fast as required by the original 2010 loan agreement signed by Tesla and the DOE.
This is a significant announcement both for Tesla and for the DOE. It is a marker of the successful launch of the Model S and the incredible market reaction to this award-winning car. And it is a tribute to the success of the DOE's Advanced Technology Vehicle Manufacturing Program (ATVM), a program which was chartered by Congress and signed into law by President George W. Bush, to accelerate the market for a broad range of promising automotive efficiency technologies - electric vehicles (EVs) principal among them.
To put the importance of Tesla’s decision into context, it is worth briefly reviewing the origins of the ATVM program and how Tesla became involved.
The ATVM program was a central element of the nation’s last major energy bill, the Energy Independence and Security Act of 2007 (EISA). The Act itself was a triumph of a bipartisan political movement that recognized that energy issues were at the same time one of our nation’s greatest risks and one of its greatest opportunities. The programs launched by the EISA were collectively intended to address our national security, our economic competitiveness and pressing environmental and climate challenges.
It is also important to note that the program was launched prior to and separate from the 2008 crisis in the automotive industry, which led to the bailout of GM and Chrysler under the Troubled Asset Relief Program (TARP). Moreover, the ATVM program was launched prior to and quite separate from the Obama stimulus program of early 2009. In fact, the call for applications came while President Bush was still in office. This is when Tesla made its application.
Importantly, in order to qualify for a loan, an applicant had to be judged as financially viable prior to any loan arrangement. Happily, with the success of the Tesla Roadster program and its future prospects, Tesla qualified under this condition. The ATVM loan program is also entirely separate from the DOE grant program, which was launched under the Obama Administration’s Stimulus Act in early 2009.
ATVM loans were intended by the President and Congress to accelerate the market introduction of promising automotive technologies. This is an important point. Tesla at the time was a viable stand-alone entity. We had plans to fund the introduction of the Model S via commercial sources of capital and the proceeds of the Roadster program. However, given the economic climate at the time (recall the “Great Recession”), accessing those sources of capital would have taken time and significantly delayed the launch of the Model S.
Following more than a year of thorough due diligence by commercial auditors, automotive consultants and lawyers, on January 20, 2010, Tesla became the recipient of one of three initial DOE loans announced by Secretary Chu, along with Ford and Nissan – good company for a start-up automaker. Tesla’s loan of $465 million was to be paid back over ten years following the start of production of the Model S. Months later in a separate announcement, an ATVM loan was announced for Fisker.
It is worth noting that in comparison with these three other recipients, Tesla had the smallest loan. Ford’s loan was for $5.9 billion, Nissan’s was for $1.4 billion, and Fisker’s was for $529 million.
Tesla’s culture has always been to be scrappy and entrepreneurial. Our personal charter, from Day One of the company’s existence has been to achieve the maximum return out of every dollar invested.
Fast forward to June 2012… barely more than two years after the loan was received, the Model S, the first EV fully engineered from the ground up, in this era, rolled off the line at the Tesla Factory, a formerly shuttered GM plant in Fremont, California. It did so to the cheers of the thousands of Tesla engineers, manufacturing associates and staff who put in long and stressful hours to get the Model S on the road.
To put this achievement into context, building a vehicle program from the ground up at a conventional automotive manufacturer would take about five years. The effort of Tesla’s people is a tribute to their focus, entrepreneurship, and hard work – all hallmarks of the very best aspects of American values and success.
As you all know, the Model S has been a widely acclaimed car, winning more awards than is useful to enumerate here. The commercial success of Model S is now emerging. We have hit our production run rate and are delivering cars at an ever-improving rate. We have announced that we expect to be slightly profitable in the first quarter of this year (excluding only non-cash option and warrant-related expenses). Demand continues to be strong and we are optimizing our operations to be ever more efficient while constantly focusing on quality so that every vehicle rolling off the line meets our exacting standards.
When we started Tesla Motors, our mission was simple – to catalyze the mass market for EVs. We thought we could do so better and faster than the incumbent automakers whose ability to innovate and move quickly is constrained by bureaucracy and a risk-averse profile that constrains break-through innovation.
Our business plan, boiled down to its simplest expression, was to build a low- volume/high-price car (Roadster) as a proof of both the technical and commercial concept, to then use that credibility to launch a ground-up mid-volume/mid-priced sedan (Model S) to show that EVs can indeed be superior to conventional ICE competitors, and then to launch a high-volume/low-price EV (Gen III) to illustrate that great EVs are available to all.
The underlying assumption in this plan is that we will move as quickly as possible to bring forward this future. In this respect, the ATVM loan has been a perfect match for our business strategy, as its charter was that loans would accelerate the market advent of EVs and other promising technologies. We expect to generate sufficient cash and profitability in our business over the next five years that it gives us confidence to proceed with this early repayment of the loan. Moreover, it is also consistent with Tesla’s mantra of speed that we would, as Elon announced last week, accelerate the repayment of our loan, a full five years earlier than required under the original loan terms, making our last payment in 2017.
In closing, let me say that we are grateful for the support of both the Bush Administration and the Obama Administration in recognizing the potential of EVs in general and Tesla in particular. We are especially grateful for the bipartisan support we have received from Congress, both before the inception of the ATVM program and since. But most of all we are grateful for the hard working employees at the Department of Energy who are the administrators of the ATVM program which, I’m confident, will be regarded by history as a model for public/private partnerships which inspire American entrepreneurship, competitiveness and innovation.
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Certain statements in this blog post, including statements regarding the timing of repayment of the DOE loan, the future financial viability and expected cash flow and profitability of the company, and development of the Gen III EV, are “forward-looking statements” that are subject to risks and uncertainties. These forward-looking statements are based on management’s current expectations, and as a result of certain risks and uncertainties, actual results may differ materially from those projected. Various important factors could cause actual results to differ materially from those in the forward-looking statements, including any unexpected delays in, or changes to, our retail plans as well as the risks and uncertainties identified in our SEC filings. Tesla disclaims any obligation to update information contained in these forward-looking statements.