TESLA MOTORS INC
FORM 10-K (Annual Report)
Filed 02/24/16 for the Period Ending 12/31/15
Address 3500 DEER CREEK RD
PALO ALTO, CA 94070 Telephone 650-681-5000
CIK 0001318605 Symbol TSLA
SIC Code 3711 – Motor Vehicles and Passenger Car Bodies Industry Auto & Truck Manufacturers
Sector Consumer Cyclical Fiscal Year 12/31
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015 OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
Commission File Number: 001-34756
Tesla Motors, Inc. (Exact name of registrant as specified in its charter)
Delaware 91-2197729 (State or other jurisdiction of
incorporation or organization) (I.R.S. Employer
3500 Deer Creek Road Palo Alto, California 94304
(Address of principal executive offices) (Zip Code) (650) 681-5000
(Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered Common Stock, $0.001 par value The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer x Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x The aggregate market value of voting stock held by non-affiliates of the registrant, as of June 30, 2015, the last day of registrant’s most recently completed second fiscal quarter, was
$26,340,519,416 (based on the closing price for shares of the registrant’s Common Stock as reported by the NASDAQ Global Select Market on June 30, 2015). Shares of Common Stock held by each executive officer, director, and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of January 31, 2016, there were 132,056,338 shares of the registrant’s Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such proxy statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended December 31, 2015.
TESLA MOTORS, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2015
INDEX Page PART I.
Item 1. Business 4 Item 1A. Risk Factors 13 Item 1B. Unresolved Staff Comments 27 Item 2. Properties 28 Item 3. Legal Proceedings 28 Item 4. Mine Safety Disclosures 28
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 29 Item 6. Selected Financial Data 31 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 43 Item 8. Financial Statements and Supplementary Data 45 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 74 Item 9A. Controls and Procedures 74 Item 9B. Other Information 74
Item 10. Directors, Executive Officers and Corporate Governance 75 Item 11. Executive Compensation 75 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 75 Item 13. Certain Relationships and Related Transactions, and Director Independence 75 Item 14. Principal Accountant Fees and Services 75
Item 15. Exhibits and Financial Statement Schedules 75
Forward-Looking Statements The discussions in this Annual Report on Form 10-K contain forward-looking statements reflecting our current expectations that involve risks and
uncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, profitability, expected cost reductions, capital adequacy, expectations regarding demand and acceptance for our technologies, growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words “anticipates”, “believes”, “estimates”, “expects”, “intends”, “may”, “plans”, “projects”, “will”, “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do not assume any obligation to update any forward-looking statements.
P ART I
I TEM 1. BUSINESS Overview
We design, develop, manufacture and sell high-performance fully electric vehicles and energy storage products. We have established our own network of vehicle sales and service centers and Supercharger stations globally to accelerate the widespread adoption of electric vehicles. Our vehicles, electric vehicle engineering expertise, and business model differentiates us from incumbent automobile manufacturers.
We currently produce and sell two fully electric vehicles, the Model S sedan and the Model X sport utility vehicle (SUV). Both vehicles offer exceptional performance, functionality and attractive styling. We commenced deliveries of Model S in June 2012 and as of December 31, 2015 we have delivered over 107,000 new Model S vehicles worldwide. We have continued to improve Model S by introducing performance, all-wheel drive dual motor, and autopilot options, as well as free over-the-air software updates.
We commenced customer deliveries of Model X in the third quarter of 2015. This unique vehicle offers exceptional safety, seating for seven people, all- wheel drive, and our autopilot functionality. We are currently ramping production and deliveries of Model X in the United States and plan to offer it in Europe and Asia in 2016.
After the Model X, our goal is to introduce the Model 3, a lower priced sedan designed for the mass market. We intend to unveil Model 3 in the first quarter of 2016 and start production and deliveries in late 2017.
The commercial production of fully electric vehicles that meets consumers’ range and performance expectations requires substantial design, engineering, and integration work on almost every system of our vehicles. Our design and vehicle engineering capabilities, combined with the technical advancements of our powertrain system, have enabled us to design and develop electric vehicles that we believe overcome the design, styling, and performance issues that have historically limited broad consumer adoption of electric vehicles. As a result, our customers enjoy several benefits, including: · Long Range and Recharging Flexibility. Our vehicles offer ranges that significantly exceed those of any other commercially available electric
vehicle. In addition, our vehicles incorporate our proprietary on-board charging system, permitting recharging from almost any available electrical outlet. Our vehicles also offer fast charging capability from our Supercharger network. We believe the long-range and charging flexibility of our vehicles will help reduce consumer anxiety over range, alleviate the need for expensive, large-scale charging infrastructure, and differentiate our vehicles as compared to those of our competitors.
· High-Performance Without Compromised Design or Functionality. Our vehicles deliver unparalleled driving experiences with instantaneous and sustained acceleration through an extended range of speed. In addition, our vehicles provide best in class storage in the trunk and hood while offering design and performance comparable to, or better than, other premium vehicles.
· Energy Efficiency and Cost of Ownership. Our vehicles offer consumers an attractive cost of ownership when compared to similar internal combustion engine or hybrid electric vehicles. Using only an electric powertrain enables us to create more energy efficient vehicles that are mechanically simpler than currently available hybrid or internal combustion engine vehicles. The cost to fuel our vehicles is less compared to internal combustion vehicles. We also expect our electric vehicles will have lower relative maintenance costs than hybrid, plug-in hybrid, or internal combustion engine vehicles due to fewer moving parts and the absence of certain components, including oil, oil filters, spark plugs and engine valves. Additionally, government incentives that are currently available can reduce the cost of ownership even further.
