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  • Tesla, Inc....2019/12/31  · TESLA, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,...
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 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, 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 Identification No.) 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 Trading Symbol(s) Name of each exchange on which registered Common stock TSLA The Nasdaq Global Select Market 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 ☒ 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 ☒ 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 ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act: Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The aggregate market value of voting stock held by non-affiliates of the registrant, as of June 30, 2019, the last day of the registrant’s most recently completed second fiscal quarter, was $31.54 billion (based on the closing price for shares of the registrant’s Common Stock as reported by the NASDAQ Global Select Market on June 30, 2019). 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 February 7, 2020, there were 181,341,586 shares of the registrant’s Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s Proxy Statement for the 2020 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, 2019.

Tesla, Inc....2019/12/31  · TESLA, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019 INDEX Page PART I. Item 1. Business 1 Item 1A. Risk Factors 15 Item 1B. Unresolved

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  • UNITEDSTATESSECURITIESANDEXCHANGECOMMISSION

    Washington,D.C.20549

    FORM10-K

    (MarkOne)☒ ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934

    ForthefiscalyearendedDecember31,2019OR

    ☐ TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934Forthetransitionperiodfromto

    CommissionFileNumber:001-34756

    Tesla,Inc.(Exactnameofregistrantasspecifiedinitscharter)

    Delaware 91-2197729(Stateorotherjurisdictionofincorporationororganization)

    (I.R.S.EmployerIdentificationNo.)

    3500DeerCreekRoadPaloAlto,California 94304

    (Addressofprincipalexecutiveoffices) (ZipCode)(650)681-5000

    (Registrant’stelephonenumber,includingareacode)SecuritiesregisteredpursuanttoSection12(b)oftheAct:

    Titleofeachclass TradingSymbol(s) NameofeachexchangeonwhichregisteredCommonstock TSLA TheNasdaqGlobalSelectMarket

    SecuritiesregisteredpursuanttoSection12(g)oftheAct:None

    Indicatebycheckmarkwhethertheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.Yes☒No☐IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13or15(d)oftheAct.Yes☐No☒Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934(“ExchangeAct”)duringthepreceding

    12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes☒No☐IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyeveryInteractiveDataFilerequiredtobesubmittedpursuanttoRule405ofRegulationS-T(§232.405ofthis

    chapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitsuchfiles).Yes☒No☐Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,asmallerreportingcompanyoranemerginggrowthcompany.Seethe

    definitionsof“largeacceleratedfiler,”“acceleratedfiler,”“smallerreportingcompany”and“emerginggrowthcompany”inRule12b-2oftheExchangeAct:

    Largeacceleratedfiler ☒ Acceleratedfiler ☐

    Non-acceleratedfiler ☐ Smallerreportingcompany ☐

    Emerginggrowthcompany ☐ Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccounting

    standardsprovidedpursuanttoSection13(a)oftheExchangeAct.☐Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).Yes☐No☒Theaggregatemarketvalueofvotingstockheldbynon-affiliatesoftheregistrant,asofJune30,2019,thelastdayoftheregistrant’smostrecentlycompletedsecondfiscalquarter,was

    $31.54billion(basedontheclosingpriceforsharesoftheregistrant’sCommonStockasreportedbytheNASDAQGlobalSelectMarketonJune30,2019).SharesofCommonStockheldbyeachexecutiveofficer,director,andholderof5%ormoreoftheoutstandingCommonStockhavebeenexcludedinthatsuchpersonsmaybedeemedtobeaffiliates.Thisdeterminationofaffiliatestatusisnotnecessarilyaconclusivedeterminationforotherpurposes.

    AsofFebruary7,2020,therewere181,341,586sharesoftheregistrant’sCommonStockoutstanding.DOCUMENTSINCORPORATEDBYREFERENCE

    Portionsoftheregistrant’sProxyStatementforthe2020AnnualMeetingofStockholdersareincorporatedhereinbyreferenceinPartIIIofthisAnnualReportonForm10-Ktotheextentstatedherein.SuchproxystatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysoftheregistrant’sfiscalyearendedDecember31,2019.

  • TESLA,INC.

    ANNUALREPORTONFORM10-KFORTHEYEARENDEDDECEMBER31,2019

    INDEX PagePARTI.

    Item1. Business 1Item1A. RiskFactors 15Item1B. UnresolvedStaffComments 34Item2. Properties 35Item3. LegalProceedings 35Item4. MineSafetyDisclosures 35

    PARTII.

    Item5. MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities 36Item6. SelectedConsolidatedFinancialData 38Item7. Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations 39Item7A. QuantitativeandQualitativeDisclosuresAboutMarketRisk 60Item8. FinancialStatementsandSupplementaryData 61Item9. ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure 127Item9A. ControlsandProcedures 127Item9B. OtherInformation 128

    PARTIII.

    Item10. Directors,ExecutiveOfficersandCorporateGovernance 129Item11. ExecutiveCompensation 129Item12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 129Item13. CertainRelationshipsandRelatedTransactions,andDirectorIndependence 129Item14. PrincipalAccountantFeesandServices 129

    PARTIV.

    Item15. ExhibitsandFinancialStatementSchedules 129Item16. Summary 155

    Signatures 156

    i

    file:///tmp/knp_snappy5f74155e644752.18737158.html#PART_Ifile:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_1_BUSINESSfile:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_1A_RISK_FACTORSfile:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_1B_UNRESOLVED_STAFF_COMMENTSfile:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_2_PROPERTIESfile:///tmp/knp_snappy5f74155e644752.18737158.html#LEGAL_PROCEEDINGSfile:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_4file:///tmp/knp_snappy5f74155e644752.18737158.html#PART_IIfile:///tmp/knp_snappy5f74155e644752.18737158.html#Item_5file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_6file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_7file:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_7A_QUANTITATIVE_QUALITATIVE_DISCLOSfile:///tmp/knp_snappy5f74155e644752.18737158.html#Item_8file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_9file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_9Afile:///tmp/knp_snappy5f74155e644752.18737158.html#Item_9Bfile:///tmp/knp_snappy5f74155e644752.18737158.html#PART_IIIfile:///tmp/knp_snappy5f74155e644752.18737158.html#Item_10file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_11file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_12file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_13file:///tmp/knp_snappy5f74155e644752.18737158.html#Item_14file:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_15_EXHIBITS_FINANCIAL_STATEMENT_SCHfile:///tmp/knp_snappy5f74155e644752.18737158.html#ITEM_16_SUMMARYfile:///tmp/knp_snappy5f74155e644752.18737158.html#SIGNATURES

  • Forward-LookingStatements

    ThediscussionsinthisAnnualReportonForm10-Kcontainforward-lookingstatementsreflectingourcurrentexpectationsthatinvolverisksanduncertainties.Theseforward-lookingstatementsinclude,butarenotlimitedto,statementsconcerningourstrategy,futureoperations,futurefinancialposition,futurerevenues,projectedcosts,profitability,expectedcostreductions,capitaladequacy,expectationsregardingdemandandacceptanceforourtechnologies,growthopportunitiesandtrendsinthemarketinwhichweoperate,prospectsandplansandobjectivesofmanagement.Thewords“anticipates,”“believes,”“could,”“estimates,”“expects,”“intends,”“may,”“plans,”“projects,”“will,”“would”andsimilarexpressionsareintendedtoidentifyforward-lookingstatements,althoughnotallforward-lookingstatementscontaintheseidentifyingwords.Wemaynotactuallyachievetheplans,intentionsorexpectationsdisclosedinourforward-lookingstatementsandyoushouldnotplaceunduerelianceonourforward-lookingstatements.Actualresultsoreventscoulddiffermateriallyfromtheplans,intentionsandexpectationsdisclosedintheforward-lookingstatementsthatwemake.Theseforward-lookingstatementsinvolverisksanduncertaintiesthatcouldcauseouractualresultstodiffermateriallyfromthoseintheforward-lookingstatements,including,withoutlimitation,theriskssetforthinPartI,Item1A,“RiskFactors”inthisAnnualReportonForm10-KandinourotherfilingswiththeSecuritiesandExchangeCommission.Wedonotassumeanyobligationtoupdateanyforward-lookingstatements.

  • PARTI

    ITEM1. BUSINESS

    OverviewWedesign,develop,manufacture,sellandleasehigh-performancefullyelectricvehiclesandenergygenerationandstoragesystems,andoffer

    servicesrelatedtoourproducts.Wearetheworld’sfirstverticallyintegratedsustainableenergycompany,offeringend-to-endcleanenergyproducts,includinggeneration,storageandconsumption.Wegenerallysellourproductsdirectlytocustomers,includingthroughourwebsiteandretaillocations.Wealsocontinuetogrowourcustomer-facinginfrastructurethroughaglobalnetworkofvehicleservicecenters,MobileServicetechnicians,bodyshops,SuperchargerstationsandDestinationChargerstoacceleratethewidespreadadoptionofourproducts.Weemphasizeperformance,attractivestylingandthesafetyofourusersandworkforceinthedesignandmanufactureofourproducts,andarecontinuingtodevelopfullself-drivingtechnologyforimprovedsafety.Wealsostrivetolowerthecostofownershipforourcustomersthroughcontinuouseffortstoreducemanufacturingcostsandbyofferingfinancialservicestailoredtoourvehicles.Oursustainableenergyproducts,engineeringexpertise,intensefocustoacceleratetheworld’stransitiontosustainableenergyandachievethebenefitsofautonomousdriving,andbusinessmodeldifferentiateusfromothercompanies.

    Wecurrentlyofferorareplanningtointroduceelectricvehiclestoaddressawiderangeofconsumerandcommercialvehiclemarkets,includingModel3,ModelY,ModelS,ModelX,Cybertruck,TeslaSemiandanewTeslaRoadster.Inordertomeetcustomers’range,functionalityandperformanceexpectations,wehaveemployedourconsiderabledesignandvehicleengineeringcapabilitiestoovercomethedesign,stylingandperformanceissuesthathavehistoricallylimitedbroadadoptionofelectricvehicles.Combinedwithtechnicaladvancementsinourpowertrainsystem,AutopilotandFullSelf-Driving(“FSD”)hardware,andneuralnet,ourelectricvehiclesboastadvantagessuchasleadingrangeandrechargingflexibility;superioracceleration,handlingandsafetycharacteristics;auniquesuiteofuserconvenienceandinfotainmentfeatures;theabilitytohaveadditionalfeaturesenabledthroughover-the-airupdates;andsavingsincharging,maintenanceandothercostsofownership.

    Infurtheranceofourmissiontoacceleratetheworld’stransitiontosustainableenergy,wehavealsodevelopedanexpertiseinsolarenergysystems.Wesellandleaseretrofitsolarenergysystemsforresidentialandcommercialcustomers,andalternativelyprovidecertaincustomerswithaccesstooursolarenergysystemsthroughpowerpurchaseorsubscription-basedarrangements.WealsooffertheSolarRoof,whichfeaturesattractiveanddurableglassrooftilesintegratedwithsolarenergygeneration.Ourapproachtothesolarbusinessemphasizessimplicity,standardizationandaccessibilitytomakeiteasyandcost-effectiveforcustomerstoadoptcleanenergy,whilereducingourcustomeracquisitioncosts.

    Finally,wehaveleveragedourtechnologicalexpertiseinbatteries,energymanagement,powerelectronics,andintegratedsystemsfromourvehiclepowertrainsystemstodevelopandmanufactureenergystorageproducts,includingPowerwall,PowerpackandMegapack.Thesescalablesystemsmaybeusedinhomes,commercialfacilitiesandontheutilitygrid,andarecapableofnumerousapplicationsincludingbackuporoff-gridpower,peakdemandreduction,demandresponse,reducingintermittencyofrenewableenergygeneration,facilitationoftheuseofrenewableenergygenerationoverfossilfuelgeneration,andothergridservicesandwholesaleelectricmarketservices.Drawingonoursolarbusinessexpertise,wecanalsoofferintegratedsystemscombiningenergygenerationandstorage.Likeourvehicles,ourenergystorageproductscanberemotelyupdatedover-the-airwithsoftwareorfirmwareimprovements.

    SegmentInformationWeoperateastworeportablesegments:(i)automotiveand(ii)energygenerationandstorage.

    Theautomotivesegmentincludesthedesign,development,manufacturing,sales,andleasingofelectricvehiclesaswellassalesofautomotiveregulatorycredits.Additionally,theautomotivesegmentisalsocomprisedofservicesandother,whichincludesnon-warrantyafter-salesvehicleservices,salesofusedvehicles,retailmerchandise,salesbyouracquiredsubsidiariestothirdpartycustomers,andvehicleinsurancerevenue.Theenergygenerationandstoragesegmentincludesthedesign,manufacture,installation,sales,andleasingofsolarenergygenerationandenergystorageproducts,servicesrelatedtosuchproducts,andsalesofsolarenergysystemincentives.

