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Published on December 17th, 2012 | by Jo Borrás

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The Long Con: Tesla to Gamble on Battery Futures With YOUR Money

Would you buy an electric car if you didn’t know the price of a replacement battery? What if you knew what the price would be – maybe – in about 8 years? Those are some of the questions electric car-maker Tesla is hoping will get lots of “yes” answers.

Tesla is offering replacement battery packs on its new Model S sedan in the form of a “Replacement Battery Option“, which recently appeared on its website. I’ll let Tesla’s PR-people explain it, so no one accuses me of skewing it weird-ways.

The option allows you to pre-purchase a new battery to be installed after eight years for a fixed price: $8,000 for 40 kWh batteries, $10,000 for 60 kWh batteries, and $12,000 for 85 kWh batteries.

That’s right, kids – Tesla wants you to give them cash money NOW. Then, EIGHT YEARS FROM NOW, you can go to a designated Tesla-authorized service and repair facility to get a fresh new battery.

There are so many problems with this, I don’t know where to start. Please find a few of my favorites, below …

1. TESLA MAY NOT BE AROUND IN 8 YEARS

Tesla has been in business for nearly a decade now … and it has yet to turn a profit.

Keep in mind, this is a car company that has been heavily subsidized with federal funds, gotten envious gobsmacks of free publicity, free celebrity endorsements, has appeared in movies, has appeared in video games, been granted access to Toyota and Mercedes’ R&D know-how, scored some big contract deals, and, still: nothing.

Nada. Zero. Less than zero, in fact.

There are no guarantees in the auto business, and the automotive landscape behind Tesla is littered with names like Tucker, American Motors, Hummer, Saturn, Pontiac, Plymouth, Mercury, DeLorean, and more. All of which, it should be noted, were profitable on at least 1 ledger before closing their doors.

There’s always 2013.

2. WHO KEEPS A NEW CAR FOR EIGHT YEARS

Nobody, that’s who.

In this Wall Street Journal article from January 2009 (the deepest, darkest days of the Great Recession), the average new car was being kept 6.8 years. That was up, dramatically, from 5.8 years in 2007 … and quite a bit higher than it is now.

3. BATTERIES ARE NOT THE ONLY THINGS THAT BREAK

More than once, someone has told me that they’d have a problem buying an electric car (or a hybrid, even) without knowing the price of a replacement battery. The one that stuck out in my mind was this article from The Truth About Cars, which seems to sum up the general public’s sentiment on the matter nicely.

That said, I call bullshit. Not on the hairdresser quoted in the article, but on the entire sentiment. The people making comments like that are utterly full of it.

To wit: they’re not walking into dealerships to buy Hyundais and asking the salespeople how much a replacement transmission costs and they aren’t buying Mercedes form salespeople who have a handy “Engine Replacement Cost” pocket guide nearby. This isn’t about a class of car or the affluence of its buyer, it’s a complete lack of understanding about cars, how they work, and what they cost, plain and simple.

If you think “I won’t buy an electric car because I don’t know how much a new battery will cost.” is a cogent argument, you let me know. I’ll get you a sweet deal on rust-proofing, nitrogen-filled tires, and VIN-coded window etching. If you buy an extended warranty with all that, the deal gets even sweeter.

4. YOU LOSE NOTHING BY NOT DOING THIS

This whole thing only pays off for the buyer if, in 8 years, the cost of a Tesla battery has NOT, in fact, dropped by some 70% to below the magical $10K mark.

If it has, then you were better off to wait and buy the battery (assuming you still want to keep the 8 year old Tesla and that nothing but the battery needs replacing).

If it hasn’t, THERE IS NO GUARANTEE YOU’LL GET YOUR BATTERY, ANYWAY. If things go south and this battery-focused Ponzi scheme doesn’t pan out in Tesla’s favor, I’m sure Tesla already has contingencies in place for “Electric Motors Liquidation Company” to be the ones stuck with paying back the Battery Replacement Option funds in the event of a government-managed bankruptcy filing, even Tesla does – somehow – manage to stay in business.

I don’t know about you, but I think this is a crap deal for Tesla buyers. Time will tell, won’t it?

 


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About the Author

I've been involved in motorsports and tuning since 1997, and write for a number of blogs in the Important Media network. You can find me on Twitter, Skype (jo.borras) or Google+.