We sell our vehicles through our own sales and service network which we are continuing to grow globally. We believe the benefits we receive from distribution ownership will enable us to improve the overall customer experience, the speed of product development and the capital efficiency of our business. We are also continuing to build our network of Superchargers in the United States, Europe and Asia to provide fast charging that enables convenient long distance travel.
In addition to developing our own vehicles, we sell energy storage products. We recently announced the next generation of our energy storage products, the 7 kWh and 10 kWh Powerwall for residential applications and the 100 kWh Powerpack for commercial and industrial applications. We began production and deliveries of these products, which we market under the Tesla Energy brand, in the third quarter of 2015.
We manufacture our products primarily at our facilities in Fremont, California, Lathrop, California, Tilburg, Netherlands and at our Gigafactory near Reno, Nevada. We are currently using battery packs manufactured at the Gigafactory for our energy storage products, and will do so for our vehicles in the future.
Our Vehicles and Products We currently design, develop, manufacture and sell fully electric vehicles and energy storage products.
Model S Model S is a fully electric, four-door, five-adult passenger sedan that offers compelling range and performance with zero tailpipe emissions. Model S offers
a range on a single charge of up to 288 miles as determined using the United States EPA’s combined two-cycle city/highway test. We offer performance and all- wheel drive dual motor system options. The performance version of our All-Wheel Drive Dual Motor Model S accelerates from 0 to 60 miles per hour in 2.8 seconds with the Ludicrous speed upgrade.
Model S offers a unique combination of functionality, convenience, safety and styling without compromising performance and energy efficiency. With the battery pack in the floor of the vehicle and the motor and gearbox in line with the rear axle, our single motor Model S provides best in class storage space. Model S is also available with premium luxury features, including a 17 inch touch screen driver interface, our advanced autopilot system with both active safety and convenience features, and over-the-air software updates. We believe the combination of performance, safety, styling, convenience and energy efficiency of Model S positions it as a compelling alternative to other vehicles in the luxury and performance segments.
Model X Model X is a sport utility vehicle that offers exceptional functionality with high performance features such as our fully electric, all-wheel drive dual motor
system and our autopilot system. Model X provides up to 257 miles of range on a single charge, and can accelerate from 0 to 60 as quickly as 3.2 seconds with the Ludicrous speed upgrade. Model X seats seven adults and incorporates a unique falcon wing door system for superior access to the second and third seating rows. Although the National Highway Traffic Safety Administration has not yet conducted crash testing on Model X, based on our internal testing, we expect Model X to receive the highest safety rating in every category. We began customer deliveries of Model X in the third quarter of 2015 in the United States. After its initial launch in the United States, Model X will be sold in all the markets where Model S is available including in Asia and Europe.
Model 3 We have also publicly announced our intent to develop a third generation electric vehicle, called Model 3, to be produced at the Tesla Factory. We intend to
offer this vehicle at a lower price point and expect to produce it at higher volumes than our Model S or Model X. We plan to unveil Model 3 in March of 2016 and expect to start production and deliveries of this vehicle in late 2017.
Energy Storage Applications Using the energy management technologies and manufacturing processes developed for our vehicle powertrain systems, we have developed energy storage
products for use in homes, commercial sites and utilities. The applications for these battery systems include backup power, peak demand reduction, demand response and wholesale electric market services. We began selling our home systems in 2013 and our commercial and utility systems in 2014. We recently announced the next generation of our energy storage products under the Tesla Energy brand.
The Tesla Energy product portfolio will include energy storage products with a wide range of applications, from use in single homes to use in larger utility- scale projects. Tesla Powerwall is a rechargeable lithium-ion battery designed to store energy at a residential and small commercial level for load shifting, backup power and self-consumption of solar power generation. Powerwall is available in storage sizes of 10kWh, optimized for backup applications, or 7kWh, optimized for daily use applications. In addition, we offer a 100 kWh Powerpack for peak shaving, load shifting and demand response for commercial customers and for renewable firming and a variety of grid services for utilities. For utility scale systems, 100kWh battery blocks can be grouped together to offer installation of over 10MWh. We began production of our Tesla Energy products at the Gigafactory in the fourth quarter of 2015.
Technology Our core competencies are powertrain engineering, vehicle engineering, innovative manufacturing and energy storage. Our core intellectual property resides
not only within our electric powertrain, but also within our ability to design a vehicle that utilizes the unique advantages of an electric powertrain and the latest advancements in consumer technologies. Our powertrain consists of our battery pack, power electronics, motor, gearbox and control software. We designed our powertrain originally for our first vehicle, the Tesla Roadster, and commercialized improvements into vehicles manufactured by Daimler and Toyota, and ultimately into the Model S and Model X. Today, we offer several powertrain variants for the Model S and Model X that incorporate years of research and development performed since the original design. In addition, we have designed our vehicles to incorporate the latest advances in consumer technologies, such as mobile computing, sensing, displays, and connectivity. Further evolution of our technology continues for Model 3, which we plan to offer at significantly lower price. In addition, advancements originally commercialized in our vehicles are being leveraged for our storage applications.
Battery Pack We design our battery packs to achieve high energy density at a low cost while also maintaining safety, reliability and long life. Our proprietary technology
includes systems for high density energy storage, cooling, safety, charge balancing, structural durability, and electronics management. We have also pioneered advanced manufacturing techniques to manufacture large volumes of battery packs with high quality and low costs.