    1

  • OurProductsandServicesAutomotive

    Model3Model3isafour-doormid-sizesedanthatwedesignedformanufacturabilitywithabasepriceformass-marketappeal,whichwebegan

    deliveringinJuly2017.WecurrentlymanufactureModel3attheFremontFactoryaswellasatGigafactoryShanghai,wherewearerampingproductionwithaninstalledannualproductioncapacityfor150,000Model3vehicles.WecurrentlyofferModel3inrear-wheeldriveanddualmotorall-wheeldrivevariants,includingaPerformanceversionofthelatter.

    ModelYModelYisacompactsportutilityvehicle(“SUV”)builtontheModel3platformwiththecapabilityforseatingforuptosevenadults,whichwe

    beganproducinginJanuary2020andexpecttocommencedeliveringinthefirstquarterof2020.WecurrentlymanufactureModelYattheFremontFactory,andarefurtherrampingproductionthereandmakingpreparationsforproductionnextatGigafactoryShanghai.WecurrentlyofferModelYindualmotorall-wheeldriveLongRangeandPerformanceversions.

    ModelSandModelXModelSisafour-doorfull-sizesedanthatwebegandeliveringinJune2012.ModelSintroducedTeslavehiclemainstayssuchasalarge

    touchscreendriverinterface,Autopilothardware,over-the-airsoftwareupdates,andfastchargingthroughourSuperchargernetwork.

    ModelXisamid-sizeSUVwithseatingforuptosevenadults,whichwebegandeliveringinSeptember2015.ModelXintroducedfeaturesincludinguniquefalconwingdoorsforeasyaccesstopassengerseatingandanall-glasspanoramicwindshield.

    ModelSandModelXfeaturethehighestperformancecharacteristicsandlongestrangesthatweofferinasedanandSUV,respectively.Thesevehiclesareequippedwithastandarddualmotorall-wheeldrivepowertrain,andarealsoavailableinPerformanceversionswithenhancedaccelerationand/ortopspeedandstyling.WemanufactureModelSandModelXattheFremontFactory.

    FutureConsumerandCommercialElectricVehiclesInaddition,wehaveunveiledanumberofplannedelectricvehiclestoaddressabroadercross-sectionofthevehiclemarket,including

    specializedconsumerelectricvehiclesinCybertruckandthenewTeslaRoadsterandacommercialelectricvehicleinTeslaSemi.

    EnergyGenerationandStorageEnergyStorageProductsWebegandeliveriesofthecurrentgenerationsofourPowerwallandPowerpackproductsinlate2016and2017,respectively,andofour

    Megapackproductinlate2019.Powerwallisa13.5kilowatthour(“kWh”)rechargeablelithium-ionbatterywithintegratedinverter,designedtostoreenergyatahomeorsmallcommercialfacility.PowerpackandMegapackarefullyintegratedenergystoragesolutionsforcommercial,industrial,utilityandenergygenerationcustomers,comprisedofupto232kWh(AC)batterypacksandupto700kilovolt-ampere(at480V)invertersforPowerpackandupto3megawatthour(“MWh”)(AC)batterypacksandupto1.54megavolt-ampereinvertersforMegapack,multipleunitsofwhichmaybegroupedtogethertoformlargerinstallations,capableofreachinggigawatthours(“GWh”)orgreater.PowerpackandMegapackcanalsobecombinedwithrenewableenergygenerationsourcestocreatemicrogridsthatprovidecommunitieswithclean,resilientandaffordablepower.

    Wealsodevelopandadvanceoursoftwarecapabilitiesforthecontrolandoptimaldispatchofenergystoragesystemsacrossawiderangeofmarketsandapplications,whichcanbesenttooursystemsthroughover-the-airupdates.

    2

  • SolarEnergyOfferingsThemajorcomponentsofourretrofitsolarenergysystemsincludesolarpanelsthatconvertsunlightintoelectricalcurrent,invertersthat

    converttheelectricaloutputfromthepanelstoausablecurrentcompatiblewiththeelectricgrid,rackingthatattachesthesolarpanelstotherooforground,electricalhardwarethatconnectsthesolarenergysystemtotheelectricgrid,andourmonitoringdevice.Wepurchasethemajorityofthesecomponents,andwedosofrommultiplesourcestoensurecompetitivepricingandadequatesupply.Wealsodesignandmanufacturecertaincomponentsforoursolarenergyproducts.Inadditiontosellingretrofitsolarenergysystemstocustomersandcertainchannelpartners,wealsomakethemavailablethroughleaseandpowerpurchaseagreement(“PPA”)arrangements,currentlywith20-yeartermsandtypicallywithrenewaloptions,andasubscription-basedsaleofsolarpower,whichiscurrentlyavailableinCalifornia.

    In2019,wecommenceddirectcustomerandchannelpartnersalesofthethirdgenerationofourSolarRoof,whichfeaturesaestheticallypleasinganddurableglassroofingtilesdesignedtocomplementthearchitectureofhomesandcommercialbuildingswhileturningsunlightintoelectricity.WearerampingthevolumeproductionofthisversionoftheSolarRoofatGigafactoryNewYork,andareincreasingourinstallationcapabilitiesbytrainingourpersonnelandthirdpartypartners.

    TechnologyAutomotive

    Ourcorevehicletechnologycompetenciesincludebatteryandpowertrainengineeringandmanufacturing,aswellasourabilitytodesignvehiclesthatutilizetheuniqueadvantagesofanelectricpowertrain.Ourcoreintellectualpropertyincludesourelectricpowertrainandourworkondevelopingself-drivingtechnologies.Ourpowertrainconsistsofourbatterypack,powerelectronics,motor,gearbox,andcontrolsoftware.Weofferseveralpowertrainvariantsforourvehiclesthatincorporateyearsofresearchanddevelopment.Inaddition,wehavedesignedourvehiclestoincorporatethelatestadvancesinconsumertechnologies,suchasmobilecomputing,sensing,displays,andconnectivity.

    BatteryandPowertrainWeoptimizethedesignofthelithium-ioncellsweuseandofourbatterypackstoachievehighenergydensityatdecreasingcostswhilealso

    maintainingsafety,reliabilityandlonglifeintherigorsofanautomotiveenvironment.Ourproprietarytechnologyincludessystemsforhighdensityenergystorage,cooling,safety,chargebalancing,structuraldurability,andelectronicsmanagement.Wehavealsopioneeredadvancedmanufacturingtechniquestomanufacturelargevolumesofbatterypackswithhighqualityatlowcost.Moreover,wemaintainextensivetestingandR&Dcapabilitiesforbatterycells,packsandsystems,andhavebuiltanexpansivebodyofknowledgeonlithium-ioncellvendors,chemistrytypesandperformancecharacteristics.Webelievethattheflexibilitythatwehavebuiltintoourdesigns,combinedwithourresearchandreal-worldperformancedata,willenableustocontinuetoevaluatenewbatterycellsandoptimizebatterypacksystemperformanceandcostforourcurrentandfuturevehicles.

    Thepowerelectronicsinourelectricpowertraingoverntheflowofelectricalcurrentthroughoutourvehiclesasneeded,convertdirectcurrentfromthebatterypackintoalternatingcurrenttodriveourvehicles’motors(andviceversafromanexternalelectricitysourcetochargethebatterypack),andprovideregenerativebrakingfunctionality.Theprimarytechnologicaladvantagestoourproprietarypowerelectronicsdesignsincludetheabilitytodrivelargeamountsofelectricalcurrentinasmallphysicalpackagewithhighefficiencyandlowcost,andtorechargeonawidevarietyofelectricitysourcesathome,attheofficeorontheroad,includingatourSuperchargers.

    Weofferdualmotorpowertrainvehicles,whichusetwoelectricmotorstomaximizetractionandperformanceinanall-wheeldriveconfiguration.Tesla’sdualmotorpowertraindigitallyandindependentlycontrolstorquetothefrontandrearwheels.Thenear-instantaneousresponseofthemotors,combinedwithlowcentersofgravity,providesdriverswithcontrolledperformanceandincreasedtractioncontrol.Wearealsodevelopingvehiclepowertraintechnologyfeaturingthreeelectricmotorsforfurtherincreasedperformance.

    3

  • VehicleControlandInfotainmentSoftwareTheperformanceandsafetysystemsofourvehiclesandtheirbatterypacksrequiresophisticatedcontrolsoftware.Therearenumerous

    processorsinourvehiclestocontrolthesefunctions,andwewritecustomfirmwareformanyoftheseprocessors.Softwarealgorithmscontroltraction,vehiclestability,theaccelerationandregenerativebrakingofthevehicle,climatecontrolandthermalmanagement,andarealsousedextensivelytomonitorthechargestateofthebatterypackandtomanageallofitssafetysystems.Driversusetheinformationandcontrolsystemsinourvehiclestooptimizeperformance,customizevehiclebehavior,managechargingmodesandtimesandcontrolallinfotainmentfunctions.Wedevelopalmostallofthissoftware,includingmostoftheuserinterfaces,internally.

    Self-DrivingDevelopmentWehaveexpertiseindevelopingtechnologies,systemsandsoftwaretoachieveself-drivingvehicles.WeareequippingallnewTeslavehicles

    withhardwareneededforfullself-drivinginthefuture,includinganewpowerfulandproprietaryon-boardcomputerthatweintroducedin2019.Thishardwaresuiteenablesfielddatafromtheon-boardcamera,radar,ultrasonics,andGPStocontinuallytrainandimproveourneuralnetworkforreal-worldperformance.

    Currently,weofferinourvehiclescertainadvanceddriverassistsystemsunderourAutopilotandFSDoptions,includingauto-steering,trafficawarecruisecontrol,automatedlanechanging,automatedparking,driverwarningsystems,andaSmartSummonfeaturethatenablesvehiclestoberemotelysummonedovershortdistancesinparkinglotsanddriveways.Thesesystemsrelieveourdriversofthemosttediousandpotentiallydangerousaspectsofroadtravel,andthefielddatafeedbackloopsfromtheon-boardhardware,aswellasover-the-airfirmwareupdates,allowustoimprovethemovertime.Althoughatpresentthedriverisultimatelyresponsibleforcontrollingthevehicle,oursystemsprovidesafetyandconveniencefunctionalitythatallowsourcustomerstorelyonthemmuchlikethesystemthatairplanepilotsusewhenconditionspermit.

    EnergyGenerationandStorageEnergyStorageProductsWeareleveragingmanyofthecomponent-leveltechnologiesfromourvehiclestoadvanceourenergystorageproducts,includinghighdensity

    energystorage,cooling,safety,chargebalancing,structuraldurability,andelectronicsmanagement.Bytakingamodularapproachtothedesignofbatterysystems,weareabletomaximizemanufacturingcapacitytoproduceourPowerwall,PowerpackandMegapackproducts.Additionally,wearemakingsignificantstridesintheareaofbi-directional,grid-tiedpowerelectronicsthatenableustointerconnectourbatterysystemsseamlesslywithglobalelectricitygridswhileprovidingfast-actingsystemsforpowerinjectionandabsorption.

    SolarEnergySystemsWearecontinuallyinnovatinganddevelopingnewtechnologiestofacilitatethegrowthofoursolarenergybusiness.Forexample,wehave

    developedproprietarysoftwaretoreducesolarenergysystemdesignandinstallationtimelinesandcosts,andtheSolarRoofisdesignedtoworkseamlesslywithPowerwall.

    DesignandEngineeringAutomotive

    Wehavecreatedsignificantin-housecapabilitiesinthedesignandtestengineeringofelectricvehiclesandtheircomponentsandsystems.Wedesign,engineerandtestbodies,chassis,exteriors,interiors,heatingandcoolingandlowvoltageelectricalsystemsin-house,andtoalesserextent,inconjunctionwithoursuppliers.Ourteamhascorecompetenciesincomputeraideddesignandcrashtestsimulations,whichreducestheproductdevelopmenttimeofnewmodels.Wecontinuetogrowourcapabilities,includingforon-sitecrashtesting,durabilitytestingandcomponentvalidation.

    4

  • Additionally,ourteamhasexpertiseinselectingandworkingwithvariousmaterials.Forexample,giventheimpactofmassonrange,whichisveryimportantforpassengervehicles,ModelSandModelXarebuiltwithlightweightaluminumbodiesandchassiswhichincorporateavarietyofmaterialsandproductionmethodsthathelpoptimizevehicleweight,andModel3andModelYarebuiltwithamixofmaterialstobelightweightandsafewhilealsoincreasingcost-effectivenessforthesemass-marketvehicles.Ontheotherhand,toaccommodatethedurabilityrequiredofworkvehicles,weplantouseathickcold-rolledstainlesssteelalloyandultra-strongglassforCybertruckwhileemployingourexpertiseinbatteryengineeringtomaintainexcellentrange.

