Tesla 2014 Annual Report Download - page 26

Table of Contents
sources of supply for most of our single sourced components in a relatively short time frame, qualifying alternate suppliers or developing our
own replacements for certain highly customized components of our vehicles may be time consuming, costly and may force us to make additional
modifications to a vehicle’s design.
This supply chain exposes us to multiple potential sources of delivery failure or component shortages for Model S, as well as for our
powertrain component sales activities. For example, earthquakes similar to the one that occurred in Japan in March 2011 could negatively impact
our supply chain. We have in the past experienced source disruptions in our supply chains, including those relating to our slower-than-
anticipated ramp in our Model S production goals for 2012. We may experience additional delays in the future with respect to Model S and any
other future vehicle we may produce. In addition, because we have written agreements in place with the majority, but not all of, our suppliers,
this may create uncertainty regarding certain suppliers’ obligations to us, including but not limited to, those regarding warranty and product
liability. Changes in business conditions, wars, governmental changes and other factors beyond our control or which we do not presently
anticipate, could also affect our suppliers’ ability to deliver components to us on a timely basis. Furthermore, if we experience significantly
increased demand, or need to replace certain existing suppliers, there can be no assurance that additional supplies of component parts will be
available when required on terms that are favorable to us, at all, or that any supplier would allocate sufficient supplies to us in order to meet our
requirements or fill our orders in a timely manner. In the past, we have replaced certain suppliers because of their failure to provide components
that met our quality control standards. The loss of any single or limited source supplier or the disruption in the supply of components from these
suppliers could lead to delays in vehicle deliveries to our customers, which could hurt our relationships with our customers and also materially
and adversely affect our financial condition and operating results.
Changes in our supply chain have resulted in the past, and may result in the future, in increased cost and delay. We have also experienced
cost increases from certain of our suppliers in order to meet our quality targets and development timelines as well as due to design changes that
we made, and we may experience similar cost increases in the future. Additionally, we are negotiating with existing suppliers for cost reductions,
seeking new and less expensive suppliers for certain parts, and attempting to redesign certain parts to make them cheaper to produce. If we are
unsuccessful in our efforts to control and reduce supplier costs, our operating results will suffer. Additionally, cost reduction efforts may
interrupt or harm our normal production processes, thereby harming Model S quality or reducing Model S production output.
Furthermore, a failure by our suppliers to provide the components in a timely manner or at the level of quality necessary to manufacture
our performance electric vehicles such as Model S could prevent us from fulfilling customer orders in a timely fashion which could result in
negative publicity, damage our brand and have a material adverse effect on our business, prospects, financial condition and operating results.
Finally, in October 2013, we entered into an amendment to our existing supply agreement with Panasonic Corporation in order to address
our anticipated short- to medium-term lithium ion battery cell needs. While we expect that this supply agreement, as amended, will provide us
with sufficient cells for the next few years, we may not be able to meet our long-term needs, including for our third generation electric vehicle,
which we refer as “Gen III,” and other programs we may introduce, without securing additional suppliers or other sources for cells. If we cannot
secure such additional suppliers or sources, we could experience production delays, which could have a material adverse effect on our financial
condition and operating results.
If we are unable to adequately reduce the manufacturing costs of Model S or otherwise control the costs associated with operating our
business, our financial condition and operating results will suffer.
Our production costs for Model S were high initially due to start-up costs at the Tesla Factory, manufacturing inefficiencies including low
absorption of fixed manufacturing costs, higher logistics costs due to the immaturity of our supply chain, and higher initial prices for component
parts during the initial period after the launch and ramp of Model S. As we have gradually ramped production of Model S, manufacturing costs
per
25