  • Tem Kuechle

    So, is it a ploy to grab money from customers? Where Tesla is suggesting that they are committed to being here 8 years from now? Or is it to assuage customers of fears that they want to take the money and run, or even that they wouldn’t be able to purchase or know the cost of a new battery pack down the line? It could be good for planning on paying that down the road.
    I have not reviewed any contractual/potentially legal binding details of the program, so I can not know if they plan to refund if they were to go bankrupt.
    I agree, just waiting would be the best strategy.
    I do believe that the cost for large battery packs will drop significantly within two years, and I don’t mean 5%. There has been and still is a lot of battery research going on, with adequate funding, to ensure that there will be improvements in cost, and availability. Time will tell, ya know.

    • http://importantmedia.org/members/joborras/ Jo Borras

      Of course Tesla is committed to being around in 8 years – especially in public! Heck, Suzuki pledged to be here and they’ve pulled out completely. Daewoo offered 10 year warranties on their US cars, and … well, they didn’t stick around for 10 years, did they? That’s a pretty empty commitment is what I’m saying. If they didn’t have that “90 day window” on the offer, and – let’s say it was a 36 month window, THEN I would be right there with you.

      As it is? I smell a frantic cash-grab.

  • Castor

    “Keep in mind, this is a car company that has been heavily subsidized with federal funds”

    Can you elaborate which are the subsidies?

    No idea what you are talking about, do you?
    Do you really believe all the things that come from your mouth?

    • http://importantmedia.org/members/joborras/ Jo Borras

      Here’s just 1 of many, dudebro …

      http://en.wikipedia.org/wiki/Government_incentives_for_plug-in_electric_vehicles#New_plug-in_electric_vehicles

      … let me know when you get your head out of there. I’ve taken lots of yoga classes in my day and still never pulled THAT trick off! Bravo, sir!

      • Castor

        Do you call heavily subsidized to the $7500 that ALL companies manufacturing EV get?

        Let see, $7500 * 2500 cars so far is about 18 million.

        Even selling the whole production for 2013, 2014
        $7500 * 44000 cars is about $330 millions

        Versus 50 BILLIONS wasted on GM.

        Dude, seriously you need to be more informed.

        • http://gravatar.com/joborras Jo Borras

          You do realize that 330 million isn’t even 2/3 of the loans Tesla has taken out already … NOT counting private loans from Muskie and his other investors OR money from Toyota and Mercedes OR the credits from California to reopen NUMMI, right?

          http://www.nationalreview.com/planet-gore/329899/doe-restructured-its-loan-tesla-greg-pollowitz

          YOuU seriously need to stop being an ignorant, self-righteous jackamoe if you want to start playing the “Who ‘s more informed game” on this blog, champ.

          • Castor

            “Keep in mind, this is a car company that has been heavily subsidized with federal funds”

            Again, can you please elaborate with the term heavily subsidized?

            FYI: Loan is not a subsidy.

            You look confused, here are a couple links since you like Wikipedia

            http://en.wikipedia.org/wiki/Subsidy
            vs
            http://en.wikipedia.org/wiki/Loan

            The DOE gave the following loans under the Bush administration on September 2008 to:

            Ford 5.9 Billion
            Nissan 1.6 Billion
            Tesla 465 Million

            You need to be informed before post something.

          • Christopher DeMorro

            @ Castor

            Whether or not you want to call a low-interest government loan a subsidy is up to you. To me at least, the very selective nature of these loans (not everyone gets them, and if the company goes bankrupt it may not be paid back) implies a certain amount of government backing.

            However, if you want to talk about a DIRECT subsidy, you need look no further than the $7,500 federal tax credit for EVs and plug-in vehicles. This represents about 15% of the Tesla Model S’s MSRP, and is in fact a direct subsidy for both Tesla buyers. While it is hard to quantify how many, if any people were swayed to buy a Tesla Model S via this subsidy, but regardless it does exist, and Tesla and their customers benefit from it.

  • Mitch

    No one is FORCING you to buy this OPTIONAL insurance, and that’s what it is. Tesla is expecting the battery pack to have between %70-%80 capacity remaining after 8 years, that might be good enough for many owners. The point of this future battery replacement is to give the owners the option, it’s not required and many will not buy the insurance plan, which is what it is.

  • Dave_SRQ

    Jo – The thing about having options like a prepaid battery replacement is “nobody’s forcing you to pay for this”. I typically keep cars about 7 years. So, I don’t anticipate spending money on a replacement battery. However, some folks keep cars for 10 years or more. Personally, I like having options. That’s why I hate spending money on gasoline. Until recently, the auto industry didn’t give the consumer any optional fuels other than gas and diesel. Now we are starting to see options.

    Why do people complain about having options? Would they be happier with no options? There is a Model S in my future. But I won’t purchase the prepaid battery, but thank you for giving me the option.