    EnergyGenerationandStorageEnergyStorageProductsWehaveanin-houseengineeringteamthatbothdesignsourenergystorageproductsthemselves,andworkswithourresidential,commercial

    andutilitycustomerstodesignbespokesystemsincorporatingourproducts.Ourteam’sexpertiseinelectrical,mechanical,civilandsoftwareengineeringenablesustocreateintegratedenergystoragesolutionsthatmeetthevariousandparticularneedsofourcustomers.

    SolarEnergySystemsWealsohaveanin-houseteamthatdesignsacustomizedsolarenergysystemorSolarRoofforeachofourcustomers,includinganintegrated

    energystoragesystemwhenrequestedbythecustomer.Wehavedevelopedsoftwarethatsimplifiesandexpeditesthedesignprocessandoptimizesthedesigntomaximizetheenergyproductionofeachsystem.Thisteamcompletesastructuralanalysisofeachbuildingandproducesafullsetofstructuraldesignandelectricalblueprintsthatcontainthespecificationsforallsystemcomponents.Additionally,thisteamspecifiescomplementarymountingandgroundinghardwarewhererequired.

    SalesandMarketingHistorically,wehavebeenabletogeneratesignificantmediacoverageofourcompanyandourproducts,andwebelievewewillcontinuetodo

    so.Suchmediacoverageandwordofmoutharethecurrentprimarydriversofoursalesleadsandhavehelpedusachievesaleswithouttraditionaladvertisingandatrelativelylowmarketingcosts.

    AutomotiveDirectSalesWemarketandsellourvehiclesdirectlytocustomersusingmeansthatwebelievewillmaximizeourreach,improvetheoverallcustomer

    experienceandmaximizecapitalefficiency.Currently,oursaleschannelsincludeourwebsiteandaninternationalnetworkofcompany-ownedstores.Insomestates,wehavealsoopenedgalleriestoeducateandinformcustomersaboutourproducts,butsuchlocationsdonotactuallytransactinthesaleofvehicles.Webelievethisinfrastructureenablesustobettercontrolcostsofinventory,managewarrantyserviceandpricing,educateconsumersaboutelectricvehiclesandcharging,maintainandstrengthentheTeslabrand,andobtainrapidcustomerfeedback.

    Wereevaluateoursalesstrategybothgloballyandatalocation-by-locationlevelfromtimetotimetooptimizeourcurrentsaleschannels.Salesofvehiclesintheautomobileindustryalsotendtobecyclicalinmanymarkets,whichmayexposeustovolatilityfromtimetotime.

    UsedVehicleSalesOurusedvehiclebusinesssupportsnewvehiclesalesbyintegratingthesaleofanewTeslavehiclewithacustomer’strade-inneedsfortheir

    existingTeslaandnon-Teslavehicles.TheTeslaandnon-Teslavehiclesweacquirethroughtrade-insaresubsequentlyremarketed,eitherdirectlybyusorthroughthird-parties.WealsoreceiveusedTeslavehiclestoresellthroughleasereturnsandothersources.

    5

  • PublicChargingWecontinuetobuildoutourglobalSuperchargernetworkforourcustomers’convenience,includingtoenablelong-distancetravelandurban

    ownership,whichisapartofourstrategytoremoveabarriertothebroaderadoptionofelectricvehiclescausedbytheperceptionoflimitedrange.EachTeslaSuperchargerisanindustrialgrade,high-speedchargerdesignedtorechargeaTeslavehiclesignificantlymorequicklythanotherchargingoptions,andwecontinuetoevolveourtechnologytoallowforevenfasterchargingtimesatlowercosttous.Wherepossible,weareco-locatingSuperchargerswithoursolarandenergystoragesystemstofurtherreducecostsandpromoterenewablepower.Superchargerstationstypicallyarestrategicallyplacedalongwell-traveledroutesandindensecitycenterstoallowTeslavehicleownerstheabilitytoenjoyquick,reliableandubiquitouschargingwithconvenient,minimalstops.UseoftheSuperchargernetworkiseitherfreeundercertainsalesprogramsorrequiresacompetitivefee.

    Wealsoworkwithawidevarietyofhospitality,retail,andpublicdestinations,aswellasbusinesseswithcommutingemployees,toofferadditionalchargingoptionsforourcustomers.TheseDestinationChargingandworkplacelocationsdeployTeslaWallConnectorstoprovidechargingtoTeslavehicleownerswhopatronizeorareemployedattheirbusinesses.Wealsoworkwithsingle-familyhomeownersandmulti-familyresidentialentitiestodeployhomechargingsolutionsinourcommunities.

    EnergyGenerationandStorageWemarketandselloursolarandenergystorageproductstoindividuals,commercialandindustrialcustomersandutilitiesthroughavarietyof

    channels.

    IntheU.S.,weofferresidentialsolarandenergystorageproductsdirectlythroughourwebsite,storesandgalleries,aswellasthroughournetworkofchannelpartners.OutsideoftheU.S.,weuseourinternationalsalesorganizationandanetworkofchannelpartnerstomarketandselltheseproductsfortheresidentialmarket.WealsosellPowerwalldirectlytoutilities.Inthecaseofproductssoldtosuchutilitiesorchannelpartners,suchpartnerstypicallysellandinstalltheproductincustomerhomes.

    WesellPowerpackandMegapacksystemstocommercialandutilitycustomersthroughourinternationalsalesorganization,whichconsistsofexperiencedenergyindustryprofessionalsinallofourtargetmarkets,aswellasthroughourchannelpartnernetwork.Incertainjurisdictions,wealsosellinstalledsolarenergysystems(withorwithoutenergystorage)tocommercialcustomersthroughcash,leaseandPPAtransactions.

    ServiceandWarrantyAutomotive

    ServiceWeprovideserviceforourelectricvehiclesatourcompany-ownedservicelocationsandthroughanexpandingfleetofTeslaMobileService

    technicianswhoprovideservicesthatdonotrequireavehicleliftremotelyatcustomers’homesorotherlocations.Performingvehicleserviceourselvesprovidesuswiththecapabilitytoidentifyproblems,findsolutions,andincorporateimprovementsfaster,andoptimizelogisticsandinventoryforservicepartsbetter,thantraditionalautomobilemanufacturers.Ourvehiclesarealsodesignedwiththecapabilitytowirelesslyuploaddatatousviaanon-boardsystemwithcellularconnectivity,allowingustodiagnoseandremedymanyproblemsbeforeeverlookingatthevehicle.

    VehicleLimitedWarrantyandExtendedServicePlansWeprovideamanufacturer’swarrantyonallnewandusedTeslavehicles.Eachnewvehiclehasafouryearor50,000mileNewVehicleLimited

    Warranty,subjecttoseparatelimitedwarrantiesforthesupplementalrestraintsystem,batteryanddriveunit,andbodyrustperforation.ForthebatteryanddriveunitonourcurrentnewModelSandModelXvehicles,weofferaneightyear,150,000milelimitedwarranty,withminimum70%retentionofbatterycapacityoverthewarrantyperiod.ForthebatteryanddriveunitonourcurrentnewModel3andModelYvehicles,weofferaneightyearor100,000milelimitedwarrantyforourStandardorStandardRangePlusbatteryandaneightyearor120,000milelimitedwarrantyforourLongRangeorPerformancebattery,withminimum70%retentionofbatterycapacityoverthewarrantyperiod.

    6

  • InadditiontotheNewVehicleLimitedWarranty,wecurrentlyofferforModelSandModelXExtendedServiceplansfornewvehiclesinspecifiedregions.TheExtendedServiceplanscovertherepairorreplacementofvehiclepartsforuptoanadditionalfouryearsoruptoanadditional50,000milesaftertheexpirationoftheNewVehicleLimitedWarranty.

    EnergyGenerationandStorageEnergyStorageSystemsWegenerallyprovidea10-year“nodefect”and“energyretention”warrantywitheverycurrentPowerwallanda15-year“nodefect”and

    “energyretention”warrantywitheverycurrentPowerpackorMegapacksystem.Pursuanttotheseenergyretentionwarranties,weguaranteethattheenergycapacityoftheapplicableproductwillbeatleastaspecifiedpercentage(withinarangeupto80%)ofitsnameplatecapacityduringspecifiedtimeperiods,dependingontheproduct,batterypacksizeand/orregionofinstallation,andsubjecttospecifieduserestrictionsorkWhthroughputscaps.Inaddition,weoffercertainextendedwarranties,whichcustomersareabletopurchasefromusatthetimetheypurchaseanenergystoragesystem,includinga20yearextendedprotectionplanforPowerwallandaselectionof10or20yearperformanceguaranteesforPowerpackandMegapack.IncircumstanceswhereweinstallaPowerwallorPowerpacksystem,wealsoprovidecertainwarrantiesonourinstallationworkmanship.Allofthewarrantiesforourenergystoragesystemsaresubjecttocustomarylimitationsandexclusions.

    SolarEnergySystemsForretrofitsolarenergysystems,weprovideaworkmanshipwarrantyforupto20yearsfrominstallationandaseparatewarrantyagainstroof

    leaks.Wealsopass-throughtheinverterandmodulemanufacturerwarranties(typically10yearsand25yearsrespectively).Whenweleasearetrofitsolarenergysystem,wecompensatethecustomeriftheirsystemproduceslessenergythanguaranteedoveraspecifiedperiod.FortheSolarRoof,weprovideawarrantyagainstdefectsfor25years,a25yearweatherizationwarrantyandapoweroutputwarranty.Forallsystems(retrofitandSolarRoof)wealsoprovideserviceandrepair(eitherunderwarrantyorforafee)duringtheentiretermofthecustomerrelationship.

    FinancialServicesAutomotive

    PurchaseFinancingandLeasesWeofferleasingand/orloanfinancingarrangementsforourvehiclesincertainjurisdictionsinNorthAmerica,EuropeandAsiathroughvarious

    financialinstitutions.Incertaininternationalmarkets,weofferresalevalueguaranteestocustomerswhopurchaseandfinancetheirvehiclesthroughoneofourspecifiedcommercialbankingpartners,underwhichthosecustomershavetheoptionofsellingtheirvehiclesbacktousatpresetfuturedates,generallyattheendofthetermsoftheapplicableloansorfinancingprograms,forpre-determinedresalevalues.Incertainmarkets,wealsooffervehiclebuybackguaranteestofinancialinstitutions,whichmayobligateustorepurchasethevehiclesforpre-determinedprices.

    WealsocurrentlyofferleasingdirectlythroughourlocalsubsidiariesforModelS,ModelXandModel3intheU.S.andforModelSandModelXinCanada.

    InsuranceInAugust2019,welaunchedaninsuranceproductdesignedforourcustomers,whichoffersratesthatareoftenbetterthanotheralternatives.

    ThisproductiscurrentlyavailableinCalifornia,andweplantoexpandboththemarketsinwhichweofferinsuranceproductsandourabilitytooffersuchproducts,aspartofourongoingefforttodecreasethetotalcostofownershipforourcustomers.

    7

  • EnergyGenerationandStorageEnergyStorageSystemsWecurrentlyofferaloanproducttoresidentialcustomerswhopurchasePowerwalltogetherwithanewsolarenergysystem,andleaseandPPA

    optionstocommercialcustomerswhopurchaseaPowerpacksystemtogetherwithanewsolarenergysystem.Weintendtointroducefinancialservicesofferingsforcustomerswhopurchasestandaloneenergystorageproductsinthefuture.

    SolarEnergySystemsWeareanindustryleaderinofferinginnovativefinancingalternativesthatallowourcustomerstotakedirectadvantageofavailabletaxcredits

    andincentivestoreducethecostofowningasolarenergysystemthroughasolarloan,ortomaketheswitchtosolarenergywithlittletonoupfrontcostsunderaleaseorPPA.Oursolarloanoffersthird-partyfinancingdirectlytoaqualifiedcustomertoenablethecustomertopurchaseandownasolarenergysystem.Wearenotapartytotheloanagreementbetweenthecustomerandthethird-partylender,andthethird-partylenderhasnorecourseagainstuswithrespecttotheloan.Oursolarleaseofferscustomersafixedmonthlyfee,atratesthattypicallytranslateintolowermonthlyutilitybills,andanelectricityproductionguarantee.OursolarPPAchargescustomersafeeperkWhbasedontheamountofelectricityproducedbyoursolarenergysystems.WemonetizethecustomerpaymentswereceivefromourleasesandPPAsthroughfundswehaveformedwithinvestors.WealsointendtointroducefinancialservicesofferingsforourSolarRoofcustomersinthefuture.

