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Tesla Warranty Costs and Reserves

Discussion in 'TSLA Investor Discussions' started by MikeC, Jul 16, 2015.

  1. MikeC

    MikeC Active Member

    Jul 9, 2012
    Los Angeles
    I came across this article on automakers' warranty costs and reserves: U.S. Asian Auto Warranty Report, 16 July 2015

    Tesla seems to have the lowest warranty costs but reserves the highest amount per car by far. Is Tesla being overly conservative or is it just because the Model S is a more expensive car?


  2. Canuck

    Canuck Active Member

    Nov 30, 2013
    South Surrey, BC
    Yes, you hit the nail on the head when you said it is because of the cost of the vehicle. The key phrases in the article are:

    Tesla: "between $2,700 and $3,800 when a vehicle is sold"

    "$350 or $500 that Ford and GM are accruing per car they sell"

    You have to do warranty costs as a percentage of the cost of the product. If we just took the $100k+ GM and Ford vehicles (or did 4 x the per vehicle cost -- and the low end vehicles would be more than 8 x! ) it would level out.
  3. Zythryn

    Zythryn MS 70D, MX 90D

    Mar 18, 2009
    You also have to figure Tesla actually goes out of its way to fix things.
    GM avoids fixing things even when they are hazards!

    OK, cheap shot, but the whole ignition switch issue really ticked me off.
  4. Robert.Boston

    Robert.Boston Model S VIN P01536

    Oct 7, 2011
    Portland, Maine, USA
    The high per-vehicle accrual could reflect a conservatism on Tesla's part: they simply don't have the experience to know what the average cost will be. While the claims rate has been very low, that also may have a lot to do with the Tesla fleet being the youngest of any car manufacturer.

    I'm also wondering about how extended warranties are being treated. Remember that no other major car manufacturer offers an extended factory warranty; the extensions (or at least the ones I'm familiar with) are offered by a dealer. If someone pays $4,000 up front for an extended warranty, I'd expect 100% of that to be reserved.
  5. cpa

    cpa Member

    May 17, 2014
    Central Valley
    Robert Boston is likely correct. In the footnotes to the financial statements there is always one footnote that reads in part like, "Preparation of financial statements in accordance with Generally Accepted Accounting Principles requires the use of estimates in the presentation. Actual results could vary significantly from these estimates." Depreciation and the allowance for uncollectible accounts and deferred income taxes and warranty reserves are estimates. We bean counters do not have crystal balls to be able to determine what may or may not transpire down the road, particularly when we do not have years and years of experience with actual data. Tesla has manufactured just shy of 100,000 expensive automobiles if we include the roadster. Tesla has experienced numerous drive train replacements, the titanium shield on older cars, plus niggling issues with the panorama roofs, 12V battery replacement, UMC and adapter snafus, etc.

    Moreover, Tesla has stated on several occasions that there are weekly changes to the manufacturing process--that a car produced today will be slightly different than one produced next week. I doubt that the major ICE manufacturers have many changes per model per year. These subtle changes might also necessitate the need for a larger liability to be recorded, as there could easily be a handful of cars that have a minor issue that needs to be corrected.

    GAAP requires a conservative approach. (That is why I wear both a belt and suspenders.) Financial statements are for the users, and not for management. Users make investment and lending decisions (among other things) based upon the audited financial statements. If I were the partner on the Tesla engagement, or the CFO, I would insist that the accrual for warranty work be large at the outset. We can always adjust it downward to a lower number per vehicle sold when enough data is available to support this lower number.

    As far as the extended warranty goes, it is required that Tesla record the payment as a liability, because performance has not yet occurred. It is probably buried in the financial statements under other long term liabilities as the amount is immaterial. This extended warranty liability will be charged as owners have extended warranty repair work performed. Those costs will not hit the bottom line, as it were. As older autos get well into the extended warranty period, Tesla will begin to adjust that liability up or down, depending upon historical rates and costs of failure. It is entirely possible that 2-3 years from now, Tesla's financial statements will receive a small boost of revenue from these contracts if extended warranty repairs are insignificant.

    Finally, these reserves and such are not amounts of cash that are squirreled away to be used to pay for claims and such. They are merely bookkeeping entries. When Tesla sells a car, the full amount of the sale (excluding sales tax and license fees) is recorded as income. A separate accounting entry is then made each accounting period (probably monthly) to charge X dollars per unit to expense for estimated warranty costs with the offsetting credit to the accrued warranty reserve (a liability on the balance sheet.) All warranty repair expenses are tallied monthly and then charged against this liability, and not to operations because this "estimate" was already booked when the car was originally sold. Quarterly, or no less than annually, Tesla will prepare a detailed analysis of the accrual for warranty repairs and make another adjustment before the financial statements are final.
  6. neroden

    neroden Happy Model S Owner

    Apr 25, 2011
    Ithaca, NY, USA
    #6 neroden, Jul 25, 2015
    Last edited: Jul 25, 2015
    Yep. If the drivetrain replacements or main battery replacements had been more common than they actually were, this reserve might have been significantly too small.

    P.S. Actually, if glhs272 is correct, a large portion of that reserve may be used for drivetrain replacements.

    EU Market Situation and Outlook - Page 121
  7. cwerdna

    cwerdna Active Member

    Jul 11, 2012
    SF Bay Area, CA
    I don't believe that's correct. Just because they're sold by dealers, doesn't mean they're not offered by the parent automaker.

    Toyota Financial Services
    Owner Portal (I recall buying a Security+ contract for my 04 Nissan 350Z that I bought new near the end of 03. It turns out, I never ended up ever utilizing it before I sold the car in mid-2011.)

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