Tesla ends car buyback program

Tesla ends car buyback program

Tesla Motors Inc. TSLA, quietly discontinued its resale value guarantee program as of July 1.

The program was "discontinued ... so we can keep interest rates as low as possible" and offer "compelling" lease and loan programs to customers, a Tesla spokeswoman said Wednesday. The program was available to those who financed their cars through Tesla official financing partners and programs. It guaranteed that Tesla would buy back the car at a minimum preset value after three years and at preset terms, in some cases at least 50% of the car's base price.

It was first offered in 2013, largely to assuage early-adopter fears and ensure buyers that their Model S, Tesla's first in-house designed and built electric car, would hold value in case sales tanked or other problems arose.

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While much of the recent public attention surrounding Tesla has focused on the car's self-driving or "autopilot" feature, which was implicated in the May 7 deadly crash and has resulted in a NHTSA probe as well as a potential SEC inquiry into whether the company misled investors by not reporting the death at the time of Tesla's May equity offering, the real problems facing Tesla is not so much whether its cars are safe but the increasingly evident lack of demand at any price point.

Last month, Tesla cut the base price of its Model S sedan to $66,000; this happens at a time when Tesla has missed its sales targets in the first two quarters this year. Then earlier today, Musk also added a lower-priced version of its Model X crossover. The new Tesla Model X 60D is priced from $74,000, $9,000 less than the Model X 75D. Equipped with a 60kWh battery,

But the real sign that Tesla is concerned about flailing demand for its cars came later in the day, when Tesla said it had discontinued its resale value guarantee program that assured buyers that cars would retain value over time.

As Reuters adds, the discontinuation of the buyback program, as of July 1, shows the company stepping back on a pledge begun in 2013 that Tesla would buy back its cars financed through specified loan partners for a predetermined resale value after three years. The program was intended to help Tesla control its secondary market and assure buyers that cars would retain value.

This means that used Tesla values are dropping faster than the company had expected in its worst case scenario, and as a result it can no longer afford to fill the gap. With this program ending, demand for new vehicles is set to slump even more as concerns about resale prices emerge.

A Tesla spokesperson said the program was discontinued to "keep interest rates as low as possible and offer a compelling lease and loan program to customers."

What he really meant but would never say is that demand for Teslas, both new and used, is cratering, something which will promptly be reflected in prices of used Teslas as they suddenly hit the market now that the company is no longer backstopping all repurchases. And, we expect, once the public realizes what the true clearing price of these vehicles is, demand for new cars will slump even further in a feedback loop that ends with Tesla eventually running out of cash.

But not quite yet.

The most recent publicly disclosed valued of Tesla's liability created by the resale value guarantee was $1.58 billion as of March 31. The resale value liability had increased by more than 20 percent since the end of 2015. Needless to say, the ending of the program simply means that Musk no longer wanted to accumulate a massive liability which would, sooner or later, have to be met with actual cash outflows by a company which already burn $2 billion annually in a good year.

Haggy | July 13, 2016

I see this as a positive. This was done quietly and Tesla has already seen that it won't affect sales to any significant degree. The program started when people had no idea whether the cars would retain value, but in real life they have retained value far better than the guarantee would force Tesla to buy the cars for, and as far as I know they have never needed to buy back a car because of this. Tesla simply keeps its value better than the cars this plan was set up to compete with.

Tesla would have dropped this at the end of 2014 but they were afraid that some might have taken it as a signal that the cars won't hold their value. The real issue is that the buyback is something that Tesla has to deal with on their books, and puts GAAP numbers even further from the ones that Tesla wants to show.

Had Tesla made this announcement a year ago, we would have seen the same ridiculous pronouncements as the one above, that completely ignore the reality of the market that shows that Tesla retains its value far better than the guarantee. The reality is that the program created a liability on paper that Tesla had to account for, even though there was little chance that they would ever have to pay anything because of it. It most likely will never have to be met with actual cash outflows. That simply ignores the market. You can check Kelly or Edmund or any website you want. The notion that Tesla would have to pay out based on this is pure fiction.

sp_tesla | July 13, 2016

Keeping up nicely with learning curve.

Mike83 | July 13, 2016

Haggy +1

Red Sage ca us | July 13, 2016

Ending the program doesn't mean that those who chose the option over the past three years lost their guarantees. Resale value for Tesla Model S has been fine in the wake of tremendously higher sales than originally expected. Direct competitors' sales have diminished considerably over the same time frame. Though their acclaimed 'exclusivity' is supposed to be a bonus in their favor, their resale values have dropped at twice the rate of Tesla Model S. Oops.

carlk | July 13, 2016

I agree with @Haggy. Accounting liability is likely the reason why Tesla dropped it. And it sure is a sign that Tesla does not think this will affect sales. By now people all got a pretty good idea of what the resale value would be. Not to mention the fear back then that Tesla could go under and makes their car worthless is no longer there.

jon | July 13, 2016

Did TM ever offer this guarantee to the model x line? Just wondering, as my APR for 72 months through TM preferred Chase is 2.49% and TD is 2.69%, while non-preferred Alliant is only 1.49%, or $3000 lower over the course of the finance period. That $3000 extra could have funded the insurance for the buyback program, but with that off the table, why would I spend that extra $3000 with a preferred lender?

wallstguy | July 13, 2016

I'm curious...if I have a confirmed order with Tesla Financing prior to this date, do I still get the RVG?

Hi_Tech | July 13, 2016

I'm very glad they did this. Couple of weeks ago I started a thread asking about how they can reduce their "cash burn issue". This was one of the items raised as a cause for the discrepancy between GAAP vs Non-GAAP figures. With this move, I think they will talk about getting to cash flow positive state sooner.

Hi_Tech | July 13, 2016
chuckschwager | July 14, 2016

Wallstguy - I was told I don't get it despite ordering in June. Yet I was told this was available and was a point in convincing me to buy. Whatever rationale Tesla has for ending the program, their sales force should not be touting it as a benefit.

brando | July 15, 2016

I recall a few complaints about buy back price, and many advised to sell on the open market as they thought you could get a higher price. Anyway, it will be interesting to watch used prices.

If I bought one, I'd be going for the million miles.