Published on July 17th, 2014 | by Guest Contributor
Why Are Tesla Model S Drive Units Failing?
Originally posted on CleanTechnica
Reports have recently begun to surface about Model S drivetrains developing issues, and/or completely failing, and needing to be completely replaced. Mostly just issues with noise, but still, not a good sign.
Greater than expected issues with said drivetrains could have a notable effect on Tesla’s profitability, via greater-than-expected repair costs for vehicles under warranty — and also via the company’s “Resale Value Guarantee” program. (Examples of issues with drivetrains: via MotorTrend; Edmunds; and Tesla’s message boards here and here.)
Something to think about, especially when you consider that the out-of-warranty replacement cost for consumers is about $15,000.
Seeking Alpha provides more:
This potential drivetrain problem has significant negative ramifications for Tesla’s profitability due to the expense of repairs performed under warranty as well as future liabilities incurred under the company’s Resale Value Guarantee” program. (The resale issue is likely to occur because as word of the problem spreads, secondary buyers may refuse to pay original owners Tesla’s guaranteed price of approximately 48% of the initial cost of a three year-old car that may need a $15,000 repair– or multiple $15,000 repairs– at any time, thereby forcing Tesla to make up the difference.) Now let’s try to quantify the impact of this on Tesla’s income statement…
Tesla’s most recent 10-Q states that Q1 2014 warranty expense was $9.3 million. If this was distributed among 28,000 cars (Tesla had delivered approximately 31,000 by the end of that quarter, but many of those came in late June and thus probably wouldn’t have yet needed warranty work), it would come to $332 per car per quarter which is $1328 per car per year which– over a four year warranty period– would be $5300 in repairs per car. (Keep in mind that this was before the company started retrofitting the titanium undershields, a project first announced on March 28th; thus, presumably none of that expense was in this figure.)
Now, one might argue that these warranty repair costs were particularly high because they covered many cars built early in the production cycle that may have had relatively minor defects that might have been engineered out of the newer cars, and I agree that this is possible. However, as the bulk of the Model S’s were less than a year old in Q1 of 2014, I think it’s also reasonable to assume that as those cars age into years two, three and four of their warranty periods (and their mileage continues to accrue), their warranty expense may increase significantly, perhaps overwhelming whatever savings Tesla may enjoy on fewer later-production squeaky sunroofs, balky door handles, etc. Thus, I think it’s reasonable– based on the information in hand– to guess that Tesla’s current “lifetime warranty repair run-rate” of approximately $5300 per car (as outlined in the paragraph above) could wind up running 50% higher, to as much as $8000 per car.
Certainly an “interesting” thought, but, of course, also something that’s very hard to predict at this point. If correct, though, it’s easy to see how this could eat quite a hole into Tesla’s profits — perhaps as much as “$87.5 million to $182 million.” The full article over at Seeking Alpha is interesting. Give it a read.
While on the subject of Tesla and money, it seems worth noting, humorously, that Tesla’s CEO Elon Musk recently pledged to donate $1 million to the creation of a museum at Nikola Tesla’s old lab in Wardenclyffe New York. While a $1 million dollar donation from a single individual is of course nothing to scoff at, it will apparently take another $8 million to completely rehab the old facility, according to those involved.
Not sure why so much would me necessary? Seems like they could get something started with less, doesn’t it?