We have significant expertise in the safety and management systems needed to use lithium-ion cells in the automotive environment, and have actively worked with lithium-ion cell suppliers to further optimize cell designs to increase overall performance. These advancements have enabled us to improve cost and performance of our batteries over time. For example, in 2015 alone, we upgraded the battery of our lowest range Model S from 60 kWh to 70 kWh, and our highest range Model S to 90 kWh.
Our engineering and manufacturing efforts have been performed with a longer-term goal of building a foundation for further development. For instance, we have designed our battery pack to permit flexibility with respect to battery cell chemistry and form factor. In so doing, we can leverage the substantial investments and advancements being made globally by battery cell manufacturers to continue to improve cost. We maintain extensive testing and R&D capabilities at the individual cell level, the full battery-pack level, and other critical battery pack systems. As a result, we have built an expansive body of knowledge on lithium-ion cell vendors, chemistry types, and performance characteristics. We believe that the flexibility of our designs, combined with our research and real-world performance data, will enable us to continue to evaluate new battery cells as they become commercially viable, and thereby optimize battery pack system performance and cost for our current and future vehicles.
Power Electronics The power electronics in our electric vehicle powertrain govern the flow of high voltage electrical current throughout the vehicle. The power electronics
have two primary functions, powering our electric motor to generate torque while driving and delivering energy into the battery pack while charging.
The first function is accomplished through the drive inverter, which converts direct current (DC) from the battery pack into alternating current (AC) to drive our induction motors. The drive inverter also provides “regenerative braking” functionality, which captures energy from the wheels to charge the battery pack when needed. Tesla has developed a family of drive inverter designs that are customized to its proprietary motor designs to most efficiently meet the demands of each of our vehicles. The primary technological advantages to our designs include the ability to drive large amounts of current in a small physical package.
The second function, charging the battery pack, is accomplished by the charger, which converts alternating current (usually from a wall outlet or other electricity source) into direct current that can be accepted by the battery. Tesla vehicles can recharge on a wide variety of electricity sources due to the design of this charger, from a common household outlet to high power circuits meant for more industrial uses. In most markets, Tesla vehicles come with a Mobile Connector that allows for multiple different charging services to be used. In many markets, Tesla offers a Tesla Wall Connector that can be set up to provide higher power charging than the Mobile Connectors.
On the road, customers can also charge using our Supercharger network or at a variety of destinations that have deployed our charging equipment. In addition, Model S vehicles can charge at a variety of public charging stations around the world, either natively or through a suite of adapters. This flexibility in charging provides customers with additional mobility, while also allowing them to conveniently charge the vehicle overnight at home.
Dual Motor Powertrain In October of 2014, we launched the initial version of our dual motor powertrain, which uses two electric motors to provide greater efficiency, performance,
and range in an all-wheel drive configuration. Conventional all-wheel drive vehicles distribute power to the wheels from a single engine driving a complex mechanical transmission system. By contrast, Tesla’s dual motor powertrain digitally and independently controls torque to the front and rear wheels. The almost instantaneous response of the motors, combined with low centers of gravity provides drivers with controlled performance and increased traction control.
Vehicle Control and Infotainment Software The performance and safety systems of our vehicles and their battery packs require sophisticated control software. There are numerous processors in our
vehicles to control these functions, and we write custom firmware for many of these processors. The flow of electricity between the battery pack and the motor must be tightly controlled in order to deliver the performance and behavior expected in the vehicle. For example, software algorithms enable the vehicle to mimic the “creep” feeling which drivers expect from an internal combustion engine vehicle without having to apply pressure on the accelerator. Similar algorithms control traction, vehicle stability and the sustained acceleration and regenerative braking of the vehicle. Software also is used extensively to monitor the charge state of each of the cells of the battery pack and to manage all of its safety systems. Drivers use the information and control systems in our vehicles to optimize performance, customize vehicle behavior, manage charging modes and times and control all infotainment functions. We develop almost all of this software, including most of the user interfaces, internally.
Autopilot Systems We have developed an expertise in vehicle autopilot systems, including auto-steering, traffic aware cruise control, lane changing, automated parking, driver
warning systems and automated braking functions. In October of 2014, we began equipping all Model S vehicles with hardware to allow for the incremental introduction of autopilot technology. Our autopilot systems relieve our drivers of the most tedious and potentially dangerous aspects of road travel. Although the driver is ultimately responsible for controlling the vehicle, our system provides safety and convenience functionality that allows our customers to rely on it much like the system that airplane pilots use when conditions permit. Our autopilot system leverages an advanced set of hardware including a forward radar, a forward- looking camera, 12 long-range ultrasonic sensors, and a high-precision digitally controlled electric assist braking system. This hardware suite, along with over-the- air firmware updates and field data feedback loops from the onboard camera, radar, ultrasonics, and GPS, enables the system to continually learn and improve its performance.
Vehicle Design and Engineering In addition to the design, development and production of the powertrain, we have created significant in-house capabilities in the design and engineering of
electric vehicles and electric vehicle components and systems. We design and engineer bodies, chassis, interiors, heating and cooling and low voltage electrical systems in house and to a lesser extent in conjunction with our suppliers. Our team has core competencies in computer aided design and crash test simulations which we expect to reduce the product development time of new models.
Additionally, our team has expertise in lightweight materials, a very important characteristic for electric vehicles given the impact of mass on range. Model S and Model X are built with a lightweight aluminum body and chassis which incorporates a variety of materials and production methods that help optimize the weight of the vehicle.
