Tesla’s used car business is growing

As the media never tires of reminding us, the price of a new electric vehicle is still considerably higher than that of a (supposedly) comparable gas-burner. However, one point that is seldom discussed is that a huge slice of the auto market consists of used vehicles. Millions of car owners go through their entire lives without ever considering the purchase of a new car. Now that EVs have been available for several years, a lively used market has developed, making electric driving available to an ever-growing segment of the population.

Above: An older Tesla Model S (Instagram: tesla_malaga)

Tesla’s used car sales are growing quickly. According to Teslarati, the company’s sales of used inventory grew by $117 million in 2016, and have already seen a further increase of $154 million this year. Part of the growth is simply due to the growing number of Teslas on the road, but the company has also been actively expanding its trade-in program, and now lists used inventory on Autotrader and Cars.com, as well as on its own web site.

“In future periods...we anticipate that revenue from sales of pre-owned vehicles will continue to increase as the volume of pre-owned vehicle sales increases,” Tesla noted in its Q2 2017 SEC filing.

Tesla has always made a point of controlling every aspect of the car ownership experience, and the used car market is no exception. In 2013, the company introduced a 63-month car loan with a twist that made it a little more like a lease: Tesla promised to buy the car back after 36 months if desired, “for the same residual value percentage as the Mercedes S Class.” This was designed to remove an objection for potential buyers who were concerned about the resale value of an electric vehicle. And just in case anyone was worried about the viability of the company, Elon Musk promised to personally stand behind that guarantee.

Above: Autolist forecasts that Tesla's Model 3, like the Model S, will be best-in-class — holding up its value better than top German competitors (Image: Teslarati via Autolist)

Bloomberg analyst Kevin Tynan predicted that Tesla’s financing/leasing offer would end up being hugely profitable for the company. “Buying back three-year-old cars at a set price means Tesla can control the secondary market. The company’s going to be the main buyer and gets a chance to earn a second gross profit on the same car.” Ed Kim, an analyst for AutoPacific, agreed. “To be able to control that process in-house would be a dream for most automakers. It means there are no dealers to negotiate with or dealing with auctions. You set the terms and control the experience.”

Like other luxury brands, Tesla offers a certified pre-owned program, which offers several good reasons for a buyer to take advantage of it, rather than buying from a third party. Tesla puts its CPO vehicles through a 214-point, seven-hour inspection, which covers not only the drivetrain, but the interior, brakes, paintwork, safety equipment and infotainment features. According to US News, most other manufacturers only put their CPO vehicles through 160-point inspections.

CPO vehicles get a four-year/50,000-mile basic warranty that replaces the original warranty, and owners are eligible for 24-hour roadside assistance. Used cars sold through Tesla are also grandfathered into free Supercharging, a benefit that new car buyers no longer enjoy (except when they do - the policy is a bit complex).

Above: Tesla Model X and S (Instagram: lemonti)

Tesla’s tight control over its used inventory probably has something to do with the fact that Teslas are holding their value better than other EV brands. While lightly used Nissan LEAFs can be had for a third of their new price, you’re not likely to find any Model S for less than 40 grand (the cheapest CPO option at the moment is $45,800 - better grab it fast!), or well over half what it would have cost new.

That’s still enough of a savings to make a Tesla a possibility for many buyers who couldn’t afford a new one. As Consumer Reports notes, a used Model S may also be tempting for someone who yearns for a Model 3, but doesn’t want to wait. A fully loaded 3 can cost close to $58,000, a sum that could buy you a pretty decent used S.

Make sure you’re familiar with the features before you buy, however. Remember that Model S built before September 2014 do not have the full suite of AutoPilot hardware. Tesla has promised to eventually enable full self-driving capability, but this depends on the newer hardware, which cannot be retrofitted to older vehicles.

Above: Tesla Model S (Instagram: trend_park_cz)

This raises a point that could be very interesting to those of us whose budgets will not stretch to 40 grand. A couple of years from now, once Autopilot becomes fully functional, everyone’s going to want it, and owners of pre-2014 Model S are likely to start trading up in droves, pushing the used prices of these models down even more.