TESLA, INC.

FORM 10-K(Annual Report)

Filed 02/23/18 for the Period Ending 12/31/17

Address 3500 DEER CREEK RD

PALO ALTO, CA, 94304Telephone 650-681-5000

CIK 0001318605Symbol TSLA

SIC Code 3711 - Motor Vehicles and Passenger Car BodiesIndustry Auto & Truck Manufacturers

Sector Consumer CyclicalsFiscal Year 12/31

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UNITED STATESSECURITIES 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, 2017OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 RoadPalo Alto, California 94304

(Address of principal executive offices) (Zip Code)(650) 681-5000

(Registrants telephone number, including area code)Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registeredCommonStock,$0.001parvalue TheNASDAQStockMarketLLC

Securities registered pursuant to Section 12(g) of the Act:None

Indicatebycheckmarkwhethertheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesNoIndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13or15(d)oftheAct.YesNoIndicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934(ExchangeAct)duringthepreceding12months(orfor

suchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesNoIndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405of

RegulationS-Tduringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).YesNoIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-K(229.405ofthischapter)isnotcontainedherein,andwillnotbecontained,tothebestofregistrantsknowledge,

indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,asmallerreportingcompanyoranemerginggrowthcompany.Seethedefinitionsoflarge

acceleratedfiler,acceleratedfiler,smallerreportingcompanyandemerginggrowthcompanyinRule12b-2oftheExchangeAct:

Largeacceleratedfiler Acceleratedfiler

Non-acceleratedfiler (Donotcheckifasmallerreportingcompany) Smallerreportingcompany

Emerginggrowthcompany Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovided

pursuanttoSection13(a)oftheExchangeAct.Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YesNoTheaggregatemarketvalueofvotingstockheldbynon-affiliatesoftheregistrant,asofJune30,2017,thelastdayoftheregistrantsmostrecentlycompletedsecondfiscalquarter,was$47.83billion(basedon

theclosingpriceforsharesoftheregistrantsCommonStockasreportedbytheNASDAQGlobalSelectMarketonJune30,2017).SharesofCommonStockheldbyeachexecutiveofficer,director,andholderof5%ormoreoftheoutstandingCommonStockhavebeenexcludedinthatsuchpersonsmaybedeemedtobeaffiliates.Thisdeterminationofaffiliatestatusisnotnecessarilyaconclusivedeterminationforotherpurposes.

AsofFebruary14,2018,therewere168,919,941sharesoftheregistrantsCommonStockoutstanding.DOCUMENTS INCORPORATED BY REFERENCE

PortionsoftheregistrantsProxyStatementforthe2018AnnualMeetingofStockholdersareincorporatedhereinbyreferenceinPartIIIofthisAnnualReportonForm10-Ktotheextentstatedherein.SuchproxystatementwillbefiledwiththeSecuritiesandExchangeCommissionwithin120daysoftheregistrantsfiscalyearendedDecember31,2017.

TESLA, INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2017

INDEX PagePART I.

Item1. Business 1Item1A. RiskFactors 15Item1B. UnresolvedStaffComments 33Item2. Properties 33Item3. LegalProceedings 34Item4. MineSafetyDisclosures 35

PART II.

Item5. MarketforRegistrantsCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities 36Item6. SelectedFinancialData 38Item7. ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations 39Item7A. QuantitativeandQualitativeDisclosuresAboutMarketRisk 58Item8. FinancialStatementsandSupplementaryData 60Item9. ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure 119Item9A. ControlsandProcedures 119Item9B. OtherInformation 120

PART III.

Item10. Directors,ExecutiveOfficersandCorporateGovernance 121Item11. ExecutiveCompensation 121Item12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 121Item13. CertainRelationshipsandRelatedTransactions,andDirectorIndependence 121Item14. PrincipalAccountantFeesandServices 121

PART IV.

Item15. ExhibitsandFinancialStatementSchedules 121Item16 Summary 151

Signatures 152

i

Forward-Looking Statements

The discussions in this Annual Report on Form 10-K contain forward-looking statements reflecting our current expectations that involve risks anduncertainties. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position,future revenues, projected costs, profitability, expected cost reductions, capital adequacy, expectations regarding demand and acceptance for our technologies,growth opportunities and trends in the market in which we operate, prospects and plans and objectives of management. The words anticipates, believes,could, estimates, expects, intends, may, plans, projects, will, would and similar expressions are intended to identify forward-lookingstatements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectationsdisclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differmaterially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risksand uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks setforth in Part I, Item 1A, Risk Factors in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. We do notassume any obligation to update any forward-looking statements.

P ART I

I TEM 1. BUSINESS

OverviewWedesign,develop,manufactureandsellhigh-performancefullyelectricvehicles,andenergygenerationandstoragesystems,andalsoinstallandmaintain

suchsystemsandsellsolarelectricity.Wearetheworldsonlyverticallyintegratedsustainableenergycompany,offeringend-to-endcleanenergyproducts,includinggeneration,storageandconsumption.Wehaveestablishedandcontinuetogrowaglobalnetworkofstores,vehicleservicecentersandSuperchargerstationstoacceleratethewidespreadadoptionofourproducts,andwecontinuetodevelopself-drivingcapabilityinordertoimprovevehiclesafety.Oursustainableenergyproducts,engineeringexpertise,intensefocustoacceleratetheworldstransitiontosustainableenergy,andbusinessmodeldifferentiateusfromothercompanies.

