Elon: "I think it’s terrible to make a profit on service"

[Ingineer]

First off, I wholly support Tesla and want them to succeed. Elon has famously made the above quote in various forms many times. If Tesla actually performed like this it would be great, but sadly, they aren't.

I've become aware of many issues lately. One is that the high cost of parts and repairs to these cars after relatively minor accidents is so high that most of them are "totaled" by insurance companies. This has got to change ASAP or the cars will become difficult or even impossible to insure which will cause them to lose value. This in turn will endanger Tesla as a company.

Tesla's parts policies are one issue; The prices are hardly low! While many are "competitve" with other luxury brands, many parts are outright insane. A friend of mine recently purchased a few parts for his car. I was shocked to see the costs of some of the items, one in particular is eggregious:

These little plastic rivets:

Tesla wants $7 for EACH ONE. These cost about the same for about 100 of them on the free market elsewhere. Even Lexus only wants $27 for a bag of 50. Tesla wants $350 for that same quantity! These are used all over the car and are easy to break, so they often need replacement. Here's the invoice:

(sorry for all the redaction, but I'm trying to protect the privacy of my friend)

I'm sorry Elon, but when you say "Our philosophy with respect to service is not to make a profit on service", it's hard to believe you with pricing like this!

The other thing is Tesla's policy on collision repair. Tesla only will sell collision parts to "Tesla Authorized" body shops, of which there are many times only one allowed in a given area. This makes it an intentional monopoly, and why so many Teslas end up totaled by insurance companies. The "authorized" body shop knows it can charge pretty much anything it wants to, and combined with the high cost of parts, very few insurance companies are willing to pay.

So now, major insurance underwriters are starting to realize the cost to insure a Tesla is very high. Many have classified the Model S as an "exotic" and the rates have gone up appropriately. Some companies are now apparently not even willing to insure them at all!

So right now the Model S enjoys one of the highest resale values of any luxury make. However once the market discovers the cost of ownership is astronomical compared to other makes, the values will fall off a cliff. I don't want to see this happen! Tesla please FIX THIS NOW!

This is on top of the poor performance many owners are witnessing at Tesla Service. I purchased a new Model S in June and it arrived with factory defects which STILL haven't been fixed. I've been repeatedly lied to by Tesla service employees and I still have unfixed issues on my "new" car. I'm about to put it up for sale because I'm worried it's value will soon plummet. I'd love to get it repaired before the next owner has to deal with it.

As many threads here will show, there isn't even consistency from service center to service center. A part at one location can cost 100% more than one only 50 miles away. Why is this? Why are there 1 month wait times to get an appointment at the factory service center? How can Tesla hope to support a mass-market car like Model 3 with their service organization in the state it's presently in? The 2 models being sold now are considered high-end luxury models that should have red-carpet owner treatment. Instead I feel like I am a 1975 Lada owner!

 

[apacheguy]

Agree. I'll add on my experience. MCU replacement comes in at $2900, far above what the unit costs to manufacture. Had mine replaced because of this:

Touchscreen: Mositure/Leak?

Otherwise, I returned a fully functional unit that simply required the touchscreen to be resealed.

 

[ItsNotAboutTheMoney]

As long as Tesla is desperate for cash (which it has been for a long time) they'll continue with their current closed garden.

But Tesla's integration means that his statement has always been worthless, anyway. The Service Centers do prep and warranty work, and therefore have a significant cost component. So, Tesla can have a significant profit on regular service, maintenance and repair, while the Service Centers are not profitable, since overall they lose money.

Never, ever, believe anything Elon Musk says unless you've parsed it carefully first.

 

[taurusking]

Not to mention how much service is costing us..

 

[Skotty]

This is one of my biggest concerns about Tesla.

For fun, I poked around a little for plastic push-in rivets, and the price variation is absolutely remarkable. It's really just unreal.

On the extreme end, here's what appears to be a single rivet for sale from AutoZone for $26.60: Dorman/AutoGrade .275 in. nylon expansion specialty rivet for Toyota 700-850 - Read Reviews on Dorman #700-850

On the more realistic end, if I look somewhere that supplies them in greater quantity, they seem to be about $0.15 to $0.20 each. Like here: Push-In Rivets - Removable | EssentraComponentsUS

Realistically, the top end you should ever pay for a plastic rivet is probably $1. So the Tesla rivets need to come down in price by a huge margin.

As for the Toyota rivet from AutoZone? You can file that one right along side the AudioQuest Diamond HDMI cables: Amazon.com: AudioQuest Diamond 1m (3.2 feet) Braided HDMI Cable: Electronics

Totally a WAG here, but I would guess the actual manufacturing cost runs less than a penny each.

 

[stopcrazypp]

As long as Tesla is desperate for cash (which it has been for a long time) they'll continue with their current closed garden.

