Tesla Motors Inc. (TSLA)’s gamble to buy back Model S electric cars from customers using its lease-style option has potential to generate further revenue when the automaker sells used cars, according to Bloomberg Industries.
The plan gives Tesla, which sells electric sedans exclusively through its own stores, more control over used vehicle resale prices than traditional automakers, said Kevin Tynan, a Bloomberg Industries analyst. Used Model S sales may generate as much as $368 million in annual revenue in 2016, or an additional $40 million in annual gross profit, based on Tynan’s analysis.
“Buying back three-year-old cars at a set price means Tesla to a great extent can control the secondary market for Model S and other cars it brings out,” Tynan said in an interview. “The company’s going to be the main buyer and gets a chance to earn a second gross profit on the same car.” Tynan estimates Tesla is offering 46 percent of the Model S’s original price.
Tesla’s unconventional finance plan -- initially criticized for overstating customer savings -- is in keeping with Chief Executive Officer Elon Musk’s avoidance of traditional industry practices. All aspects of Tesla assembly operations are integrated at its California plant and the company makes Model S enhancements with wireless software updates.
The finance plan, announced in April and backed by Wells Fargo & Co. (WFC) and U.S. Bancorp, guarantees a resale value for Model S “equal to 50 percent of the base purchase price” of the entry-level car, currently about $70,000, and “43 percent of the original purchase price for all options” after 36 months, according to a Tesla agreement obtained by Bloomberg Industries.
Owners can opt to keep their cars, with loans running as long as six years, Tesla said in a May revision to the plan.
The Bloomberg Industries estimate is based on the company reselling as many as 10,000 used cars in 2016, at an average resale price of $36,763.
While Palo Alto, California-based Tesla expects revenue from used Model S sales, it can’t forecast the amount, said Jeff Evanson, the company’s head of investor relations. “The biggest unknown right now is how many cars will come back,” he said, declining to confirm the Bloomberg Industries estimate.
Under a traditional lease plan, after three years customers return a vehicle to a dealer, who either resells it to another individual or through vehicle auction services. Tesla’s plan to handle all such sales directly is enviable, said Ed Kim, senior industry analyst for AutoPacific Inc.
“To be able to control that process in-house would be a dream for most automakers,” Kim said in an interview. “It means there are no dealers to negotiate with or dealing with auctions. You set the terms and control the experience.”
Direct repurchases of vehicles by a carmaker’s dealers or finance company are desirable to ensure the best vehicles are the ones going into certified pre-owned programs, said Bill Fay, group vice president for Toyota Motor Corp. (7203)’s U.S. sales unit.
With Tesla, “it will be interesting to see how they do it,” Fay said in an interview. “Obviously, it will give them a lower price point.” The company’s lack of a dealer network and in-house finance unit creates some challenges, Fay said.
“There’s going to be some growing pains there to figure all of that out,” he said.
Musk vowed to use his personal fortune to ensure Model S resale prices. An almost fivefold surge in Tesla stock this year has boosted his net worth to about $8 billion, according to the Bloomberg Billionaires Index. Tesla rose 3.5 percent to $166.37 at the close in New York, the biggest gain in more than two weeks.
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