Wecurrentlyproduceandsellthreefullyelectricvehicles,theModelSsedan,theModelXsportutilityvehicle(SUV)andtheModel3sedan.Allofourvehiclesofferhighperformanceandfunctionalityaswellasattractivestyling.

WecommenceddeliveriesofModelSinJune2012andhavecontinuedtoimproveModelSbyintroducingperformance,all-wheeldrivedualmotor,andautopilotoptions,aswellasfreeover-the-airsoftwareupdates.WecommenceddeliveriesofModelXinSeptember2015.ModelXoffersseatingforuptosevenpeople,all-wheeldrive,andourautopilotfunctionality.WecommenceddeliveriesofModel3,alowerpricedsedandesignedforthemassmarket,inJuly2017andcontinuetorampitsproduction.

Wealsointendtobringadditionalvehiclestomarketinthefuture,includingtrucksandanall-newsportscar.Theproductionoffullyelectricvehiclesthatmeetsconsumersrangeandperformanceexpectationsrequiressubstantialdesign,engineering,andintegrationworkonalmosteverysystemofourvehicles.Ourdesignandvehicleengineeringcapabilities,combinedwiththetechnicaladvancementsofourpowertrainsystem,haveenabledustodesignanddevelopelectricvehiclesthatwebelieveovercomethedesign,styling,andperformanceissuesthathavehistoricallylimitedbroadadoptionofelectricvehicles.Asaresult,ourcustomersenjoyseveralbenefits,including: LongRangeandRechargingFlexibility.Ourvehiclesofferrangesthatsignificantlyexceedthoseofanyothercommerciallyavailableelectric

vehicle.Inaddition,ourvehiclesincorporateourproprietaryon-boardchargingsystem,permittingrechargingfromalmostanyavailableelectricaloutlet,andalsoofferfastchargingcapabilityfromourSuperchargernetwork.

High-PerformanceWithoutCompromisedDesignorFunctionality.Ourvehiclesdeliverinstantaneousandsustainedacceleration,anadvancedautopilotsystemwithactivesafetyandconveniencefeatures,andover-the-airsoftwareupdates.

EnergyEfficiencyandCostofOwnership.Ourvehiclesofferanattractivecostofownershipcomparedtointernalcombustionengineorhybridelectricvehicles.Usingonlyanelectricpowertrainenablesustocreatemoreenergyefficientvehiclesthataremechanicallysimplerthancurrentlyavailablehybridorinternalcombustionenginevehicles.Thecosttofuelourvehiclesislesscomparedtointernalcombustionvehicles.Wealsoexpectourelectricvehicleswillhavelowerrelativemaintenancecoststhanothervehiclesduetofewermovingpartsandtheabsenceofcertaincomponents,includingoil,oilfilters,sparkplugsandenginevalves.

Wesellourvehiclesthroughourownsalesandservicenetworkwhichwearecontinuingtogrowglobally.Thebenefitswereceivefromdistributionownershipenableustoimprovetheoverallcustomerexperience,thespeedofproductdevelopmentandthecapitalefficiencyofourbusiness.WearealsocontinuingtobuildournetworkofSuperchargersandDestinationChargersinNorthAmerica,EuropeandAsiatoprovidebothfastchargingthatenablesconvenientlong-distancetravelaswellasotherconvenientchargingoptions.

Inaddition,weareleveragingourtechnologicalexpertiseinbatteries,powerelectronics,andintegratedsystemstomanufactureandsellenergystorageproducts.Inlate2016,webeganproductionanddeliveriesofourlatestgenerationenergystorageproducts,Powerwall2andPowerpack2.Powerwall2isa14kilowatthour(kWh)homebatterywithanintegratedinverter.Powerpack2isaninfinitelyscalableenergystoragesystemforcommercial,industrialandutilityapplications,comprisedof210kWh(AC)batterypacksand50kVa(at480V)inverters.

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Similartoourelectricvehicles,ourenergystorageproductshavebeendevelopedtoreceiveover-the-airfirmwareandsoftwareupdatesthatenableadditionalfeaturesovertime.

Finally,wesellandleasesolarsystems(withorwithoutaccompanyingenergystoragesystems)toresidentialandcommercialcustomersandsellrenewableenergytoresidentialandcommercialcustomersatpricesthataretypicallybelowutilityrates.Since2006,wehaveinstalledsolarenergysystemsforhundredsofthousandsofcustomers.Ourlong-termleaseandpowerpurchaseagreementswithourcustomersgeneraterecurringpaymentsandcreateaportfolioofhigh-qualityreceivablesthatweleveragetofurtherreducethecostofmakingtheswitchtosolarenergy.TheelectricityproducedbyoursolarinstallationsrepresentsaverysmallfractionoftotalU.S.electricitygeneration.Withtensofmillionsofsingle-familyhomesandbusinessesinourprimaryserviceterritories,andmanymoreinotherlocations,wehavealargeopportunitytoexpandandgrowthisbusiness.