But Tesla's integration means that his statement has always been worthless, anyway. The Service Centers do prep and warranty work, and therefore have a significant cost component. So, Tesla can have a significant profit on regular service, maintenance and repair, while the Service Centers are not profitable, since overall they lose money.

Never, ever, believe anything Elon Musk says unless you've parsed it carefully first.

I had the same thought. It is possible that the service division as a whole is still not profitable, so they use margins in other areas (like parts) to make up for it. If they made everything no profit at the component level, service as a whole would be a big money loser.

The other factor that plays into it is that Tesla is still a low volume make and only recently is getting some better prices for parts. Lexus may be a luxury make, but they negotiate prices for parts at Toyota level volumes.

 

[Todd Burch]

I believe if you look at the latest financial report, service nearly broke even, so Elon's statement is not far off.

However, having said that, it seems clear to me that Tesla's trying to make back losses in some areas (perhaps warranty repairs) by overcharging in others.

 

[TaoJones]

Service, and specifically uneven experiences therewith, would constitute my biggest concern with keeping this car past 50,000 miles - which is to say past about 18 months of ownership. In that time, I've experienced phenomenally good service and abysmally awful service. And parts prices are certainly part of that from an out-of-warranty forecasting perspective.

I've been to more SvCs than most, pretty much from coast to coast. I appreciate very much the above-and-beyond service experiences that have come my way, but it's fair to say that the abysmal experiences have also cost a lot of time and aggravation, not to mention money, just in damage done to the car if nothing else. Most of the abysmal experiences could have been avoided, but weren't, for various reasons. One of the above-and-beyond experiences involved the Saint Louis SvC which performed with race car team precision first thing on a Monday morning. It gets no better. And there were other experiences just like that - some covered by NDA, and most not. So you can imagine how bad the bad has been to offset those.

I don't know who's running the Service show these days, but that person is convincing me, with increasing enthusiasm, to no longer be a shareholder. And the stock is up $70/share in about a month. Yes, it was down $100 recently as well, but that's not the point.

Great car - the best car out there for extended road trips, bar none, is an AP Model S. As for total ownership experience, well... then you end up with some opportunities for improvement, just like the dealerships have. But Tesla is supposed to be better than the dealerships. As in the best. And this thread and our own experiences don't match that.

Failure can be defined as a series or collection of missed objectives. I doubt most owners would be terminally frustrated with any single problem. But when you stack $175/hour labor on top of $7 plastic fasteners on top of an industry-trailing ESA for miles 50,001-100,000 and NO ESA whatsoever for miles 100,001-150,000 despite obvious and comprehensive improvements in quality and reliability and general owner satisfaction, well, there you have a path for failure.

What's particularly incongruous in this whole Service snafu are examples such as those described in the next 2 paragraphs:

Speaking of at least *new* owner satisfaction, see the recent survey *not* done by Consumer Reports which placed new Tesla owners #1 at just shy of 99%, Corvette owners #2 at just shy of 98%, and the rest of the pack well behind those top 2. Now, I have no idea what the results would be if you polled Tesla owners at 50,000 or 100,000 miles, but I highly doubt the numbers would fall off a cliff. We're talking about kaizen, about continuous improvement, about getting from 99% to 99.9% and 99.99% and beyond, about fixing the incredibly frustrating experiences that are often avoidable and that probably drive Elon and the rest of senior management nuts as a result. Put another way, an example of 95% customer satisfaction doesn't just mean you're missing 5%, folks.

The positive spin is all future-facing. In 5 years or so it is reasonable to conclude that the Model 3 will have a realistic 250-mile range, and there will be a *bunch* of them, which means a shorter curve for aftermarket parts and everything else, including maybe even 3rd party extended warranties. OK, maybe not the last part. In 10 years, one has to believe that Tesla will *still* be King of the Hill (see current large luxury category) *across* categories and will finally have this Service stuff under control.

For now, however, it kinda sucks, and tends to kill the word of mouth beyond the obvious surface-level driving experience.

And that's a shame.

 

[Ingineer]

Excellent post @TaoJones

 

[CaptainKirk]

I had the same thought. It is possible that the service division as a whole is still not profitable, so they use margins in other areas (like parts) to make up for it. If they made everything no profit at the component level, service as a whole would be a big money loser.

The other factor that plays into it is that Tesla is still a low volume make and only recently is getting some better prices for parts. Lexus may be a luxury make, but they negotiate prices for parts at Toyota level volumes.

Last year I needed 4 of these because my rocker panel lost 2 of them and was at risk of coming off of my Lexus. Walked into the Lexus dealership, and it was $9 Canadian each. I don't think this really has anything to do with the volume of the car maker. These plastic plugs are really a commodity item, it's just that they're not frequently in need of replacement, so you pay more for it. If I were not in a desperate situation, I would have bought mine off of Amazon, but the rocker panel needed it.

