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What happens to warranty if Tesla goes bankrupt?

What happens to warranty if Tesla goes bankrupt?

Hi,
My first post, however I've been following the forum for a few weeks.

I just bought the Model S a couple weeks ago. If Tesla goes Bankrupt is their a sister company that would honor the warranty? What's the probability of another company merging or taking over? I'm a bit anxious that I may be up a creek without a paddle (screwed).

Think Love

redacted | August 21, 2018

Tesla is on as firm a financial foundation as it's ever been, with three profitable car lines running, so it doesn't seem terribly likely; although it's got debt too.

If the company were to reorganize then it would likely honor warranties because it's hard to get people to buy your product when you've ditched warranties on a bunch of people. Think GM.

If the company closes then you'd be out of luck. No sister company around. You might get parts, at least, if somebody bought the assets. But think Fisker, I doubt you can get parts for one very easily.

If you've bought the car, enjoy it and don't worry since there's not much you can do about it. If you sell, you'll have big depreciation.

Tropopause | August 21, 2018

I’d say it’s more likely GM or VW will go bankrupt as they become obsolete. Tesla is more likely to be up there with sizeable companies like Amazon and Apple. Good thing you bought a Tesla because the future is relevant.

tes-s | August 21, 2018

If that is what causes you worry, then you are truly blessed.

parkerjs | August 21, 2018

Hello Christie.jo. I see the risk of bankruptcy as significantly higher than redacted sees above. I'm a proud Model S owner just like you and I share your concerns... they are real. Tesla faces some serious profitability challenges in the months ahead and Tesla's financial reports do not support the notion of three profitable car lines. The financial reality of the current state is that Tesla lost $700 million in the 2nd quarter alone.

In order to turn a net profit, Tesla needs to make and sell substantially more cars per week, per month and per year. The contribution margin at current volumes is insufficient to cover fixed costs, that's why the 2Q loss was so big and that's also why so much attention is paid to the quantity of model 3's produced per week. EM suggests that production will reach 7,500 M3 per week in the 2nd half of the year and if he succeeds in accomplishing that then Tesla will start producing net profits consistently for the first time. So far in its history there has only been one quarter with a net profit.

This is a pivotal time for the company and I for one will never bet against EM. If he loses then it would be an unprecedented event...it's never happened before to my knowledge. If he succeeds then the value of our cars will be just fine. Business challenges ahead or not, I'm still glad I bought the car and I enjoy it every day. I hope you enjoy yours too.

kerryglittle | August 21, 2018

Several years ago I bought my wife an expensive diamond ring from Ben Moss Jewellers. They insisted I buy the extra warranty that would cover the ring if the diamond fell out or some other BS. I trusted them as they had been in business for a long time. Guess what? Two months later they closed the doors. That was a quick out the window $400.00 warranty. I'm sure Tesla will not go bankrupt and will eventually be the world leading car maker. Elon is a stand up guy. After all look at what money he has invested in the company of his own. Most people wouldn't want that headache and would just buy an island and live life to its fullest. Elon works crazy hours to keep his customers happy. Enjoy your car. Tesla will be around for a long time. :-)

rxlawdude | August 21, 2018

They won't go bankrupt. Question is moot.

Tropopause | August 21, 2018

THE END

carlk | August 22, 2018

***They won't go bankrupt. Question is moot.***

What if it goes bankwupt?

ulrichard | August 22, 2018

Actually, I'm worried more than they will turn evil once they have a monopoly just like so many other companies that were great during the growing phase. But that won't happen for another couple of years.

oceanzhang420 | August 22, 2018

even if your warranty is gone doesn't mean your car is worthless. It can still be serviced if it needs repairs. You'll just have to pay the service fee, which is not the end of the world, so don't worry yourself to death.

Lots of people here think it's impossible for tesla to go bankrupt. I have no idea how likely it'll be, but I know companies can't continue to lose $700million every quarter and be liquid enough to survive in the long term. This doesn't worry me as I'm about to buy my 3rd Tesla very soon.

terri.greeno | August 22, 2018

But software updates?

christie.jo | August 22, 2018

Thanks for the input. Greatly appreciated.

