Tesla Motors didn't just set out to build an electric car. It set out to teach Detroit a lesson. Back in 2003, when these guys from Silicon Valley were launching their company, they didn't apologize for knowing next to nothing about the automotive industry. In fact, they took pride in this. They were rebels, disruptors, technogeeks operating at Internet speed—and they were convinced they could do better than the lumbering, clueless Big Three. Tesla's lead investor, Elon Musk, a charismatic Web entrepreneur who made a fortune as a cofounder of PayPal, last year boasted to BusinessWeek that "Silicon Valley is the best in the world at everything it does."

Well, five years after its founding, Tesla has shipped about 70 electric roadsters, and the car does in fact turn out to be a classic Silicon Valley product—it's late and over budget, has gone through loads of redesigns, still has bugs and, at $109,000, costs more than originally planned. Tesla's first 40 roadsters went out of the factory with a drivetrain that needs to be replaced. (Tesla will do the rip-and-replace for free.) Its second car, a sedan, has been delayed until 2011. Tesla, based in San Carlos, Calif., has raised $150 million and burned through almost all of it, plus millions more put down by customers in the form of deposits (the company won't give an exact figure). Now, hit by the downturn, Tesla has laid off 20 percent of its staff, closed its Detroit office and borrowed money to stay afloat.

In classic Valley fashion, Musk, 37, insists his company is doing great, despite the fact that a planned $100 million funding round recently fell apart and the company's cash balance dropped to $9 million before Tesla lined up $40 million of convertible debt financing. "I really don't feel like we're on the ropes. We did some early retrenchment in the face of a tough market," he says. He claims Tesla has developed "the most advanced electric powertrain in the world," and even puts a positive spin on the layoffs, saying, "We're raising the bar on talent, raising expectations to a higher level."

But the past two years have been rocky for Tesla, which first announced it would build a big factory in New Mexico, then said it would instead build in San Jose, after California dangled incentives to stay in the state. Tesla also wasted precious time and money on a quixotic lawsuit against Fisker Automotive, a onetime supplier and now a competitor. Tesla, which hired Fisker to design its sedan, claimed Fisker did lousy work and then stole Tesla's ideas to develop its own hybrid sedan, the Fisker Karma. The case was tossed out on Nov. 3 by an arbitrator who scolded Tesla for making claims that "were baseless and neither brought nor pursued in good faith." Musk says the decision was "a miscarriage of justice, a pretty severe one."

Originally an investor in Tesla, Musk last month appointed himself CEO, having pushed out the company's cofounder and first CEO, Martin Eberhard, and then gone through two subsequent CEOs. He has invested $55 million in Tesla and soon will put in "a bunch more," he says. "That's part of the reason I decided to take over as CEO. I have so many chips on the table. I need to steer the boat completely."

Eberhard, the ousted cofounder, says Musk interfered with the design of the roadster, demanding changes that were costly and led to delays. These included installing electronic door latches, building a lightweight carbon-fiber body and lowering the doorsill by two inches. "It cost us $1.5 million to lower that doorsill," Eberhard says. "We would have been better off to have a simpler car shipping a year earlier." Musk says his design changes were not the cause of delays. Eberhard says that despite Tesla's green-tech credentials, the roadster has a coolant pump that operates even when the car is parked, wasting as much electricity as two refrigerators. Musk says that will be fixed next month. Eberhard also gripes that Musk controls the board of directors, whose members include his brother Kimbal Musk. "I'm very unhappy about what's happened to my company" under Elon, says Eberhard, who still owns about 3 percent of Tesla. "I think he's a terrible CEO." Elon Musk responds that "Martin is the worst individual I've ever had the displeasure of working with."

One thing Eberhard is not complaining about is the car itself. He has the second unit built—Musk has the first—and says he drives it every day. This zippy two-seater runs entirely on batteries—it's pure electric, not a hybrid—and looks a bit like a Lotus Elise (not by accident, since its chassis is derived from that wonderful British sports car). The roadster can go 200 miles on a charge. Better yet, it goes zero to 60 in about four seconds, outgunning a Porsche 911. "It's a phenomenal car. I take people for rides and they just have big smiles on their faces," Eberhard says.

Tesla has received 1,200 orders and is cranking out 10 roadsters a week, Musk says. By next year, he expects to be producing 30 cars a week and turning a profit on each one. He says Tesla is still taking orders (it operates dealerships in Menlo Park, Calif., and Los Angeles), and soon will open service centers in New York, Chicago, Miami and Seattle. Musk says he's "absolutely certain" Tesla will not go out of business; he also says that if Tesla can't fill all its orders, he will personally pay back customer deposits. As for teaching Detroit how to build cars the Silicon Valley way? That will have to wait.

© 2008