Tesla Motors Counting on $400 Million Government Package of Its Own

Diarmuid O’Connell has been vice president of corporate development at Tesla Motors since reading about the electric car company in a business magazine, and “dialing around” until he reached then-CEO Martin Eberhard.

Prior to meeting with Eberhard and landing his job of three years, O’Connell worked as a mid-ranking chief of staff in the U.S. State Department under Colin Powell, where he’d become “convinced that our national security is wrapped up in our oil dependency, and saw Tesla as one way of moving our country in the right direction.”

O’Connell has always viewed his job at San Carlos, Calif.-based Tesla as an opportunity to leverage his Washington experience in a way that could bring down its massive manufacturing costs. Yet it’s made zero headway on that front so far. In fact, O’Connell says that Tesla hasn’t received a penny from Uncle Sam, and hinted that if it doesn’t soon, the company may be forced to close shop. (The company has raised nearly $200 million from private investors since its 2004 launch, including a $40 million convertible debt financing from existing investors earlier this month.)

I spoke yesterday afternoon with O’Connell about Tesla’s futures, the Big Three automakers’ hopes to collect $25 in emergency bailout money via TARP and the already-approved $25 billion loan allocation to help carmakers develop more fuel-efficient vehicles.

Does Tesla have a position on whether the Big Three should receive the bailout package they’re begging lawmakers for right now?

Whether you think the automotive industry hasn’t been particularly innovative, or its union contracts are too rich, or its management is ineffective, we are where we are, and whether we should do something about it isn’t something we’ll comment on. What we do care about is that young innovative companies that are showing the way for the incumbents, whether U.S.- or German- or Japanese-based, that we are supported and that we thrive.

How has Tesla led the way for incumbents?

The [high-performance electric sports car] Tesla Roadster is a perfect example. When the Chevy Volt [electric car] program started in response to the Roadster, my work was done. We basically spurred them to innovate by proving that it could be done. That’s the value of companies like Tesla. It’s because we’re scrappy and resource-constrained and don’t have incumbencies and status quos to protect that it’s important to support our efforts.

What about the value of GM, Ford, and Chrysler?

I have my personal opinions, but what concerns me is that we’re not going to root of matter and making these companies competitive in the long term, and that in the rush to solve the problem of the moment, we’re not solving real strategic issues.

I think we’re all very sensitive to the personal component of this —  the millions of jobs that would be lost and the many more lives that would be effected and the broader impacts that would push us into a broader, deeper recession. But fundamentally, these companies have a lot to do in terms of capturing efficiencies in their go-to-market strategies.

Apparently, the White House is opposed to using anything from the $700 billion financial services bailout package and pushing the carmakers to instead tap $25 billion in already approved monies that were meant to retool production plants to make fuel-efficient cars.

They’re talking about Section 136, a loan guarantee and grant program that was part of the Energy Independence and Security Act of 2007 and that set aside awards and direct loans for advanced vehicle engineering. It was meant to help Detroit retool and help companies that make components for these vehicles, as well as companies like Tesla that make both components and vehicles.

We care, because we just applied for two projects that go right to the heart of what program aimed to achieve. One project is a manufacturing operation to create advanced batteries for electric vehicles, and not just our cars but a whole spate of large OEMs. The second project under this application is to build out a second vehicle. The Roadster was meant to be a profitable car, sold to a niche market. But the whole proposition is to drive the cost curve down and the volume curve out with Model S, our own $30,000 car.

That’s why you’re in Washington D.C. today and not home in California?

I dropped off our applications at 4:59.

How much money will your two projects require?

The battery project will require less than $200 million and the car more than $200 million, so in the $400 million category.

And why should Tesla’s applications be considered?

Because these are two products that are economically viable and would create up to 1,000 jobs in manufacturing, not to mention construction and maintenance. It would be a miscarriage [of justice, not to approve them].

Whatever is done should be done with a view toward supporting the young innovative companies that are struggling with the same pressing economic circumstances as the Big Three. The credit environment hurts our chances of raising capital, too. It’s much harder to do another round of VC funding, or to obtain commercial loans.

If you want to save these behemoth car companies whose business models are failed or failing, that’s a policy comment. But if you want to assure the viability of the domestic automotive industry [it’s a mistake to overlook us]. Tesla is a shining beacon of what can be done and policymakers should support us fiscally, just as it’s supporting these incumbent dinosaurs.

What would you say the odds are that the government will retool the language of Section 136 and give those loans to Detroit sometime soon?

The executive branch is no doubt seeking to modify the rule to allow for those monies to be made to simply take care of the Big Three’s cash flow problem. I don’t know the answer but we’re adamantly opposed to changing the rule as it’s currently written.

And what are the chances of Tesla getting its $400 million in government loans, do you think?

We’d be very pleased to have the Department of Energy move our application [through proper channels] quickly. They’ve signaled that they’ll do so. If we’re able to close on that money in January or February, I think we could stand up our operation in a matter of months. And we’ve said publicly that we plan to produce the Model S in 2011. But time to money is all important.

Is there a precedent here that gives you reason to be encouraged?

I’m sure there is, though I don’t have that information. In the alternative technology space focused around energy, technology can be funded by initially by venture capital, but when you get to commercialization, that’s where it gets expensive. That’s literally death valley. These [government] loan guarantee programs are the perfect point for the government to get involved. Whether it’s solar panels or wind farms, if you can lower the cost of capital, you can bring these products forward and get them into the marketplace and get them to scale.

What if the government doesn’t approve your applications?

We have a lot of confidence that the programs will be implemented in the way that the law intended and that our applications will be judged as deserving as strong business cases.

In the meantime, you just wait?

Now that our applications are in, we’re letting lawmakers know that we’re in the mix, that our applications merit support, and that we’d appreciate that support in this very fluid economic environment. The rush to save [traditional] carmakers could [otherwise] really pervert some terrific, forward-thinking policy and legislative work that’s been done to support clean tech projects like ours.