So, what prompted this idea?
We were figuring out how to come up with a product that was better than a lease, that had the best elements of ownership. People like to own things more than rent them. But leases have benefits like tax deductions, you don't have to worry about the residual value, and there's no big initial cash payment. So, how do we put all this together with the option of owning a car?
We wanted to provide the ability to give us back the car for the same residual value of a Mercedes S-class, and obviously that's backstopped by me, not just Tesla. You have protection on the residual value. After the tax credit, there is no down payment. Then when you factor in savings from going from gasoline to electric, and tax deductions, you can own the 85 kWh car for $543 out-of-pocket net.
Tesla immediately took some social media flak for including items like "value of time saved" by driving in the carpool lane and time not spent pumping gas. Those benefits are not exclusive to Tesla. Any EV or NGV gets that…
Even if you don't count the time savings, you can own the car for net cash out of pocket for $500 a month, no marketing gimmicks. Some people wanted to call bull---t on us because we had certain default [calculations] set up on the site, and we have fixed them. But if you select a 60 kWh pack and factor in gas savings and tax deductions, you are net out-of-pocket $500 a month before any time savings are taken into account. I do think there is value to considering not using a gas station.
But why use that as a marketing ploy, when you could have compared the Model S financing to a lease on a Porsche 911S or Aston Martin Vantage, except that it's a lease-to-own deal?
It's more like what you would pay for a BMW 5 series or Audi A6. It depends on your driving habits. I just want to make sure people really do appreciate that $500 is a real number and not some sort of marketing fiction, where you have to take into account non-cash items.
Is the residual value of the Model S set when the financing agreement is signed? Is it locked in to what ALG says it is at the time of the deal? What happens if the Mercedes S-class either jumps or plummets in value when turn-in time happens?
ALG is the benchmark and they have their prediction model, so we're going off their trailing 12-month average for a S550. But you really do own the car. I think the actual residual value is going to be a fair bit above that. The Roadster values have been excellent -- above 50 percent after three years. People drive those things pretty hard, so we feel pretty good about our residual values after three years. I am super confident. We thought about using the segment average, but there might be confusion as to what product we were referring to. I wanted a car people recognized. That's the reference point.
So, who takes the financial hit if the Model S actual resale value underperforms, Tesla or you? Was your pledge basically that, if losses are so great that Tesla can't cover them, you will?
There are some people who question the long-term viability of all electric car companies, and start-up companies in general. I wanted to give people absolute peace of mind no matter what happens with Tesla. I wanted to eliminate that worry.
Hyundai did a similar guarantee program a couple years back. Comparisons?
We looked at that program, and they used an outside insurance company. It would have taken us too long to get it set up, so I thought, "I'll be the insurance company." But we are meeting with an insurance company in the next week or two, so we may transition to that. But for now I'm happy to be the reinsurance company.
So, with a 43 percent residual value, that's $27,000 for a 60 kWh car after three years. Is that really what you think the car is going to be worth?
I think it will be worth more than that. We are putting the guarantee out there so that there's a [residual value] floor, so that it will be no less than that. With the structure of the program, the customer has the right to sell [the car back to Tesla], but not the obligation.
Are Tesla showrooms going to sell used Model S sedans? Where do trade-ins go?
They will. Even today we sell used Roadsters. We stopped [producing] at 2,500 units, so you can buy a certified pre-owned Roadster from a Tesla dealer, and it will be similar with the Model S. When we take the car back, we will do a thorough review, do any upgrades, then sell it again with some increased warranty level or something.
Upgrades? Such as if there are battery advances in the next few years? Will it be possible to swap out the original battery pack, or is today's buyer stuck with what he's got?
It may not be a three-year frame, but in four or five years, we'll have a step change in battery technology, so there will be a better pack than today. The pack today in the Model S costs half as much and has 50 percent more energy per unit mass than the Roadster.
So in 2018, could a 2013 Model S get a battery pack swapped out if there's a better one?
It can take a new battery pack. Even though the car is used, it could be better than the new car today in terms of increased range and functionality.
I just drove the Model S to Las Vegas and had to wait behind two other cars to use the Supercharger in Barstow. Are you going to improve the network?
We're making dramatic changes to the Supercharging system, huge increases. There's going to be an announcement in about two weeks. There will be a service announcement next week. Then the Supercharger announcement. Then there will be a mystery announcement. Then we'll shut up and hopefully people won't be sick of us. These things are all coming together and maturing at the same time.
What is this about this recent Model X "delay" story? At last spring's shareholders meeting, you said prototype production was going to be mid-14 at earliest, which meant serial production late '14. How did this story get a life of its own?
We're kind of puzzled by that. When we published the 10-K (the annual report filed with U.S. securities regulators), what was old news was thought of by some people as new news. They didn't check with us. But some people thought it was a revelation.
Any possibility that Tesla and Solar City could join forces for some sort of incentivized promotion, such as, "Buy a Tesla, get a free home solar panel?"
We do some joint promotion and it can be cost effective to have the high-powered connector installed at same time as doing solar panels. But Solar City is kind of backlogged, and we are too. We're just focused on internal execution issues. [For Tesla], service is my main focus right now; previously it was production and supply chain. At Solar City, we are ramping up the run rate that we can do quality installations without the wheels coming off the bus. We might do joint things in the future, but right now you can save money by doing the high-powered connector at the same time as solar panels.