Tesla 2011 Annual Report Download - page 64

Table of Contents
for the Model S, which are required for sales exceeding certain annual volumes outside the United States. We performed such a test on the Tesla
Roadster based on European Union testing standards in connection with sales exceeding certain volume thresholds in Australia and Japan, and
two criteria were not met in the test. We may experience difficulties in meeting all the criteria for this test or similar tests for our planned
Model S, which may delay our ability to sell the Model S in high volumes in certain jurisdictions.
We may be compelled to undertake product recalls.
Any product recall in the future may result in adverse publicity, damage our brand and adversely affect our business, prospects, operating
results and financial condition. We previously experienced product recalls in May 2009 and October 2010, both of which were unrelated to our
electric powertrain. In April 2009, we determined that a condition caused by insufficient torquing of the rear inner hub flange bolt existed in
some of our Tesla Roadsters, as a result of a missed process during manufacture of the Tesla Roadster glider. In October 2010, we initiated a
product recall after the 12 volt, low voltage auxiliary cable in a single vehicle chafed against the edge of a carbon fiber panel in the vehicle
causing a short, smoke and possible fire behind the right front headlamp of the vehicle. The cost of fixing this most recent recall is not material.
In the future, we may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles or electric powertrain components
prove to be defective or noncompliant with applicable federal motor vehicle safety standards. Such recalls, voluntary or involuntary, involve
significant expense and diversion of management attention and other resources, which would adversely affect our brand image in our target
markets and could adversely affect our business, prospects, financial condition and results of operations.
Our warranty reserves may be insufficient to cover future warranty claims which could adversely affect our financial performance.
If our warranty reserves are inadequate to cover future warranty claims on our vehicles, our business, prospects, financial condition and
operating results could be materially and adversely affected. We provide a three year or 36,000 miles New Vehicle Limited Warranty with every
Tesla Roadster, which we extended to four years or 50,000 miles for the purchasers of our 2008 Tesla Roadster. In addition, customers have the
opportunity to purchase an Extended Service Plan for the period after the end of the New Vehicle Limited Warranty to cover additional services
for an additional three years or 36,000 miles, whichever comes first. The New Vehicle Limited Warranty is similar to other vehicle
manufacturers’ warranty programs and is intended to cover all parts and labor to repair defects in material or workmanship in the body, chassis,
suspension, interior, electronic systems, battery, powertrain and brake system. We record and adjust warranty reserves based on changes in
estimated costs and actual warranty costs. However, because we only began delivering our first Tesla Roadster in early 2008, we have extremely
limited operating experience with our vehicles, and therefore little experience with warranty claims for these vehicles or with estimating
warranty reserves. Since we began initiating sales of our vehicles, we have continued to increase our warranty reserves based on our actual
warranty claim experience and we may be required to undertake further such increases in the future. As of December 31, 2010, we had warranty
reserves of $5.4 million. We could in the future become subject to a significant and unexpected warranty expense. There can be no assurances
that our existing warranty reserves will be sufficient to cover all claims or that our limited experience with warranty claims will adequately
address the needs of our customers to their satisfaction.
We may need to defend ourselves against patent or trademark infringement claims, which may be time-consuming and would cause us to
incur substantial costs.
Companies, organizations or individuals, including our competitors, may hold or obtain patents, trademarks or other proprietary rights that
would prevent, limit or interfere with our ability to make, use, develop or sell our vehicles or components, which could make it more difficult for
us to operate our business. From time to time, we may receive inquiries from holders of patents or trademarks inquiring whether we infringe
their proprietary rights. Companies holding patents or other intellectual property rights relating to battery packs, electric motors or
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