Anthony J. Parisio | August 22, 2018

parkerjs,
Model S and X have a 25% profit per car. The Model 3 is at 18% profit per car. The company's hyper expansion uses all this income and more. This leads the company to an over all quarterly loss. However all this money is spent on expanding production and sales capacity. This leads to greater faster income. This will lead them to greater over all profitability. How is this a problem? The more they expand the more it sells. The more they sell the closer to profitability they become. This is not a formula for bankruptcy.

Silver2K | August 22, 2018

Think Positive

NoMoPetrol | August 22, 2018

@terri.greeno "But software updates?"

Once they fix the real time traffic info, I don't care if they ever send another uppdate. Ever.

barrykmd | August 22, 2018

After what the last few software downdates have done, we're better off without them.

minervo.florida | August 22, 2018

Just ask Lutz, he knows.

Hahaha.

mcmack15 | August 22, 2018

christie.jo, anything can happen in a Chapter 11 bankruptcy regarding the warranty. The warranties may be honored, or they may not. If the firm did go Chapter 11 (reorganization) and a ton of warranty claims were on the books and building, then I think it would be a pretty safe bet that the court approved reorganization plan (required to exit bankruptcy) from existing management or new owners would probably exclude taking on the warranty coverage. Keep in mind filing for Chapter 11 can be part of a well designed business plan to greatly reduce, or eliminate, as much debt and other obligations such as leases and warranties as possible.

In a Chapter 7 bankruptcy filing (liquidation) the warranties are lost.

Clearly the financial statements show that the firm's operations are cause for concern. The public debt ratings for the company's debt are well into the 'speculative' (a/k/a junk) category. Folks can debate the merits of the losses and S & P ratings adnauseam, but the bottom line is the cumulative losses have been huge.

Now here is the paradox------for me personally, I would not invest in the firm's stock because I deem it too risky---too speculative for me to sleep at night. So, if that it the case, how can I explain that I shelled out some $75K to $80K and bought a model S about 11 months ago (and absolutely love the car). I won't spend $5K or $10K on the stock, but I took a chance that the firm will survive and spent all that money on the car?????

Additionally, I feel the company's success is overly reliant upon Mr. Musk------in the banking world you never want to lend to a firm where the success of the firm relies on one individual ----------this is one of the key signs of potential problems and ultimate bankruptcy with struggling firms. What happens if the key person unexpectedly dies, has a stroke, etc., etc.? Where does that leave the firm?

So why is my wife's name on the list for the model 3, which she was told should be here between September and November? It makes absolutely no financial sense for us based upon my knowledge from decades working in finance and with firms filing for bankruptcy protection.

But christie.jo, here we are------loving our model S, which I would buy again in a heartbeat, while waiting to spend an additional $55K or so on the 3.

Drive your car like you stole it (just a saying), and enjoy yourself. You will love it. If the firm collapses, maybe we won't ever need those warranties and the car will just drive and drive for a decade or so just needing tires and minor repairs that niche shops can take care of for us.

mdmgso | August 22, 2018

Since Tesla's long term prospects are excellent, and since their current problems are largely cash flow and debt due to ramp up, any bankruptcy would almost certainly be a Chapter 11 reorganization, where Tesla would continue to operate. The shareholders and unsecured debt holders would take a haircut, but it would most likely be business as usual for car owners. Tesla can't, as a practical matter continue to sell cars and operate if it renigs on its warranty.

parkerjs | August 22, 2018

Hello Anthony J. Those are really poor gross margins and they will never provide sufficient contribution margin to cover fixed cost, whether in expansion mode or not. Surely Tesla knows this and surely Tesla is working to improve the operational performance because the situation is not trivial. Time will tell.

mscott | August 22, 2018

I'm much less concerned about warranty and OTA updates than I am the loss of the Supercharger network. That would be a major blow, at least in the short run.

(Says the guys with a 2015 S that is well out of warranty and won't ever be self-driving. ;-)

Rocky_H | August 22, 2018

@christie.jo, GM actually did go bankrupt recently. Barely anyone noticed. The concerns seem exaggerated.

@parkerjs, Quote: “So far in its history there has only been one quarter with a net profit.”

If by “one”, you mean “two”. Mar 31, 2013 at +11.25 million and Sept 30, 2016 at 21.88 million.

@terri.greeno, Quote: “But software updates?”

…are not necessary for the car to continue to operate.

parkerjs | August 22, 2018

Rocky. I accept your correction at two quarters with a net profit.

