August 15, 2014 at 5:20 pm

Tesla's Model S 8-year warranty will hurt earnings in short term

Tesla Motors Inc. is modifying the warranty for its electric Model S sedan by offering unlimited mileage for the drive unit and battery pack for eight years to ease reliability concerns, in a move that will crimp profit.

The “drive-unit warranty has been increased to match that of the battery pack,” Elon Musk, Tesla’s chief executive officer and co-founder, said on the company’s website. “There is also no limit on the number of owners during the warranty period.”

The changes in Model S warranty, which affect both new and existing customers, will have a “moderately negative effect” on earnings in the short term, said Musk, who is also Tesla’s biggest shareholder. The company is making the change to reinforce its belief that electric motors are more reliable than gasoline engines, he said.

The announcement comes after Tesla’s flagship vehicle, ranked as the best-reviewed car of the year by Consumer Reports in February, exhibited flaws following continued use, according to the magazine. In July, automotive data and pricing company Edmunds also reported glitches with its Model S after more than a year of heavy driving. The entire vehicle, including drivetrain, previously had a warranty for four years, or 50,000 miles (80,450 kilometers).

“This obviously addresses concerns owners and potential owners may have had after those reports,” said Alan Baum, an auto analyst at Baum & Associates in West Bloomfield, Michigan. “The bigger issue is have they resolved the manufacturing issues that led to these problems?”

The warranty change may also help boost Model S resale values, Baum said.

Consumer Reports and Edmunds both said flaws they experienced with the Model S, priced from $71,000 in the U.S., were repaired by Palo Alto, California-based Tesla and covered under warranty at no additional cost.

The company on July 31 said its accrued warranty at the end of the second quarter was $84.4 million, up from $36.9 million a year earlier, reflecting the expansion of vehicle sales.

“In hindsight, this should have been our policy from the beginning of the Model S program,” Musk said. “By doing the right thing for Tesla vehicle owners at this early stage of our company, I am confident that it will work out well in the long term.

Tesla fell less than 0.5 percent to $261.89 at 4:30 p.m. in New York. Through Friday’s close the shares had gained 74 percent this year.