The 2008 financial crisis shook the global economy to its core. During the crisis, major financial institutions collapsed, stock markets were down, businesses across various sectors faced many challenges, and the automotive industry particularly suffered a lot. But the companies that survived the crisis are doing really well now. Tesla Motors, a relatively young company at the time, faced the daunting task of not only surviving but also laying the groundwork for future success.
If you are a reader of this website, then you already know the magnitude of the 2008 financial crisis and how exactly it happened. If you don’t know anything about the 2008 crisis, then please read this article or watch this playlist.
As the 2008 financial crisis started, the credit markets froze, and consumer spending plummeted. This created a highly volatile environment, particularly for companies in the automotive sector, which experienced lower and lower sales and severe cash flow issues.
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Tesla before 2008 crisis
When Elon Musk joined Tesla by investing $6.3 million, he became chairman of the board. Before the financial crisis itself, Tesla was having a rough time. At the time, electric vehicles were largely seen as an unproven technology. There was a lot of skepticism about the viability and market potential of electric cars. Investors as well as customers doubted whether EVs could offer the same performance, range, and reliability as traditional gasoline-powered vehicles. When Tesla launched its first car, the Roadster, in 2008, It received praise for its performance and range, but its high price made it accessible only to small, affluent people.
This limited market size made it challenging for Tesla to generate significant revenue. However, the financial crisis posed a significant threat to Tesla’s survival. The company was burning through its cash reserves, and raising new capital became incredibly difficult. Investors were hesitant to put money into what they saw as a risky startup with unproven technology.
Tesla was hand-assembling its cars at the time. It resulted in slow production and high costs. Scaling up production was a significant challenge for Tesla, which required substantial investment in manufacturing infrastructure.
The Impact of the Crisis on Tesla
As the financial crisis unfolded, Tesla faced a severe cash crunch. During the 2008 crisis, even traditional automakers, like General Motors, were struggling. The craze for electric vehicles at the time did not even exist. People didn’t even consider electric vehicles as a viable option. So in the middle of a crisis where everything is going down, investors were hesitant to fund a company like Tesla that had not proven the viability of its products. This uncertainty in the financial markets at the time meant that access to capital was limited. It made it very difficult for Tesla to continue its operations and fund the development of its next vehicle.
Tesla was an electric car company and was trying to introduce a completely new product that the auto market had never seen before. That’s why Tesla faced skepticism from investors and customers. But during the financial crisis, all the issues faced by Tesla were amplified at such a high scale that it made it very difficult for them to survive. In the words of Elon Musk, Tesla came as close as a few hours to bankruptcy.
How Musk saved Tesla
But if the company was facing such a big issue, then how did Elon Musk manage Tesla to survive? Here comes Elon Musk’s leadership and commitment as a result of Tesla’s success. He had invested his own money in the company despite facing personal financial difficulties due to the simultaneous struggles of his other venture, SpaceX. He refused to accept defeat and embarked on a desperate scramble to secure funding.
Cost cutting
To navigate through the financial crisis, Tesla implemented significant cost-cutting measures. This included layoffs, renegotiating supplier contracts, and delaying non-essential projects. These steps helped reduce operational expenses and conserve cash, which was critical for the company’s survival. While these measures were painful and difficult, they were necessary to extend Tesla’s financial runway during the economic downturn.
Focus on quality
Even though the company was facing issues during the crisis, Tesla remained focused on innovation and quality. The Roadster, Tesla’s first production car, continued to receive praise for its performance and range. It helped build Tesla’s reputation and attract a loyal customer base during tough economic times. By delivering a high-quality product, Tesla maintained customer interest and media attention. It was crucial for its survival. Tesla’s commitment to quality and innovation kept it relevant and competitive. Overall, all the automotive companies were struggling during the crisis. But as Tesla was a new company with a new product, it was 10 times more difficult for Tesla to survive the crisis.