WemanufactureourvehicleproductsprimarilyatourfacilitiesinFremont,California,Lathrop,California,Tilburg,NetherlandsandatourGigafactory1nearReno,Nevada.WemanufactureourenergystorageproductsatGigafactory1andoursolarproductsatourfactoriesinFremont,CaliforniaandBuffalo,NewYork(Gigafactory2).

Our Products and ServicesVehicles

Model SModelSisafullyelectric,four-door,five-adultpassengersedanthatofferscompellingrangeandperformance.Weofferperformanceandall-wheeldrive

dualmotorsystemoptions.ModelS100Disthelongestrangeall-electricproductionsedanintheworld,andtheperformanceversionwiththeLudicrousspeedupgradeisthequickestacceleratingproductionvehicleever.

ModelSincludesa17inchtouchscreendriverinterface,ouradvancedautopilothardwaretoenablebothactivesafetyandconveniencefeatures,andover-the-airsoftwareupdates.Webelievethecombinationofperformance,safety,styling,convenienceandenergyefficiencyofModelSpositionsitasacompellingalternativetoothervehiclesintheluxuryandperformancesegments.

Model XModelXisthelongestrangeall-electricproductionsportutilityvehicleintheworld,andoffershighperformancefeaturessuchasourfullyelectric,all-wheel

drivedualmotorsystemandourautopilotsystem.ModelXcanseatuptosevenadultsandincorporatesauniquefalconwingdoorsystemforeasyaccesstothesecondandthirdseatingrows.ModelXissoldinallthemarketswhereModelSisavailable,includinginAsiaandEurope.

Model 3Model3isourthirdgenerationelectricvehicle.WebegandeliveriesinJuly2017.Model3isproducedattheTeslaFactoryinFremont,Californiaandat

Gigafactory1.Wewillofferavariantofthisvehicleatastartingpriceof$35,000andexpecttoproduceModel3vehiclesatfarhighervolumesthanourModelSorModelXvehicles.

Future Consumer and Commercial EVsWeareplanningtointroduceadditionalvehiclestoaddressabroadercross-sectionofthevehiclemarket,includingcommercialEVssuchastheTeslaSemi

truck,andanewversionoftheTeslaRoadster.Wehavestartedtoacceptreservationsforbothofthesenewvehicles.

Energy StorageUsingtheenergymanagementtechnologiesandmanufacturingprocessesdevelopedforourvehiclepowertrainsystems,wedevelopedenergystorage

productsforuseinhomes,commercialfacilitiesandontheutilitygrid.Advancesinbatteryarchitecture,thermalmanagementandpowerelectronicsthatwereoriginallycommercializedinourvehicles,arenowbeingleveragedinourenergystorageproducts.Ourenergystoragesystemsareusedforbackuppower,gridindependence,peakdemandreduction,demandresponse,reducingintermittencyofrenewablegenerationandwholesaleelectricmarketservices.

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Ourenergyproductportfolioincludessystemswithawiderangeofapplications,fromresidentialusetouseinlargegrid-scaleprojects.Powerwall2isa14kWhrechargeablelithium-ionbatterydesignedtostoreenergyatahomeorsmallcommercialfacilityandcanbeusedtoprovideseamlessbackuppowerinagridoutageandtomaximizeself-consumptionofsolarpowergeneration.Inaddition,weofferthePowerpack2system,afullyintegratedenergystoragesolutioncomprisingof210kWh(AC)batterypacksand50kVa(at480V)invertersthatcanbegroupedtogethertoformMWhandGWhsizedinstallations.ThePowerpack2systemcanbeusedbycommercialandindustrialcustomersforpeakshaving,loadshifting,self-consumptionofsolargenerationanddemandresponse,aswellastoprovidebackuppowerduringgridoutages,andbyutilitiesandindependentpowerproducerstosmoothandfirmtheoutputofrenewablepowergenerationsources,providedynamicenergycapacitytothegrid,deferoreliminatetheneedtoupgradetransmissioninfrastructure,andprovideavarietyofothergridservicessuchasfrequencyregulationandvoltagecontrol.Powerpack2canalsobecombinedwithrenewableenergygenerationsourcestocreatemicrogridsthatprovideremotecommunitieswithclean,resilientandaffordablepower.

Alongwithdesigningandmanufacturingenergystorageproducts,wecontinuetodevelopandadvanceoursoftwarecapabilitiesforthecontrolandoptimaldispatchofenergystoragesystemsacrossawiderangeofmarketsandapplications.

Solar Energy SystemsThemajorcomponentsofoursolarenergysystemsincludesolarpanelsthatconvertsunlightintoelectricalcurrent,invertersthatconverttheelectricaloutput

fromthepanelstoausablecurrentcompatiblewiththeelectricgrid,rackingthatattachesthesolarpanelstotherooforground,electricalhardwarethatconnectsthesolarenergysystemtotheelectricgridandourmonitoringdevice.WhilewehaverecentlystartedmanufacturingsolarpanelsinGigafactory2incollaborationwithPanasonic,wecurrentlypurchasethemajorityofsystemcomponentsfromvendors,maintainingmultiplesourcesforeachmajorcomponenttoensurecompetitivepricingandanadequatesupplyofmaterials.Wealsodesignandmanufactureothersystemcomponents.

