Tesla scraps residual value guarantees and proves what I’ve said all along


In April 2016 I wrote about Tesla’s residual value guarantees

“The Tesla Residual Value Guarantee, while well intentioned carries risks that we saw crucify the leasing arms of the Big 3. After the tech bubble collapsed at the turn of the Century do you remember the ‘Keep America Rolling’ programme, which was all about free financing for five years? While sales were helped along nicely, the reality was it stored up pain. As new car sales became harder to achieve, new financial products offered sweeter upfront incentives and buyback guarantees (because cheap finance was everywhere and not a differentiator) helped keep the fire stoked. However as front end incentives kept getting juicier, the cars on guaranteed buybacks were starting to return to market at prices well below the ‘guarantee’ leaving automotive finance arms in a whole world of hurt and huge losses. Goldberg & Hegde’s Residual Value Risk and Insurance study in 2009 suggested on average 92% of cars returned to leasing companies recorded losses on return of up to 12%. Any company can guarantee the price of its used product in theory, the question is whether used car buyers will be willing to pay for it. Sadly Tesla does not get a say in what the consumer will be willing to pay. Reading through the guarantee naturally fine-print will taketh away.”

Reuters said, “The discontinuation of the buyback program, as of July 1, allows Tesla to free up cash that had been set aside to buy back Model S cars after three years at a value of at least 50 percent of the base purchase price…The changes come after Tesla warned earlier this month it will miss its vehicle delivery target for a second consecutive quarter.

It faces other challenges, including a regulatory investigation of its Autopilot technology following a May 7 fatal crash and more scrutiny of its financials after a proposed merger with SolarCity Corp.

Within the next 12 months, Tesla has disclosed it could pay a maximum of $192.4 million to cover resale value guarantees on 4,209 vehicles. That amounts to a maximum liability of $45,711 per car, although Tesla could offset payouts by reselling repurchased vehicles.”

The issue as we wrote above is simple – what Tesla can resell used cars for is at the end of the day decided by the consumer.

CEO Musk is a visionary but he is also a rookie in the automotive game. Whether it be his dismissive attitude at the shares being unaffected by a death related to the auto-pilot he so actively promotes or the realisation that production efficiency means so much so late in the game tells you all you need to know. This could well end in a disaster. As I often point out. Toyota bought into Tesla. Then sold out. In a sense it dated the American and saw there was not much under the hood in terms of technology and realised it wasn’t worth holding in the long run. Investors may be fooled by the ‘Tesla’ phenomenon but when a pioneer such as Toyota has spoken indirectly like this it speaks volumes at how far behind they really are.

Perhaps the deal is simple. Buying a 1965 Ford Mustang for the intrinsic value of its push-rod V8 makes sense because you’re buying it for the ‘engineering’. Unlike a Tesla, you are buying a the equivalent of a 3 year old iPhone and there is little value proposition in that. Buying tech is all about the latest and greatest. I am doubting that iPhone4 will become a back in vogue product…

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