Vehicle Sales and Marketing Company-Owned Stores and Galleries
We market and sell cars directly to consumers through an international network of company-owned stores and galleries. Our Tesla stores and galleries are highly visible, premium outlets in major metropolitan markets, some of which combine retail sales and service. We have also found that opening a service center in a new geographic area can increase demand. As a result, we have complemented our store strategy with sales facilities and personnel in service centers to more rapidly expand our retail footprint. We refer to these as “Service Plus” locations. Including all of our stores, galleries, Service Plus and service facilities, we operated 208 locations around the world as of December 31, 2015.
We own our sales and service network because the traditional franchised distribution and service model is not viable for a business like ours. In our company-owned network, our customers deal directly with our own Tesla-employed sales and service staff, creating a differentiated buying experience from the buying experience consumers have with franchised automobile dealers and service centers. We believe we will also be able to better control costs of inventory, manage warranty service and pricing, maintain and strengthen the Tesla brand, and obtain rapid customer feedback.
Tesla Supercharger Network We are building a network of up to 120 kW fast charging equipment, each called a Tesla Supercharger, throughout North America, Europe and Asia for fast
charging of Tesla vehicles. Our Supercharger network is a strategic corporate initiative designed to remove a barrier to the broader adoption of electric vehicles caused by the perception of limited vehicle range and to provide fast charging to enable long-distance travel. The Tesla Supercharger is an industrial grade, high speed charger designed to replenish 170 miles of range in the battery pack in as little as 30 minutes. Supercharger stations typically have between four to ten Superchargers and are strategically placed primarily along well-travelled highways to allow Model S and Model X owners to enjoy long distance travel with convenient, minimal stops. As of December 31, 2015, we had 584 Supercharger stations open in North America, Europe, and Asia. We are planning to continue to expand the Supercharger network in the United States, Europe and Asia.
Destination Charging We are working with a wide variety of hospitality locations, including hotels and popular destinations, to offer an additional charging option for our
customers. These destination charging partners deploy our wall connectors and provide charging to Model S owners that patronize their businesses. As of December 31, 2015, over 1,800 locations around the world had more than 3,100 Tesla wall connectors installed.
Orders and Reservations We typically carry a very limited inventory of our vehicles at our Tesla stores. The vast majority of our customers customize their vehicle by placing an
order with us via the Internet. To begin production or make a reservation, we require an initial payment which is collected once the customer has selected the vehicle specifications and has entered into a purchase agreement. We require all remaining payment of the purchase price of the vehicle upon delivery of the vehicle to the customer.
Marketing Our principal marketing goals are to:
· generate demand for our vehicles and drive leads to our sales teams; · build long-term brand awareness and manage corporate reputation; · manage our existing customer base to create loyalty and customer referrals, including through our referral programs; and · enable customer input into the product development process.
Historically, we have been able to generate significant media coverage of our company and our vehicles, and we believe we will continue to do so. To date, media coverage and word of mouth have been the primary drivers of our sales leads and have helped us achieve sales without traditional advertising and at relatively low marketing costs.
Vehicle Service and Warranty Service
We provide service for our electric vehicles at our company-owned service centers, at our Service Plus locations or, in certain areas for an additional charge, through Tesla Ranger mobile technicians who provide services that do not require a vehicle lift. We owned and operated 118 service locations as of December 31, 2015. We are continuing our plan to build a number of additional service centers in several markets worldwide.
Our vehicles are designed with the capability to wirelessly upload the data to us via an on-board system with cellular connectivity, allowing us to diagnose and remedy many problems before ever looking at the vehicle. When maintenance or service is required, a customer can schedule service by contacting one of our Tesla service centers. Our Tesla Rangers, or mobile service team, can also perform an array of services from the convenience of a customer’s home or other remote location.
Our company-owned service centers enable our technicians to work closely with our engineers and research and development teams in Silicon Valley to identify problems, find solutions, and incorporate improvements faster than incumbent automobile manufacturers.
New Vehicle Limited Warranty, Maintenance and Extended Service Plans We provide a four year or 50,000 mile New Vehicle Limited Warranty with every new vehicle, subject to separate limited warranties for the supplemental
restraint system and battery. For the battery and drive unit on our current new vehicles, we offer an eight year, infinite mile warranty, although the battery’s charging capacity is not covered.
In addition to the New Vehicle Limited Warranty, we offer a comprehensive maintenance program for every new vehicle, which includes plans covering prepaid maintenance for up to eight years or up to 100,000 miles and an Extended Service plan. The maintenance plans cover annual inspections and the replacement of wear and tear parts, excluding tires and the battery. The Extended Service plan covers the repair or replacement of vehicle parts for up to an additional four years or up to an additional 50,000 miles after the New Vehicle Limited Warranty.
Our New Vehicle Limited Warranty and Extended Service plans are subject to certain limitations, exclusions or separate warranties, including on certain wear items, such as tires, brake pads, paint and general appearance, and battery performance, and are intended to cover parts and labor to repair defects in material or workmanship in the body, chassis, suspension, interior, electronic systems, battery, powertrain and brake system. In addition, all prepaid maintenance and Extended Service plans must be purchased within a specified period of time after vehicle purchase or warranty expiration.
Financial Services We offer loans and leases for our vehicles in North America, Europe and Asia primarily through various financial institutions. We also offer financing
arrangements directly through our local subsidiaries in certain areas of the United States, Germany, Canada and the UK. We intend to broaden our financial services offerings during the next few years.
Certain of our financing programs provide customers with a resale value guarantee under which those customers have the option of selling their vehicle back to us at a preset future date, generally during the period of 36 to 39 months following delivery for a pre-determined resale value . This structure allows the customer to enjoy the benefits of vehicle ownership without concern for resale value. We introduced this program in North America in 2013 and expanded it to selected European and APAC markets in 2014 and 2015. In certain markets, we also offer residual value guarantees to financial institutions which may obligate us to repurchase the vehicles for a pre-determined price.