Salesofresidentialsolarsystemsenableourcustomerstotakedirectadvantageoffederaltaxcreditstoreducetheirelectricitycosts.Oursolarloanofferingenablescustomerstoowntheirsolarsystemwithlittleupfrontcost.Wealsocontinuetoofferleaseandpowerpurchaseagreementoptionstobothresidentialandcommercialcustomers.OurcurrentstandardleasesandPPAshavea20-yearterm,andwetypicallyoffercustomerstheopportunitytorenewouragreements.

InOctober2016,weunveiledSolarRoof,whichintegratessolarenergyproductionwithaestheticallypleasinganddurableglassroofingtilesandisdesignedtocomplementthearchitectureofhomesandcommercialbuildingswhileturningsunlightintoelectricity.WerecentlycommencedSolarRoofproductionatourGigafactory2inBuffalo,NewYork,andarebeginningtoinstallthemincustomershomes.

TechnologyVehicles

Ourcorecompetenciesarepowertrainengineering,vehicleengineering,innovativemanufacturingandenergystorage.Ourcoreintellectualpropertyincludesourelectricpowertrain,ourabilitytodesignavehiclethatutilizestheuniqueadvantagesofanelectricpowertrainandourdevelopmentofself-drivingtechnologies.Ourpowertrainconsistsofourbatterypack,powerelectronics,motor,gearboxandcontrolsoftware.Weofferseveralpowertrainvariantsforourvehiclesthatincorporateyearsofresearchanddevelopment.Inaddition,wehavedesignedourvehiclestoincorporatethelatestadvancesinconsumertechnologies,suchasmobilecomputing,sensing,displays,andconnectivity.

Battery PackWedesignourbatterypackstoachievehighenergydensityatalowcostwhilealsomaintainingsafety,reliabilityandlonglife.Ourproprietarytechnology

includessystemsforhighdensityenergystorage,cooling,safety,chargebalancing,structuraldurability,andelectronicsmanagement.Wehavealsopioneeredadvancedmanufacturingtechniquestomanufacturelargevolumesofbatterypackswithhighqualityatlowcost.

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Wehavesignificantexpertiseinthesafetyandmanagementsystemsneededtouselithium-ioncellsintheautomotiveenvironment,andhavefurtheroptimizedcelldesignstoincreaseoverallperformance.Theseadvancementshaveenabledustoimprovecostandperformanceofourbatteriesovertime.

Ourengineeringandmanufacturingeffortshavebeenperformedwithalonger-termgoalofbuildingafoundationforfurtherdevelopment.Forinstance,wehavedesignedourbatterypacktopermitflexibilitywithrespecttobatterycellchemistryandformfactor.WemaintainextensivetestingandR&Dcapabilitiesattheindividualcelllevel,thefullbattery-packlevel,andothercriticalbatterypacksystemsandhavebuiltanexpansivebodyofknowledgeonlithium-ioncellvendors,chemistrytypes,andperformancecharacteristics.Webelievethattheflexibilityofourdesigns,combinedwithourresearchandreal-worldperformancedata,willenableustocontinuetoevaluatenewbatterycellsandoptimizebatterypacksystemperformanceandcostforourcurrentandfuturevehicles.

Power ElectronicsThepowerelectronicsinourelectricvehiclepowertraingoverntheflowofhighvoltageelectricalcurrentthroughoutourvehiclesandservetopowerour

electricmotortogeneratetorquewhiledrivinganddeliverenergyintothebatterypackwhilecharging.

Thedriveinverterconvertsdirectcurrent(DC)fromthebatterypackintoalternatingcurrent(AC)todriveourinductionmotorsandprovidesregenerativebrakingfunctionality,whichcapturesenergyfromthewheelstochargethebatterypack.Theprimarytechnologicaladvantagestoourdesignsincludetheabilitytodrivelargeamountsofcurrentinasmallphysicalpackage.

Thechargerchargesthebatterypackbyconvertingalternatingcurrent(usuallyfromawalloutletorotherelectricitysource)intodirectcurrentthatcanbeacceptedbythebattery.Teslavehiclescanrechargeonawidevarietyofelectricitysourcesduetothedesignofthischarger,fromacommonhouseholdoutlettohighpowercircuitsmeantformoreindustrialuses.

Dual Motor PowertrainWeofferdualmotorpowertrainvehicles,whichusetwoelectricmotorstoprovidegreaterefficiency,performance,andrangeinanall-wheeldrive

configuration.Teslasdualmotorpowertraindigitallyandindependentlycontrolstorquetothefrontandrearwheels.Thealmostinstantaneousresponseofthemotors,combinedwithlowcentersofgravity,providesdriverswithcontrolledperformanceandincreasedtractioncontrol.

