High Warranty Costs Standing In The Way Of Tesla Profits

Cue the Tesla fangurls claiming there are no quality issues...

Do you ever wonder how many of them work for Tesla? Some definitely live in the Bay area and some of the stuff they write sounds like it is right out company slides.

@Vette71 I fully believe they are paid by Tesla to go on social media and gush. ALL brands pay attention to social media.

I wonder if TVR will hire me to do that?

TVR is smart enough not to hire a high school drop out like you Matt. You really don't understand the car business that your father-in-law bought you into just so you wouldn't have to stand in the unemployment line. Good thing we have people like TheSteve, TomM, Yonder7, nguyenvuminh, Agent009, Agent00R, GermanNut that really understand the automobile industry and aren't just a capuchin with a keyboard.

Title: "High Warranty Costs Standing In The Way Of Tesla Profits"

That's just one factor. There's also their dependency on cash injections from sources other than sales, such as government grants and issuing shares (people send cash to Tesla in exchange for a piece of the company, in the belief that they'll get more money out that what they put in when they sell their shares someday).

The article alleges "...Elon Musk has told investors his electric car company will stop burning cash and turn a profit this year...". If that's true -- and I mean REALLY true, in a sustainable manner over several years, and not through "cooking the books" -- then we really have something! Until then, I'm wary of Musk and his motor company.

I still believe that his sales model of one price AND no dealers - with limited service option - is going to do the company in.

THe markets for High Priced Luxury cars is quite different than the market for daily drivers. People who have bought those cars until now - for the most part - were the ones who likely always returned to the dealers for service - and the price was not really the object - since the lack of competition made it so.

For less well healed people - with shorter warranties - and for having other options in the same price range - means that people will be able to get service(I am not talking about auto/body) on the competitions cars at far more outlets - those dealers CANNOT collude on prices so they compete - And options for service from Independents because availability of parts and service information is likely to be better from mainstream brands. - puts Tesla in a bad situation - unless they are willing to negotiate. Still - as YOUR site has shown - Tesla's warranty service costs are MUCH higher than the competition so they cannot claim less need. BUT - we can say that Tesla will not be able to afford having as many free loaners available when they start to mass produce cars. ANd for a person buying a mainstream priced car - they cannot afford the tow to the other end of the state and a long time for service.

Read the article one more time before spilling your beans guys. The numbers are per car cost. The average Model S costs around $100K, 3 times average cars from GM and Ford - but the warranty cost is 2.5x. Similarly, the warranty cost for Tesla still compares favorably to MB at 7.5% higher per car ($1043 vs $970), and I am sure average MB cars don't cost $100K.

There are ways to distort the truth, but this is not one of them.

Given that Tesla still has a lot to learn from their manufacturing, the cost improvement is there for them to realize. I don't see any problem for Tesla to beat MB on this front.

HenryN: Relating warranty cost to a vehicle’s cost is not a meaningful metric, any more than “grams of protein per 100 calories of food” is. In fact, this metric helps obfuscate the reality of the situation.

Common metrics for warranty costs are:
- Warranty cost per vehicle
- Warranty cost in relation to a vehicle’s gross margin (roughly profit)

Using either of these common metrics, Tesla is not doing well with respect to warranty costs.

@TheSteve: points taken, however I think my point is still valid:

- Warranty cost per vehicle: Compare any repair cost between a premium/luxury vehicle and an economy one, the former would generally cost more. MB warranty cost is more than 2x GM's and Ford's even though MB has a better ranking in term of quality than GM and Ford. Using MB as a reference, then Tesla warranty cost per vehicle is roughly the same while its average cost is much higher (my estimate is 1.5x-2x). In term of cost as percentage per revenue, Tesla number is better than any company mentioned in the article.

- Warranty cost in relation to a vehicle’s gross margin (roughly profit): if this metric is used, then Tesla is way ahead - its current gross margin is ~25% versus < 5% for average automaker (according to some accounts, gross margins are as low as 1%-3%).

I am not here to deny the fact that Tesla is still losing money - not a good thing for any business in the long term. Tesla is a very young company competing in a mature industry, but it is making great progress and its impact is widespread. This is well documented and has been discussed many times over. The support for Tesla from both the stock market as well as consumers worldwide indicates that people dig the company with its vision, strategy and its products.