    ManufacturingWemanufactureourproductsandrelatedcomponentsprimarilyattheFremontFactoryandatnearbyfacilitiesintheBayArea,California;

    GigafactoryNevadanearReno,Nevada;GigafactoryNewYorkinBuffalo,NewYork;andGigafactoryShanghaiinChina.WehavealsoselectedasitenearBerlin,GermanytobuildafactoryfortheEuropeanmarket,whichwerefertoasGigafactoryBerlin.

    ManufacturingFacilitiesintheBayArea,CaliforniaWemanufactureourvehicles,andcertainpartsandcomponentsthatarecriticaltoourintellectualpropertyandqualitystandards,atour

    manufacturingfacilitiesintheBayAreainCalifornia,includingtheFremontFactory,andotherlocalmanufacturingfacilities.OurBayAreafacilitiescontainseveralmanufacturingoperations,includingstamping,machining,casting,plastics,bodyassembly,paintoperations,seatassembly,finalvehicleassemblyandend-of-linetestingforourvehicles,aswellasproductionofbatterypacksanddriveunitsforModelSandModelX.Somemajorvehiclecomponentsystemsarepurchasedfromsuppliers;however,wehaveahighlevelofverticalintegrationinourmanufacturingprocessesatourBayAreafacilities.

    GigafactoryNevadaGigafactoryNevadaisafacilitywhereweworktogetherwithoursupplierstointegratebatterymaterial,cell,moduleandbatterypack

    productioninonelocation.WeusethebatterypacksmanufacturedatGigafactoryNevadaforModel3,ModelYandourenergystorageproducts.WealsomanufactureModel3andModelYdriveunitsatGigafactoryNevada.Finally,theassemblyofMegapacksystemstakesplaceatGigafactoryNevada,allowingustoshipdeployment-readysystemsdirectlytocustomers.

    WehavedesignedGigafactoryNevadatoallowusaccesstohighvolumesoflithium-ionbatterycellswhileachievingasignificantreductioninthecostofourbatterypacks,andwehaveanagreementwithPanasonictopartnerwithusonGigafactoryNevadawithinvestmentsinproductionequipmentthatitisusingtomanufactureandsupplyuswithbatterycells.Givenitsimportancetotheproductionofourvehicleandenergystorageproducts,inparticularModel3,ModelYandMegapack,wecontinuetoinvestinGigafactoryNevadatoachieveadditionalproductionoutputthere.

    8

  • GigafactoryNewYorkWehaveprimarilyusedourmanufacturingfacilityinBuffalo,NewYork,whichwerefertoasGigafactoryNewYork,forthedevelopmentand

    productionofourSolarRoofandothersolarproductsandcomponents,energystoragecomponents,andSuperchargercomponents,andforotherlessor-approvedfunctions.Inparticular,ourmanufacturingoperationsatGigafactoryNewYorkareincreasingsignificantlyasweramptheproductionofthethirdgenerationofourSolarRoofthere.

    GigafactoryShanghaiInDecember2019,wecommencedproductionofModel3vehiclesatGigafactoryShanghai,whichwehaveestablishedinordertoincreasethe

    affordabilityofourvehiclesforcustomersinlocalmarketsbyreducingtransportationandmanufacturingcostsandeliminatingcertaintariffsonvehiclesimportedintoChinafromtheU.S.AtGigafactoryShanghai,wehaveinstalledannualproductioncapacityfor150,000Model3vehiclesthatwebelievewewilleventuallybeabletopushtoactualratesofproductioninexcessofsuchnumber,subjecttolocalproductionofbatterypacks,whichwebeganrampingtherelaterthanotherprocesses.WehavealsocommencedconstructionofthenextphaseofGigafactoryShanghaitoaddModelYmanufacturingcapacityatleastequivalenttothatforModel3.MuchoftheinvestmentinGigafactoryShanghaihasbeenandisexpectedtocontinuetobeprovidedthroughlocaldebtfinancing,includingaRMB9.0billion(ortheequivalentamountinU.S.dollars)fixedassettermfacilityandaRMB2.25billion(ortheequivalentamountinU.S.dollars)workingcapitalrevolvingfacilitythatoursubsidiaryenteredintoinDecember2019.Wearesupplementingsuchfinancingwithlimiteddirectcapitalexpendituresbyus,atalowercostperunitofproductioncapacitythanthatofModel3productionattheFremontFactory.

    OtherManufacturingGenerally,wecontinuetoexpandproductioncapacityatourexistingfacilities.Wealsointendtofurtherincreasecost-competitivenessinour

    significantmarketsbystrategicallyaddinglocalmanufacturing,includingatourplannedGigafactoryBerlin.

    SupplyChainOurproductsusethousandsofpurchasedpartsthataresourcedfromhundredsofsuppliersacrosstheworld.Wehavedevelopedclose

    relationshipswithvendorsofkeypartssuchasbatterycells,electronicsandcomplexvehicleassemblies.Certaincomponentspurchasedfromthesesuppliersaresharedoraresimilaracrossmanyproductlines,allowingustotakeadvantageofpricingefficienciesfromeconomiesofscale.

    Asisthecaseformostautomotivecompanies,mostofourprocuredcomponentsandsystemsaresourcedfromsinglesuppliers.Certainkeycomponentsweusehavemultipleavailablesources,andweworktoqualifymultiplesuppliersforeachsuchcomponentwhereitissensibletodoso,inordertominimizeproductionrisksowingtodisruptionsintheirsupply.Wealsomitigateriskbymaintainingsafetystockforkeypartsandassembliesanddiebanksforcomponentswithlengthyprocurementleadtimes.

    Ourproductsusevariousrawmaterialsincludingaluminum,steel,cobalt,lithium,nickelandcopper.Pricingforthesematerialsisgovernedbymarketconditionsandmayfluctuateduetovariousfactorsoutsideofourcontrol,suchassupplyanddemandandmarketspeculation.Wecurrentlybelievethatwehaveadequateaccesstorawmaterialssuppliesinordertomeettheneedsofouroperations.

    GovernmentalPrograms,IncentivesandRegulationsGlobally,boththeoperationofourbusinessbyusandtheownershipofourproductsbyourcustomersareimpactedbyanumberofgovernment

    programs,incentivesandotherarrangements.Ourbusinessandproductsarealsosubjecttoanumberofgovernmentalregulationsthatvaryamongjurisdictions.

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  • ProgramsandIncentivesCaliforniaAlternativeEnergyandAdvancedTransportationFinancingAuthorityTaxIncentivesWehaveenteredintomultipleagreementsoverthepastfewyearswiththeCaliforniaAlternativeEnergyandAdvancedTransportation

    FinancingAuthority(“CAEATFA”)thatprovidemulti-yearsalestaxexclusionsonpurchasesofmanufacturingequipmentthatwillbeusedforspecificpurposes,includingtheexpansionandongoingdevelopmentofModelS,ModelX,Model3,ModelYandfutureelectricvehiclesandtheexpansionofelectricvehiclepowertrainproductioninCalifornia.

    GigafactoryNevada—NevadaTaxIncentivesInconnectionwiththeconstructionofGigafactoryNevada,wehaveenteredintoagreementswiththeStateofNevadaandStoreyCountyin

    Nevadathatprovideabatementsforsales,use,realproperty,personalpropertyandemployerexcisetaxes,discountstothebasetariffenergyratesandtransferabletaxcredits.TheseincentivesareavailablefortheapplicableperiodsbeginningonOctober17,2014andendingoneitherJune30,2024orJune30,2034(dependingontheincentive).Undertheseagreements,wewereeligibleforamaximumof$195.0millionoftransferabletaxcredits,subjecttocapitalinvestmentsbyusandourpartnersforGigafactoryNevadaofatleast$3.50billion,whichweexceededduring2017,andspecifiedhiringtargetsforGigafactoryNevada,whichweexceededduring2018.Asaresult,asofDecember31,2018,wehadearnedthemaximumamountofcredits.

    GigafactoryNewYork—NewYorkStateInvestmentandLeaseWehavealeasethroughtheResearchFoundationfortheStateUniversityofNewYork(the“SUNYFoundation”)forGigafactoryNewYork,

    whichwasconstructedonbehalfoftheSUNYFoundation.Undertheleaseandarelatedresearchanddevelopmentagreement,therecontinuestobe,onbehalfoftheSUNYFoundation,installationofcertainutilitiesandotherimprovementsandacquisitionofcertainmanufacturingequipmentdesignatedbyustobeusedatGigafactoryNewYork.Thetermsofsuchagreementrequireustocomplywithanumberofcovenants,includingrequiredhiringandcumulativeinvestmenttargets,whichwehavemettodateasoftheapplicablemeasurementdates.

    GigafactoryShanghai—LeaseandLandUseRightsWehavealeasearrangementwiththelocalgovernmentofShanghaiforlanduserightsatGigafactoryShanghai.Underthetermsofthe

    arrangement,wearerequiredtomeetacumulativecapitalexpendituretargetandanannualtaxrevenuetargetstartingattheendof2023,whichwebelievewillbeattainableevenifouractualvehicleproductionatGigafactoryShanghaiwerefarlowerthanthevolumesweareforecasting.

    TeslaRegulatoryCreditsInconnectionwiththeproduction,delivery,placementintoserviceandongoingoperationofourzeroemissionvehicles,charginginfrastructure

    andsolarsystemsinglobalmarkets,wehaveearnedandwillcontinuetoearnvarioustradableregulatorycredits.Wehavesoldthesecredits,andwillcontinuetosellfuturecredits,toautomotivecompaniesandotherregulatedentitieswhocanusethecreditstocomplywithemissionstandardsandotherregulatoryrequirements.Forexample,underCalifornia’sZeroEmissionVehicleRegulationandthoseofstatesthathaveadoptedCalifornia’sstandard,vehiclemanufacturersarerequiredtoearnorpurchasecredits,referredtoasZEVcredits,forcompliancewiththeirannualregulatoryrequirements.Theselawsprovidethatautomakersmaybankorselltootherregulatedpartiestheirexcesscreditsiftheyearnmorecreditsthantheminimumquantityrequiredbythoselaws.TeslaalsoearnsothertypesofsaleableregulatorycreditsintheUnitedStatesandabroad,includinggreenhousegas,fueleconomy,renewableenergy,andcleanfuelscredits.Likewise,severalU.S.stateshaveadoptedprocurementrequirementsforrenewableenergyproduction.TheserequirementsenablecompaniesdeployingsolarenergytoearntradablecreditsknownasSolarRenewableEnergyCertificates(“SRECs”).

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  • EnergyStorageSystems—IncentivesTheregulatoryregimeforenergystorageprojectsisstillunderdevelopment.Nevertheless,therearevariouspolicies,incentivesandfinancial

    mechanismsatthefederal,stateandlocallevelsthatsupporttheadoptionofenergystorage.Forexample,energystoragesystemsthatarechargedusingsolarenergyareeligibleforthe26%taxcreditin2020witharampdownin2021andbeyondunderSection48(a)(3)oftheInternalRevenueCode,ortheIRC,asdescribedbelow.Inaddition,Californiaandanumberofotherstateshaveadoptedprocurementtargetsforenergystorage,andbehindthemeterenergystoragesystemsqualifyforfundingundertheCaliforniaSelfGenerationIncentiveProgram.

    TheFederalEnergyRegulatoryCommission(“FERC”)hasalsotakenstepstoenabletheparticipationofenergystorageinwholesaleenergymarkets.Forexample,inlate2016,FERCissuedafinalrule,OrderNo.821,tofurtherbreakdownbarrierspreventingenergystoragefromfullyparticipatinginwholesaleenergymarkets.Order821iscurrentlyunderreviewbeforetheU.S.CourtofAppealsfortheD.C.Circuit.

    SolarEnergySystems—GovernmentandUtilityProgramsandIncentivesU.S.federal,stateandlocalgovernmentshaveestablishedvariouspolicies,incentivesandfinancialmechanismstoreducethecostofsolar

    energyandtoacceleratetheadoptionofsolarenergy.Theseincentivesincludetaxcredits,cashgrants,taxabatementsandrebates.

    Thefederalgovernmentcurrentlyprovidesanuncappedinvestmenttaxcredit(“ITC”)undertwosectionsoftheIRC:Section48andSection25D.Section48(a)(3)oftheIRCallowsataxpayertoclaimacreditof26%ofqualifiedexpendituresforacommercialsolarenergysystemthatcommencesconstructionbyDecember31,2020.Thecreditthendeclinesto22%in2021andapermanent10%thereafter.WeclaimtheSection48commercialcreditwhenavailableforbothourresidentialandcommercialprojects,basedonownershipofthesolarenergysystem.Thefederalgovernmentalsoprovidesaccelerateddepreciationforeligiblecommercialsolarenergysystems.Section25DoftheIRCallowsahomeowner-taxpayertoclaimacreditof26%ofqualifiedexpendituresforaresidentialsolarenergysystemownedbythehomeownerthatisplacedinservicebyDecember31,2020.Thecreditthendeclinesto22%in2021andisscheduledtoexpirethereafter.CustomerswhopurchasetheirsolarenergysystemsforcashorthroughoursolarloanofferingareeligibletoclaimtheSection25Dinvestmenttaxcredit.