    You ever wonder why the haters are drawn to Tesla, when they are bringing thousands of factory jobs back to America? These folks just want to make a buck on betting against the future of American transportation. Short on. The future will prove you wrong.

    • http://importantmedia.org/members/joborras/ Jo Borras

      There aren’t any “haters” drawn to Tesla, and that’s just their problem. The company has more free love and semi-patriotic nonsense being tossed at it than almost any other company out there – and it has brain-addled blog-readers furiously defending it on those same patriotic grounds. As for the “thousands of factory jobs” Tesla is bringing back, the company operates out of the old NUMMI facility, which is still operating at much lower capacity (and employment) than it was in the GM days.

      As for the future proving me wrong, I hope you’re right. The littered landscape of automotive history doesn’t need another “could’ve been cool” carcass to add to the long, long list (that, IMO, will soon in clude Fisker).

  • Nick

    Keep shorting, Jo.. and you will end on the wrong side of automotive history.

    • http://importantmedia.org/members/joborras/ Jo Borras

      It would be a grand thing if you were right! (you’re not, of course)

      • Scottie

        Sorry dude, you sound like JP. Have you not seen the 2500+ model S’s on the road already. Probably >3500 by the end of December.

        I got mine Dec 1st – # P1722. Have spent 25$ in electricity for > 1000 miles. Of HARD, catch me if you can, driving

  • CS

    Who says Tesla is expecting to battery prices to fall to the prices they are offering? It seems pretty clear that their intention is to subsidize the price of the replacement battery for buyers who are willing to pay now. In other words, Tesla is taking a future loss in return for current liquidity. The company is expanding rapidly, and needs cash to do that. The goal is for the expansion to result in larger future profits, negating the loss from selling additional batteries for less than their worth. Sure, the investment might not work out that way, but it is hardly a Ponzi scheme, and Tesla is certainly not gambling on battery futures.

    The reason that people are most concerned with the cost of replacing the battery is that the battery is the single most expensive component of the car, and it is known to deteriorate with time. There are also reasonable predictions about decreasing prices in EV batteries because of economies of scale in their production, whereas other parts have known prices that are not expected to change. People don’t ask a similar question about internal combustion engine vehicles because there is no comparable part.

  • Geo

    So, $12,000 with interest over 8 years equals about $20K. Battery prices will go down in 8 years, plus Tesla can recycle the old battery for some money as well. Seems like they could make a profit off of this.

    You’d be just as well off investing the money yourself.

  • Christopher DeMorro

    I have to admit, it is a bit of a strange strategy.

    While not as cynical as Jo, it is no secret that Tesla is hard up for cash. Building cars is expensive, and Tesla is close to a billion dollars in debt between the government loans private capital.

    This is, for Tesla, a chance to get some free money on their plate right now. without having to really do anything.

    It’s not a bad strategy, but it does raise a few alarm bells with me.

    • http://importantmedia.org/members/joborras/ Jo Borras

      CS made a good point, too – no doubt Tesla has a plan to make the difference up. Maybe selling an “old” motor to insurance companies as a lower capacity model? Not sure … but it is fishy as hell, and not *just* because the Model S has a bit of carp-mouth happening! LOL

  • http://MrEnergyCzar.com MrEnergyCzar

    There won’t be a need for a new battery, you’ll just get less range…

    MrEnergyCzar

  • George

    Great read Jo, very informative. If you could do an article about the cronyism that is rampant in this government funded industry, that would possibly open some eyes.

    • http://gravatar.com/joborras Jo Borras

      Indeed … Maybe I need to get angrier? LOL

  • Tem Kuechle

    So comparing what falls apart on the Tesla S vs a ICE based vehicle, I can guess that the cost are different and yet nearly the same. I just had to replace a clutch, transmission and cooler on a 2001 Eurovan: $5900.00. I’ve been driving this vehicle since about 2007. I’ve spent nearly that on other parts and maintenance up to this year. A Tesla doesn’t have those parts to go bad but it does have costs due to normal use. Which eventually is mostly going to be battery replacement. From my position it would cost less to keep going that what I have now. (But, it wouldn’t be all that great for camping). In the end the running costs seem a lot less than other types of vehicles on the road (except a skateboard or bicycle of course).

    • http://gas2.org Jo Borras

      Wait, that’s not entirely true. The Tesla may not have a trans cooler but it does have gears in its differentials, CV joints, etc. – which are all common wear items. Add that to the fact that Eurovan (while, admittedly, a rare bird here in the US) is a common enough vehicle with several parts-sharing siblings in the US, while the Tesla is a much pricier vehicle at start and makes use of more “bespoke” items, I doubt the repair bills would be comparable at all.