Manufacturing We conduct vehicle manufacturing and assembly operations at our facilities in Fremont, California; Lathrop, California; and Tilburg, Netherlands. We are
also building a cell and battery manufacturing facility, the Tesla Gigafactory, outside of Reno, Nevada.
The Tesla Factory in Fremont, CA and Manufacturing Facility in Lathrop, CA We manufacture the Model S and Model X and certain components that are critical to our intellectual property and quality standards at the Tesla Factory.
The Tesla Factory contains several manufacturing operations, including stamping, machining, casting, plastics, body assembly, paint operations, seat assembly, final vehicle assembly and end-of-line testing. In addition, we manufacture lithium-ion battery packs, electric motors, gearboxes and components for our vehicles at the Tesla Factory. Several major component systems of our vehicles are purchased from suppliers; however we have a high level of vertical integration in our manufacturing processes at the Tesla Factory. We machine various aluminum components at our facility in Lathrop, California and are nearing completion of a site expansion to include an aluminum castings operation.
We have completed significant investments to increase our production capacity and to begin production of the Model X at the Tesla Factory. This includes the completion and launch of the first phase of a new high volume paint shop, our second body assembly shop, two new stamping lines, a seat assembly facility, and an expansion of the battery pack and drive unit production lines.
We plan to produce Model S, Model X and Model 3 at the Tesla Factory. In some areas of the Tesla Factory, we have designed our investments with flexibility to accommodate multiple products. For example, our new high volume paint shop and new stamping lines can support all three vehicles. Our final vehicle assembly line is producing the Model S and the Model X while certain powertrain components are shared between the Model S and Model X. Over the course of 2016, we plan to make significant additional investments at the Tesla Factory in order to be able to start production and deliveries of Model 3, in late 2017. These include a new body assembly shop and Model 3 final vehicle assembly.
The Netherlands Our European headquarters and manufacturing facilities are located in Amsterdam and Tilburg. The entities through which these facilities are operated hold
the rights to manufacture and distribute all Tesla products to customers in all markets outside of the United States and provide corporate oversight functions for European sales, service, and administrative functions. Our operations in Tilburg include final assembly, testing and quality control for vehicles delivered within the European Union, a parts distribution warehouse for service centers throughout Europe, a center for remanufacturing work and a customer service center.
The Gigafactory outside of Reno, Nevada We are developing the Gigafactory as a facility where we work together with our suppliers to integrate battery material, cell, module and battery pack
production in one location. We plan to use the battery packs manufactured at the Gigafactory for our vehicles and for our Tesla Energy applications. We broke ground on the Gigafactory in June 2014 and began assembling our Tesla Energy products in the first portion of the facility in the fourth quarter of 2015.
We currently expect to produce cells at the Gigafactory beginning in 2016 for use initially in our Tesla Energy products and later for our vehicles. The Gigafactory is currently expected to attain full production capacity in 2020, which is anticipated to be sufficient for the production of approximately 500,000 vehicles annually as well as for the production of our energy storage products. By that time, we expect battery pack production capacity to reach 50 GWh. Of this, we expect to build 35 GWh of cell production capacity at the Gigafactory and purchase 15 GWh of cells from other manufacturers.
We believe that the Gigafactory will allow us to achieve a significant reduction in the cost of our battery packs once we are in volume production with Model 3. The total capital expenditures associated with the Gigafactory through 2020 are expected to be $4 to $5 billion, of which approximately $2 billion is expected to come from Tesla. Panasonic has agreed to partner with us on the Gigafactory with investments in production equipment that it will use to manufacture and supply us with battery cells. We have a supply agreement with Panasonic that, among other things, allows us to purchase a minimum of 1.8 billion lithium-ion battery cells at preferential prices that we intend to purchase from 2014 through 2017. We have agreed to prepare and provide the land, buildings and utilities, invest in production equipment for battery module and pack production and be responsible for the overall management of the Gigafactory.
Supply Chain Our vehicles use over 3,000 purchased parts which we source globally from over 350 suppliers. We have developed close relationships with several key
suppliers particularly in the procurement of cells and certain other key system parts. While we obtain components from multiple sources in some cases, similar to other automobile manufacturers, many of the components used in our vehicles are purchased by us from a single source. In addition, while several sources of the battery cell we have selected for our battery packs are available, we have currently fully qualified only one cell for the battery packs we use in our production vehicles. We are working to fully qualify additional cells from other manufacturers.
We use various raw materials in our business including aluminum, steel, cobalt, nickel and copper. The prices for these raw materials fluctuate depending on market conditions and global d emand for these materials. We believe that we have adequate supplies or sources of availability of the raw materials necessary to meet our manufacturing and supply requirements.
Governmental Programs, Incentives and Regulations California Alternative Energy and Advanced Transportation Financing Authority Tax Incentives
We have entered into agreements in 2012, 2013, and 2015 with the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) that each provide multi-year sales tax exclusions on purchases of manufacturing equipment that will be used for specific purposes including the expansion and ongoing development of Model S, Model X and future electric vehicles and expansion of electric vehicle powertrain production in California. We estimate the combined tax savings under these agreements will be approximately $98 million, of which $56 million has been realized as of December 31, 2015.
