Tesla 2016 Annual Report Download - page 15

Our long-term success will be dependent upon our ability to achieve market acceptance of our vehi cles, including Model S and Model X, and new
vehicle models such as Model 3.
ThereisnoguaranteethatModelS,ModelXorourfuturevehiclessuchasModel3willcontinuetobesuccessfullyacceptedbythegeneralpublic,
especiallyinthelong-term.AlthoughwehavesuccessfullygrowndemandforModelStodateandhaveseenstronginitialdemandforModelX,andwebelieve
thatwewillbeabletocontinuetogrowdemandforthesevehicles,thereisnoguaranteethatfuturedemandforModelSorModelXwillmeetourexpectations.
Additionally,wehavelimitedexperienceinintroducingnewvehicles.AlthoughourreservationconversionrateforModelXhasbeenstrong,wehaveonly
recentlycommencedproductionanddeliveriesofModelX.TotheextentthatwearenotabletobuildModelXinaccordancewithconsumerexpectations,
customersmaycanceltheirreservationsandourfuturesalescouldbeharmed.
WhilewebelievethattherewillcontinuetobeseparateandstrongdemandforbothModelSandModelX,wehavelimitedexperienceinsellingmultiple
vehiclemodelsatthesametime.Althoughwebelievethateachofourvehiclesandtheirvariantsmeetadistinctsegmentoftheautomotivemarket,ifourvehicles
endupcompetingwithoneanotherinthemarket,thenourabilitytoselleachvehiclemodelatplannedquantitiesorpricesmaybeimpacted.
BeyondModelX,wehaveannouncedourintenttodevelopModel3,whichweintendtoofferatalowerpricepointandtoproduceathighvolumes.We
havenotyetfinalizedthedesign,engineeringormaterialandcomponentsourcingplansforModel3.Ifwearenotsuccessfulinbringingittomarketatthe
expectedpricepointandtheexpectedvolume,ouroperatingresultsmaysuffer.Additionally,whileweexpectModel3tobeanextremelypopularvehicle,wedo
notknowwhatlong-termdemandforModel3willbeandwhetheritwillmeetourexpectations.Furthermore,themarketforvehiclesinthepricerangeweexpect
forModel3islarger,butmorecompetitive,thanthemarketsforModelSandModelX.
Problems or delays in bringing the Gigafactory online and operating it in line with our expectations could negatively affect the production and
profitability of our products, such as Model 3 or Tesla Energy products.
Tolowerthecostofcellproductionandproducecellsinhighvolume,weintendtointegratetheproductionoflithium-ioncellsandfinishedbatterypacks
forourvehicles,includingModel3,andTeslaEnergyproductsatournewGigafactory.Wehavelimitedexperienceinbuildingafactory,andnodirectexperience
intheproductionoflithium-ioncells.Also,thecostandcomplexityofbuildingandoperatingtheGigafactorycouldexceedourcurrentexpectationsandthe
Gigafactorymaytakelongertobringonlineforlithium-ioncellandbatterypackproductionthanweanticipate.IfweareunabletobuildtheGigafactoryina
timelymannertoproducehighvolumesofqualitylithium-ioncellsatreasonableprices,ourabilitytosupplybatterypackstoourvehicleandotherproducts
accordingtoourscheduleand/oratapricethatallowsustosellthemprofitablyandinthequantitiesweestimatecouldbeconstrained.Anysuchproblemsor
delayswiththeGigafactorycouldnegativelyaffectourbrandandharmourbusiness,prospects,financialconditionandoperatingresults.
If our vehicles or vehicles that contain our powertrains fail to perform as expected, our ability to develop, market and sell our electric vehicles could be
harmed.
Ifourvehiclesorvehiclesthatcontainourpowertrainsweretocontaindefectsindesignandmanufacturethatcausethemnottoperformasexpectedorthat
requirerepair,ourabilitytodevelop,marketandsellourvehiclescouldbeharmed.Forexample,theoperationofourvehiclesishighlydependentonsoftware,
whichisinherentlycomplexandcouldconceivablycontaindefectsanderrors.Issuesthathavehistoricallybeenexperiencedbycustomersincludethoserelatedto
thesoftwareforthe17inchdisplayscreen,thepanoramicroofandthe12voltbatteryintheModelS.Althoughweattempttoremedyanyissuesweobserveinour
vehiclesaseffectivelyandasrapidlyaspossible,sucheffortsmaynotbetimely,mayhamperproductionormaynotbeuptothesatisfactionofourcustomers.
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battery
packs,powertrains,vehiclesandTeslaEnergyproducts.Therecanbenoassurancethatwewillbeabletodetectandfixanydefectsinourproductspriortotheir
saletoconsumers.
Anyvehicleproductdefectsoranyotherfailureofourvehiclestoperformasexpectedcouldharmourreputationandresultindeliverydelays,product
recalls,productliabilityclaims,significantwarrantyandotherexpenses,andcouldhaveamaterialadverseimpactonourbusiness,financialcondition,operating
resultsandprospects.OurModelXvehicleshavenotyetbeenevaluatedbyNHTSAforits5-StarSafetyRatings,andwhilebasedonourinternaltestingweexpect
toobtaincomparableratingstothoseachievedbyModelS,thereisnoassurancethiswilloccur.
We are dependent on our suppliers, the majority of which are single source suppliers, and the inability of these suppliers to continue to deliver, or their
refusal to deliver, necessary components of our vehicles in a timely manner at prices, quality levels, and volumes acceptable to us would have a material
adverse effect on our financial condition and operating results.
ModelSandModelXcontainnumerouspurchasedpartswhichwesourcegloballyfromhundredsofdirectsuppliers,themajorityofwhomarecurrently
singlesourcesuppliersdespiteeffortstoqualifyandobtaincomponentsfrommultiplesourceswheneverpossible.Furthermore,wedonotmaintainlong-term
agreementswithanumberofoursuppliers.
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