Add this to a great article this week in the Wall Street Journal about how Musk is funding the 3 companies makes a lot of things clearer. Money gets moved between Tesla and Solar City both public companies and SpaceX which is still private. SpaceX cash may be "loaned" to one of the others and vice versa in the form of debt notes. Congress is concerned that SpaceX has government contracts and they don't want cash from these going to Tesla. Further much of the convertible debt in Tesla is money loaned by Musk who pledged his Tesla stock as collateral. The WSJ article states that is a risky strategy, especially when the company CEO who can have a conflict of interest with outside shareholders does it. Further a hiccup can cause rapid decrease in value. Musk's argument is that it is only 5% of his net worth. Folks are watching closely. Tesla is a high risk financial play that still has a lot of work to do.

Note to all Autospies. The CEO of Tesla has stated that the company is NOT YET operationally profitable, never mind just not making a total company profit. He is saying that they currently do not make a profit selling cars. This settles the debate that has been going on on these pages.

It doesn't settle anything, but is just spreading false information... not sure if this is something you are paid to do, if you work for Chevy, or if you are shorting Tesla stock. Profit is being reinvested in infrastructure for the Model 3 and Gigafactory, there is a gross margin of 18-20% right now on the Model S and X combined. Below are two direct quotes from the last Tesla Investor Letter from their last earnings reports (public financial record).

"Total Q4 gross margin was 20.0% on a non-GAAP basis and 18.0% on a GAAP basis".

"Throughout the rest of 2016, Automotive gross margin should continue
to increase, helped by cost reductions for Model S and improving margin
on Model X as our manufacturing efficiency improves for that vehicle.
By year-end, Model S gross margin should begin to approach 30% and
Model X gross margin should be about 25%, with continued
improvement for Model X in 2017."

You're on the payroll.

"In 2015, Tesla lost a net $888.7 million, and lost $716 million from operations. It ended the year with $1.2 billion in cash, $708 million less than a year earlier. Tesla bolstered its cash balance with $730 million from the sale of new common stock". Operations Profit = gross margin minus marketing costs (those Tesla stores), R&D costs (personnel and project costs for all cars and likely batteries as they are a necessary equivalent like an ICE auto firms need to invest in ICE engines.), Admin costs (finance, HR, Quality, regulatory, etc.) all of which gives one the operating profit or loss. These are all expenses that are normal in running a business. As a public company Tesla has to report them as certified by a public accounting firm per the US SEC. It is out there for anyone to see. It is not false unless they cooked the books which is a serious offense. Note tooling and building the battery plant are capital investments and use cash. They hit the expense line as depreciation over their lifetime.

I am a retired CEO of a couple high tech public companies as well as a Board of Director of another. Hence pretty familiar with start up finances as well as strategy to get one successful. "Been there, done that". Don't work for a car company, but love cars and business strategy hence interest in Tesla.

Again GROSS MARGIN is not a business's profit. Operating profit is what stock holders care about. High tech product businesses have gross margins of 50% or so which supports all the other costs needed to grow.

@ Vette71: with all things being equal, would you rather have 25% gross margin or 5% ?

There are visionary CEOs and there are those who only worry about next quarterly report. Which one were you ?

Amazon for about 15 years had been in the red, but they have now built an empire and recently became profitable. There were countless doubters about Amazon's business model, and where are they now ? Facebook had the same issue only until the got the mobile ads platform going the past few years, and they have been on a tear lately.

For any tech companies, the important ingredients for success are:
1. Differentiating / disrupting technology. In the high tech world, there is little room for "me too" companies - they are there for the crumbs
2. Having a sound Strategic plan and stick to it
3. Branding
4. Visionary leadership

Tesla checks all those items listed above. The fact that Tesla is enjoying widespread support from both the market and the consumers around the world speak volume about the business and what it offers.

Don't discount the knowledge and "car enthusiasm" of Tesla's supporters. They come from the same car driving population as the doubters, and most still drive the same ICE cars as you. Most of what is said on this board has already been discussed thousands of times elsewhere with similarly passionate views from both sides.