Disagreement with investors for the funds
Until December 2008, Elon Musk managed to fund Tesla’s operation by investing his own money. But by the end of December 2008, Tesla was on the brink of financial collapse. The company was set to run out of money on Christmas Eve. Neither Tesla nor Musk personally had enough funds to cover the next payroll.
So, in a desperate attempt to keep Tesla running, Elon Musk went back to the existing investors and asked for $20 million in equity in Tesla in order to keep the company running. One of the major investors in Tesla at the time was VantagePoint Capital, led by Alan Salzman. He wanted Tesla to change the direction and instead supply battery packs to other EV manufacturers.
Elon refused the idea of changing the direction of the company. This created a lot of boardroom drama, and Elon restructured his plan of giving away $20 million in equity to $20 million in debt. So basically, Elon got a loan of $20 million from his existing investors, which saved Tesla from bankruptcy for a time.
Bringing Mercedes/Daimler’s crucial investment
However, securing internal support wasn’t enough. External investment was crucial for Tesla. Elon Musk leveraged his reputation and network to reach out to potential partners in the auto industry. A critical breakthrough came in the form of a $40 million deal with Daimler, the German automaker. Their strategic partnership involved supplying Daimler with electric car battery technology, and Daimler will provide a much-needed cash injection for Tesla.
In May 2009, Daimler acquired nearly a 10% stake in Tesla for $50 million. This collaboration with one of the giant German automakers increased the confidence of investors in Tesla and its technology. Daimler’s investment was a strategic move to collaborate on the future of sustainable transportation, signalling confidence in Tesla’s potential.
Hiring Deepak Ahuja
One of the most important things Elon Musk has done since 2008 was to hire Deepak Ahuja. He joined the company as its first chief financial officer. He joined Tesla just before the financial crisis severely impacted global markets. Deepak Ahuja’s financial expertise and strategic management played a vital role in helping Tesla navigate through this difficult period.
Upon joining Tesla, Ahuja was faced with the daunting task of managing the company’s finances during one of the worst economic crises in history. Tesla was in dire need of capital to continue its operations and fund the development of its next vehicle, the Model S. Ahuja’s strategic financial management was crucial in navigating these challenges.
Getting government loan
Deepak Ahuja managed to give one of the crucial lifelines to Tesla through the U.S. government. In June 2009, Tesla received a $465 million loan from the Department of Energy’s Advanced Technology Vehicles Manufacturing loan program. This program aimed to support the development of fuel-efficient vehicles and reduce dependence on foreign oil. The loan was instrumental in helping Tesla continue its operations and fund the development of its next vehicle, the Model S. Ahuja played a key role in negotiating and securing this loan, demonstrating his financial acumen and ability to navigate complex regulatory environments.
Tesla IPO
One of Deepak Ahuja’s crowning achievements was guiding Tesla through its initial public offering in June 2010. The IPO raised approximately $226 million, providing a significant capital infusion that further stabilized the company’s finances. Ahuja’s role in preparing Tesla for the IPO, including ensuring financial readiness and regulatory compliance, was critical to making the offering a success.
Conclusion
Tesla’s survival through the 2008 financial crisis laid the foundation for its future growth. Elon himself said that the investment by Daimler has saved Tesla from bankruptcy. Tesla got the $465 million loan from the government in 2010, though it was approved in 2009. The company repaid the Department of Energy loan by 2013, nine years ahead of schedule.
Tesla successfully launched the Model S in 2012. It marked a significant milestone, showcasing Tesla’s ability to produce a mass-market electric vehicle with impressive performance and range. This achievement signaled to the market that Tesla was not just a survivor but a leader in the electric vehicle revolution.
This is how Elon Musk saved Tesla during the 2008 crisis. The 2008 financial crash was the result of the ignorance and greed of the government and big banks. The government did not keep an eye on the bad loans given by the banks, and they didn’t do anything until the last moment. The people were unaware of what exactly was going on. But some people were aware of what was going on, and they made huge profits by shorting the housing market. To know how these people figured out potential crash, you should watch these videos on our YouTube channel.
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