Tesla 2015 Annual Report Download - page 25

Our business is dependent on the continued supply of battery cells for our vehicles’ battery packs as well as for the battery packs we
produce for other automobile manufacturers. While we believe several sources of the battery cells are available for such battery packs, we have
fully qualified only one supplier for the cells used in such battery packs and have very limited flexibility in changing cell suppliers. Any
disruption in the supply of battery cells from such vendors could disrupt production of our vehicles and of the battery packs we produce for other
automobile manufacturers until such time as a different supplier is fully qualified. Furthermore, fluctuations or shortages in petroleum and other
economic conditions may cause us to experience significant increases in freight charges and raw material costs. Substantial increases in the
prices for our raw materials or prices charged to us, such as those charged by our battery cell manufacturers, would increase our operating costs,
and could reduce our margins if we cannot recoup the increased costs through increased electric vehicle prices. There can be no assurance that
we will be able to recoup increasing costs of raw materials by increasing vehicle prices. Any attempts to increase vehicle prices in response to
increased raw material costs could be viewed negatively by our customers, result in cancellations of vehicle orders and reservations and could
materially and adversely affect our brand, image, business, prospects and operating results.
Our success could be harmed by negative publicity regarding our company or our products, particularly Model S.
Occasionally, third parties evaluate or publish stories regarding our vehicles. For example, in 2013 the New York Times published a
negative review of the Model S and our Supercharger network on a route from Washington, D.C. to Boston. The story created a negative public
perception about Model S, its capabilities and the Supercharger network. To the extent that negative comments about us or our products are
believed by the public, this may cause current or potential customers not to purchase our electric vehicles, including Model S and Model X,
which can materially and adversely affect our business, operating results, financial conditions and prospects.
Our distribution model is different from the predominant current distribution model for automobile manufacturers, which makes
evaluating our business, operating results and future prospects difficult.
Our distribution model is not common in the automobile industry today, particularly in the United States. We plan to continue to sell our
performance electric vehicles in company-
owned Tesla stores and over the internet. While we believe our approach is important to the success of
our technology and vehicles, this model of vehicle distribution is relatively new and unproven, especially in the United States, and subjects us to
substantial risk as it requires, in the aggregate, a significant expenditure and provides for slower expansion of our distribution and sales systems
than may be possible by utilizing a more traditional dealer franchise system. For example, we do not utilize long-established sales channels
developed through a franchise system to increase our sales volume, which may harm our business, prospects, financial condition and operating
results. Moreover, we compete with companies with well-established distribution channels.
We have opened Tesla stores in North America, Europe and the Asia Pacific Region, many of which have been open for only a short
period of time. We have relatively limited experience distributing and selling our performance vehicles through our Tesla stores, especially in
Asia. Our success will depend in large part on our ability to effectively develop our own sales channels and marketing strategies. Implementing
our business model is subject to numerous significant challenges, including obtaining permits and approvals from local and state authorities, and
we may not be successful in addressing these challenges. The concept and layout of our interactive stores, which are typically located in high
profile retail centers, is different than what has previously been used in automotive sales. We do not know whether our store strategy will
continue to be successful. We may incur additional costs in order to improve or change our retail strategy.
Other aspects of our distribution model also differ from those used by traditional automobile manufacturers. For example, we do not
anticipate that we will ever carry a significant amount of vehicle inventory at our stores and customers may need to wait up to a few months
from the time they place an order until the time they receive their vehicle. This type of custom manufacturing is unusual in the premium sedan
market in the United States and it is unproven whether the average customer will be willing to wait this amount of time for such a vehicle. If
customers do not embrace this ordering and retail experience, our business will be harmed.
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