Tesla Motors Inc is expanding the warranty for its electric Model S sedan by offering unlimited distance for the drive unit and battery pack to eight years to ease reliability concerns, a move that is set to crimp profit.
“[The] drive-unit warranty has been increased to match that of the battery pack... There is also no limit on the number of owners during the warranty period,” Tesla chief executive officer and co-founder Elon Musk said on Friday on the company’s Web site.
The changes in coverage for the Model S, which affect both new and existing customers, would have a “moderately negative effect” on earnings in the short term, said Musk, who is also Tesla’s biggest shareholder. The company is making the change to reinforce its belief that electric motors are more reliable than gasoline engines, he said.
The announcement comes after Tesla’s flagship vehicle, ranked as the best-reviewed car of the year by Consumer Reports magazine in February, exhibited flaws following continued use, the magazine recently reported. Last month, auto data and pricing company Edmunds also reported glitches with its Model S after more than a year of heavy driving. The entire vehicle, including drivetrain, previously had a warranty for four years or 80,450 kilometers.
“This obviously addresses concerns owners and potential owners may have had after those reports,” Baum & Associates auto analyst Alan Baum said. “The bigger issue is have they resolved the manufacturing issues that led to these problems?”
Tesla’s so-called infinite warranty might also help boost Model S resale values, Kelley Blue Book senior industry analyst Karl Brauer said.
“Eight-year, unlimited coverage on the warranty is going to help when someone sells the car after three or four years,” Brauer said. Musk has “made it as painless as possible to deal with unexpected service issues.”
Consumer Reports and Edmunds both said problems they had experienced with the Model S, priced from US$71,000 in the US, were repaired by Tesla and covered under warranty at no additional cost.
The company said on July 31 that its warranty reserve at the end of the second quarter was US$84.4 million, up from US$36.9 million a year earlier, reflecting the expansion of vehicle sales.
Tesla has a target of delivering at least 35,000 cars this year, up about 60 percent from last year. Production is accelerating at its plant in Fremont, California, to a pace of 50,000 units by the end of the year, and is to double to a rate of 100,000 units by late 2015, Musk said last month.
“In hindsight, this should have been our policy from the beginning of the Model S program,” Musk said. “By doing the right thing for Tesla vehicle owners at this early stage of our company, I am confident that it will work out well in the long term.”
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