I am sending this message in hopes it reaches George Blankenship.
George, I hope you will consider my view of this service contract dust up.
First I want to say I am happily a shareholder in Tesla (hopefully a Gen3 customer one day). I appreciate the effort and risk you and everyone at Tesla are undertaking. I also realize I am on the outside. Among other things, I don’t know the cost of starting a national service center from day one when there are only a few thousand Teslas scattered across the country.
All that being said, to me the service contract plan sounds like a mistake from both a mission and bottom line perspective.
Tesla may or may not have an official mission statement, but I have repeatedly heard Elon Musk say he started Tesla to accelerate the adoption of electric vehicles. I have also recently heard Musk say that what will separate Tesla from the other automakers is that Tesla will never make a bad product. He explained that other companies had allowed a “bean counter” mentality to drive their decisions rather than creating an experience of wonder and delight.
I really think the service contract as offered is headwind to those two objectives (and I think by being responsive to your customers reaction to the plan you have the opportunity to turn it into a tailwind).
Yesterday I read through all the posts on Tesla Motors Club forum since your posting at the start of the week. It does seem your posting has had an impact. My sense is it’s about 50/50 between those who are basically okay with the service plan and those who are basically not okay with it.
I consistently read three points from the not okay camp it is difficult not to empathize with.
Firstly, the low maintenance cost of the vehicle, and EVs in general, has been cited as one of the basic advantages of an EV. Now in year 1, the maintenance cost is $5-600, perhaps comparable to ICE service contracts, but more than most people would pay out of pocket. Beyond being an irritant to those buying the car now (“I thought I’d save $1,200 in gas a year, but now half of that is chewed up in the cost of the service contract”), it leaves an open target of ridicule to detractors of EVs, and implies a credibility issue about the promises of EVs and Tesla. This does not help accelerate the advent of electric vehicles. It does not make for an experience of wonder and delight for customers either.
Second point, having the very people, the early adopters who helped Tesla remain in business, take so much of the hit for the development of the service network. Last I checked, Tesla has $133 million dollars they can use as working capital because these customers put some skin in the game. Additionally, I think they’ve already taken one for the team in the past month. Tesla has been delivering cars out of sequence. This is probably quite beneficial to Tesla to batch the production and distribution of the cars and ask the reservation holders to be patient when they see someone a few hundred reservations behind them get their car first. These customers have taken this hit, when it comes to the cost of service, I think Tesla can step up and take a hit.
Finally, I’ve read of the feeling of being forced into an expensive service contract by the threat of losing one’s warranty. I think for many reservationists they do not simply feel like consumers making a purchase. I think so many of them feel like a part of Tesla, and a part of the advent of EVs. The postings I read strongly suggest the compulsion of an expensive service contract undermines that connection to the company. There is clear reason to have the cars, a brand new product, inspected by Tesla each year. This benefits the owner, but it is clearly a major benefit for Tesla today and as it develops cars for the future. This could be an opportunity to deepen people’s sense of being a part of Tesla’s success by having the car checked on. The cost of the contract frankly replaces that sense with the one of being nickeled and dimed by a faceless corporation which does so simply because they can. Not helpful to the advent of EVs or an experience of wonder and delight.
I told you I think the plan is also off the mark financially.
If Tesla were to drop the 4 year plan by $600 that would mean a drop in cash flow of $3 million in the rest of 2012, if 5,000 cars are sold. At this revised price, on an ongoing basis, for every 20,000 cars Tesla sells it would mean $3 million less in earnings, likely $2 million after taxes, or $.02 eps each year.
What might Tesla receive in return for forgoing $3 million or so in cash flow these next several months, and $2 million, or $.02 in eps for every 20,000 cars sold?
- Vehicle sales. At an $8,000 profit for vehicle, it would take 250 to make up for lost service contract revenue of 20,000 cars at the lower contract rate. Might 1.25% of potential customers walk away because of the cost of the service contract? Perhaps not, but consider how B, C, and D might impact how many look at a Tesla in the first place.
- Free enthusiastic marketing. You have a very loyal enthusiastic following who feel like they are part of Tesla. Could you produce and buy ad space for $2 million for the impact of keeping each set of 20,000 enthusiasts speaking from a point of view of wonder, delight and participation in the progress Tesla represents?
- Protecting entryway to mainstream public. How many fewer mainstream consumers will be opened to the idea of EVs if the media comes to view the lower maintenance cost of EVs as a fallacy? Comes to view the claims in general of EV makers with skepticism?
- Safeguarding Tesla’s first only chance at a first impression. Right now Tesla means progress to so many of us. Isn’t it worth a few pennies in eps to protect that impression rather than falling into “Meet the new boss, same as the old boss.”
Thanks for your time
Steve
The reality of the situation is that the service plan is better than what I expected. I set 
