Why is Elon Musk raising funds for Tesla?

The company announced a $500 million sale in common stock Thursday.

Mario Anzuoni/Reuters
A view of the controls of a Tesla 85D on display at a Tesla showroom in Pasadena, California, August 3, 2015.

Tesla Motors filed with the Securities and Exchange Commission (SEC) Thursday morning to sell $500 million worth of common stock, a move analysts say will allow the electric-car maker to aggressively expand. 

Elon Musk, Tesla's CEO, chairman, and product architect, indicated interest in purchasing more than 80,000 shares of the public offering for a total purchase price of about $20 million.

The company indicated it would use the proceeds for the development and production of its Model 3, a lower priced line that Tesla hopes to bring to market by 2017 for around $35,000 per car. The cash infusion will also fund the continued development of the Tesla Gigafactory battery manufacturing plant outside Reno, Nev. and fund "other general corporate purposes."

Reuters reported earlier this week that Mr. Musk's car company has been operating at a loss per vehicle that has tripled in the past year, to nearly $15,000, and at its current rate of spending, even in a bullish auto market, the company will burn through its cash reserves faster than initially projected.

The latest to launch is Tesla's Model X, a luxury SUV with flashy gullwing doors that the automaker plans to pump $1.5 billion into this year.

One analyst, Adam Jonas of Morgan Stanley, called Tesla's spending "eye watering", according to Bloomberg

Musk candidly acknowledged in a call with analysts that the company would seek to raise capital to stanch some of its spending, saying "there may be some value" in raising capital "as a risk reduction measure." 

“Clearly they are not done raising capital. It’s just $500 million, and they’ll need more to bring the Model 3 to market,” Andrea James, an analyst with Dougherty & Co., said in an interview Thursday with Bloomberg. “But this gets them through to free cash-flow positive in” the fourth quarter.

A recent study by the National Bureau of Economic Research, the largest economics research organization in the US, has cast doubt on the environmental advantages of electric vehicles over fossil-fuel vehicles. The study found that, on average, electric vehicles have a negative impact on the environment, of about -0.5 cents per mile traveled relative to comparable fossil fuel powered vehicles driven in the US. The US Department of Energy, however, cites large reductions in emissions between conventional cars and hybrid or all-electric autos.

The researchers found that depending on where the car is driven, given the setup of the electric power grid, electric cars can produce net environmental benefits in places like Los Angeles, Calif., allowing electric vehicles to produce 3.3 cents per mile in benefits, but an electric vehicle used in Grand Forks, North Dakota, for example, results in a net environmental cost of 3 cents per mile due to the constraints recharging a car battery in a less dense place puts on the grid. 

The report concluded that the federal subsidy on electric cars of $7,500 per vehicle purchase should be reevaluated, given the mixed environmental benefits the cars were found to provide. 

of stories this month > Get unlimited stories
You've read  of 5 free articles. Subscribe to continue.

Only $1 for your first month.

Get unlimited Monitor journalism.