Tesla 2011 Annual Report Download - page 63

Table of Contents
resolve these problems. A major breach of our network security and systems could have serious negative consequences for our businesses and
future prospects, including possible fines, penalties and damages, reduced customer demand for our vehicles, and harm to our reputation and
brand.
Our vehicles make use of lithium-ion battery cells, which on rare occasions have been observed to catch fire or vent smoke and flame.
The battery pack in the Tesla Roadster makes use of lithium-ion cells, which have been used for years in laptops and cell phones. We also
currently intend to make use of lithium-ion cells in the battery pack for the Model S and any future vehicles we may produce. On rare occasions,
lithium-ion cells can rapidly release the energy they contain by venting smoke and flames in a manner that can ignite nearby materials. Highly
publicized incidents of laptop computers and cell phones bursting into flames have focused consumer attention on the safety of these cells. The
events have also raised questions about the suitability of these lithium-ion cells for automotive applications. To address these questions and
concerns, a number of cell manufacturers are pursuing alternative lithium-ion battery cell chemistries to improve safety. We have designed our
battery pack to passively contain any single cell’s release of energy without spreading to neighboring cells and we are not aware of any such
incident in our customers’ vehicles. We have tested the batteries and subjected them to damaging treatments such as baking, overcharging,
crushing or puncturing to assess our battery pack’s response to deliberate and sometimes destructive abuse. However, we have delivered only a
limited number of Tesla Roadsters to customers and have limited field experience with our vehicles. Accordingly, there can be no assurance that
a field failure of our battery packs will not occur, which could damage the vehicle or lead to personal injury or death and may subject us to
lawsuits. In addition, we store a significant number of lithium-
ion cells at our manufacturing facility. Any mishandling of battery cells may cause
disruption to the operation of our facilities. While we have implemented safety procedures related to the handling of the cells, there can be no
assurance that a safety issue or fire related to the cells would not disrupt our operations. Such damage or injury would likely lead to adverse
publicity and potentially a safety recall. Moreover, any failure of a competitor’s electric vehicle, especially those that use a high volume of
commodity cells similar to the Tesla Roadster, may cause indirect adverse publicity for us. Such adverse publicity would negatively affect our
brand and harm our business, prospects, financial condition and operating results.
We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to
successfully defend or insure against such claims.
We may become subject to product liability claims, which could harm our business, prospects, operating results and financial condition.
The automobile industry experiences significant product liability claims and we face inherent risk of exposure to claims in the event our vehicles
do not perform as expected or malfunction resulting in personal injury or death. Our risks in this area are particularly pronounced given the
limited number of vehicles delivered to date and limited field experience of those vehicles. A successful product liability claim against us could
require us to pay a substantial monetary award. Moreover, a product liability claim could generate substantial negative publicity about our
vehicles and business and inhibit or prevent commercialization of other future vehicle candidates which would have material adverse effect on
our brand, business, prospects and operating results. We maintain product liability insurance for all our vehicles with annual limits of
approximately $21 million on a claims-made basis, but we cannot assure that our insurance will be sufficient to cover all potential product
liability claims. Any lawsuit seeking significant monetary damages either in excess of our coverage, or outside of our coverage, may have a
material adverse effect on our reputation, business and financial condition. We may not be able to secure additional product liability insurance
coverage on commercially acceptable terms or at reasonable costs when needed, particularly if we do face liability for our products and are
forced to make a claim under our policy.
In connection with the development and sale of our planned Model S, we will need to comply with various additional safety regulations
and requirements that were not applicable to the sales of our Tesla Roadsters, with which it may be expensive or difficult to comply. For
example, we will need to pass certain frontal impact tests
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