Vehicle Control and Infotainment SoftwareTheperformanceandsafetysystemsofourvehiclesandtheirbatterypacksrequiresophisticatedcontrolsoftware.Therearenumerousprocessorsinour

vehiclestocontrolthesefunctions,andwewritecustomfirmwareformanyoftheseprocessors.Softwarealgorithmscontroltraction,vehiclestabilityandthesustainedaccelerationandregenerativebrakingofthevehicle,andarealsousedextensivelytomonitorthechargestateofthebatterypackandtomanageallofitssafetysystems.Driversusetheinformationandcontrolsystemsinourvehiclestooptimizeperformance,customizevehiclebehavior,managechargingmodesandtimesandcontrolallinfotainmentfunctions.Wedevelopalmostallofthissoftware,includingmostoftheuserinterfaces,internally.

Self-Driving DevelopmentWehaveexpertiseinvehicleautopilotsystems,includingauto-steering,trafficawarecruisecontrol,automatedlanechanging,automatedparking,Summon

anddriverwarningsystems.InOctober2016,webeganequippingallTeslavehicleswithhardwareneededforfullself-drivingcapability,includingcamerasthatprovide360degreevisibility,updatedultrasonicsensorsforobjectdetection,aforward-facingradarwithenhancedprocessing,andapowerfulnewonboardcomputer.Ourautopilotsystemsrelieveourdriversofthemosttediousandpotentiallydangerousaspectsofroadtravel.Although,atpresent,thedriverisultimatelyresponsibleforcontrollingthevehicle,oursystemprovidessafetyandconveniencefunctionalitythatallowsourcustomerstorelyonitmuchlikethesystemthatairplanepilotsusewhenconditionspermit.Thishardwaresuite,alongwithover-the-airfirmwareupdatesandfielddatafeedbackloopsfromtheonboardcamera,radar,ultrasonics,andGPS,enablesthesystemtocontinuallylearnandimproveitsperformance.

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Additionally,wecontinuetomakesignificantadvancementsinthedevelopmentoffullyself-drivingtechnologies.

Energy StorageWeareleveragingmanyofthecomponentleveltechnologiesfromourvehiclestoadvanceourenergystorageproducts,includinghighdensityenergy

storage,cooling,safety,chargebalancing,structuraldurability,andelectronicsmanagement.Bytakingamodularapproachtothedesignofbatterysystems,weareabletomaximizemanufacturingcapacitytoproducebothPowerwallandPowerpackproducts.Additionally,wearemakingsignificantstridesintheareaofbi-directional,grid-tiedpowerelectronicsthatenableustointerconnectourbatterysystemsseamlesslywithglobalelectricitygridswhileprovidingfast-actingsystemsforpowerinjectionandabsorption.

Solar Energy SystemsWearecontinuallyinnovatinganddevelopingnewtechnologiestofacilitatethegrowthofoursolarenergysystemsbusiness.Forexample,SolarRoofis

beingdesignedtoworkseamlesslywithTeslaPowerwall2andwehavedevelopedproprietarysoftwaretoreducesystemdesignandinstallationtimelinesandcosts.

Design and EngineeringVehicles

Inadditiontothedesign,developmentandproductionofthepowertrain,wehavecreatedsignificantin-housecapabilitiesinthedesignandengineeringofelectricvehiclesandtheircomponentsandsystems.Wedesignandengineerbodies,chassis,interiors,heatingandcoolingandlowvoltageelectricalsystemsinhouseandtoalesserextentinconjunctionwithoursuppliers.Ourteamhascorecompetenciesincomputeraideddesignandcrashtestsimulationswhichreducestheproductdevelopmenttimeofnewmodels.

Additionally,ourteamhasexpertiseinlightweightmaterials,averyimportantcharacteristicforelectricvehiclesgiventheimpactofmassonrange.ModelSandModelXarebuiltwithalightweightaluminumbodyandchassiswhichincorporatesavarietyofmaterialsandproductionmethodsthathelpoptimizetheweightofthevehicle.Moreover,wehavedesignedModel3withamixofmaterialstobelightweightandsafewhilealsoincreasingcost-effectivenessforthismass-marketvehicle.

Energy StorageWehaveanin-houseengineeringteamthatbothdesignsourenergystorageproductsthemselves,andworkswithourresidential,commercialandutility

customerstodesignbespokesystemsincorporatingourproducts.Ourteamsexpertiseinelectrical,mechanical,civilandsoftwareengineeringenablesustocreateintegratedenergystoragesolutionsthatmeettheparticularneedsofallcustomertypes.

Solar Energy SystemsWealsohaveanin-houseengineeringteamthatdesignsacustomizedsolarenergysystemorSolarRoofforeachofourcustomers,andwhichworksclosely

withourenergystorageengineeringteamstointegrateanenergystoragesystemwhenrequestedbythecustomer.Wehavedevelopedsoftwarethatsimplifiesandexpeditesthedesignprocessandoptimizesthedesigntomaximizetheenergyproductionofeachsystem.Ourengineerscompleteastructuralanalysisofeachbuildingandproduceafullsetofstructuraldesignandelectricalblueprintsthatcontainthespecificationsforallsystemcomponents.Additionally,wedesigncomplementarymountingandgroundinghardwarewhererequired.