There is no denying that Tesla makes very good car in term of performance. I strongly suggest the true car "enthusiasts" have a test drive and tell us what you think about the car with your own experience.

@HenryN. In answer to your question, I was a visionary risk taking CEO doing startups and turnarounds who learned a lot, sometimes the hard way, along the journey. Don't forget the Steve Jobs, the ultimate visionary, got Apple into trouble and was fired. He learned and came back with a vision but with his feet closer to the ground still on the ground. Being a visionary isn't enough.

A few points:
1. The car business by itself is a mature capital intensive "regulated" business, dominated by large companies. It is extremely difficult and perhaps not a good use of time and money for small Tesla to duplicate on its own what others already do. Not a lot of ROI in doing that. Note that Musk's Solar City didn't go into the solar panel business but let others do that.
2. The vision is really around vehicles powered by "clean" electricity. Lots of opportunities to "disrupt" the blockages to that happening. Energy storage, range, "refueling", etc. etc. A company making a breakthrough there will be highly rewarded.
3. Musk's vision is an electric car purchased by someone from an Apple like store. From what I have read about the Apple effort its vision is an electric powered transportation machine perhaps not owned and maintained by an individual but provided on a per use basis. Radically different and really disruptive. As an aging boomer the Apple approach has a lot of appeal for the time when my kids take the keys away!
4. Completely agree with a strong strategy and sticking to it. Almost did that once, but we corrected in time. By his own admission Musk stated that as vehicle 2.5 the model X was never in the original strategy. It has been and will be costly. I would argue that adding autonomy may also be a strategy deviation consuming time and money needed to build a really fast (ten minutes) nationwide charging network, long range batteries and getting a top quality vehicle in the Model 3 range out yesterday.
5. Amazon was cash flow positive in a non capital intensive industry. Tesla is burning cash in a capital intensive industry. Big difference.

I'm not on the Tesla payroll, but am a big fan of the company (products, vision, leadership) and am very familiar with the tech industry. I have a 2013 Model S 40, best car purchase I have ever made by far, and a reservation for a Model 3 for my wife.

Vette if what you're saying is true about your background I'll take your posts a bit more seriously. I still think the gross margin on the cars is very relevant and might be more telling than operational profit. The majority of R&D costs are not going to the Model S and X, they are going to future product that is not being sold today and won't be sold for a while. Also the Marketing costs will scale in Tesla's favor. If sales quadruple they will not need to quadruple the number of stores (or administrative costs I'm assuming).

Obviously there is still a lot of risk, but I'm an optimist and am very excited about the future opportunity the company has and the pressure it has already placed on traditional automakers to innovate.

With Ford and GM history of sweeping problems under the rug it is no surprise their warranty costs are low, it certainly is not a result of quality products.

Spurious relationship. Your bashing of Ford and GM does not therefore elevate Tesla.

Their costs are not at all low, how do you think the dealerships make their living? Friend's Volt, one screw fell off holding the passenger seat frame and the dealership replaced the entire frame under warranty, $800. He also had a squeaking noise in the steering, the dealership replaced the R&P steering box, control arms, bushing, joints, thousands of dollars for GM to shed, still the steering was squeaking. What ended up fixing it was greasing a rubber seal, $0.50 worth of grease, 10 minutes worth of labor. Similar thing on my Volt, scraping sound from the rear suspension resulted in the replacement of the whole rear-end, it was still scraping, cheap Korean shocks.

And let's not forget about recalls. All written off as "oups the gov't made us do it!"

There is a plus side to warranty expenditures, it can show a manufacturer is taking care of issues.

With that kind of logic, VW must love its customers tons and tons.

While they should take care of customers, high warranty costs are symptoms of a lack of a quality program. Warranty is rework and means the firm didn't catch issues early in the design and production process. Since it reduces Gross Margin and therefore net profit investors (stockholders) don't like to see warranty costs high.

My friend's model X has been getting warranty repaired for about a month now. The car even had to be sent back to the factory because the local dealer could not fix it. What a comedy.

VW appears preparing to go above and beyond for customers and dealers, to the tune of a 10B fund. Credit VW over GM's killing customers off.

How would you explain Mercedes for their model S issues?