 

[Ingineer]

Normal car dealers are independent entities and thus they can mark up parts to whatever they want. Tesla's service centers are all company owned, and thus should at least be consistent from store to store, and one would hope not selling 10 cent parts for $7.

 

[AudubonB]

Although I am confident Ingineer's overall theme is valid: that parts from Tesla cost quite a bit more than they might, I will argue that the merits of his example are tenuous. As follows:

The labor costs of supplying one item include ordering, warehousing, accounting, record-keeping, ordering from one location ("Fremont" as an example) to another (Service Center X) - that's a lot of input other than the item itself. So, for a measly little hyper-low value rivet....I am going to suggest that Tesla loses money by selling it for $7.

HOWEVER - the marginal costs of selling the same purchaser the second through tenth such rivets should not, in this case, then also be $7 each. MAYBE $7 for the first and 50¢ for all the rest. IF full costs are covered by that first seven dollars....

 

[roblab]

The other thing is Tesla's policy on collision repair. Tesla only will sell collision parts to "Tesla Authorized" body shops, of which there are many times only one allowed in a given area.

Welllll, I got my car repaired at my LOCAL body shop. Tesla is not allowed to approve one shop or another by law, (Not sure if state or Fed). Tesla "authorized" my choice, which I chose because it is close. And they ordered a LOT of body parts, at Tesla "authorized" prices.

 

[omarsultan]

However, having said that, it seems clear to me that Tesla's trying to make back losses in some areas (perhaps warranty repairs) by overcharging in others.

Per the last earnings call. warranty costs are down. IIRC the are half what the were a couple of years ago

 

[Ingineer]

HOWEVER - the marginal costs of selling the same purchaser the second through tenth such rivets should not, in this case, then also be $7 each. MAYBE $7 for the first and 50¢ for all the rest. IF full costs are covered by that first seven dollars....

Well then they should sell them in packs of 50 or whatever.

 

[Ingineer]

Welllll, I got my car repaired at my LOCAL body shop. Tesla is not allowed to approve one shop or another by law, (Not sure if state or Fed). Tesla "authorized" my choice, which I chose because it is close. And they ordered a LOT of body parts, at Tesla "authorized" prices.

I have friends in the body business, they absolutely will not sell any "restricted" parts, such as a quarter panel to anyone except an authorized body shop. They only authorize ones that meet their approval and have specific equipment and factory training. They will sell parts to owners or shops working on your car only provided your VIN is "clear".

If your car is blacklisted because of a serious accident, they will not sell ANYTHING to ANYONE for it (not even a $7 plastic rivet) except a Tesla Authorized shop, and then you must pay to have the car "recertified".

 

[Sogorman]

I agree that Elon and TM has been deceptive with the "we don't profit off of service" rhetoric.

I understand that the techs and service advisors are paid a flat hourly rate and not compensated based on the amount of services or repairs rendered but $3k for a MCU and $7 for a plastic clip is a little outrageous.

I'm sure TM needs to pad the SC costs for warranty repairs but we are no where close to "not profiting on repair costs"

 

[jaguar36]

I think we need to be clear on the three separate pieces of the service center, Warranty repairs, Annual service (aka preventative maintence) and after warranty parts/repairs.

For warranty work they are clearly getting killed. Obviously there is no way to make money on this and with all the factory quality issues they are losing tons of money. We just had our car in and they probably did $10k worth of warranty work.

For Annual service they are making money hand over fist. The margins are ridiculous on this. Its gotta be one of the biggest rip-offs in the auto industry. We paid $850 for what would have cost $200 at NTB (who still would have made a good profit on it).

For non-warranty repairs and parts they are clearly making a good profit as well, but I think that is more inline with the industry average. I think their rates do tend to be higher, particularly in less expensive parts of the country.

Folks need to realize that there are 5000 other people at Tesla making decisions, and Elon isn't over seeing most of them. He may say what he'd like, but when it comes down to low level policies, he's not looking at em.


PS. Those rivets are available all over the place, Lowes and Autozone both carry em for a reasonable price.

 

[zerokewl]

Correct me if im wrong but the current annual service is $600 correct? do you think it will be the same for the model 3 or will they bring the cost down a little for us that cant afford the S and are buying the 3?

 

[Twiglett]

not to be picky - but I think his statement is in relation to the fact that dealers usually make more money from the service department than they do from selling cars. So servicing revenue supports the car sales business.
It looks like this isn't remotely the case with Tesla, regardless of what they charge for a plastic rivet. Service may have to at least cover its costs, but it certainly isn't a profit center for them - in which case his statement is correct.