Is Tesla’s Best Quality its Biggest Flaw?

Gad Elmoznino has been a Tesla die-hard since day one. He jumped in early, buying a Roadster and reserved a Model S the same day. Today he owns both and couldn’t be happier with either of the luxurious, sporty electric cars.

Part of that has to do with Tesla’s exceptional customer service; a silver lining that some critics see as a serious risk to the company’s future.

Elmoznino has owned the Roadster just over two years. “I’ve’ been used to their customer service and responsiveness already,” he said.

Still, it came as a surprise when someone from the Tesla service center in his area called him, and asked to schedule a repair for his Model S, which he’s had since December, 2012. That’s because as far as Elmoznino was concerned; he hadn’t asked for one.

He had, however, sent an email to the company more than two weeks prior to the phone call. The leather covering his rear seats seemed not to have been stretched properly.

WARRANTY CLAIMS COULD HURT BOTTOM LINE

“I was on the edge. They looked a little bit unstretched. I probably would have let it go,” he said. “[The email] was just to say ‘hey look guys, this is happening.’ I know you’re probably not producing the seats yourselves. Here’s my input.”

Unsure of what would happen, he scheduled time for the car to be serviced. Tesla replaced the entire rear seat free of charge.

It isn’t easy to launch an automaker, and Tesla CEO Elon Musk isn’t one to back down from a fight. Just ask any of the dealer associations opposing Tesla’s direct-to-customer business model.

For the most part, Musk has found success. The company reported a profit for the first time at the end of the quarter, share prices are baffling much of Wall Street and sales seem on track.

Tesla’s tendency to fix problems quickly and often without charging owners probably has something to do with that.

How long can such an expensive cure-all last? Tesla forecasts that it will have 21,000 vehicles delivered by the end of this year and Musk expects that number to grow significantly as stores open in Europe and China.

Financial analyst Donn Vickrey of Gradient Analytics isn’t sold on Telsa yet and gave the company’s earnings an “F” rating in May.

Among other uncertainties, Vickrey sees Tesla’s warranty costs as a potential problem.

“As of the last quarter, the estimate is about 1.75 years in reserve. Which is not good when you’ve got a four-year period you’ve got to cover,” Vickrey said. “Could their costs go down over time? Possibly so. But right now it looks like they need double the amount of warranty costs they’re recording.”

It’s still difficult to predict what the warranty costs will be in the long run, Vickrey said, because Tesla is still too new. The Roadster started reaching customers in 2008, which gives the company over five years of data to predict warranty costs. But that data doesn’t mean much for the Model S, which is a completely different vehicle.

Vickrey pointed out that companies like General Motors can predict what warranty costs will be with much more accuracy than Tesla because of their history. More notably, he said Tesla reports warranty accruals at about the same rate as GM. To Vickrey, that boils down to wishful thinking.

Last quarter, Tesla reported about $3.1 million in warranty costs.

“Presumably that’s without battery problems because you wouldn’t think they would be having battery problems this early,” Vickrey said.

Poor leather upholstery like what Elmoznino experienced is far from the only quality issue known about the Model S.

CUSTOMER COMPLAINTS SOLVED

Users on enthusiast forum TeslaMotorsClub.com have compiled a thread dedicated to discussing issues with their cars. One of the commonly discussed topics deals with how some early Model S sedans suffered from stress fractures through their windshields. Again, Tesla paid for the repairs.

Lloyd Marcum is one such user and a Model S owner since December 21, 2012.

“In my experience they have covered items over and above what they are required,” he wrote in an email. For example, he said that Telsa called him a week after taking delivery of the car to ask if all was well. They had noticed several tire pressure warnings.

As it turned out, one of the tires on Marcum’s car had a slow leak. Tesla sent someone to Marcum with a new tire, wheel and sensor to fix the issue at no charge. He estimates the cost would have been around $600.

“I am thrilled with the service so far,” he said.

And so he should be. It isn’t often that an automaker will go literally miles out of the way to make sure its customers remain as happy as day one.

It’s an issue Elmoznino has spent some time thinking about too. He wonders if Tesla will be able to maintain such stellar service as the company looks for higher volume.

SEE ALSO: Tesla Announces 90-Second Battery Swap, Available Later This Year

“I think that’s quite amazing,” he said. “Will they be able to sustain that? I don’t know.”

A Tesla spokesperson did not respond to requests for comment.

MUSK A HEADLINE-GENERATING MACHINE

One thing Tesla has managed to sustain since the start of the year is a series of announcements. Musk’s serial revelations keep his company at the center of attention.

That attention could come back to bite the company and Vickrey explained why.

He said Tesla was able to report its first ever profit last quarter, but those numbers were possible in large part because of paper gains on foreign exchange rates and selling Zero Emission Vehicle (ZEV) credits to other manufacturers.

Of its $562 million revenue reported last quarter, Tesla’s net income was just $11 million. More importantly, about $68 million of that revenue came from selling ZEV credits. Without those sales, net income would have been in the negative.

In 2012, the California Air Resources Board mandated that major automakers must produce a certain number of zero-emissions vehicles. Those companies may also purchase ZEV credits from other companies that build zero-emissions cars in lieu of selling their own.

IS TESLA JUST GAMING THE SYSTEM?

Tesla is in a convenient place right now to capitalize on that policy.

Fiat-Chrysler CEO Sergio Machionne has been vocal about his company losing roughly $10,000 for every electric Fiat 500 it sells. Given that, it can make better business sense for Fiat to buy ZEV credits rather than lose money selling EVs.

But as more automakers begin selling electric cars, the market for ZEV credits will shrink.

Shortly after Tesla reported its first quarter results, the company acknowledged carbon credit income will be phased out by the end of the year. It wasn’t long after the company reported its first profit that shares of its stock peaked at $114.90 per share.

Since then, Musk also said Tesla has enough cash to withstand a major supplier interruption or other unforeseen catastrophe.

Those are relatively short-term provisions, and the fact remains that few people can afford to buy a six-figure car.

Again, Musk has a plan. During a shareholder meeting, he said the company expects to be selling its smaller, less expensive electric car by 2016. It will be priced near the Nissan Leaf and will offer 200 miles of range.

SEE ALSO: Tesla ‘Gen III’ Car Coming in 2016: CEO Says

Even if that timeline comes to be, Tesla could have a battle royale to slug through. It may have a pile of cash lumped up, but that can’t compare with major automaker budgets.

“They will be the least capitalized of the group,” Vickrey said. “Nissan can undercut you all day long.”

Musk’s map to selling a lower cost car is still a couple calendars away, and the automotive landscape will likely have changed by its arrival. But the latest chapter in Tesla’s gripping saga is much closer at hand with the company’s second quarter wrapping up and the latest report soon to follow.

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