Sales and MarketingVehicles

Company-Owned Stores and GalleriesWemarketandsellourvehiclesdirectlytoconsumersthroughaninternationalnetworkofcompany-ownedstoresandgallerieswhichwebelieveenablesus

tobettercontrolcostsofinventory,managewarrantyserviceandpricing,maintainandstrengthentheTeslabrand,andobtainrapidcustomerfeedback.OurTeslastoresandgalleries

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arehighlyvisible,premiumoutletsinmajormetropolitanmarkets,someofwhichcombineretailsalesandservice.Wehavealsofoundthatopeningaservicecenterinanewgeographicareacanincreasedemand.Asaresult,wehavecomplementedourstorestrategywithsalesfacilitiesandpersonnelinservicecenterstomorerapidlyexpandourretailfootprint.WerefertotheseasServicePluslocations.

Used Car SalesOurusedcarbusinesssupportsnewcarsalesbyintegratingthesaleofanewTeslavehiclewithacustomerstrade-inneedsfortheirexistingTeslaandnon-

Teslavehicles.TheTeslaandnon-Teslavehiclesweacquirethroughtrade-insaresubsequentlyremarketed,primarilytothegeneralpublicandthroughthird-partyautoauctions.WealsoreceiveusedTeslavehiclestoresellthroughleasereturnsandothersources.

ChargingOntheroad,customerscanalsochargeusingourSuperchargernetworkoratavarietyofdestinationsthathavedeployedourchargingequipment.Inaddition,

ourvehiclescanchargeatavarietyofpublicchargingstationsaroundtheworld,eithernativelyorthroughasuiteofadapters.Thisflexibilityinchargingprovidescustomerswithadditionalmobilityinadditiontotheirabilitytoconvenientlychargetheirvehiclesovernightathome.

WecontinuetobuildoutourTeslaSuperchargernetworkthroughoutNorthAmerica,Europe,Asiaandothermarketstoenableconvenient,long-distancetravel.OurSuperchargernetworkisastrategiccorporateinitiativedesignedtoprovidefastchargingtoenablelong-distancetravelandremoveabarriertothebroaderadoptionofelectricvehiclescausedbytheperceptionoflimitedvehiclerange.TheTeslaSuperchargerisanindustrialgrade,highspeedchargerdesignedtorechargeaTeslavehiclesignificantlymorequicklythanotherchargingoptions.Tosatisfygrowingdemand,SuperchargerstationstypicallyhavebetweensixandtwentySuperchargersandarestrategicallyplacedalongwell-travelledroutestoallowTeslavehicleownerstheabilitytoenjoylongdistancetravelwithconvenient,minimalstops.Additionally,wearealsobuildingSuperchargersinanincreasingnumberofcitycenterstoenableurbanuse.UseoftheSuperchargernetworkiseitherfreeorrequiresasmallfee.

Weareworkingwithawidevarietyofhospitalitylocations,includinghotels,resorts,shoppingcentersandparkstoofferanadditionalchargingoptionforourcustomers.TheseDestinationChargingpartnersdeployTeslawallconnectorsandprovidechargingtoTeslavehicleownersthatpatronizetheirbusinesses.

Wherepossible,weareco-locatingSuperchargerswithoursolarandenergystoragesystemstoreducethecostofelectricityandpromotetheuseofrenewableelectricitybyTeslavehicleowners.

Orders and ReservationsWetypicallycarryasmallinventoryofourvehiclesatourTeslastoreswhichareavailableforimmediatesale.Themajorityofourcustomers,however,

customizetheirvehiclebyplacinganorderwithusviatheInternet.

MarketingHistorically,wehavebeenabletogeneratesignificantmediacoverageofourcompanyandourvehicles,andwebelievewewillcontinuetodoso.Todate,

forvehiclesales,mediacoverageandwordofmouthhavebeentheprimarydriversofoursalesleadsandhavehelpedusachievesaleswithouttraditionaladvertisingandatrelativelylowmarketingcosts.

Solar and Energy StorageWemarketandsellourenergystorageproductstoindividuals,commercialandindustrialcustomersandutilitiesthroughavarietyofchannels.

OurresidentialsolarandenergystorageproductsappearinanincreasingnumberofourstoresandgalleriesintheU.S.whichgeneratesfurtherinterestintheseproducts.IntheU.S.,wealsouseournationalsalesorganization,channelpartnernetworkandcustomerreferralprogramtomarketandsellourresidentialsolarandenergystoragesystems.OutsideoftheU.S.,weuseourinternationalsalesorganizationandanetworkofchannelpartnerstomarketandsellPowerwall2,andwehaverecentlylaunchedpilotprogramsforthesaleofresidentialsolarproductsincertaincountries.WealsosellPowerwall2directlytoutilities,whothendeploytheproductincustomerhomes.

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WesellPowerpack2systemstocommercialandutilitycustomersthroughourinternationalsalesorganization,whichconsistsofexperiencedpowerindustryprofessionalsinallofourtargetmarkets,aswellasthroughourchannelpartnernetwork.IntheU.SandMexico,wealsosellinstalledsolarsystemstocommercialcustomersthroughcash,leaseandpowerpurchaseagreementtransactions.