    InadditiontothefederalITC,manyU.S.statesofferpersonalandcorporatetaxcreditsandincentivesforsolarenergysystems.

    RegulationsVehicleSafetyandTestingOurvehiclesaresubjectto,andcomplywithorareotherwiseexemptfrom,numerousregulatoryrequirementsestablishedbytheNational

    HighwayTrafficSafetyAdministration(“NHTSA”),includingallapplicableUnitedStatesFederalMotorVehicleSafetyStandards(“FMVSS”).OurvehiclesfullycomplywithallapplicableFMVSSswithouttheneedforanyexemptions,andweexpectfutureTeslavehiclestoeitherfullycomplyorcomplywithlimitedexemptionsrelatedtonewtechnologies.Additionally,thereareregulatorychangesbeingconsideredforseveralFMVSS,andwhileweanticipatecompliance,thereisnoassuranceuntilfinalregulationchangesareenacted.

    Asamanufacturer,wemustself-certifythatourvehiclesmeetallapplicableFMVSS,aswellastheNHTSAbumperstandard,orotherwiseareexempt,beforethevehiclescanbeimportedorsoldintheU.S.NumerousFMVSSapplytoourvehicles,suchascrash-worthinessrequirements,crashavoidancerequirements,andelectricvehiclerequirements.WearealsorequiredtocomplywithotherfederallawsadministeredbyNHTSA,includingtheCAFEstandards,TheftPreventionActrequirements,consumerinformationlabelingrequirements,EarlyWarningReportingrequirementsregardingwarrantyclaims,fieldreports,deathandinjuryreportsandforeignrecalls,andowner’smanualrequirements.

    TheAutomobileInformationandDisclosureActrequiresmanufacturersofmotorvehiclestodisclosecertaininformationregardingthemanufacturer’ssuggestedretailprice,optionalequipmentandpricing.Inaddition,thislawallowsinclusionofcityandhighwayfueleconomyratings,asdeterminedbyEPA,aswellascrashtestratingsasdeterminedbyNHTSAifsuchtestsareconducted.

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  • OurvehiclessoldoutsideoftheU.S.aresubjecttosimilarforeignsafety,environmentalandotherregulations.ManyofthoseregulationsaredifferentfromthoseapplicableintheU.S.andmayrequireredesignand/orretesting.TheEuropeanUnionhasestablishednewrulesregardingadditionalcomplianceoversightthatarescheduledtocommencein2020,andthereisalsoregulatoryuncertaintyrelatedtotheUnitedKingdom’swithdrawalfromtheEuropeanUnion.ThesechangescouldimpacttherolloutofnewvehiclefeaturesinEurope.

    Self-DrivingTherearenofederalU.S.regulationspertainingtothesafetyofself-drivingvehicles;however,NHTSAhasestablishedrecommended

    guidelines.CertainU.S.stateshavelegalrestrictionsonself-drivingvehicles,andmanyotherstatesareconsideringthem.Thispatchworkincreasesthelegalcomplexityforourvehicles.InEurope,certainvehiclesafetyregulationsapplytoself-drivingbrakingandsteeringsystems,andcertaintreatiesalsorestrictthelegalityofcertainhigherlevelsofself-drivingvehicles.Self-drivinglawsandregulationsareexpectedtocontinuetoevolveinnumerousjurisdictionsintheU.S.andforeigncountries,andmaycreaterestrictionsonself-drivingfeaturesthatwedevelop.

    AutomobileManufacturerandDealerRegulationStatelawsregulatethemanufacture,distribution,saleandserviceofautomobiles,andgenerallyrequiremotorvehiclemanufacturersand

    dealerstobelicensedinordertosellvehiclesdirectlytoconsumersinthestate.AsweopenadditionalTeslastoresandservicecenters,wesecuredealerlicenses(ortheirequivalent)andengageinsalesactivitiestosellourvehiclesdirectlytoconsumers.Certainstatesdonotpermitautomobilemanufacturerstobelicensedasdealersortoactinthecapacityofadealer,orotherwiserestrictamanufacturer’sabilitytodeliverorservicevehicles.Tosellvehiclestoresidentsofstateswherewearenotlicensedasadealer,wegenerallyconductthetransferoftitleoutofthestate.Insuchstates,wehaveopened“galleries”thatserveaneducationalpurposeandwherethetitletransfermaynotoccur.

    AsweexpandourretailfootprintintheU.S.,someautomobiledealertradeassociationshavebothchallengedthelegalityofouroperationsincourtandusedadministrativeandlegislativeprocessestoattempttoprohibitorlimitourabilitytooperateexistingstoresorexpandtonewlocations.Weexpectthatthedealerassociationswillcontinuetomountchallengestoourbusinessmodel.Inaddition,weexpectthedealerassociationstoactivelylobbystatelicensingagenciesandlegislatorstointerpretexistinglawsorenactnewlawsinwaysnotfavorabletoTesla’sownershipandoperationofitsownretailandservicelocations,andweintendtoactivelyfightanysucheffortstolimitourabilitytosellandserviceourownvehicles.

    BatterySafetyandTestingOurbatterypackconformstomandatoryregulationsthatgoverntransportof“dangerousgoods,”definedtoincludelithium-ionbatteries,which

    maypresentariskintransportation.Theregulationsvarybymodeofshippingtransportation,suchasbyoceanvessel,rail,truck,orair.Wehavecompletedtheapplicabletransportationtestsforourbatterypacks,demonstratingourcompliancewithapplicableregulations.

    Weuselithium-ioncellsinourhighvoltagebatterypacksinourvehiclesandenergystorageproducts.Theuse,storage,anddisposalofourbatterypacksisregulatedunderfederallaw.Wehaveagreementswiththirdpartybatteryrecyclingcompaniestorecycleourbatterypacksandwearealsodevelopingourownrecyclingtechnology.

    SolarEnergy—GeneralWearenota“regulatedutility”intheU.S.,althoughwearesubjecttocertainstateandfederalregulationsapplicabletosolarandbattery

    storageproviders.Tooperateoursystems,weobtaininterconnectionagreementsfromtheutilities.Inmostcases,interconnectionagreementsarestandardformagreementsthathavebeenpre-approvedbythepublicutilitycommissionorotherregulatorybody.

    Salesofelectricityandnon-saleequipmentleasesbythirdparties,suchasourleases,PPAsandsubscriptionagreements,faceregulatorychallengesinsomestatesandjurisdictions.

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  • SolarEnergy—NetMeteringMoststatesintheU.S.havearegulatorypolicyknownasnetenergymetering,ornetmetering,availabletosolarcustomers.Netmetering

    typicallyallowssolarcustomerstointerconnecttheiron-sitesolarenergysystemstotheutilitygridandoffsettheirutilityelectricitypurchasesbyreceivingabillcreditforexcessenergygeneratedbytheirsolarenergysystemthatisexportedtothegrid.Incertainjurisdictions,regulatorsorutilitieshavereducedoreliminatedthebenefitavailableundernetmetering,orhaveproposedtodoso.

    SolarEnergy—MandatedRenewableCapacityManystatesalsohaveadoptedprocurementrequirementsforrenewableenergyproduction,suchasanenforceablerenewableportfolio

    standard,orRPS,orotherpoliciesthatrequirecoveredentitiestoprocureaspecifiedpercentageoftotalelectricitydeliveredtocustomersinthestatefromeligiblerenewableenergysources,suchassolarenergysystems.InSRECstatemarkets,theRPSrequireselectricitysupplierstosecureaportionoftheirelectricityfromsolargenerators.TheSRECprogramprovidesameansforthegenerationofSRECs,whichcanthenbesoldseparatelyfromtheenergyproducedtocoveredentitieswhosurrendertheSRECstothestatetoprovecompliancewiththestate’srenewableenergymandate.

    CompetitionAutomotive

    Theworldwideautomotivemarketishighlycompetitiveandweexpectitwillbecomeevenmorecompetitiveinthefutureasweintroduceadditionalvehiclesinabroadercross-sectionofthepassengerandcommercialvehiclemarketandexpandourvehicles’capabilities.

    Webelievethatourvehiclescompeteinthemarketbothbasedontheirtraditionalsegmentclassificationaswellasbasedontheirpropulsiontechnology.Forexample,ModelSandModelXcompeteprimarilywithpremiumsedansandpremiumSUVsandModel3andModelYcompetewithsmalltomedium-sizedsedansandcompactSUVs,whichareextremelycompetitivemarkets.Competingproductstypicallyincludeinternalcombustionvehiclesfrommoreestablishedautomobilemanufacturers;however,manyestablishedandnewautomobilemanufacturershaveenteredorhaveannouncedplanstoenterthealternativefuelvehiclemarket.Overall,webelievetheseannouncementsandvehicleintroductionspromotethedevelopmentofthealternativefuelvehiclemarketbyhighlightingtheattractivenessofalternativefuelvehicles,particularlythosefueledbyelectricity,relativetotheinternalcombustionvehicle.ManymajorautomobilemanufacturershaveelectricvehiclesavailabletodayinmajormarketsincludingtheU.S.,ChinaandEurope,andothercurrentandprospectiveautomobilemanufacturersarealsodevelopingelectricvehicles.Inaddition,severalmanufacturersofferhybridvehicles,includingplug-inversions.

    Ourvehiclesalsocompeteinthemarketbasedonthecompellinguserexperiencethattheyoffer.WebelievethatakeyfactorinoursuccesswillbeourAutopilotandFSDtechnologiesthatcurrentlyenablethedriver-assistancefeaturesinourvehicles,andinwhichwearemakingsignificantstridesthroughourproprietaryandpowerfulFSDcomputerandremotelyupdateableartificialintelligencesoftware.Ultimately,whilewearesubjecttoregulatoryconstraintsoverwhichwehavenocontrol,ourgoalisafullyautonomously-drivenfuturethatimprovessafetyandprovidesourcustomerswithconvenienceandadditionalincomethroughparticipationinanautonomousTeslaride-hailingnetwork.Thisnetwork,whichwillalsoincludeourownfleetofvehicles,willalsoallowustoaccessanewcustomerbaseevenasmodesoftransportationevolve.Finally,ourvehiclesofferunparalleledin-vehicleentertainmentfeatures,currentlyincludingInternetsearch,musicservices,passengerkaraoke,andparkedvideostreamingandgaming.

    13

  • EnergyGenerationandStorageEnergyStorageSystemsThemarketforenergystorageproductsisalsohighlycompetitive.Establishedcompanies,suchasAESEnergyStorage,Siemens,LGChemand

    Samsung,aswellasvariousemergingcompanies,haveintroducedproductsthataresimilartoourproductportfolio.Thereareseveralcompaniesprovidingindividualcomponentsofenergystoragesystems(suchascells,batterymodules,andpowerelectronics)aswellasothersprovidingintegratedsystems.Wecompetewiththesecompaniesbasedonprice,energydensityandefficiency.Webelievethatthespecificationsofourproducts,ourstrongbrand,andthemodular,scalablenatureofourPowerpackandMegapackproductsgiveusacompetitiveadvantagewhenmarketingourproducts.

    SolarEnergySystemsTheprimarycompetitorstooursolarenergybusinessarethetraditionallocalutilitycompaniesthatsupplyenergytoourpotentialcustomers.

    Wecompetewiththesetraditionalutilitycompaniesprimarilybasedonprice,predictabilityofpriceandtheeasebywhichcustomerscanswitchtoelectricitygeneratedbyoursolarenergysystems.Wealsocompetewithsolarenergycompaniesthatprovideproductsandservicessimilartoours.Manysolarenergycompaniesonlyinstallsolarenergysystems,whileothersonlyprovidefinancingfortheseinstallations.Intheresidentialsolarenergysysteminstallationmarket,ourprimarycompetitorsincludeVivintSolarInc.,SunrunInc.,TrinitySolar,SunPowerCorporation,andmanysmallerlocalsolarcompanies.

    TheelectricityproducedbysolarinstallationsstillrepresentsasmallfractionoftotalU.S.electricitygeneration.Withtensofmillionsofsingle-familyhomesandbusinessesinourprimaryserviceterritories,andmanymoreinotherlocations,wehavealargeopportunitytoexpandandgrowthisbusinessaswemakeourretrofitinstallationsmoreaccessibleandrampourinnovativeSolarRoof.Wealsobelievethatresidentialsolarenergygenerationisgainingfavorableregulatorymomentum,asexemplifiedinpartbythestateofCaliforniarecentlyrequiringthatnewhomesbebuiltwithsolargenerationstartingin2020.

