Tesla Discontinues Guaranteed Resale Value Program

JUL 14 2016 BY MARK KANE 30

Tesla debuted the 60 kWh Model S In June

Tesla debuted the 60 kWh Model S In June

Tesla Motors’s Resale Value Guarantee program once introduced with a blog post accompaniment and much fanfare, was quietly ended for cars purchased after July 1.

The Resale Value Guarantee was designed to secure Tesla vehicle’s value to remain at least 50% after three years of ownership (base version and 43% for added options).

Lack of RVG isn’t end of the world, it’s more like back to norm for the automaker, and letting market forces to determine the value of a used cars.

Because of the lack of RVG for new cars sold, used Tesla EV prices should drop a bit as a result.

Tesla Motors on the other hand will release itself from expensive financial reserves for guaranteed value (total liabilities were valuated at $1.58 billion as of March 31).

The trigger for ending RVG could be the introduction of cheaper Model X with 60 kWh battery (preceded by the Model S sedan’s 60 kWh re-introduction).

“The discontinuation of the buyback program, as of July 1, allows Tesla to free up cash that had been set aside to buy back Model S cars after three years at a value of at least 50 percent of the base purchase price.”

“Within the next 12 months, Tesla has disclosed it could pay a maximum of $192.4 million to cover resale value guarantees on 4,209 vehicles. That amounts to a maximum liability of $45,711 per car, although Tesla could offset payouts by reselling repurchased vehicles.

Tesla valued the total liability created by the resale value guarantee at $1.58 billion as of March 31, according to its latest quarterly filing with the Securities and Exchange Commission, up over 20 percent since the end of 2015.”

source: Reuters

Categories: Tesla

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30 Comments on "Tesla Discontinues Guaranteed Resale Value Program"

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etd

This is why they created the 60kw software limited battery. Protects resale value by allowing Tesla to increase capacity when/if it is traded in. I imagine 75kw will be the base model s after model 3 is released.

Terawatt

Makes no sense to me! Yes, they can increase the value by increasing the useable capacity. But they also increased their sunk cost since they had to deliver 75 kWh of physical pack but were only paid for 60 kWh…

Given the RIDICULOUS price asked to make those last 15 kWh accessible one wonders how much more it costs to MAKE the 75 kWh pack than it would have cost to make a 60 kWh pack. Presumably cell cost is at least $100 per kWh even for Tesla…

I don’t know. Tesla probably has good reason to do it, but it seems to me more likely they wanted to have a car at a lower price point, perhaps to try and sell to M3 reservation holders, and hope enough buyers will eventually upgrade to make it worthwhile. If the marginal cost is 1500, they only need about one in six buyers to upgrade to break even. It I don’t think it has anything to do with the buy-back program.

Also, wouldn’t it be silly to introduce new car options to make the resale value guarantee work better less than a month before discontinuing the resale guarantee program?!?

Alaa

This means that they will make millions. And it stands to reason that they discontinue this program because they simply can not buy back millions of old cars.

SJC

I don’t think they “buy them back” they make sure the seller gets 50% within 3 years.

Auto trader lists 2013 S models with less than 30,000 miles for just over $50,000. If that is half the original cost, but the car sold for less, Tesla would make up the difference.

Pushmi-Pullyu

Alaa said:

“…they simply can not buy back millions of old cars.”

You write as if Tesla buying its own used cars would be a money loser for them. What you’re missing is that Tesla can, and does, resell those cars. Tesla’s CPO (Certified Previously Owned) program is one of Tesla Motors’ sources of profits.

Nathanael

In practice, three-year-old base model Teslas are worth a lot more than 50% of their original price, so Tesla will never have to do the buy back on them.

The options, however, depreciated a lot faster, so Tesla will have to buy back some of those super-ultra-fully-loaded cars.

Getting rid of this simplifies Tesla’s accounting, which is good for investors.

sven

In three years when the Resale Value Guarantee expires on all existing Tesla cars, Tesla will finally be reporting financial results on a GAAP basis. Or am I missing missing another reason for Tesla adjusting their GAAP financial results.

