Tesla’s new partnership with Toyota comes at a trying time in the history of both companies. The recent announcement initially seemed to be good news for these two leaders in the burgeoning green car market. But Tesla’s amended S-1 filing released May 27 indicates that perhaps the deal isn’t as rosy as it first appeared–at least for Tesla.
The agreement hinges on three key points:
- Tesla will purchase Toyota’s recently closed NUMMI factory in Fremont, Calif.
- Toyota will invest $50 million in Tesla when the company goes public.
- The companies will partner to develop a more affordable electric car, capitalizing on key aspects of Tesla’s IP while incorporating the economies of scale and high performance Toyota is known for.
Tesla’s tenuous situation
Tesla’s reputation has suffered as the Model S failed to bring expected success. Reports of leadership problems, poor revenue figures and high costs leading to net losses, and the tragic plane crash that killed three key Tesla employees in February further dampened the company’s prospects of a successful 2010 IPO. Recent news of CEO Elon Musk’s messy divorce and tenuous cash situation, and disclosures that the company paid him hundreds of thousands of dollars in exchange for use of his private plane, also contribute to the poor outlook.
Purchasing the NUMMI factory allows Tesla to avoid tens of millions of dollars of fixed costs associated with building and outfitting a new factory, though cash will be needed for updated and new equipment (in addition to the $42 million purchase price). Toyota’s willingness to invest in and partner with Tesla is a much-needed vote of confidence from one of the giants of the automotive industry. It also constitutes a change of dogma from Toyota, which had long held fast to the idea that hybrids, not all-electric vehicles, were the future of the green car industry.
However, Tesla does not currently need the additional capacity, and has no firm plans on what it is going to do with it. Its current volume is less than 5,000 cars per year, while the NUMMI plant has a capacity of over half a million. Further, the amended S-1 states that Toyota and Tesla “have not yet entered into any agreements, including any purchase orders…for such arrangements and [they] may never do so.” Not exactly a reassuring statement, particularly to the Fremont NUMMI workers.
This isn’t the first time that Tesla has released overly optimistic announcements–in August 2009 it announced that it was finally profitable, but this was belied by fourth quarter sales reports included in the original S-1 filing in January 2010.
Toyota is in even more trouble than Tesla. It is in the midst of the largest recall in automotive history, bringing public relations nightmares and financial problems in its wake. Though analysts have remained bullish on Toyota stock, the share price has declined significantly over the past six months. Toyota has long been seen as an innovator in developing alternative energy sources for cars as seen in the popular Prius model, but its reputation for quality and safety has suffered a major blow.
For Toyota, the agreement with Tesla is relatively small potatoes—but the public relations boost and Tesla’s taking the NUMMI factory off of its hands are good things in the short term. If it does invest in Tesla, that might lead to Toyota’s eventual acquisition of the electric car maker, which would make Toyota the leader in the green car market. But the long-term impact of the potential partnership remains to be seen.
Stylish and affordable green cars?
Clearly, both Toyota and Tesla are in need of some good news and a public relations win. But has the hype surrounding the announcement been primarily to fan the flames of Wall Street and Silicon Valley investment? Or will it really create more affordable choices for those of us who want to drive stylish and affordable green cars?