Nevada Tax Incentives In connection with the construction of the Gigafactory in Nevada, we have entered into agreements with the State of Nevada and Storey County in Nevada
that will provide abatements for sales and use taxes, real and personal property taxes, and employer excise taxes, discounts to the base tariff energy rates, and transferable tax credits. These incentives will be available for the applicable periods beginning on October 17, 2014 and ending on June 30, 2034, subject to capital investments by Tesla and its partners for the Gigafactory of at least $3.5 billion in the aggregate on or before June 30, 2024, and certain other conditions specified in the agreements. If we do not satisfy one or more conditions under the agreements, Tesla will be required to repay to the respective taxing authorities the amounts of the tax incentives incurred, plus interest.
Tesla Regulatory Credits In connection with the production, delivery, and placement into service of our zero emission vehicles in global markets, we have earned and will continue to
earn various tradable regulatory credits that can be sold to other manufacturers.
Under California’s Zero-Emission Vehicle Regulations and those of states that have adopted the California standards, vehicle manufacturers are required to ensure that a portion of the vehicles delivered for sale in those states during each model year are zero-emission vehicles and partial zero-emission vehicles. Currently, the states of Arizona, California, Connecticut, Maine, Maryland, Massachusetts, New Jersey, New Mexico, New York, Oregon, Rhode Island and Vermont have such laws in effect. These laws provide that a manufacturer may earn credits, referred to as ZEV credits, if they produce more zero-emission vehicles than the minimum quantity required by those laws. Those manufacturers with a surplus of credits may sell the excess credits to other manufacturers who can then apply such credits to comply with the regulatory requirements, including making up for deficits. As a manufacturer solely of zero-emission vehicles, we have no minimum requirement, and therefore earn ZEV credits on each vehicle delivered and placed into service in such states. We have entered into agreements with other automobile manufacturers to sell the ZEV credits that we earn. Recently, California passed amendments to the ZEV mandate that would require, starting in 2018, all large-volume manufacturers (those manufacturers selling 20,000 or more vehicles in California in 2018) to increase the number of zero emission vehicles sold, such that 15.4% of each manufacturers’ fleet must be made of zero emission vehicles by 2025. All states that have adopted the California program will amend their programs to conform to the new California standards.
Additionally, under the Environmental Protection Agency’s (EPA) national greenhouse gas (GHG) emission standards and similar standards adopted by the Canadian government, car and truck manufacturers are required to meet fleet-wide average carbon dioxide emissions standards. Manufacturers who fail to meet such standards have a deficit in their emission profile. Manufacturers whose fleet wide average performs better than such standards may earn credits. Manufacturers may sell excess credits to other manufacturers, who can use the credits to comply with these regulatory requirements. As a manufacturer solely of zero emission vehicles, we earn the full amount of GHG credits established by the standards on each vehicle sold. We have contracted with another automobile manufacturer to sell all earned credits.
Under the National Highway Traffic Safety Administration’s (NHTSA) Corporate Average Fuel Economy (CAFE) standards, car and truck manufacturers are required to meet fleet-wide average fuel economy standards. Manufacturers that fail to meet such standards have a deficit in their fuel economy profile. Manufacturers whose fleet-wide average performs better than such standards may earn credits. Manufacturers may sell excess credits to other manufacturers, who can use such credits to comply with these regulatory requirements. We have entered into agreements to sell the credits that we earn.
Regulation—Vehicle Safety and Testing Our vehicles are subject to, and comply with or are otherwise exempt from, numerous regulatory requirements established by NHTSA, including all
applicable United States Federal Motor Vehicle Safety Standards (FMVSS). Model S and Model X fully comply with all FMVSSs without the need for any exemptions.
As a manufacturer, we must self-certify that our vehicles meet all applicable FMVSS, as well as the NHTSA bumper standard, or otherwise are exempt, before the vehicles can be imported or sold in the United Sta tes. Numerous FMVSS apply to our vehicles, such as crash-worthiness requirements, crash avoidance requirements, and electric vehicle requirements. We are also required to comply with other federal laws administered by NHTSA, including the CAFE standards, T heft Prevention Act requirements, consumer information labeling requirements, Early Warning Reporting requirements regarding warranty claims, field reports, death and injury reports and foreign recalls, and owner’s manual requirements.
The Automobile Information and Disclosure Act requires manufacturers of motor vehicles to disclose certain information regarding the manufacturer’s suggested retail price, optional equipment and pricing. In addition, the Act allows inclusion of city and highway fuel economy ratings, as determined by EPA, as well as crash test ratings as determined by NHTSA if such tests are conducted.
Our vehicles sold in outside of the U.S. are subject to foreign safety testing regulations. Many of those regulations are different from the federal motor vehicle safety standards applicable in the United States and may require redesign and/or retesting.
Regulation—Battery Safety and Testing Our battery pack conforms to mandatory regulations that govern transport of “dangerous goods”, defined to include lithium-ion batteries, which may present
a risk in transportation. The regulations vary by mode of shipping transportation, such as by ocean vessel, rail, truck, or air. We have completed the applicable transportation tests for our battery packs, demonstrating our compliance with applicable regulations.
We use lithium metal oxide cells in our high voltage battery packs. The cells do not contain any lead, mercury, cadmium, other hazardous materials, heavy metals, or toxic materials. Our battery packs include certain packaging materials that contain trace amounts of hazardous chemicals whose use, storage, and disposal is regulated under federal law. We currently have an agreement with a third party battery recycling company to recycle our battery packs. If a customer wishes to dispose of a battery pack from one of our vehicles, we anticipate accepting the depleted battery from the customer without any additional charge.
