Tesla 2012 Annual Report Download - page 34

Table of Contents
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 battery packs 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, especially Model S. Additionally, final
safety testing for Model S, some versions of which use new, higher density cells in their battery packs, is currently in progress. Accordingly,
there can be no assurance that a field failure of our Model S or other battery packs will not occur, which could damage the vehicle or lead to
personal injury or death and may subject us to lawsuits. We may have to redesign our battery packs, which would be time consuming and
expensive. In addition, negative public perceptions regarding the suitability of lithium-
ion cells for automotive applications could seriously harm
our business.
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 or Model S, may cause indirect adverse publicity for us and our electric vehicles. Such adverse
publicity would negatively affect our brand and harm our business, prospects, financial condition and operating results.
If our vehicles fail to perform as expected, or if we suffer product recalls for our upcoming Model S, our ability to develop, market and sell
our electric vehicles could be harmed.
Our vehicles may contain defects in design and manufacture that may cause them not to perform as expected or that may require repair. For
example, our vehicles use a substantial amount of software code to operate. Software products are inherently complex and often contain defects
and errors when first introduced. While we have performed extensive internal testing, we currently have a limited frame of reference by which to
evaluate the long-term performance of our Tesla Roadster. We have no frame of reference by which to evaluate our Model S upon which our
business prospects depend. There can be no assurance that we will be able to detect and fix any defects in the vehicles prior to their sale to
consumers. We experienced product recalls in May 2009 and October 2010, both of which were unrelated to our electric powertrain. In May
2009, we initiated a product recall after 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 the manufacture of the Tesla Roadster glider, which is the partially
assembled Tesla Roadster that does not contain our electric powertrain. 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. Although the cost of the most recent recall was not material, we may experience additional recalls
in the future, which could adversely affect our brand in our target markets and could adversely affect our business, prospects and results of
operations.
Our electric vehicles, including the Tesla Roadster and Model S, may not perform consistent with customers’ expectations or consistent
with other vehicles currently available. For example, our electric vehicles may not have the durability or longevity of current vehicles, and may
not be as easy to repair as other vehicles currently on the market. Additionally, while we are designing Model S with the intent to achieve a five
star safety rating and an estimated 300 mile range while traveling at a steady speed of 55 miles per hour, there is no assurance that we will be
able to achieve these performance levels. Any product defects or any other failure of our performance electric vehicles to perform as expected
could harm our reputation and result in adverse publicity, lost revenue, delivery delays, product recalls, product liability claims, harm to our
brand and reputation, and significant warranty and other expenses, and could have a material adverse impact on our business, financial condition,
operating results and prospects.
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