Paulo Santos recently wrote an interesting article about the high cost of repairing the Tesla (NASDAQ:TSLA) Model S, and how that may lead to higher insurance rates. However, it is important to note that a large factor is that the Tesla Model S is a premium-priced car and that alone would make repair costs expensive. Beyond that, some factors that may create a repair cost differential between the Tesla Model S and other premium-priced cars should naturally disappear over time.
The Tesla Model S has only been in production for a limited amount of time, and it only reached 50,000 units recently, so the availability of second-hand parts is limited, and the number of authorized repair shops is also limited due to repair shops weighing the cost of becoming Tesla authorized versus the relatively small number of Teslas on the road. Other premium car brands have decades worth of production on the road.
It is worth looking at the evolution of hybrid cars to see what could happen with Tesla. Hybrids faced questions over higher repair costs early on, but studies showed that the repair cost differential versus gasoline-powered cars disappeared as hybrids became increasingly common.
Repair Costs Often Reflect Premium Purchase Prices
As noted, repair costs for the Tesla Model S can be significantly higher than the average car. Putting a quarter panel on a Model S was said to be an $18,000 job compared to $5,000 for the average domestic vehicle. Work on the Model S was said to be a high-ticket job similar to a Audi A8.
This makes sense when you look at the cost of the cars. The Audi A8's price can easily reach $100,000. The average price of a Tesla Model S is said to be around $100,000 as well. Comparatively, the average price of a new domestic car was around $24,000. Based on average purchase prices, the quarter panel cost for a Model S should be similar to an Audi A8 and three to four times higher than the average domestic car. In all cases, the cost is roughly 20% of the average purchase price of the car.
In the particular case above, the repair shop appears to have been charging a reasonable price for the Tesla Model S repairs compared to other premium cars. There have also been anecdotal examples where the quoted Model S repair prices seem to be significantly above that of similar premium cars. Those particular repair shops may pose a problem for now.
Any Repair Cost Premium Should Come Down Over Time
A tougher question to determine is whether the Model S's repair cost is significantly greater than the average $100,000 car. I wouldn't be surprised if there was at least a moderate repair cost premium on average since the Model S hasn't been around very long, and doesn't have the same repair shop base (leading to competition among repair shops) and second-hand or aftermarket parts availability that brands and models that have been around for decades have developed.
In that sense, Tesla's situation is similar to that of hybrid cars when they first came out. The Toyota Prius only sold 123,000 units over six years (1997 to 2003) for its first generation model. There was apparently an 8.4% repair cost premium for the Prius compared to its gasoline powered counterparts between 2001 and 2006, but this premium was mostly eliminated after 2006 as the Prius became increasingly common, routinely selling over 100,000 units per year. The article attributes the higher repair cost early on as due to the limited number of repair parts available from junkyards.
There are currently quite limited amounts of used Tesla Model S parts available since it has only been available for a couple years, and the average Model S age is around one year. Eventually these numbers will increase to be similar to other premium cars (Model S sales volumes are quite strong for a premium car), and the part costs should end up in-line with other $100,000 cars. Based on the history of hybrids, any Model S parts cost premium should disappear within a few years.
As for the quantity of certified repair shops - that should naturally increase over time. More Tesla vehicles on the road means increased demand for repairs, which would justify the investment that repair shops would need to become certified. A lot of this is likely dependent on whether Tesla can come close to meeting its targets for the Model III. To put things in perspective, Audi sold 158,000 vehicles in the United States in 2013, so if Tesla can get near those sales figures with more affordable models, the number of Tesla-certified repair shops should theoretically also approach Audi's numbers.
If higher repair costs do translate into higher insurance costs, it still probably won't have a major effect on Tesla sales. Insurance fees was ranked as 12th out of 15 in terms of factors affecting new car purchase decisions (based on percent mentioning that it was important or very important), while only 1% mentioned that it was the most important factor.
There are a couple items that may make Model S repairs more expensive than other premium cars, and these should be corrected over time. Based on the history of hybrids, second-hand parts should become significantly more available after the Model S has been available for 5+ years.
The other key item is that individual Tesla-certified repair shops may charge inflated prices. This item may cause complaints in the short-term, but should be fixed over time as the increasing number of Teslas favorably changes the equation of cost of certification versus demand for Tesla repair services.
I don't believe that this potential issue will have a significant impact on Tesla's fortunes though. Insurance costs seem to have a limited effect on vehicle purchase decisions, coming in near the bottom of most important factors. As well, the repair cost issues would appear likely to be resolved by around the time a more mass-market Tesla model is available.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.