Tesla (NASDAQ:TSLA) announced on Friday, Aug 15, 2014 that they were extending the drive train warranty on the Model S to match the battery pack, to 8 years with unlimited mileage (from the previous four years, or 50,000 miles):
The Tesla Model S drive unit warranty has been increased to match that of the battery pack. That means the 85 kWh Model S, our most popular model by far, now has an 8 year, infinite mile warranty on both the battery pack and drive unit. There is also no limit on the number of owners during the warranty period.
The policy change applies retroactively to all Model S vehicles. For consumers, there should be fewer worries and more reassurance about drive train reliability after hearing of such horror stories as the Edmunds vehicle. Musk was quoted saying, in part, "If we truly believe that electric motors are fundamentally more reliable than gasoline engines, with far fewer moving parts and no oily residue or combustion byproducts to gum up the works, then our warranty policy should reflect that."
The announcement also included an acknowledgement that Tesla will increase its warranty reserve and that this will affect "short term" earnings.
Some Tesla watchers were previously criticizing the company for not having an adequate warranty reserve, even though it matched GMand Ford (NYSE:F). They are claiming that the warranty extension merely provides cover for rectifying their previous error. I take the less cynical view that it was also done to address the reliability doubts raised by the Edmunds experience and also recent Consumer Reports published doubts about reliability.
It should be noted that Tesla has not been shy about replacing drive trains if there was any suspicion that one was faulty. Some of these replacements have proven unnecessary. Two common problems were found to be properly addressed with a cable tie in one case, and a shim in the other. The drive trains themselves were not faulty. However, the company did incur warranty costs in its early attempts to address the problems with drive train replacements. The change in policy should change few if any actual warranty expenditures. Most electric drive train problems should be discovered and corrected in the first year or so of driving anyway. In fact, due to better knowledge of the potential problems and how they should be resolved, and better production techniques to avoid the problems in the first place, warranty costs should actually decrease over time.
Tesla investors should be expecting the company to be investing essentially all cash flow into growing the business for the foreseeable future, much like Amazon (NASDAQ:AMZN). They should not be concerned about a small additional hit to earnings in the current quarter, or any "short term" quarter, especially if it means that customers are able to buy Tesla products with greater assurance of reliability. The company's reputation for building quality products that consumers genuinely enjoy should be paramount.
Disclosure: The author is long TSLA.
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