Tesla Faces High Warranty Costs Thanks to Quality Issues

Perhaps befitting its status as a relative newcomer to the industry, Tesla is facing high warranty costs due to problems with quality.

Tesla CEO Elon Musk promised investors that the company will be profitable in 2016, but in order to do so, the company must cut down on warranty costs that are higher than those faced by larger automakers.

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According to a Reuters data analysis, Tesla has to pay more than twice what GM, Ford, or Mercedes-Benz parent company Daimler pay in average warranty repair cost per car. And that’s actually down from 2014.

Outside analysis is needed since automakers don’t disclose specific numbers regarding the average warranty cost per vehicle. Automakers do, however, disclose other key data, such vehicle deliveries, total warranty spending, and money set aside for future repairs performed under warranty.

According to the Reuters data, which was included in the Tesla annual report, Tesla spent $1,043 per vehicle on average for repairs, and set aside another $2,306 per car in accruals to offset future warranty work. The warranty expenses were down 17 percent in 2015 compared to 2014, and the accruals were 34 percent lower.

By comparison, GM spent $400 per vehicle and $332 per car on accruals, while Ford was at $429 per unit for repairs and $308 for accruals. Daimler clocked in at $970 per vehicle for warranty work and $1,294 in the average amount set aside for future repairs.

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Tesla is a small automaker, with just two models on sale now, and 2015 sales of only about 50,000 vehicles. That stands in stark contrast to GM, Ford, and Daimler – companies with large product portfolios that move millions of cars every year. Those three automakers reported $150 billion and up in revenue in 2015, while Tesla’s was just over $4 billion.

First-quarter financial results are due May 4, and Tesla will be watched closely, as business analysts will want to see if Tesla is on track to have positive cash flow in 2016, which is what Musk promised in February. Getting costs in line, including those incurred by warranty repairs, will be a priority for the company, especially with Model 3 production slated to begin in 2017. Tesla eventually wants to expand production to a level about 10-times that of what it had in 2015.

Tesla lost money in 2015 – a net $888.7 million, with $716 million being lost on operations. Tesla finished 2015 with $1.2 billion in cash, which was down $708 million from 2014. The sale of new common stock infused the company with $730 million, and Tesla put aside $103 million for future warranty work. The company paid out $52.8 million in warranty work.

CFO Jason Wheeler spoke to analysts in February and said that increasing the reliability of their cars would help with cash flow. “That reduces our warranty. That actually has a cash impact when the cars show up less at the service centers,” he said, according to Automotive News.

Tesla told Reuters that it has cut the cost of repair claims that happen in the first year of ownership while also reducing the amount of money set aside to pay future claims.

Tesla says it has taken steps such as “aggressively” sending out service bulletins to its repair shops to “correct identified issues prior to a failure” and to “offer ways to enhance the vehicle after delivery, even (on) non-warranty related items.”

Common complaints from Tesla owners including door latches that don’t work properly on the Model X crossover. One owner told Reuters that he had to drive home 30 miles with one hand on the door to keep it shut.

Tesla responded by saying that number of complaints regarding the Model X have dropped considerably over the past six months, and that the company is responding by replacing faulty sensors, replacing components in the door-latch mechanisms, and changing the design of the door latches, while also using software updates, issued over the air, to address necessary fixes.

Automotive News