Automobile Manufacturer and Dealer Regulation State laws regulate the manufacture, distribution, and sale of automobiles, and generally require motor vehicle manufacturers and dealers to be licensed in
order to sell vehicles directly to consumers in the state. As we open additional Tesla stores and service centers, we secure dealer licenses (or their equivalent) and engage in sales activities to sell our vehicles directly to consumers. A few states, such as Texas and Michigan, do not permit automobile manufacturers to be licensed as dealers or to act in the capacity of a dealer, or otherwise restrict a manufacturer’s ability to deliver or service vehicles. To sell vehicles to residents of states where we are not licensed as a dealer, we generally conduct the sale out of the state via the internet, phone or mail. In such states, we have opened “galleries” that serve an educational purpose and are not retail locations.
As we expand our retail footprint in the United States, some automobile dealer trade associations have both challenged the legality of our operations in court and used administrative and legislative processes to attempt to prohibit or limit our ability to operate existing stores or expand to new locations. Although we have thus far prevailed in every lawsuit brought by dealer associations, we expect that the dealer associations will continue to mount challenges to our business model. In addition, we expect the dealer associations to actively lobby state licensing agencies and legislators to interpret existing laws or enact new laws in ways not favorable to Tesla’s ownership and operation of its own retail and service locations.
While we have analyzed the principal laws in the US, EU, China, Japan, UK, and Australia relating to our distribution model and believe we comply with such laws, we have not performed a complete analysis of all jurisdictions in which we may sell vehicles. Accordingly, there may be laws in certain jurisdictions that may restrict our sales and service operations.
Competition The worldwide automotive market, particularly for alternative fuel vehicles, is highly competitive today and we expect it will become even more so in the
future as we introduce additional, lower priced vehicles such as our Model 3.
We believe the primary competitive factors in our markets include but are not limited to: · technological innovation; · product quality and safety; · service options; · product performance; · design and styling; · brand perception;
· product price; and · manufacturing efficiency.
We believe that our vehicles compete in the market both based on their traditional segment classification as well as based on their propulsion technology. For example, Model S competes primarily in the extremely competitive premium sedan market with internal combustion vehicles from more established automobile manufacturers, including Audi, BMW, Lexus and Mercedes. Our vehicles also compete with vehicles propelled by alternative fuels, principally electricity.
Many established and new automobile manufacturers have entered or have announced plans to enter the alternative fuel vehicle market. Overall, we believe these announcements and vehicle introductions promote the development of the alternative fuel vehicle market by highlighting the attractiveness of alternative fuel vehicles, particularly those fueled by electricity, relative to the internal combustion vehicle. BMW, Daimler, Nissan, Fiat, Ford and Mitsubishi, among others, have electric vehicles available today. Moreover, Porsche, Lexus, Audi, Volkswagen and Volvo, as well as a number of prospective automobile manufacturers, are also developing electric vehicles. Electric vehicles have also already been brought to market in China and other foreign countries and we expect a number of those manufacturers to enter the United States market as well. In addition, several manufacturers, including General Motors, Toyota, Ford, and Honda, are each selling hybrid vehicles, and certain of these manufacturers have announced plug-in versions of their hybrid vehicles.
The market for energy storage products is also highly competitive. Established companies as well as emerging companies have introduced products that are similar to our product portfolio. For instance, there are several companies providing individual components of energy storage systems (such as cells, battery modules, and power electronics) as well as others providing integrated systems.
Most of our current and potential competitors in both the automotive and energy storage markets have significantly greater resources than we do, may be able to devote greater resources to the manufacture, sale and support of their products, and have other advantages. We believe our exclusive focus on electric vehicles, electric vehicle components and energy storage products, as well as our history of vehicle development and production, however, are the basis on which we can compete in the global automotive market in spite of the challenges posed by our competition.
Intellectual Property As part of our business, we seek to protect our intellectual property rights in various ways, including through trademarks, copyrights, trade secrets, including
know-how, patents, patent applications, employee and third party nondisclosure agreements, intellectual property licenses and other contractual rights. Additionally, consistent with our mission to accelerate the advent of sustainable transport, we announced a patent policy in which we irrevocably pledged that we will not initiate a lawsuit against any party for infringing our patents through activity relating to electric vehicles or related equipment for so long as such party is acting in good faith. We made this pledge in order to encourage the advancement of a common, rapidly-evolving platform for electric vehicles, thereby benefiting ourselves, other companies making electric vehicles, and the world.
Segment Information We operate as one reportable segment which is the design, development, manufacturing and sales of electric vehicles.
Employees As of December 31, 2015, we had 13,058 full-time employees. To date, we have not experienced any work stoppages, and we consider our relationship with
our employees to be good.
Available Information We file or furnish periodic reports and amendments thereto, including our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K; proxy statements and other information with the Securities and Exchange Commission (SEC). Such reports, amendments, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website ( www.sec.gov ) that contains reports, proxy and information statements, and other information regarding issuers that file electronically. Our reports, amendments thereto, proxy statements and other information are also made available, free of charge, on our investor relations website at ir.teslamotors.com as soon as reasonably practicable after we electronically file or furnish such information with the SEC. The information posted on our website is not incorporated by reference into this Annual Report on Form 10-K.
I TEM 1A. RISK FACTORS You should carefully consider the risks described below together with the other information set forth in this report, which could materially affect our
business, financial condition and future results. The risks described below are not the only risks facing our company. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.