Tropopause | August 22, 2018

Agree with Carlk- “bankwupt” has already occurred at Tesla. OTOH- The competition wishes they were headed for bankwuptcy but instead they’re playing with bankruptcy.

Go Tesla!

Anthony J. Parisio | August 23, 2018

parkerjs,
"Those are really poor gross margins", are you kidding me! No other manufacturer has greater than 11% per unit margins.

parkerjs | August 23, 2018

Those are net margins, not gross margins.

SUN 2 DRV | August 23, 2018

I don't worry that Tesla will go under, but if they were to start struggling financially they would get bought by either a high tech company wanting to get into the mobility market or by an automaker who didn't want to get left behind in the switch to electric vehicles. In either case they pick up both the assets (people, factories etc) and the liabilities (debts, warranty obligations etc)

I'm an owner and have no qualms about my Tesla's future and plan to drive it for at least 5 more years.

Rocky_H | August 23, 2018

Yeah...I'm going to weigh in on that gross margins thing with some facts and links and data and stuff.

@Anthony J Paraiso, Quote: "Model S and X have a 25% profit per car. The Model 3 is at 18% profit per car. "

@parkerjs, Quote: "Hello Anthony J. Those are really poor gross margins"

@Anthony J. Paraiso, Quote: " are you kidding me! No other manufacturer has greater than 11% per unit margins."

@parkerjs, Quote: "Those are net margins, not gross margins."

That right there, folks, is what we call a false statement. Since Ford seems to be an oft-used comparison, I just went and looked up their gross margins. Multiple sources are showing that Ford's gross margins are at 8.64%. Those are GROSS margins, not NET margins.
https://ycharts.com/companies/F/gross_profit_margin
https://www.gurufocus.com/term/grossmargin/F/Gross-Margin-/Ford-Motor-Co

So let's repeat this: @Anthony J. Paraiso is correct, that Tesla has much higher GROSS margins than Ford. Facts--they're pretty awesome.

mcmack15 | August 23, 2018

Just my two cents.....................I didn't pull the annual or quarterly reports filed with the SEC, and I just searched for gross profit margins for GM and Ford. The results listed the gross profit margins for these firms for each quarter and year end for a few years. Ford had a low quarter with the 8.6%, but the results showed most other periods for both firms to be within spitting distance of the above noted 18% for the model 3. If the 25% for the Tesla S and X is accurate, that is well above the 'industry average.'

I will just throw out one more observation. Firms can and do grow (increase sales) faster than is prudent sometimes, and bankruptcy does result. Management grows and or expands too quickly and the working capital can't support the growth (e.g., liquidity is tied up in inventory, receivables, and paying salaries and benefits to the expanding workforce, etc.). Now, in these situations, if management is reporting profits and positive cash flow, obtaining financing to support the growth is usually available. The problems tend to arise if the firm is not profitable (regardless of the reasons why), or if the cash flow does not support the debt service. In these cases it can prove difficult to obtain financing, and in economic slow downs it can become impossible because the bank examiners (OCC and FDIC) discourage banks from lending to such firms, and force the banks to 'classify' such loans, resulting in a hit against the bank's capital.

When the economy is booming and there is 'excessive exuberance' in the market place, financing tends to be available, but when the economy sours, the financing tends to dry up. This tends to hold true for banks, finance companies, and the bond and stock markets as well, or at least it has since the mid 1970's that I have observed.

In any event, I am hoping Mr. Musk remains healthy and in charge; he meets and exceeds the model 3 production targets; and all works out. I think he has done a tremendous job so far-----look at the cars we are driving! He took on a near impossible task of starting new car company from scratch---with new technology to boot----, and I think he is going to pull it off.............and while I didn't bet on him by purchasing the stock, I did bet on him by buying a model S, with a 3 expected in the next month or three.

parkerjs | August 23, 2018

Facts are indeed pretty awesome Rocky_H and I love them even when I step on my own Johnson. I usually like to be a little more thoughtful and certainly didn't do so in that case. Where I should have constrained my comments was with respect to contribution margin, but I didn't do that. The passing one liner was incorrect and unjustified and I apologize for it. Contribution margin is at the heart of every business related discussion point I've made and its impact on net profitability is exactly as Anthony J. Parisio describes above. That is not a formula for bankruptcy unless the volume doesn't come. That's what threatens the survival of companies in capital intensive industries when they attempt to scale...as Tesla is doing now. The pivotal period that I have referred to elsewhere is centered around the contribution margin being sufficient to cover the fixed costs of the business at scale.

parkerjs | August 23, 2018

mcmack15. Those are great points regarding some of the risks and opportunities, particularly as it relates to financing and access to working capital. I would also add that companies can also grow too slowly and not generate enough free cash to stay viable.