Service and WarrantyVehicles

ServiceWeprovideserviceforourelectricvehiclesatourcompany-ownedservicecenters,atourServicePluslocationsor,incertainareas,throughTeslamobile

technicianswhoprovideservicesthatdonotrequireavehiclelift.Performingvehicleserviceourselvesallowsustoidentifyproblems,findsolutions,andincorporateimprovementsfasterthanincumbentautomobilemanufacturers.

Ourvehiclesaredesignedwiththecapabilitytowirelesslyuploaddatatousviaanon-boardsystemwithcellularconnectivity,allowingustodiagnoseandremedymanyproblemsbeforeeverlookingatthevehicle.Whenmaintenanceorserviceisrequired,acustomercanscheduleservicebycontactingoneofourTeslaservicecentersorourTeslamobiletechnicianscanperformanarrayofservicesfromacustomershomeorotherremotelocation.

New Vehicle Limited Warranty, Maintenance and Extended Service PlansWeprovideafouryearor50,000mileNewVehicleLimitedWarrantywitheverynewvehicle,subjecttoseparatelimitedwarrantiesforthesupplemental

restraintsystemandbatteryanddriveunit.ForthebatteryanddriveunitonourcurrentnewModelSandModelXvehicles,weofferaneightyear,infinitemilelimitedwarranty,althoughthebatteryschargingcapacityisnotcovered.ForthebatteryanddriveunitonourcurrentnewModel3vehicles,weofferaneightyearor100,000milelimitedwarrantyforourstandardrangebatteryandaneightyearor120,000milelimitedwarrantyforourlongrangebattery,withminimum70%retentionofbatterycapacityoverthewarrantyperiod.

InadditiontotheNewVehicleLimitedWarranty,wecurrentlyofferforModelSandModelXacomprehensivemaintenanceprogramforeverynewvehicle,whichincludesplanscoveringprepaidmaintenanceforuptofouryearsorupto50,000milesandanExtendedServiceplan.Themaintenanceplanscoverannualinspectionsandthereplacementofwearandtearparts,excludingtiresandthebattery.TheExtendedServiceplancoverstherepairorreplacementofvehiclepartsforuptoanadditionalfouryearsoruptoanadditional50,000milesaftertheNewVehicleLimitedWarranty.

Energy StorageWegenerallyprovideatenyearnodefectandenergyretentionwarrantywitheveryPowerwall2andafifteenyearnodefectandenergyretention

warrantywitheveryPowerpack2system.ForPowerwall2,theenergyretentionwarrantyinvolvesusguaranteeingthattheenergycapacityoftheproductwillbe70%or80%(dependingontheregionofinstallation)ofitsnameplatecapacityafter10yearsofuse.ForPowerpack2,theenergyretentionwarrantyinvolvesusguaranteeingaminimumenergycapacityineachofitsfirst15yearsofuse.Forbothproducts,ourwarrantyissubjecttospecifieduserestrictionsorkWhthroughputcaps.Inaddition,weoffercertainextendedwarranties,whichcustomersareabletopurchasefromusatthetimetheypurchaseanenergystoragesystem,includinga20yearextendedprotectionplanforPowerwall2andaselectionof10or20yearperformanceguaranteesforPowerpack2.Weagreetorepairorreplaceourenergystorageproductsintheeventofavalidwarrantyclaim.IncircumstanceswhereweinstallaPowerwall2orPowerpack2system,wealsoprovidewarranties,generallyrangingfromonetofouryears,onourinstallationworkmanship.Allofthewarrantiesforourenergystoragesystemsaresubjecttocustomarylimitationsandexclusions.

Solar Energy SystemsFortraditionalsolarsystemsthatareleasedorunderpowerpurchaseagreements(PPAs),weprovideafullsystemwarrantyfor20yearsfrominstallation.

Forothertraditionalsolarsystems,weprovidea20yearinstallationwarrantyandawarrantyagainstroofleaksofatleastayear.Wealsopass-throughtheinverterandmodulemanufacturerwarranties(typically10yearsand25yearsrespectively)and,foranadditionalfee,offeranextended

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inverterwarrantythatrunsfromtheendofthemanufacturerswarrantyuntil20yearsaftersysteminstallation.Whenwesellorleaseatraditionalsolarsystem,oracustomerpaysupfrontinfullunderaPPA,wecompensatethecustomeriftheirsystemproduceslessenergythanguaranteedoveraspecifiedperiod.ForSolarRoof,weprovideawarrantyagainstglasstilechippingorcrackingforthelifetimeofthehome,a30yearinstallationwarranty,a30yearweatherizationwarrantyandapoweroutputwarranty.Forallsystems(traditionalandSolarRoof)wealsoprovideserviceandrepair(eitherunderwarrantyorforafee)duringtheentiretermofthecustomerrelationship.

Financial ServicesVehicles

WeofferloansandleasesforourvehiclesinNorthAmerica,EuropeandAsiaprimarilythroughvariousfinancialinstitutions.WealsoofferfinancingarrangementsdirectlythroughourlocalsubsidiariesincertainareasoftheU.S.,Germany,CanadaandtheUK.Weintendtobroadenourfinancialservicesofferingsduringthenextfewyears.

