23 October 2016
Tesla received nearly 330,000 orders within a week for its new Model 3. Photo: Slash Gear
Tesla received nearly 330,000 orders within a week for its new Model 3. Photo: Slash Gear

Tesla uses ‘crowdfunding’ to finance production of Model 3

Two entrepreneurs at a startup company in Hong Kong have raised nearly HK$200 million (US$25.8 million) from crowdfunding website Kickstarter and venture capital funds to produce smart coffee machines.

However, the brothers’ company has yet to deliver a coffee machine, and there is a lot of skepticism about the viability of the business.

Raising money for a product before starting mass production is quite common among high-tech startups around the world.

And Tesla Motors Inc. also used that method to raise billions of dollars to expand its capacity.

The maker of electric cars announced its Model 3 early this month, priced at US$35,000, which is only half the price of the existing Model S and Model X.

The company received nearly 330,000 orders within a week.

These orders are worth a total of US$12 billion, three times the firm’s sales revenue last year.

However, Tesla has yet to build a production line for the model, and it aims to start mass production next year.

The firm expects that buyers will get their cars delivered starting at the end of next year and that it will take around three years to absorb all those orders.

Capacity has always been the biggest bottleneck for Tesla.

It has an annual production capacity of about 50,000 cars at present, and customers need to wait more than a year for a car after placing an order.

How could the company handle the huge number of orders for the new Model 3?

Founder and chief executive Elon Musk said Tesla will invest up to US$5 billion in a new factory in Nevada to ramp up its capacity to produce the Model 3. 

Tesla has lost money ever since it became a listed company in 2010. Last year, it suffered a loss of almost US$900 million.

The firm has a debt pile of US$7 billion and a net asset value of about US$1 billion.

How could it afford the US$5 billion investment to build new factory?

That’s the reason it decided to accept orders for the Model 3 in advance.

Each customer needs to make a US$1,000 deposit when placing an order for the Model 3.

So, the firm has already bagged US$330 million from existing orders.

And Tesla will require customers to make another installment payment late this year or early next year when they confirm their orders.

In addition, Tesla could use the enormous number of orders as collateral when applying for bank loans.

The firm’s share price surged more than 10 percent within a week after it unveiled the Model 3.

Its market capitalization grew by over US$3 billion, which may prompt the company to issue shares to raise funds.

The Model 3 has been so sought-after because of its promised 557 kilometers per battery charge and six-second zero to 100 km/h acceleration time.

The car will come with autopilot equipment and various top-notch functions.

It seems great value for money at half the price of the existing high-end models.

However, its advanced equipment could become more commonplace in 2017-2019, when the cars are scheduled to be delivered.

This article appeared in the Hong Kong Economic Journal on April 13.

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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