I second your point about "starting a new car company from scratch"...an extremely difficult thing to do and there is a great deal of work still to do before declaring victory.

Buckling the chin strap would be a good idea.

s.grot | August 25, 2018

@Christie.jo , if you are worried about risk of Tesla going Bankrupt just lease the car. That way when they go bankrupt you won’t have to mail the payment to them .

tes-s | August 25, 2018

Unit margins are basically the same as company margins for the large automakers - GM, Ford, Toyota. Chrysler, Nissam, etc. Wehn you sell millions of cars, the corporate overhead is negligible. When you sell 100,000 or so, and are investing heavily, it is a different story.

clay.fujimura | August 25, 2018

I am sure the warranty will be honored by Delorean. But seriously, the bankruptcy process includes allocation of resources to honor existing commitments that would include warranty. The real risk is parts for cars if Tesla goes out of business entirely. While there might be an inventory of parts for new cars and an inventory of parts for recent cars, the availability of parts for the older models could become an issue. Especially since the volume is too low for an after market vendor to come in and make parts. Chances of this happening are so slim, but if you are worried about it, you can always buy a car from another vendor that has different issues.

john.schreiber8 | May 22, 2019

I've had a model 3 for 5 months. No question a game changer product that is among the best cars I have ever owned. That said, the car business is brutal and bankruptcy a possibility. But I can't imagine that another company like Apple wouldn't pick up Tesla. Great product, ahead of the game technology, great brand but more importantly a nationwide charging infrastructure already in place. That is gold. So I make myself feel better by thinking Tesla will survive one way or another.

carlk | May 22, 2019

Just short 200 shares of TSLA. You will be able to buy a new car if Tesla goes bankwupt. Idiot!

Gordon.r.bennett | May 28, 2019

I am certainly no expert, but I doubt with the technology and direction the auto industry is heading there would be a “vanishing” of Tesla HOWEVER, unlike combustion vehicles, where if one gas station closes another takes its place, we are at the mercy of the supercharger network (I know, we can use other sources). I would be (and am) more worries about curtailment of those assets.

Gordon.r.bennett | May 28, 2019

I am certainly no expert, but I doubt with the technology and direction the auto industry is heading there would be a “vanishing” of Tesla HOWEVER, unlike combustion vehicles, where if one gas station closes another takes its place, we are at the mercy of the supercharger network (I know, we can use other sources). I would be (and am) more worries about curtailment of those assets.

Pungoteague_Dave | May 28, 2019

I own a 1952 MG TD. A total of 29k MG-TDs were made, of which 24k were exported to the U.S. MG later made a few more models and went out of business in the 1980's IIRC. Even with so few cars made in MG's history, and despite them being out of business for over 30 years, I still have many more choices of 1950's-era MG services and parts suppliers than I do with my Tesla - there are three MG T-series experts closer to me than the closest Tesla service center. Service will not be an issue.

The real concern would be the connectivity features and Supercharger network. There are a few Teslas reportedly operating in unsupported locales, working fine, just no maps, updates, etc. I think we would be fine given the number of Teslas out there, but doubt we'll see any other tech company swoop in for the Tesla carcass, if that's what it becomes. Too many legacy issues and liabilities - the "free" connectivity that we get now would just be a start.

sr.smr | May 28, 2019

The biggest problem with Tesla seems to be keeping up with demand. Not a bad thing. They have come out with software that add major functionality, hardware upgrades in Raven that are game changers for range and ride comfort, software is being written for HW3 that will be a turning point for self driving. Tesla is by far the Rolls-Royce in the EV market and they are leaving the competition in the dust.

Life is filled with uncertainty, but worrying about what will or will not happen should be avoided at all cost.

bp | May 29, 2019

Unlike other auto manufacturers that have failed, Tesla has a multi-year lead in technology over other manufacturers, #1 market position in the EV segment, increasing sales of their current vehicles, and a pipeline of new vehicles with strong customer interest.

The likelihood of Tesla going bankrupt and shutting down completely seems very, very low.