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Cars Tesla

Published on July 16th, 2014 | by James Ayre

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Defective Model S Drivetrains Due To Give Tesla Unfunded Warranty Problem Headache?

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July 16th, 2014 by
 
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?

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About the Author

's background is predominantly in geopolitics and history, but he has an obsessive interest in pretty much everything. After an early life spent in the Imperial Free City of Dortmund, James followed the river Ruhr to Cofbuokheim, where he attended the University of Astnide. And where he also briefly considered entering the coal mining business. He currently writes for a living, on a broad variety of subjects, ranging from science, to politics, to military history, to renewable energy. You can follow his work on Google+.



  • Leo

    Where is the actual statistics of how often
    this “power train problem” happens?

    And how do you know if a forum posting
    Is not another fake FUD?

  • Paul Bartel

    Tesla will go bankrupt within 8 years, 5 if their fanbois come to their senses which I doubt because they’re tools.

    • A Real Libertarian

      Tesla will go bankrupt within 8 years, 5 if their fanbois come to their senses which I doubt because they’re tools.

      So you’re going to go bankrupt if your short-selling backfires?
      https://www.youtube.com/watch?v=pqUDg_PKzBk

  • EFFBIGOIL

    Owners of a Tesla Model S like myself, plunked down some big $$$ for one of the most advanced cars ever built. Having owned BMWs, Porsches, Lexus in the past, I can say that this car is superior in every way. It is faster than a 911, holds 7 passengers, and has as much cargo space as an SUV. The fact that is uses no gas is icing on the cake. I’ll never purchase another gas car and that is for sure. As early adopters, we understand that the tech on this car might need warranty replacement from time to time. The Tesla service centers have always fixed any issue that I have had, gave me a loaner Tesla when my car has been in service. My car’s features and performance have improved since I purchased it a year ago, due to the constant stream of software updates, and you can’t say that about other cars. This is exactly what you want when you spend this kind of money.
    I’ll be ordering a Tesla Model X SUV when they launch and have no problem betting even more money on Tesla.

  • Johnny Le

    Does the drivetrain really cost $15k? Because the battery is about $20k. So just those two, it already costs half of the price of the car.

  • Leo

    Boycott the Seeking Alpha’s greedy shorts!

  • Albert Bodenhamer

    Keep in mind that people who have a problem are likely to make noise while people who don’t will keep silent. Take a look at the forums for any car brand and you’ll get the impression that the world is ending.

    It’s impossible to tell from a couple of articles and forum posts how widespread this sort of issue is. It might be a catastrophic issue. I doubt it, or we’d have seen warranty costs ballooning in their quarterly reports.

    The Edmunds case is interesting, but it makes me wonder what they’re doing to the car, rather than if there’s a widespread problem.

    Reposting articles from the TSLA shorts over at SA is rarely a good idea.

  • hhl

    really, quoting seeking alpha where Tesla trolls abound. Seeking Alpha as far as Tesla is concerned just involves writing articles that get more clicks and more views. Authors get paid 1c/page view so the more controversial the article, the more clicks it gets.

  • StefanoR99

    Yeah don’t give Seeking Alpha the click thrus.

  • Guest

    Jesus it seems Telsa has developed a cult following. One were nothing it does is wrong.

    • Bob_Wallace

      Probably has.

      And a much larger group of people who greatly admire what they’ve pulled off in such a short time.

      Then there’s the sour grapes folks….

  • Jouni Valkonen

    Why this kind of Seeking Alpha nonsense is discussed here? That site is not credible news site, but it publishes mostly on articles that are based on subjective opinions, where different entities are trying to boost their financial position. E.g. This article writer nick name “Logical Thought” is known that he has a short position in Tesla stock, therefore he is using all his paid free time on ranting against Tesla.

    Also Logical Thought is paid the more clicks his article gets and you did now great free service that you managed to boost the click count considerably by sharing this provocative utter nonsense and plain disinformation.

    Again his personal finding is not based on facts but it is based on anekdotal evidence where single entity has faced some hardships. But this is not a symptom from wider problems. Tesla’s warranty issues has not been anyway more problematic than any other car manufacturer. We could have assumed that these expenses had been more significant as Tesla is novice in car manufacturing.

    So by all metrics, Tesla is doing very good job.

    The real issue of course was that Logical Thought wanted to attack against Tesla’s battery warranty program, but here again he spreads disinformation or better said, his own ignorance. Tesla will typically replace battery on warranty if there is more than 25 % battery degradation after eight years.

  • dgaetano

    The author of the Seeking Alpha article is the same one that wrote an absurd hit piece on how much the model 3 should cost last February. I lost brain cells reading it, no way I’m repeating that mistake and reading this one. You’d have to pay me.

    You also failed to mention they (Stanphyl Capital Management) are short TSLA.

  • WeaponZero

    The drivetrains Tesla replaces are all refurbished drivetrains. While the cost of a new one might be 15k, the cost to take an old one, and replace it with a refurbished one is pretty cheap.

  • Jordan Smith

    Tesla wants to be the leader in the electric vehicles coming with model III as well.

    • Bob_Wallace

      I think at one level Elon would not be unhappy if the big car manufacturers suddenly brought very affordable. long range EVs to market.

      Were that to happen he would have achieved his goal of pushing EVs into common use and moving the world off petroleum.

      I’m also certain that Elon wouldn’t be unhappy being the Henry Ford of the 21st Century, having created a major car company as well has changing the course of history.

      He’s pretty much in a win-win….

      • MorinMoss

        He’s in it for the long haul and the energy storage market is probably far more profitable & secure than automaking.

        With his fingers in Solar City, if he gets the Gigafactories built & running, powered by wind & sun, he could drop making cars altogether and still make a profit.
        Can you imagine if he gets Li-on batteries made for $100/ kwh and then tells utilities he has 35 – 50 GWh of fast-response, high output energy storage that he can charge through his own solar & wind??

        • Bob_Wallace

          Our first trillionaire?

          Interesting times…

          • MorinMoss

            Whoever really cracks the energy storage problem will make a pile of money as tall as Everest – and deservedly so.
            If it happens to be a true no-compromise, no-downside solution, so much the better.
            Something hi-density, rapid-response, durable, non-toxic, small footprint, cheap materials so we can do away with polluting peaker plants and cut spinning reserve at least in half.

          • Calamity_Jean

            Heck, if someone did even half that, s/he would deserve a pile of money as tall as Annapurna. If Musk does it, more power to him!

  • patb2009

    could be, it’s hard to make money in car manufacturing.

    However, TESLA could open new revenue by starting to charge for the supercharger network. Now that the network is basically nationwide, Tesla could charge “Subscription fees”, which would be a “AAA” and “Supercharger” service.

    people who plopped down 85K for a car won’t notice the subscription.

    • RobS

      People who plopped down any amount for a car with a written and stated guarantee of free supercharging for life would most certainly notice if it became a paid subscription. It would be a disaster. You should spend some time on the forums if you want to see what minuscule details are noticed by and aggressively reacted to by Tesla fans.

      • jeffhre

        Right, and current owners have been promised free for life! Although differing price schemes could be offered to future owners.

    • MorinMoss

      It would be better for them to charge other EVs for use of the Supercharger network. They’ll probably need to dial down the power for ones with smaller batteries or different chemistries but it shouldn’t be too difficult given the number of computers & sensors in modern autos.

      • jeffhre

        “They’ll probably need to dial down the power for ones with smaller batteries…”

        Tesla has offered the use of the network and it’s attendant patents, with the condition that any added cars charge at full power.

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