    IntellectualPropertyWeplaceastrongemphasisonourinnovativeapproachandproprietarydesignswhichbringintrinsicvalueanduniquenesstoourproduct

    portfolio.Aspartofourbusiness,weseektoprotecttheunderlyingintellectualpropertyrightsoftheseinnovationsanddesignssuchaswithrespecttopatents,trademarks,copyrights,tradesecretsandothermeasures,includingthroughemployeeandthirdpartynondisclosureagreementsandothercontractualarrangements.Forexample,weplaceahighpriorityonobtainingpatentstoprovidethebroadestandstrongestpossibleprotectiontoenableourfreedomtooperateourinnovationsanddesignswithinourproductsandtechnologiesintheelectricvehiclemarketaswellastoprotectanddefendourproductportfolio.Wehavealsoadoptedapatentpolicyinwhichweirrevocablypledgedthatwewillnotinitiatealawsuitagainstanypartyforinfringingourpatentsthroughactivityrelatingtoelectricvehiclesorrelatedequipmentforsolongassuchpartyisactingingoodfaith.Wemadethispledgeinordertoencouragetheadvancementofacommon,rapidly-evolvingplatformforelectricvehicles,therebybenefitingourselves,othercompaniesmakingelectricvehicles,andtheworld.

    EmployeesAsofDecember31,2019,Tesla,Inc.had48,016full-timeemployees.Todate,wehavenotexperiencedanyworkstoppages,andweconsider

    ourrelationshipwithouremployeestobegood.

    AvailableInformationWefileorfurnishperiodicreportsandamendmentsthereto,includingourAnnualReportsonForm10-K,ourQuarterlyReportsonForm10-Q

    andCurrentReportsonForm8-K,proxystatementsandotherinformationwiththeSecuritiesandExchangeCommission(“SEC”).Inaddition,theSECmaintainsawebsite(www.sec.gov)thatcontainsreports,proxyandinformationstatements,andotherinformationregardingissuersthatfileelectronically.Ourwebsiteislocatedatwww.tesla.com,andourreports,amendmentsthereto,proxystatementsandotherinformationarealsomadeavailable,freeofcharge,onourinvestorrelationswebsiteatir.tesla.comassoonasreasonablypracticableafterweelectronicallyfileorfurnishsuchinformationwiththeSEC.TheinformationpostedonourwebsiteisnotincorporatedbyreferenceintothisAnnualReportonForm10-K.

    14

  • ITEM1A. RISKFACTORS

    Youshouldcarefullyconsidertherisksdescribedbelowtogetherwiththeotherinformationsetforthinthisreport,whichcouldmateriallyaffectourbusiness,financialconditionandfutureresults.Therisksdescribedbelowarenottheonlyrisksfacingourcompany.Risksanduncertaintiesnotcurrentlyknowntousorthatwecurrentlydeemtobeimmaterialalsomaymateriallyadverselyaffectourbusiness,financialconditionandoperatingresults.

    RisksRelatedtoOurBusinessandIndustryWehaveexperiencedinthepast,andmayexperienceinthefuture,delaysorothercomplicationsinthedesign,manufacture,launch,andproductionrampofourvehicles,energyproducts,andproductfeatures,ormaynotrealizeourmanufacturingcosttargets,whichcouldharmourbrand,business,prospects,financialconditionandoperatingresults.Wehavepreviouslyexperiencedlaunchandproductionrampdelaysorothercomplicationsinconnectionwithnewvehiclemodelssuchas

    ModelS,ModelXandModel3,andnewvehiclefeaturessuchastheall-wheeldrivedualmotordrivetrainonModelSandthesecondversionofourAutopilothardware.Forexample,weencounteredunanticipatedsupplychainconstraintsthatledtoinitialdelaysinproducingModelXandanisolatedsupplierlimitationinthemanufactureofModel3.Similarly,duringourinitialModel3productionramp,wehadchallengesrampingfullyautomatedprocesses,suchasportionsofthebatterymoduleassemblyline,materialflowsystemandthegeneralassemblyline,whichweaddressedbyreducingthelevelsofautomationandintroducingsemi-automatedormanualprocesses.Inaddition,wehaveusedanumberofnewmanufacturingtechnologies,techniquesandprocessesforourvehicles,suchasaluminumspotweldingsystemsandhigh-speedblowformingofcertaindifficulttostampvehicleparts,andwemayintroducenewprocessesinthefuture.Wehavealsointroduceduniquedesignfeaturesinourvehicleswithdifferentmanufacturingchallenges,suchaslargedisplayscreens,dualmotordrivetrain,hardwareforourAutopilotandFSDfeaturesandfalcon-wingdoors.Thereisnoguaranteethatwewillbeabletosuccessfullyandtimelyintroduceandscaleanysuchnewprocessesorfeatures.

    Inparticular,ourfuturebusinessdependsinlargepartonthehigh-volumeproductionofModel3andModelY,whichwebelieveareourvehicleswiththelargestmarkets.WehavelimitedexperiencetodateinmanufacturingModel3athighvolumesandcontinuouslyincreasingitsproductionrates,particularlyacrossmultiplevehiclemanufacturingfacilities,whichwecommencedinthefourthquarterof2019withGigafactoryShanghaicomingonline.Inordertobesuccessful,wewillneedtoimplement,maintainand/orrampefficientandcost-effectivemanufacturingcapabilities,processesandsupplychainsandachievethedesigntolerances,highqualityandmaximumoutputrateswehaveplanned,includingatGigafactoryShanghai,andforModelY,whichwecommencedmanufacturingattheFremontFactoryinthefirstquarterof2020.Bottleneckssuchasthosewehaveexperiencedinthepastwithnewproductrampsandotherunexpectedchallengesmayalsoariseaswerampproduction,anditwillbeimportantthatweaddressthempromptlywhilecontinuingtoreduceourmanufacturingcosts.Ifwearenotsuccessfulindoingso,orifweexperienceissueswithourongoingmanufacturingprocessimprovementsandcost-downefforts,wecouldfacedelaysinestablishingand/orsustainingourModel3andModelYrampsorbeunabletomeetourrelatedcostandprofitabilitytargets.

    Moreover,wewillneedtohire,trainandcompensateskilledemployeestooperatehigh-volumeproductionfacilitiestosupportourvehiclerampattheFremontFactoryandGigafactoryShanghai,aswellasatGigafactoryNevadatosupportthemanufactureofbatterypacksanddriveunitsforcertainofourvehicles.Finally,becauseourvehiclemodels,inparticularModel3andModelY,maysharecertainparts,suppliersorproductionfacilitieswitheachother,thevolumeorefficiencyofproductionwithrespecttoonemodelmayimpactalsotheproductionofothermodelsorleadtobottlenecksthatimpacttheproductionofallmodels.

    Wemayalsoexperiencesimilarfuturedelaysorothercomplicationsinlaunchingand/orrampingproductionofnewvehicles,suchasTeslaSemi,CybertruckandthenewTeslaRoadster,ourenergystorageproductsandtheSolarRoof,aswellasfuturefeaturesandservicessuchasnewAutopilotorFSDfeaturesandtheautonomousTeslaride-hailingnetwork.Likewise,wemayencounterdelayswiththedesign,constructionandregulatoryorotherapprovalsnecessarytobuildandbringonlinefuturemanufacturingfacilities,includingourplannedGigafactoryBerlininGermany.

    15

  • Anysignificantdelayorothercomplicationintheproductionrampofourcurrentproductsorthedevelopment,manufacture,launchandproductionrampofourfutureproducts,featuresandservices,includingcomplicationsassociatedwithexpandingourproductioncapacityandsupplychainorobtainingormaintainingrelatedregulatoryapprovals,orinabilitytomanagesuchrampscost-effectively,couldmateriallydamageourbrand,business,prospects,financialconditionandoperatingresults.

    Wemaybeunabletomeetourgrowingproductsales,deliveryandinstallationplansandvehicleservicingandchargingnetworkneeds,oraccuratelyprojectandmanagethisgrowthinternationally,anyofwhichcouldharmourbusinessandprospects.Concurrentwithdeveloping,launchingandrampingourproducts,oursuccesswilldependonourabilitytocontinuetosignificantlyincrease

    theirsales,deliveries,installationsandservicingworldwide,whileallocatingouravailableresourcesamongmultipleproductssimultaneously.Asweexpandglobally,wewillalsoneedtoensureweareincompliancewithanyregulatoryrequirementsapplicabletothesale,installationandserviceofourproducts,thesaleofelectricitygeneratedthroughoursolarenergysystemsandoperationofSuperchargersinvariousjurisdictions,whichcouldtakeconsiderabletimeandexpense.Theseplansrequiresignificantcashinvestmentsandmanagementresourcesandthereisnoguaranteethattheywillultimatelygenerateadditionalsalesorinstallationsofourproducts.

    Wecontinuouslyevaluate,andasappropriateevolve,ourretailoperationsandproductofferingsinordertomaximizeourreachandoptimizeourcosts,vehicleline-upandmodeldifferentiation,andpurchasingexperience.However,thereisnoguaranteethateachstepinourevolvingstrategywillbeperceivedasintendedbyprospectivecustomersaccustomedtomoretraditionalsalesmodels.Inparticular,wearetargetingwithModel3andModelYaglobalmassdemographicwithabroadrangeofpotentialcustomers,inwhichwehavelimitedexperienceprojectingdemandandpricingourproducts.UntilweramplocalproductionatGigafactoryShanghaiandinthefutureatGigafactoryBerlin,wewillhavetocontendwithpredominantlysingle-factoryvehicleproductionattheFremontFactoryfornumerousinternationalvariants.Ifourspecificdemandexpectationsforthesevariantsproveinaccurate,wemaynotbeabletotimelygeneratesalesmatchedtothespecificvehiclesthatweproduceinthesametimeframeorthatarecommensuratewithouroperationsinagivenregion,whichmaynegativelyimpactourdeliveriesandoperatingresultsinaparticularperiod.Likewise,aswedevelopandgrowourenergystorageproductandsolarbusinessworldwide,oursuccesswilldependonourabilitytocorrectlyforecastdemandforourproductsindifferentmarkets.

    Moreover,becausewedonothaveindependentdealernetworks,weareresponsiblefordeliveringallofourvehiclestoourcustomersandmeetingtheirvehicleservicingneeds.Whilewehavesubstantiallyimplementedandimprovedmanyaspectsofourdeliveryandserviceoperations,westillhaverelativelylimitedexperiencewith,andmayfacedifficultiesin,suchdeliveriesandservicingathighvolumes,particularlyininternationalmarketsasweexpand.Forexample,significanttransittimemayberequiredtotransportvehiclesinvolumeintointernationalmarkets,andwealsosawchallengesininitiallyrampingourlogisticalchannelsinChinaandEuropeaswedeliveredModel3thereforthefirsttimeinthefirstquarterof2019.Toaccommodategrowingvolumes,wehavedeployedanumberofdeliverymodels,suchasdeliveriestocustomers’homesandworkplaces,someofwhichhavenotbeenpreviouslytestedatscaleandindifferentgeographiesandmaynotultimatelybesuccessful.Likewise,becauseofouruniqueexpertisewithourvehicles,werecommendthatourvehiclesbeservicedbyourservicecenters,MobileServicetechniciansorcertainauthorizedprofessionalsthatwehavespecificallytrainedandequipped.Ifweexperiencedelaysinaddingsuchservicingcapacityorexperienceunforeseenissueswiththereliabilityofourvehicles,particularhigher-volumeandneweradditionstoourfleetsuchasModel3andModelY,itcouldoverburdenourservicingcapabilitiesandpartsinventory.Finally,theincreasingnumberofTeslavehiclesalsorequiresustocontinuetorapidlyincreasethenumberofourSuperchargerstationsandconnectorsthroughouttheworld.

    WearealsoexpandingourinstallationcapabilitiesfortheSolarRoofaswecontinueitsmanufacturingrampbytrainingbothourownpersonnelandthirdpartyinstallers.Ifwearenotsuccessfulingrowingthisoverallinstallationcapabilitytokeeppacewithourincreasingproduction,orifweexperienceunforeseendelaysintheproductionramporinaccuratelyforecastdemandfortheSolarRoof,ouroperatingresultsmaybenegativelyimpacted.

    16

  • Thereisnoassurancethatwewillbeabletorampourbusinesstomeetoursales,delivery,servicing,chargingandinstallationtargetsglobally,thatourprojectionsonwhichsuchtargetsarebasedwillproveaccurate,orthatthepaceofgrowthorcoverageofourcustomerinfrastructurenetworkwillmeetcustomerexpectations.Moreover,wemaynotbesuccessfulinundertakingthisglobalexpansionifweareunabletoavoidcostoverrunsandotherunexpectedoperatingcosts,adaptourproductsandconductouroperationstomeetlocalrequirementsandregulations,implementrequiredlocalinfrastructure,systemsandprocesses,andfindandhireasignificantnumberofadditionalsales,service,electricalinstallation,constructionandadministrativepersonnel.Ifwefailtomanageourgrowtheffectively,itcouldresultinnegativepublicityanddamagetoourbrandandhaveamaterialadverseeffectonourbusiness,prospects,financialconditionandoperatingresults.

