Strategy

Tesla Ends Buyback Program for Model S Cars

The discontinuation of the resale value guarantee frees up cash as Tesla prepares to launch the Model 3 and boost production.
Matthew HellerJuly 14, 2016

Tesla Motors has ended its popular resale value program for the entry-level Model S, freeing up cash as it seeks to boost total production.

The buyback program guaranteed the resale value of a Model S after three years when purchased through one of Tesla’s loan financing plans. As Reuters reports, it was launched in 2013 to help Tesla control the secondary market and “reassure buyers purchasing vehicles using its novel technology that resale values wouldn’t drop substantially.”

But with the total liability created by the resale value guarantee at $1.58 billion as of March 31, up over 20% since the end of 2015, the electric car maker discontinued the program effective July 1.

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A Tesla spokesman said the move would enable the company to “keep interest rates as low as possible and offer a compelling Lease and Loan program to customers.” But Reuters also noted it would free up cash.

“Tesla has outlined an ambitious and costly plan to speed up the launch of its Model 3 sedan, and boost total production to a rate of 500,000 vehicles a year by 2017,” Reuters said.

The company warned earlier this month it will miss its vehicle delivery target for a second consecutive quarter. It is also facing a host of other challenges, including the proposed acquisition of solar energy company SolarCity, that have investors keeping a close eye on its balance sheet.

Under the buyback program, the resale value was calculated as 50% of the base purchase price of a Model S plus 43% of the value of all options added to the vehicle. An update to the program guaranteed that the value of a Model S would remain higher than that of competing BMW, Audi, Mercedes, Lexus, and Jaguar models.

“In general, buyers of premium automobiles upgrade to newer models within a few years, making resale value an important consideration to purchasers,” The Verge noted.

The National Automobile Dealers Association reported last year that the Model S retains an impressive 57.2% of its value after three years versus the segment average of 49.5%.