High warranty costs reflect Tesla’s struggle with quality

Thomson ReutersPeople visit a Tesla Model S car during the Auto China 2016 in Beijing

By Paul Lienert and Alexandria Sage

DETROIT/SAN FRANCISCO (Reuters) – Tesla Motors Inc Chief Executive Elon Musk has told investors his electric car company will stop burning cash and turn a profit this year, and corralling costs associated with quality problems will be critical to making good on that pledge.

While Tesla has trimmed its average warranty repair cost per premium electric vehicle since 2014, it still spends more than twice as much as General Motors Co and Ford Motor Co, according to a Reuters analysis of company data.

Tesla’s warranty costs are also higher than those of Germany’s Daimler AG, maker of Mercedes-Benz luxury cars.

Tesla and other auto makers don’t reveal specific figures for warranty costs per vehicle, but they do disclose vehicle deliveries, and total spending for warranty repairs and accruals, representing money set aside for future warranty repair work.

Last year, according to a Reuters analysis of data provided in the company’s annual report, Tesla spent $1,043 per vehicle on actual repairs and set aside $2,036 in warranty accruals to cover future repairs on the vehicles it sold in 2015. It trimmed warranty expenses by 17 percent from 2014 and cut warranty accruals by 34 percent.

Meanwhile, GM spent just $400 last year for every vehicle it sold on warranty repairs and set aside $332 for future work. Ford spent $429 per vehicle and set aside $308. Daimler spent $970 per vehicle and set aside $1,294.

While Tesla builds only two models and last year sold just 50,000 vehicles, GM, Ford and Daimler all have widely disparate product lines and sell millions of vehicles a year. And where Tesla’s 2015 revenue was just over $4 billion, the three larger automakers reported revenues of $150 billion and more.

RESULTS DUE

When Tesla reports first-quarter results on May 4, analysts will be watching to see whether it is on track to deliver positive cash flow for the year, as Musk forecast in February.

Quality control and warranty costs are among the challenges as Musk prepares to ramp up production next year for the Model 3 sedan. Tesla plans to boost annual vehicle production over the next several years to roughly ten times the 2015 level.

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. Total warranty costs were $52.8 million, and it set aside $103 million for future warranty repairs.

Chief Financial Officer Jason Wheeler told analysts in February that as Tesla cars become more reliable, “that reduces our warranty. That actually has a cash impact when the cars show up less at the service centers.”

In a statement to Reuters, Tesla said it has reduced the cost of first-year repair claims as well as the amount of money it reserves for future warranty repairs.

Among other steps, Tesla said it “aggressively” issues bulletins to its service centers to “correct identified issues prior to a failure” and to “offer ways to enhance the vehicle after delivery, even (on) non-warranty related items.”

COMPLAINTS

Tesla has been contending with complaints from owners about problems with Model S sedans and the recently launched Model X sport utility vehicle. Some customers have complained on internet forums that doors on their Model X SUVs wouldn’t latch properly. Complaints about the Model X were amplified in April when Consumer Reports highlighted problems with the SUV.

Fort Lauderdale Model X owner Colin Campbell told Reuters he loved his car, although he had to drive 30 miles home one day with one hand on the door, trying to keep it shut.

“If you want to be one of the first to use the most advanced cars you have to expect you’ll have some issues at the beginning,” he said. Campbell added he “recognized I’m a beta tester,” a technology industry term for someone who gets to try a new product in its last stages of development.

Tesla, in a statement to Reuters, said the number of issues the company has dealt with on the Model X has fallen by 400 percent over the past six months. The company has responded to customer complaints by offering to replace faulty sensors that sometimes saw obstacles that weren’t there.

The company said it issued a bulletin to service technicians to replace components in the mechanism that opened the falcon wing doors to remedy a creaking or groaning sound, and recently changed the design of the door latches. Tesla also fixes issues using over-the-air software upgrades.

(Editing by Joseph White and Bernadette Baum)

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