Terawatt

As a listed company they are definitely obliged to follow Generally Accepted Accounting Principles..! Nothing to do with the resale program.

You may be confusing this with the fact that Tesla has never reported a profit on a GAAP basis. That’s accurate because they reported a loss, not because they didn’t use GAAP.

sven

You’re right Tesla does have to report financial results on a GAAP basis. Bad choice of words on my part. I was referring to the conference call when earnings are announced, Tesla also gives out its “adjusted proft/loss” on a non-GAAP basis to better represent the economic reality of the business, in addition to GAAP results. These “adjusted” non-GAAP numbers are the ones that Elon discusses on the earnings call and many/most websites repeat in their reports.

Cars that are sold with the Resale Value Guarantee must use lease accounting under GAAP rules. Therefore, under GAAP Tesla can’t recognize 100% of its sales revenue in the year of sale, but must instead recognize sales revenue over time during the Resale Value Guarantee period. So Tesla also gives income figures that include 100% of sales revenue on a non-GAAP basis because it better represents economic reality.

Now I see in first link below that Tesla also uses non-GAAP accounting for other items, such as excluding stock-based compensation from their results, which is included under gAAP accounting.

http://www.fool.com/investing/general/2016/04/06/why-teslas-lease-accounting-is-less-devious-than-y.aspx

https://teslamotorsclub.com/tmc/threads/gaap-vs-non-gaap.42561/

Nix
Yes, this information is also found in there 10-Q reports at ir.teslamotors.com under the section “Critical Accounting Policies and Estimates”: “Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. We believe that the following critical accounting policies involve a greater degree of judgment and complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to understanding and evaluating our consolidated financial condition and results of operations.… Read more »
Doggydogworld

As the section Nix excerpted shows, in addition to RVG Tesla has two other programs which affect GAAP revenue recognition:

1. Direct leasing
2. 3rd party leasing with residual value support

So there will still be a “gap” between GAAP revenue and the revenue quoted in press releases, conference calls, analyst reports, etc. It just won’t be as large.

Pushmi-Pullyu

“Or am I missing missing another reason for Tesla adjusting their GAAP financial results.”

Tesla says that it uses non-GAAP accounting because it’s a growth company, and GAAP accounting is designed for stable companies.

Since I’m not a “financial guy”, I won’t presume to speak to the accuracy or inaccuracy of this assertion. Here’s a blog post by someone who knows a lot more about the subject, and his opinion is that it’s appropriate for Tesla to use non-GAAP for some things, but he also thinks Tesla should be using GAAP for some things it’s not:

http://www.fool.com/investing/general/2016/03/27/how-tesla-motors-could-be-profitable-if-it-wanted.aspx

Ambulator

I think this was a bit overdue from Tesla. It does show that they are paying attention.

Trollnonymous

IMHO, AP and its accompanying hardware should all me an option when purchasing.

When I mean “option”, I mean no hardware or code/program should not exist or be installed period..

mike

nothing humble about that opinion 🙂
what difference does it make if the hardware is there or not?
You aren’t paying for it and get the flexibility to enable later.
The manufacturer gets to simplify the build process and save money.
This is likely to become more common, not less, so best get used to it.

AlanSqB

Correct. Your option is buy or don’t.

Terawatt
This ignores multiple important points. First, I don’t know what school of economics you guys took, but it is pure fantasy when you say the hardware is there but you’re not paying for it. Secondly, and much more important, we may be paying with our lives for it – and not just if we opt to have the system, but if OTHERS opt to have the system. It should be pretty obvious they this kind of system needs to be safe not just for the sake of the people in the car, but for everyone in traffic. Judging by Model S’ seeming affinity for Sushi, even those who work in or otherwise frequent sushi restaurants can legitimately feel their safety threatened. IDK if the autopilot is “perfectly safe” (HHGTTG!), very dangerous, or smack in the middle. But I do find it quite strange that this should be simply up to each car manufacturer to decide on their own by releasing beta software and experiment with not just the Tesla drivers who opt in to test the thing, but everyone else as well. It’s a tragedy when a Tesla driver is killed while possibly not paying much attention because of the… Read more »
Pushmi-Pullyu

“It should be pretty obvious they this kind of system needs to be safe not just for the sake of the people in the car, but for everyone in traffic.”