    Ourfuturegrowthandsuccessisdependentuponconsumers’willingnesstoadoptelectricvehiclesandspecificallyourvehicles.Weoperateintheautomotiveindustry,whichisgenerallysusceptibletocyclicalityandvolatility.Ourgrowthishighlydependentupontheworldwideadoptionbyconsumersofalternativefuelvehiclesingeneralandelectricvehiclesin

    particular.Althoughwehavesuccessfullygrowndemandforourvehiclesthusfar,thereisnoguaranteeofsuchfuturedemand,orthatourvehicleswillnotcompetewithoneanotherinthemarket.Moreover,thetargetdemographicsforourvehicles,inparticularthemassmarketdemographicforModel3andModelY,arehighlycompetitive.IfthemarketforelectricvehiclesingeneralandTeslavehiclesinparticulardoesnotdevelopasweexpect,developsmoreslowlythanweexpect,orifdemandforourvehiclesdecreasesinourmarkets,ourbusiness,prospects,financialconditionandoperatingresultscouldbeharmed.

    Wehaveonlyrelativelyrecentlyachievedhigh-volumeproductionofvehicles,andarestillatanearlierstageandhavelimitedresourcesrelativetoourcompetitors.Moreover,themarketforalternativefuelvehiclesisrapidlyevolving.Asaresult,themarketforourvehiclescouldbeaffectedbynumerousfactors,suchas: • perceptionsaboutelectricvehiclefeatures,quality,safety,performanceandcost; • perceptionsaboutthelimitedrangeoverwhichelectricvehiclesmaybedrivenonasinglebatterycharge; • competition,includingfromothertypesofalternativefuelvehicles,plug-inhybridelectricvehiclesandhighfuel-economyinternal

    combustionenginevehicles; • volatilityinthecostofoilandgasoline; • governmentregulationsandeconomicincentives; • accesstochargingfacilities;and • concernsaboutourfutureviability.

    Inaddition,salesofvehiclesintheautomotiveindustrytendtobecyclicalinmanymarkets,whichmayexposeustoincreasedvolatility,especiallyasweexpandandadjustouroperationsandretailstrategies.Specifically,itisuncertainastohowsuchmacroeconomicfactorswillimpactusasacompanythathasbeenexperiencinggrowthandincreasingmarketshareinanindustrythathasgloballybeenexperiencingarecentdeclineinsales.

    17

  • Wearedependentonoursuppliers,themajorityofwhicharesingle-sourcesuppliers,andtheinabilityofthesesupplierstodelivernecessarycomponentsofourproductsaccordingtoourscheduleandatprices,qualitylevelsandvolumesacceptabletous,orourinabilitytoefficientlymanagethesecomponents,couldhaveamaterialadverseeffectonourfinancialconditionandoperatingresults.Ourproductscontainthousandsofpurchasedpartsthatwesourcegloballyfromhundredsofdirectsuppliers.Weattempttomitigateour

    supplychainriskbyenteringintolong-termagreementswhereitispracticalandbeneficialtodoso,includingagreementsweenteredintowithPanasonictobeourmanufacturingpartnerandsupplier;qualifyingandobtainingcomponentsfrommultiplesourceswheresensible,suchasthePVpanelsforourretrofitsolarinstallationsthatwepurchasefromavarietyofsuppliers;andmaintainingsafetystockforkeypartsandassembliesanddiebanksforcomponentswithlengthyprocurementleadtimes.However,ourlimited,andinmostcasessingle-source,supplychainexposesustomultiplepotentialsourcesofdeliveryfailureorcomponentshortagesforourproduction,suchasthosewhichweexperiencedin2012and2016inconnectionwithourslower-than-plannedModelSandModelXramps.Furthermore,unexpectedchangesinbusinessconditions,materialspricing,laborissues,wars,governmentalchanges,tariffs,naturaldisasterssuchastheMarch2011earthquakesinJapan,healthepidemics,andotherfactorsbeyondourandoursuppliers’controlcouldalsoaffectthesesuppliers’abilitytodelivercomponentstousonatimelybasis.Thelossofanysupplier,particularlyasingle-orlimited-sourcesupplier,orthedisruptioninthesupplyofcomponentsfromoursuppliers,couldleadtoproductdesignchanges,productiondelaysofkeyrevenue-generatingproducts,idlemanufacturingfacilities,andpotentiallossofaccesstoimportanttechnologyandpartsforproducing,servicingandsupportingourproducts,anyofwhichcouldresultinnegativepublicity,damagetoourbrandandamaterialandadverseeffectonourbusiness,prospects,financialconditionandoperatingresults.

    Wemayalsobeimpactedbychangesinoursupplychainorproductionneeds.Wehaveexperiencedinthepast,andmayexperienceinthefuture,costincreasesfromcertainofoursuppliersinordertomeetourqualitytargetsanddevelopmenttimelinesaswellasduetoourdesignchanges.Likewise,anysignificantincreasesinourproduction,suchasforModel3andourexpectationsforModelY,hasrequiredand/ormayinthefuturerequireustoprocureadditionalcomponentsinashortamountoftime.Oursuppliersmaynotultimatelybeabletosustainablyandtimelymeetourcost,qualityandvolumeneeds,requiringustoreplacethemwithothersources.Whilewebelievethatwewillbeabletosecureadditionaloralternatesourcesofsupplyformostofourcomponentsinarelativelyshorttimeframe,thereisnoassurancethatwewillbeabletodosoordevelopourownreplacementsforcertainhighlycustomizedcomponents.Additionally,wecontinuouslynegotiatewithexistingsupplierstoobtaincostreductionsandavoidunfavorablechangestoterms,seeknewandlessexpensivesuppliersforcertainparts,andattempttoredesigncertainpartstomakethemlessexpensivetoproduce.Ifweareunsuccessfulinoureffortstocontrolandreducesuppliercosts,ouroperatingresultswillsuffer.

    OutsideoftheU.S.,wehavelimitedmanufacturingexperienceandwemayexperienceissuesordelaysincreasingtheleveloflocalizedprocurementatourGigafactoryShanghaiandinthefutureatourGigafactoryBerlin.Furthermore,asthescaleofourvehicleproductionincreases,wewillneedtoaccuratelyforecast,purchase,warehouseandtransportcomponentstoourmanufacturingfacilitiesandservicinglocationsinternationallyandatmuchhighervolumes.Ifweareunabletoaccuratelymatchthetimingandquantitiesofcomponentpurchasestoouractualneedsorsuccessfullyimplementautomation,inventorymanagementandothersystemstoaccommodatetheincreasedcomplexityinoursupplychain,wemayincurunexpectedproductiondisruption,storage,transportationandwrite-offcosts,whichcouldhaveamaterialadverseeffectonourfinancialconditionandoperatingresults.

    AnyproblemsordelaysinexpandingGigafactoryNevadaorrampingandmaintainingoperationstherecouldnegativelyaffecttheproductionandprofitabilityofourproducts,suchasModel3,ModelYandourenergystorageproducts.Inaddition,thebatterycellsproducedtherestorelargeamountsofenergy.Tolowerthecostofcellproductionandproducecellsinhighvolume,wehaveverticallyintegratedtheproductionoflithium-ioncellsat

    GigafactoryNevada,wherewealsomanufacturebatterypacksanddriveunitsforcertainvehiclesandenergystorageproductsandassembleourMegapackproduct.Productionoflithium-ioncellsatGigafactoryNevadabeganin2017,andwehavenootherdirectexperienceintheproductionoflithium-ioncells.Giventhesizeandcomplexityofthisundertaking,itispossiblethatfutureeventscouldresultinissuesordelaysinfurtherrampingourproductsandexpandingproductionoutputatGigafactoryNevada.

    18

  • Inordertoachieveourvolumeandgrossmargintargetsforourvehiclesandenergystorageproducts,wemustcontinuetosustainandrampsignificantcellproductionatGigafactoryNevada,which,amongotherthings,requiresPanasonictosuccessfullyoperateandfurtherrampitscellproductionlinesatsignificantvolumes.AlthoughPanasonichasalongtrackrecordofproducinghigh-qualitycellsatsignificantvolumeatitsfactoriesinJapan,ithasrelativelylimitedexperiencewithcellproductionatGigafactoryNevada.Inaddition,weproduceseveralcomponentsforModel3andModelY,suchasbatterymodulesincorporatingthelithium-ioncellsproducedbyPanasonicanddriveunits(includingtosupportGigafactoryShanghaiproduction),atGigafactoryNevada.Someofthemanufacturinglinesforsuchcomponentstooklongerthananticipatedtoramptotheirfullcapacity.Whilewehavelargelyovercomethisbottleneckafterdeployingmultiplesemi-automatedlinesandimprovingouroriginallines,additionalbottlenecksmayariseaswecontinuetoincreasetheproductionrateandintroducenewlines.IfweareunabletomaintainGigafactoryNevadaproduction,rampoutputadditionallyovertimeasneeded,anddosocost-effectively,orifweorPanasonicareunabletohireandretainasubstantialnumberofhighlyskilledpersonnel,ourabilitytosupplybatterypacksorothercomponentsforModel3,ModelYandourotherproductscouldbenegativelyimpacted,whichcouldnegativelyaffectourbrandandharmourbusiness,prospects,financialconditionandoperatingresults.

    Inaddition,thehighvolumesoflithium-ioncellsandbatterymodulesandpacksmanufacturedatGigafactoryNevadaarestoredandrecycledatourvariousfacilities.Anymishandlingofbatterycellsmaycausedisruptiontotheoperationofsuchfacilities.Whilewehaveimplementedsafetyproceduresrelatedtothehandlingofthecells,therecanbenoassurancethatasafetyissueorfirerelatedtothecellswouldnotdisruptouroperations.Suchdisruptionsorissuescouldnegativelyaffectourbrandandharmourbusiness,prospects,financialconditionandoperatingresults.

    Anyissuesordelaysinmeetingourprojectedtimelines,costsandproductionatorfundingtherampofGigafactoryShanghai,oranydifficultiesingeneratingandmaintaininglocaldemandforvehiclesmanufacturedthere,couldadverselyimpactourbusiness,prospects,operatingresultsandfinancialcondition.Aspartofourcontinuingworktoincreaseproductionofourvehiclesonasustainedbasis,andinordertomakethemaffordableininternational

    marketsbyaccessinglocalsupplychainsandworkforces,wehaveestablishedGigafactoryShanghaiinChina.Currently,wehaveinstalledannualproductioncapacityfor150,000Model3vehiclestherethatwebelievewewilleventuallybeabletopushtoactualratesofproductioninexcessofsuchnumber,andwehavecommencedconstructionofthenextphaseofGigafactoryShanghaitoaddModelYmanufacturingcapacityatleastequivalenttothatforModel3.TherampandfurtherexpansionofGigafactoryShanghaiaresubjecttoanumberofuncertaintiesinherentinallnewmanufacturingoperations,includingongoingcompliancewithregulatoryrequirements,maintenanceofoperationallicensesandapprovalsforadditionalexpansion,potentialsupplychainconstraints,hiring,trainingandretentionofqualifiedemployees,andthepaceofbringingproductionequipmentandprocessesonlinewiththecapabilitytomanufacturehigh-qualityunitsatscale.Wehavelimitedexperiencetodatewithoperatingmanufacturingfacilitiesabroad,andonlyrecentlybegantosellModel3inChina.Ifweexperienceanyissuesordelaysinmeetingourprojectedtimelines,costs,capitalefficiencyandproductioncapacityforGigafactoryShanghai,orinmaintainingandcomplyingwiththetermsoflocaldebtfinancingthatweintendwilllargelyfundit,oringeneratingandmaintainingdemandlocallyforthevehicleswemanufactureatGigafactoryShanghai,ourbusiness,prospects,operatingresultsandfinancialconditioncouldbeadverselyimpacted.

    Inparticular,localmanufacturingiscriticaltoourexpansionandsalesinChina,whichisthelargestmarketforelectricvehiclesintheworld.OurvehiclesalesinChinahavebeennegativelyimpactedinthepastbycertaintariffsonautomobilesmanufacturedintheU.S.,suchasourvehicles,andourcostsforproducingourvehiclesintheU.S.havealsobeenaffectedbyimportdutiesoncertaincomponentssourcedfromChina.IfwearenotabletosuccessfullyandtimelyrampGigafactoryShanghai,wemaycontinuetobeexposedtotheimpactofsuchunfavorabletariffs,dutiesorcoststoourdetrimentcomparedtolocally-basedcompetitors.