  • Tem Kuechle

    Correction: From my position it would cost less to keep a Model S going than what I have now”. Late night typing stumble.

  • http://gravatar.com/anderlan anderlan

    If Tesla does need money and can’t scale without it, and it doesn’t make it through the valley to profitability, is it anything other than something to feel sad and maybe ashamed about? I mean, how do we have a system where we are forced to buy crap that the oligopoly makes when we know it’s possible to make something about 8,000 times better?

    I hate that we’ve seen this movie before. I just hope Tesla gets another billion in funding, or 2 billion, or whatever it takes to have a viable company making something worthy of my admiration. Given what they have done already, and the bent of the team, I am 100 percent certain that given $X (where $X = the minimal amount of money the smartest team in the world would ever possibly need to get into profitability as a high volume automaker), Tesla WILL execute.

    • http://gas2.org Jo Borras

      Wait – wha!?? I actually WANT Tesla to win, at least the idea of Tesla, if that makes any sense. Elon? I could take or leave him, without prejudice. My issue with what YOU are saying, though, is that “we know it’s possible to make something 8000 times better” part.

      Sorry, duder, but a Tesla would be 100% useless to me, since I regularly drive 300-400 miles in a day (not less than once a week). Granted, I could always keep a second car handy, but you’re committing the logical fallacy of the false dichotomy.

      In short: it’s not “we can buy a Tesla (or whatever your automotive cause du jour is)” and “we can buy a Ford (or whoever you perceive makes up the oligarchy)” … it is, in fact “we can buy, OR NOT BUY, whatever we want now”.

      I think what you’re really complaining about is that 99.9% of people don’t agree with you (or me, actually) in terms of what makes a car “good”.

    • http://gas2.org Jo Borras

      Also: if they’re SOOOOO smart, why aren’t they profitable now?

      • http://gnuber.com/ anderlan

        1. You are in a tiny minority regarding your daily driving.

        (I admit at this point even a 300 mile EV is no good for continental road tripping. I enjoy visiting friends 600 miles away, for example, and until superchargers are in the right places, I would be SOL in a Model S. I am going to be forced to tote a generator in the car (i.e. buy a hybrid/PHEV whatever) if I want the car to make the trip.)

        2. I dare say the more people know about the Model S, the more people agree with us and love it. Like, people are more impressed than they were when they saw the freaking iPhone :-} Not pulling that out of my butt: Awards, awards, awards; Giddy customers.

        3. My point is that there’s another story here about the viability of anyone scaling up to being a profitable mass market car company. What are the actual capital requirements? Should we be expecting Tesla to make money in 5 years, even if it had 2 billion dollars? Or is it’s existence ONLY about spurring the market and then dying? Is the best outcome that it would be bought up for IP in a handful of years?

  • markdecelles@yahoo.com

    JUST MY TWO CENTS WORTH:
    If I were able to afford a TESLA, It would money well spent. There is virtually no maintenance involved. The vehicle is a rolling computer chassis that could be upgrade at any tome. The chance to by a new battery before it degrades is a cost effective way to keep customer loyalty. Any one who knows someone whom is well off also knows they are frugal to an extreme. So the battery buy is a great buy.

  • Dave OConnor

    We all agree: material goods are subject to wear and tear. So why pay up front for it? Just set some money aside in a “depreciation fund” where it can earn interest for you, not a car company.Also, I would guess that if Tesla does make it better and cheaper batteries will play a role.

  • George
  • http://www.facebook.com/doug.liser Doug Liser

    I don’t see anything evil in the plot. It’s basically a futures contract. You need to consider the interest rate your money would have earned if you invested it somewhere else, the long-term cost of the battery and the counter-party risk.

  • Mark h

    You readily admit you have heard people comment that they wouldn’t want to buy an electric car without knowing the cost of a replacement battery. You go on to criticize this thinking but you admit it is common. Do you really think businesses should criticize their customers opinions and refuse to cater to them if they think they’re uninformed? Good luck with that!

    All Tesla is doing is addressing a customer concern that you admit is not uncommon. It’s an option…not especially promoted or encouraged. It’s a pretty direct and elegant way to say they are confident that by the time anyone needs a replacent the cost will be reasonable. Just in case you really don’t get it…this issue is also about resale value and depreciation which are very real concerns for a product with no history.

    I think model S will have very high resale value based on the fundamental simplicity and modularity of the design. There’s a lot more stuff to wear out on an IC car. The big concern for resale is the battery.

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