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Is Tesla Motors Inc (TSLA) Struggling With Quality? High Warranty Costs Say Yes

Tesla Inc (TSLA)

Tesla Motors Inc has been running in losses for several years, but this year, the firm is hopeful of making a profit, as per the statement by CEO – Elon Musk – to the investors. But, to achieve this goal, controlling the costs related to the quality problems will be critical.

Tesla Motors Inc (TSLA) Model 3

Tesla warranty costs higher than others

Reuters in an analysis of the firm’s data, found that despite trimming its average warranty repair cost per premium electric vehicle since 2014, Tesla still spends more than twice as much as GM and Ford do. This indicates that the firm is struggling with quality. The warranty costs that Tesla incurs are even higher than those of Germany’s Daimler AG that makes Mercedes-Benz luxury cars.

Generally, the automakers including Tesla do not reveal specific figures for the 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.

Reuter found that last year 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. Warranty expenses were reduced by 17% and warranty accruals by 34% from 2014.

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

Tesla Motors Inc builds only two models, and last year sold 50,000 vehicles while GM, Ford and Daimler all have widely disparate product lines and every year sell millions of vehicles. For 2015, Tesla reported revenue of over $4bn while for the three large automakers, it was $150bn or more.

Making efforts to lower warranty costs

Speaking to the analysts in February, Tesla’s CFO – Jason Wheeler – noted that the increased reliability of Tesla cars has helped the firm reduce its warranty. “That actually has a cash impact when the cars show up less at the service centers.” The cost of first-year repair claims as well as the amount of money in reserves for future warranty repairs both have been reduced, said Tesla in a statement to Reuters.

Tesla has taken other steps as well including “aggressively” issuing 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.”

However, mounting consumer complaints related to the Model X – especially after a report from Consumer Reports in April – could push the costs up for the EV firm.

Earnings report to make it clear

The analysts are waiting for 4th of May, when Tesla will report Q1 results as they are interested in seeing whether or not the firm is on track to deliver positive cash flow for the year in accordance with Musk’s forecast in February. Musk is preparing to ramp up the production next year for the Model 3, and quality control and warranty costs are the major challenges he will be facing.

Tesla Motors Inc is aiming to boost the annual vehicle production to roughly ten times the 2015 level in the coming years. In 2015, Tesla reported a net loss of $888.7m while loss from operations came in $716m. At the end of the year, it had cash worth $1.2bn, less than a year earlier by $708m. Sale of new common stock generated $730m in cash that helped bolster firms cash balance. Total warranty costs were $52.8m, and for future warranty repairs, it set aside $103m.

On Wednesday, Tesla shares closed down 0.89% at $251.47. Year to date, the stock is up almost 6% while in the last one-year, it is up over 15%.

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Aman is MBA (Finance) with an experience on both marketing and Finance side. He has work as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, playing PC games and cricket.