Tesla 2016 Annual Report Download - page 18

Our resale value guarantee and leasing programs expose us to the risk that the resale values of vehicles returned to us are lower than our estimates and
may result in lower revenues, gross margin, profitab ility and liquidity.
Weofferresalevalueguaranteestomanyofourcustomers,underwhichsuchcustomersmayselltheirvehiclesbacktousatcertainpointsintimeatpre-
determinedresalevalues.Customerscanleaseourvehiclesthroughbothleasingpartnersandfromusdirectly,throughourcaptivefinancecompanies.Theresale
valuesofanyvehiclesresoldorreturnedtouspursuanttotheseprogramsmaybelowerthanourestimates,whicharebasedonalimitedsecondarymarketforour
vehicles.Ifthevolumeofvehiclesreturnedtousishigherthanourestimatesand/orwearenotabletoresellthem,timelyoratall,ourliquiditycouldbenegatively
impacted.Incaseswherecustomersretaintheirvehiclespasttheguaranteeperiod,ourgrossmarginwillbenegativelyimpactedasallremainingrevenuesand
costsrelatedtothevehiclewillberecognizedatnogrossprofit.
Weapplyleaseaccountingonsalesofvehicleswitharesalevalueguaranteeandonleasesmadedirectlybyus.Underleaseaccounting,werecognizethe
associatedrevenuesandcostsofthevehiclesaleovertimeratherthanfullyupfrontatvehicledelivery.Asaresult,theseprogramsgeneratelowerrevenuesinthe
periodthecarisdeliveredandhighergrossmarginsduringtheperiodoftheresalevalueguaranteeascomparedtopurchasesinwhichtheresalevalueguarantee
doesnotapply.Ahigherthananticipateduptakeundertheseprogramscouldthereforehaveanadverseimpactonourneartermrevenuesandoperatingresults.
Moreover,unliketheresalevalueguaranteeprogramorprogramswithleasingpartnerswhichdonotimpactourcashflowsandliquidityatthetimeofvehicle
delivery,underaleasehelddirectlybyus,wemayreceiveonlyaverysmallportionofthetotalvehiclepurchasepriceatthetimeoflease,followedbyastreamof
paymentsoverthetermofthelease.Totheextentweexpandourleasingprogramwithoutsecuringexternalfinancingorbusinesspartnerstosupportsuch
expansion,ourcashflowandliquiditycouldalsobenegativelyimpacted.
If we fail to effectively manage the residual, financing and credit risks related to our direct Tesla leasing programs our business may suffer.
WeofferfinancingarrangementsthroughourlocalsubsidiariesintheUnitedStates,Canada,GermanyandtheUK,includingleasingdirectlythrough
certainofthosesubsidiaries.Theprofitabilityoftheleasingprogramdependsonourabilitytoaccuratelyprojectresidualvalues,secureadequatefinancingand/or
businesspartnerstofundandgrowthisprogram,andmanagecustomercreditrisk.Ifactualresidualvaluesofourvehiclesarebelowourestimates,wemaysuffer
lowerprofitabilityorpotentiallyhavelosses.Ifweareunabletoadequatelyfundourleasingprogramwitheitherinternalfundsorexternalfinancingsources,we
maybeunabletogrowoursales.Additionally,ifwedonotproperlyscreencustomersfortheircreditworthiness,wemaybeexposedtoexcessivecreditrisksand
associatedlosses.Furthermore,ifourleasingbusinessgrowssubstantially,ourbusinessmaysufferifwecannoteffectivelymanagethegreaterlevelsofresidual
andcreditrisksresultingfromgrowth.Finally,ifwedonotsuccessfullymonitorandcomplywithapplicablenational,stateand/orlocalfinancialregulationsand
consumerprotectionlawsgoverningleasetransactions,wemaybecomesubjecttoenforcementactionsorpenalties,eitherofwhichmayharmourbusiness.
Increases in costs, disruption of supply or shortage of raw materials, in particular lithium-ion cells, could harm our business.
Wemayexperienceincreasesinthecostorasustainedinterruptioninthesupplyorshortageofrawmaterials.Anysuchincreaseorsupplyinterruption
couldmateriallyandnegativelyimpactourbusiness,prospects,financialconditionandoperatingresults.Weusevariousrawmaterialsinourbusinessincluding
aluminum,steel,nickelandcopper.Thepricesfortheserawmaterialsfluctuatedependingonmarketconditionsandglobaldemandforthesematerialsandcould
adverselyaffectourbusinessandoperatingresults.Forinstance,weareexposedtomultiplerisksrelatingtolithium-ioncells.Theserisksinclude:
·theinabilityorunwillingnessofcurrentbatterymanufacturerstobuildoroperatebatterycellmanufacturingplantstosupplythenumbersoflithium-
ioncellswerequire;
·disruptioninthesupplyofcellsduetoqualityissuesorrecallsbybatterycellmanufacturers;
·anincreaseinthecostofrawmaterialsusedinthecells;and
·fluctuationsinthevalueoftheJapaneseyenagainsttheU.S.dollarasourbatterycellpurchasesarecurrentlydenominatedinJapaneseyen.
Ourbusinessisdependentonthecontinuedsupplyofbatterycellsforthebatterypacksusedinourvehiclesandenergystorageproducts.Whilewebelieve
severalsourcesofthebatterycellsareavailableforsuchbatterypacks,wehavefullyqualifiedonlyaverylimitednumberofsuppliersforthecellsusedinsuch
batterypacksandhaveverylimitedflexibilityinchangingcellsuppliers.Inparticular,wehavefullyqualifiedonlyonesupplierforthecellsusedinbatterypacks
forourproductionvehicles.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vehicleprices.Anyattemptstoincreasevehiclepricesinresponsetoincreasedrawmaterialcostscouldresult
incancellationsofvehicleordersandreservationsandthereforemateriallyandadverselyaffectourbrand,image,business,prospectsandoperatingresults.
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