You keep committing the same fallacy, Terawatt, altho your mistake has been pointed out to you before, and I think more than once.

Driving or riding in a vehicle moving at high speed will never be “safe”, period. The relevant question, therefore, isn’t whether or not you’re “safe” in a Tesla car operating under Autopilot/AutoSteer; the question is whether you are safer with it, or without it.

And a handful of reports about near-accidents or even 1 fatal accident while using Autopilot/AutoSteer are a very, very long way from providing strong evidence that you’re safer without it.

Trollnonymous

Considering the car is pretty much built to order, I find it hard to believe that omitting a few steps, hardware and software does not equate to less cost. If anything it should speed it through the line.

Why one would not want one?
1: Less chance of it getting activated if one NEVER wants it.
2: Eliminates the possibility of the teenage driver ever trying to use it.

And yes I have worked in manufacturing and I favored the products that had less in the BOM because it made your output numbers bigger.

Nix

It is MORE expensive to deliver 2 different copies of software, than just 1 copy.

As for the physical equipment, I don’t know how much of it also serves dual purpose for other stuff, like backup cameras.

Pushmi-Pullyu

“…what difference does it make if the hardware is there or not?
You aren’t paying for it…”

Well actually, you are paying for the cost of the hardware, since it’s included in the cost of making the car. You’re just not paying Tesla’s full price, including its profit margin, for the driver assist/ self-driving hardware.

TomArt

The hardware is also being used for the standard safety features, including emergency braking, lane departure warnings, proximity alarms, etc., along with adaptive cruise control, etc.

Someone out there

Well it also affects resale value. Maybe you don’t want the autopilot but the next owner of your car might, especially since the software is probably far better several years down the road. Having the hardware is better than not having it from a resale point of view, even if you don’t use it.

Pushmi-Pullyu

Right.

It makes no economic sense for Tesla to omit Autopilot hardware from cars even when the owner doesn’t order it. The owner may want to upgrade later, and even if he doesn’t, the second owner may want it.

I’m sure Tesla has done a cost/benefit analysis and concluded that simply including the hardware in all cars is less expensive than refitting those individual cars where the owner decides to upgrade, or where the car goes thru Tesla’s CPO program and has to be updated with new hardware where necessary.

Yes, you do have to pay for it even if you don’t want it. But that doesn’t necessarily mean that it’s a poor buying choice, or that you’re getting “cheated”, as Terrawatt keeps insisting. Tesla, just like every other manufacturer, saves money by making certain features the same on all their cars. That saves the buyers money, too.

pjwood1

Tesla buyers no longer need a put option. Resale is just too good.

Empire State

Including the put option with every product is no longer addressing important buyer objections. The resale market is not fully insulated from the withdrawal of the put option. I think Tesla could continue to offer buyers the put option with each sale, at a price discounted from Tesla’s estimated fair value of the option, to continue allaying the minority of buyers’ objections. This might incent the proliferation of buyers instead of lessees.

Alan

Most of the resale cars were under the warranty period. Resale value is highly dependent on post-warranty maintenance costs.

If maintenance is too costly, resale value will drop as most of the affluent will always buy or lease new while the middle class will shy away from a cool Tesla car for fear or nightmarish repair costs.

I did put a reservation down for a M3.

Pushmi-Pullyu

If this is an indication Tesla is freeing up some of its financial burden so it can invest more in tooling up and ramping up to build the Model ≡, then that’s a very good thing.

But not being a “financial guy”, I won’t presume to guess just what the motive is here, or more likely multiple motives. Unfortunately, financial analysts tend to pull out one factor and talk as if that’s the only motive for a company doing something.

In the short term at least, I don’t see this having a significant effect on resale value of Tesla cars. They’re in such high demand that relatively few are available at any time, and as a result used Tesla car prices are a significantly higher fraction of full retail price than is the norm in the used car market.

Speculawyer

Part of growing up.