Tesla 2015 Annual Report Download - page 35

We retain certain personal information about our customers and may be subject to various privacy and consumer protection laws.
Our collection, use, retention, security and transfer of personal information of our customers is subject to federal, state, and international
laws. These laws continue to be enacted and may be inconsistent from jurisdiction to jurisdiction. Complying with changing international laws
may cause us to incur substantial costs, expose us to legal liability or require us to change our business practices. Our privacy policy is posted on
our website, and any failure by us or our vendor or other business partners to comply with it or with federal, state or international privacy, data
protection or security laws or regulations could result in regulatory or litigation-related actions against us, legal liability, fines, damages and
other costs. Although we take steps to protect the security of our customers’ personal information, we may be required to expend significant
resources to comply with data breach requirements if third parties improperly obtain and use the personal information of our customers or we
otherwise experience a data loss with respect to customers’ personal information. 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.
We may be compelled to undertake product recalls or take other actions, which could adversely affect our brand image and financial
performance.
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, October 2010 and June 2013, none of which was related
to our electric powertrain. In April 2009, we determined that a condition caused by insufficient torqueing 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. 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. In June 2013, we initiated a recall of slightly more than
one thousand Model S vehicles to inspect and repair rear seat strikers that may have been compromised during the assembly process. Rear seat
strikers are used to retain the rear seat backs in an upright position. Failure of this component may have resulted in collapse of the rear seat back
during a crash. Finally, in January 2014, we implemented a firmware update to address issues with certain Universal Mobile Connector NEMA
14-50 adapters, which are part of the charging units and are not part of the vehicles themselves, potentially overheating during charging. In the
future, we may at various times, voluntarily or involuntarily, initiate a recall if any of our vehicles, including Model S, or our 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, and could adversely affect our brand image in our target
markets, as well as our business, prospects, financial condition and results of operations.
Our current and future 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. Warranty reserves include management’s best estimate of the projected costs to
repair or to replace items under warranty. These estimates are based on actual claims incurred to-date and an estimate of the nature, frequency
and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected experience may cause material
changes to our warranty reserves in the future. Subject to separate limited warranties for the supplemental restraint system and battery, we
provide a four year or 50,000 mile New Vehicle Limited Warranty for the purchasers of Model S. The New Vehicle Limited Warranty for
Model S also covers the drive unit for eight years and the battery for a period of eight years or 125,000 miles or unlimited miles, depending on
the size of the vehicle’s battery; although the battery’s charging capacity is not covered under the New Vehicle Limited Warranty or any
Extended Service plan.
In addition, customers have the opportunity to purchase an Extended Service plan for the period after the end of the New Vehicle Limited
Warranty for Model S to cover additional services for an additional four years or 50,000 miles, provided it is purchased within a specified period
of time. The New Vehicle Limited Warranty and Extended Service plans for the Tesla Roadster and Model S are subject to certain limitations,
exclusions or separate warranties, including certain wear items, such as tires, brake pads, paint and general appearance, and battery performance,
and is intended to cover parts and labor to repair defects in material or workmanship in the vehicle including the body, chassis, suspension,
interior, electronic systems, powertrain and brake system. We have previously provided our Tesla Roadster customers with a battery replacement
option to replace the battery in their vehicles at any time after the expiration of the New Vehicle Limited Warranty but before the tenth
anniversary of the purchase date of their vehicles. Additionally, in 2013, as part of our ongoing efforts to improve the customer ownership
experience, we expanded the battery pack warranty and also eliminated the annual service requirement that was needed to keep the New Vehicle
Limited Warranty in effect. Should this change in warranty coverage lead to an increase in warranty claims, we may need to record additional
warranty reserves which would negatively affect our profitability.
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