    19

  • Wefacerisksassociatedwithourinternationaloperations,includingunfavorableanduncertainregulatory,political,economic,taxandlaborconditions,andwithestablishingourselvesinnewmarkets,allofwhichcouldharmourbusiness.Wehaveaglobalfootprintwithdomesticandinternationaloperationsandsubsidiaries.Accordingly,wearesubjecttoavarietyoflegal,

    politicalandregulatoryrequirementsandsocial,environmentalandeconomicconditionsoverwhichwehavelittlecontrol.Forexample,wemaybeimpactedbytradepolicies,environmentalconditions,politicaluncertaintyandeconomiccyclesinvolvinggeographicregionswherewehavesignificantoperations,whichareinherentlyunpredictable.Wearesubjecttoanumberofrisksassociatedinparticularwithinternationalbusinessactivitiesthatmayincreaseourcosts,impactourabilitytosellourproductsandrequiresignificantmanagementattention.Theserisksincludeconformingourproductstovariousinternationalregulatoryandsafetyrequirementsaswellaschargingandotherelectricinfrastructures,organizinglocaloperatingentities,difficultyinestablishing,staffingandmanagingforeignoperations,challengesinattractingcustomers,foreigngovernmenttaxes,regulationsandpermitrequirements,ourabilitytoenforceourcontractualrights,traderestrictions,customsregulations,tariffsandpriceorexchangecontrols,andpreferencesofforeignnationsfordomesticallymanufacturedproducts.

    Increasesincosts,disruptionofsupplyorshortageofmaterials,inparticularforlithium-ioncells,couldharmourbusiness.Wemayexperienceincreasesinthecostoforasustainedinterruptioninthesupplyorshortageofmaterials.Anysuchincrease,supply

    interruptionorshortagecouldmateriallyandnegativelyimpactourbusiness,prospects,financialconditionandoperatingresults.Weusevariousmaterialsinourbusinessincludingaluminum,steel,lithium,nickel,copperandcobalt,aswellaslithium-ioncellsfromsuppliers.Thepricesforthesematerialsfluctuate,andtheiravailablesupplymaybeunstable,dependingonmarketconditionsandglobaldemandforthesematerials,includingasaresultofincreasedproductionofelectricvehiclesandenergystorageproductsbyourcompetitors,andcouldadverselyaffectourbusinessandoperatingresults.Forinstance,weareexposedtomultiplerisksrelatingtolithium-ioncells.Theserisksinclude: • anincreaseinthecost,ordecreaseintheavailablesupply,ofmaterialsusedinthecells; • disruptioninthesupplyofcellsduetoqualityissuesorrecallsbybatterycellmanufacturersoranyissuesthatmayarisewithrespect

    tocellsmanufacturedatourownfacilities;and • fluctuationsinthevalueofanyforeigncurrenciesinwhichbatterycellandrelatedrawmaterialpurchasesareormaybedenominated,

    suchastheJapaneseyen,againsttheU.S.dollar.

    Ourbusinessisdependentonthecontinuedsupplyofbatterycellsforthebatterypacksusedinourvehiclesandenergystorageproducts.Whilewebelieveseveralsourcesofthebatterycellsareavailableforsuchbatterypacks,andexpecttoeventuallyrelysubstantiallyonbatterycellsmanufacturedatourownfacilities,wehavetodatefullyqualifiedonlyaverylimitednumberofsuppliersforthecellsusedinsuchbatterypacksandhaveverylimitedflexibilityinchangingcellsuppliers.Anydisruptioninthesupplyofbatterycellsfromsuchsupplierscoulddisruptproductionofourvehiclesandofthebatterypacksweproduceforenergyproductsuntilsuchtimeasadifferentsupplierisfullyqualified.Furthermore,fluctuationsorshortagesinpetroleumandothereconomicconditionsmaycauseustoexperiencesignificantincreasesinfreightchargesandmaterialcosts.Substantialincreasesinthepricesforourmaterialsorpriceschargedtous,suchasthosechargedbybatterycellsuppliers,wouldincreaseouroperatingcosts,andcouldreduceourmarginsifwecannotrecouptheincreasedcoststhroughincreasedvehicleprices.Anyattemptstoincreaseproductpricesinresponsetoincreasedmaterialcostscouldresultincancellationsofordersandreservationsandthereforemateriallyandadverselyaffectourbrand,image,business,prospectsandoperatingresults.

    20

  • Ifourvehiclesorotherproductsthatwesellorinstallfailtoperformasexpected,ourabilitytodevelop,marketandsellourproductsandservicescouldbeharmed.Ifourvehiclesorourenergyproductscontaindefectsindesignandmanufacturethatcausethemnottoperformasexpectedorthatrequire

    repair,orcertainfeaturesofourvehiclessuchasnewAutopilotorFSDfeaturestakelongerthanexpectedtobecomeenabled,arelegallyrestrictedorbecomesubjecttoonerousregulation,ourabilitytodevelop,marketandsellourproductsandservicescouldbeharmed.Forexample,theoperationofourvehiclesishighlydependentonsoftware,whichisinherentlycomplexandmaycontainlatentdefectsanderrorsorbesubjecttoexternalattacks.Issuesexperiencedbyvehiclecustomershaveincludedthoserelatedtothesoftwareforthe17inchdisplayscreen,aswellasthepanoramicroofandthe12-voltbatteryintheModelSandtheseatsanddoorsintheModelX.Althoughweattempttoremedyanyissuesweobserveinourproductsaseffectivelyandrapidlyaspossible,sucheffortsmaynotbetimely,mayhamperproductionormaynotbetothesatisfactionofourcustomers.Whilewehaveperformedextensiveinternaltestingontheproductswemanufacture,wecurrentlyhavealimitedframeofreferencebywhichtoevaluatedetailedlong-termquality,reliability,durabilityandperformancecharacteristicsofourbatterypacks,powertrains,vehiclesandenergystorageproducts.Therecanbenoassurancethatwewillbeabletodetectandfixanydefectsinourproductspriortotheirsaletoorinstallationforcustomers.

    Anyproductdefects,delaysorlegalrestrictionsonproductfeatures,orotherfailureofourproductstoperformasexpected,couldharmourreputationandresultindeliverydelays,productrecalls,productliabilityclaims,breachofwarrantyclaims,andsignificantwarrantyandotherexpenses,andcouldhaveamaterialadverseimpactonourbusiness,financialcondition,operatingresultsandprospects.

    Wemaybecomesubjecttoproductliabilityclaims,whichcouldharmourfinancialconditionandliquidityifwearenotabletosuccessfullydefendorinsureagainstsuchclaims.Althoughwedesignourvehiclestobethesafestvehiclesontheroad,productliabilityclaims,eventhosewithoutmerit,couldharmour

    business,prospects,operatingresultsandfinancialcondition.Theautomobileindustryinparticularexperiencessignificantproductliabilityclaimsandwefaceinherentriskofexposuretoclaimsintheeventourvehiclesdonotperformorareclaimedtonothaveperformedasexpected.Asistrueforotherautomakers,ourvehicleshavebeeninvolvedandweexpectinthefuturewillbeinvolvedincrashesresultingindeathorpersonalinjury,andsuchcrasheswhereAutopilotorFSDfeaturesareengagedarethesubjectofsignificantpublicattention.Wehaveexperiencedandweexpecttocontinuetofaceclaimsarisingfromorrelatedtomisuseorclaimedfailuresofnewtechnologiesthatwearepioneering,includingAutopilotandFSDfeaturesinourvehicles.Inaddition,thebatterypacksthatweproducemakeuseoflithium-ioncells.Onrareoccasions,lithium-ioncellscanrapidlyreleasetheenergytheycontainbyventingsmokeandflamesinamannerthatcanignitenearbymaterialsaswellasotherlithium-ioncells.Whilewehavedesignedthebatterypacktopassivelycontainanysinglecell’sreleaseofenergywithoutspreadingtoneighboringcells,therecanbenoassurancethatafieldortestingfailureofourvehiclesorotherbatterypacksthatweproducewillnotoccur,inparticularduetoahigh-speedcrash,whichcouldsubjectustolawsuits,productrecallsorredesignefforts,allofwhichwouldbetimeconsumingandexpensive.

    Moreover,asoursolarenergysystemsandenergystorageproductsgenerateandstoreelectricity,theyhavethepotentialtocauseinjurytopeopleorproperty.Asuccessfulproductliabilityclaimagainstuscouldrequireustopayasubstantialmonetaryaward.Ourrisksinthisareaareparticularlypronouncedgiventherelativelylimitednumberofvehiclesandenergystorageproductsdeliveredtodateandlimitedfieldexperienceofourproducts.Moreover,aproductliabilityclaimcouldgeneratesubstantialnegativepublicityaboutourproductsandbusinessandcouldhaveamaterialadverseeffectonourbrand,business,prospectsandoperatingresults.Inmostjurisdictions,wegenerallyself-insureagainsttheriskofproductliabilityclaimsforvehicleexposure,meaningthatanyproductliabilityclaimswilllikelyhavetobepaidfromcompanyfunds,notbyinsurance.

    21

  • Themarketsinwhichweoperatearehighlycompetitive,andwemaynotbesuccessfulincompetingintheseindustries.Wecurrentlyfacecompetitionfromnewandestablisheddomesticandinternationalcompetitorsandexpecttofacecompetitionfromothersinthefuture,includingcompetitionfromcompanieswithnewtechnology.Theworldwideautomotivemarket,particularlyforalternativefuelvehicles,ishighlycompetitivetodayandweexpectitwillbecomeevenmore

    sointhefuture.Thereisnoassurancethatourvehicleswillbesuccessfulintherespectivemarketsinwhichtheycompete.Asignificantandgrowingnumberofestablishedandnewautomobilemanufacturers,aswellasothercompanies,haveenteredorarereportedtohaveplanstoenterthealternativefuelvehiclemarket,includinghybrid,plug-inhybridandfullyelectricvehicles,aswellasthemarketforself-drivingtechnologyandapplications.Insomecases,suchcompetitorshaveannouncedanintentiontoproduceelectricvehiclesexclusivelyatsomepointinthefuture.Mostofourcurrentandpotentialcompetitorshavesignificantlygreaterfinancial,technical,manufacturing,marketing,vehiclesalesresourcesandnetworksthanwedoandmaybeabletodevotegreaterresourcestothedesign,development,manufacturing,distribution,promotion,saleandsupportoftheirproducts.Inparticular,somecompetitorshavealsoannouncedplanstocompetewithusinimportantandlargemarketsforelectricvehicles,suchasChinaandinEurope.Increasedcompetitioncouldresultinlowervehicleunitsales,pricereductions,revenueshortfalls,lossofcustomersandlossofmarketshare,whichcouldharmourbusiness,prospects,financialconditionandoperatingresults.Inaddition,Model3andModelYfacecompetitionfromexistingandfutureautomobilemanufacturersintheextremelycompetitiveentry-levelpremiumsedanandcompactSUVmarket,includingBMW,Ford,Lexus,MercedesandVolkswagenGroup.

    Thesolarandenergystorageindustriesarehighlycompetitive.Wefacecompetitionfromothermanufacturers,developersandinstallersofsolarandenergystoragesystems,aswellasfromlargeutilities.Decreasesintheretailpricesofelectricityfromutilitiesorotherrenewableenergysourcescouldmakeourproductslessattractivetocustomersandleadtoanincreasedrateofcustomerdefaultsunderourexistinglong-termleasesandPPAs.Moreover,pricesforsolarproductcomponentsandpricesperkWhforlithium-ionbatterycellshavedeclinedandmaycontinuetodecline,whichmayadverselyimpactourabilitytocost-effectivelymanufacturesuchcomponentsourselves.

    Ifweareunabletoestablishandmaintainconfidenceinourlong-termbusinessprospectsamongconsumers,analystsandwithinourindustries,oraresubjecttonegativepublicity,thenourfinancialcondition,operatingresults,businessprospectsandaccesstocapitalmaysuffermaterially.Consumersmaybelesslikelytopurchaseourproductsiftheyarenotconvincedthatourbusinesswillsucceedorthatourserviceandsupport

    andotheroperationswillcontinueinthelongterm.Similarly,suppliersandotherthirdpartieswillbelesslikelytoinvesttimeandresourcesindevelopingbusinessrelationshipswithusiftheyarenotconvincedthatourbusinesswillsucceed.Accordingly,inordertobuildandmaintainourbusiness,wemustmaintainconfidenceamongcustomers,suppliers,analysts,ratingsagenciesandotherpartiesinourlong-termfinancialviabilityandbusinessprospects.Maintainingsuchconfidencemaybeparticularlycomplicatedbycertainfactorsincludingthosethatarelargelyoutsideofourcontrol,suchasourlimitedoperatinghistory,customerunfamiliaritywithourproducts,anydelaysinscalingmanufacturing,deliveryandse


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