Risks Related to Our Business and Industry We may experience significant delays or other complications in the design, manufacture, launch and production ramp of new vehicles such as Model X and future vehicles such as Model 3, which could harm our brand, business, prospects, financial condition and operating results. We may experience significant delays or other complications in bringing to market and ramping production of new vehicles, such as Model X. While we
commenced Model X deliveries late in the third quarter of 2015, we have only recently begun manufacturing Model X vehicles, and various factors could result in delays in its production ramp, including the capacity of our suppliers to deliver us components at the timing and volumes we require and production limitations that are needed to maintain our quality production standards. In addition, since Model X shares certain production facilities with the Model S, the volume or efficiency of Model S production may be impacted if the ramp of Model X is not as efficient as we plan.
We have experienced delays or other complications in connection with new vehicle models in the past, such as production ramp delays for Model S in 2012 and the All-Wheel Drive Dual Motor Model S, and the launch of Model X. Any significant additional delay or other complication in the ramp of Model X or the development, manufacture, launch and production ramp of our future vehicles, including complications associated with expanding our production capacity, supply chain or regulatory approvals, could materially damage our brand, business, prospects, financial condition and operating results.
The complexity in our business continues to grow as we introduce new products and variants. We have limited experience simultaneously designing, testing, manufacturing, upgrading, adapting and selling our electric vehicles as well as limited
experience allocating our available resources among the design and production of multiple vehicles, such as Model S, Model X and Model 3, and the variants thereof. In the past, when we have added complexity to our production line, we have occasionally experienced unexpected delays. Similar problems may occur in the future as we simultaneously produce Model X and Model S vehicles, as well as future vehicles and Tesla Energy products.
We may be unable to meet our production and delivery plans for Model S and Model X, both of which could harm our business and prospects. We have significantly increased vehicle production and deliveries, and our plans call for significant increases in vehicle production and deliveries going
forward. Our ability to further increase vehicle production, including the ramp of Model X production, will depend upon a number of factors, including our ability to use new manufacturing processes as planned while maintaining our desired quality levels, our suppliers’ ability to deliver sufficient volumes of quality parts to us in a timely manner, and carefully but efficiently making design and production changes to ensure consistently high quality. Certain suppliers have historically experienced delays in meeting our demand or have sought to renegotiate the terms of the supply arrangements, and we continue to focus on supplier capabilities and constraints. While our plans call for us to significantly increase vehicle production and deliveries in a short amount of time, we may be unable to do so. Any delays or disruption in our production of Model S and Model X in line with our plans could materially damage our brand, business, prospects, financial condition and operating results.
In addition, we have introduced a number of new manufacturing technologies and techniques for our vehicles, such as aluminum spot welding systems and high-speed blow forming of certain difficult to stamp vehicle parts. Our vehicles also have unique design features, such as a 17 inch display screen, retractable exterior door handles, and all-new dual motor and autopilot hardware introduced in Model S and falcon-wing doors and other unique features introduced in Model X, each of which poses different manufacturing challenges.
Concurrent with the significant increase in our planned vehicle production levels, we will also need to continue to significantly increase deliveries of our vehicles. We have limited experience in delivering a high volume of vehicles, and we may face difficulties meeting our delivery and growth plans into both existing markets as well as new markets into which we expand. If we are unable to ramp up to meet our delivery goals globally, this could have a material adverse effect on our business, prospects, financial condition and operating results.
Finally, detailed long-term testing of quality, reliability and durability of our vehicles is ongoing, and in the case of Model X vehicles has only recently commenced, and any negative results from such testing could cause production or delivery delays or cost increases.
Our long-term success will be dependent upon our ability to achieve market acceptance of our vehi cles, including Model S and Model X, and new vehicle models such as Model 3. There is no guarantee that Model S, Model X or our future vehicles such as Model 3 will continue to be successfully accepted by the general public,
especially in the long-term. Although we have successfully grown demand for Model S to date and have seen strong initial demand for Model X, and we believe that we will be able to continue to grow demand for these vehicles, there is no guarantee that future demand for Model S or Model X will meet our expectations.
Additionally, we have limited experience in introducing new vehicles. Although our reservation conversion rate for Model X has been strong, we have only recently commenced production and deliveries of Model X. To the extent that we are not able to build Model X in accordance with consumer expectations, customers may cancel their reservations and our future sales could be harmed.
While we believe that there will continue to be separate and strong demand for both Model S and Model X, we have limited experience in selling multiple vehicle models at the same time. Although we believe that each of our vehicles and their variants meet a distinct segment of the automotive market, if our vehicles end up competing with one another in the market, then our ability to sell each vehicle model at planned quantities or prices may be impacted.
Beyond Model X, we have announced our intent to develop Model 3, which we intend to offer at a lower price point and to produce at high volumes. We have not yet finalized the design, engineering or material and component sourcing plans for Model 3. If we are not successful in bringing it to market at the expected price point and the expected volume, our operating results may suffer. Additionally, while we expect Model 3 to be an extremely popular vehicle, we do not know what long-term demand for Model 3 will be and whether it will meet our expectations. Furthermore, the market for vehicles in the price range we expect for Model 3 is larger, but more competitive, than the markets for Model S and Model X.
Problems or delays in bringing the Gigafactory online and operating it in line with our expectations could negatively affect the production and profitability of our products, such as Model 3 or Tesla Energy products. To lower the cost of cell production and produce cells in high volume, we intend to integrate the production of lithium-ion cells and finished battery packs
for our vehicles, including Model 3, and Tesla Energy products at our new Gigafactory. We have limited experience in building a factory, and no direct experience in the production of lithium-ion cells. Also, the cost and complexity of building and operating the Gigafactory could exceed our current expectations and the Gigafactory may take longer to bring online for lithium-ion cell and battery pack production than we anticipate. If we are unable to build the Gigafactory in a timely manner to produce high volumes of quality lithium-