Tesla 2014 Annual Report Download - page 68

Table of Contents
Through the first half of 2013, we had delivered Model S vehicles solely to customers in North America. In August 2013, we started
European deliveries of Model S. Similar to the initial launch of Model S in the United States and in Canada, we experienced an increase in our
average selling price during the third quarter of 2013 due to the start of delivery of European Signature Series vehicles, and a higher mix of 85
kWh vehicles and other options in all markets.
We intend to commence deliveries into China in the spring of 2014. We recently announced that the price for a Model S in China will be
the same as the price for a Model S in the United States, with the addition of only unavoidable taxes, customs duties and transportation costs.
While we believe that this is consistent with our objective of offering transparent and fair pricing in every market, this pricing strategy is counter
to prevailing auto industry practices. As such, Model S in China would be priced comparable to a mid-
sized premium vehicle in China instead of
a large luxury vehicle.
Expansion into the right hand drive markets, such as the United Kingdom, Japan, Hong Kong and Australia will occur gradually over the
year starting this spring. We have not delivered Model S vehicles outside of North America and Europe in volume; thus, we may face difficulties
meeting our delivery plans in Asia and other right hand drive markets later this year, which may impact our ability to achieve our worldwide
delivery goals.
In April 2013, we began offering a resale value guarantee to all customers who purchased a Model S in the United States and financed their
vehicle through one of our specified commercial banking partners, and in October 2013, we introduced this program in Canada. Under the
program, Model S customers have the option of selling their vehicle back to us during the period of 36 to 39 months after delivery for a pre-
determined resale value. We account for transactions under the resale value guarantee program as operating leases and accordingly, we defer and
amortize to automotive sales revenue the initial purchase consideration less resale value guarantee amount on a straight-line basis, over the
contractual term of the guarantee program. Similarly, we capitalize and depreciate the cost of the respective operating lease vehicles less
expected salvage value to cost of automotive sales over the same period. If a customer decides not to sell their vehicle back to us by the end of
the resale value guarantee term, the amount of the resale value guarantee and operating lease vehicle net book value are then recognized in
automotive sales and cost of automotive sales, respectively.
The resale value guarantee amount represents management’s best estimate as to the resale value of the Model S vehicle and related vehicle
options during the 36 to 39 month period after delivery. We are depreciating our operating lease vehicles to expected salvage value of our
operating lease vehicles at the end of their economic useful life (i.e., the end of their expected operating lease term), and we will adjust our
depreciation estimates as needed if the expected salvage value decreases in future periods. As we accumulate more actual data related to the
resale experience of Model S, we may be required to make significant changes to our estimates.
In 2013, we provided the resale value guarantee to approximately 5,200 Model S deliveries in North America. During the fourth quarter of
2013, we provided the resale value guarantee to approximately 40% of Model S deliveries in North America. We expect the penetration rate of
the resale value guarantee to remain at the current level in the near-term. Model S deliveries with the resale value guarantee currently do not
impact our cash flows and liquidity, since we receive the full amount of cash for the vehicle sales price at delivery. However, this program has
adversely impacted our 2013 revenues and operating results by requiring the amortization of revenues and costs under lease accounting, and will
continue to adversely impact our future revenues and operating results, based on the lease accounting treatment applied to this program.
Furthermore, while we do not assume any credit risk related to the customer, we are exposed to the risk that the vehicles’ resale value may be
lower than our estimates and the volume of vehicles returned to us may be higher than our estimates which could adversely impact our gross
margin.
In Germany and other European markets, we recently announced new leasing and financing options in collaboration with a number of
global financial partners. If customer interest in these options is significant, we may be directly or indirectly subject to resale value risks for the
Model S. We are currently evaluating a number of other customer financing products, including direct small business leases, as a way to better
serve our growing customer base.
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