CertainofourcurrentfinancingprogramsoutsideofNorthAmericaprovidecustomerswitharesalevalueguaranteeunderwhichthosecustomershavetheoptionofsellingtheirvehiclebacktousatapresetfuturedate,generallyattheendofthetermoftheapplicableloanorfinancingprogram,forapre-determinedresalevalue.Incertainmarkets,wealsooffervehiclebuybackguaranteestofinancialinstitutionswhichmayobligateustorepurchasethevehiclesforapre-determinedprice.

Solar Energy SystemsWeareanindustryleaderinofferinginnovativefinancingalternativesthatallowourcustomerstotakedirectadvantageofavailabletaxcreditsandincentives

toreducethecostofowningasolarenergysystemthroughasolarloan,ortomaketheswitchtosolarenergywithlittletonoupfrontcostsunderaleaseorPPA.Oursolarloanoffersthird-partyfinancingdirectlytoaqualifiedcustomertoenablethecustomertopurchaseandownasolarenergysystem.Wearenotapartytotheloanagreementbetweenthecustomerandthethird-partylender,andthethird-partylenderhasnorecourseagainstuswithrespecttotheloan.Oursolarleaseofferscustomersafixedmonthlyfee,atratesthattypicallytranslateintolowermonthlyutilitybills,andanelectricityproductionguarantee.OursolarPPAchargescustomersafeeperkWhbasedontheamountofelectricityproducedbyoursolarenergysystems,atratestypicallylowerthantheirlocalutilityrate.BothourleaseandPPAcreatehigh-quality,recurringcustomerpaymentsthatwemonetizethroughfundswehaveformedwithinvestors.

Energy StorageWecurrentlyofferaloanproducttoresidentialcustomerswhopurchasePowerwall2togetherwithanewsolarsystem,andleaseandpowerpurchase

agreementstocommercialcustomerswhopurchaseaPowerpack2systemtogetherwithanewsolarsystem.Weintendtointroducefinancialservicesofferingsforcustomerswhopurchaseenergystorageonly,aswellasforourSolarRoofcustomers,inthefuture.

ManufacturingVehicles

WeconductvehiclemanufacturingandassemblyoperationsatourfacilitiesinFremont,California;Lathrop,California;andTilburg,Netherlands.Wehavealsobuiltandcontinuetoexpandacellandbatterymanufacturingfacility,Gigafactory1,outsideofReno,Nevada.

The Tesla Factory in Fremont, CA and Manufacturing Facility in Lathrop, CAWemanufactureourvehicles,andcertainpartsandcomponentsthatarecriticaltoourintellectualpropertyandqualitystandards,attheTeslaFactoryandour

manufacturingfacilityinLathrop,CA.TheTeslaFactorycontainsseveralmanufacturingoperations,includingstamping,machining,casting,plastics,bodyassembly,paintoperations,driveunitproduction,finalvehicleassemblyandend-of-linetesting.Inaddition,wemanufacturelithium-ionbatterypacks,electricmotors,gearboxesandcomponentsforModelSandModelXattheTeslaFactory.Somemajorvehiclecomponentsystemsarepurchasedfromsuppliers;howeverwehaveahighlevelofverticalintegrationinourmanufacturingprocessesattheTeslaFactory.

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The NetherlandsOurEuropeanheadquartersandmanufacturingfacilitiesarelocatedinAmsterdamandTilburg.OuroperationsinTilburgincludefinalassembly,testingand

qualitycontrolforvehiclesdeliveredwithintheEuropeanUnion,apartsdistributionwarehouseforservicecentersthroughoutEurope,acenterforremanufacturingworkandacustomerservicecenter.

Gigafactory 1 outside of Reno, NevadaGigafactory1isafacilitywhereweworktogetherwithoursupplierstointegratebatterymaterial,cell,moduleandbatterypackproductioninonelocation.

WeusethebatterypacksmanufacturedatGigafactory1forourvehicles,includingModel3andenergystorageproducts.WealsomanufactureModel3driveunitsatGigafactory1.

Gigafactory1isbeingbuiltinphases.Tesla,Panasonicandotherpartnersarecurrentlymanufacturinginsidethefinishedsections.OurpresentplanistocontinueexpandingGigafactory1overthenextfewyearssothatitscapacitysignificantlyexceedstheapproximately500,000vehicleperyearcapacitythatweannouncedwhenwefirststarteddevelopingit,andtoadditionallyhavesufficientcapacityforourenergystorageproducts.

WebelievethatGigafactory1willallowustoachieveasignificantreductioninthecostofourbatterypacksonceweareinvolumeproductionwithModel3.WehavecommittedtosubstantialcapitalexpendituresforGigafactory1.PanasonichasagreedtopartnerwithusonGigafactory1withinvestmentsinproductionequipmentthatitwillusetomanufactureandsupplyuswithbatterycells.ThroughourownershipofGigafactory1andourpartnershipwithPanasonic,weownsoleaccesstoafacilitydesignedtobethehighest-volumeandlowest-costsourceoflithium-ionbatteriesintheworld.

Supply ChainOurvehiclesusethousandsofpurchasedpartswhichwesourcegloballyfromhundredsofsuppliers.Wehavedevelopedcloserelationshipswithseveralkey

suppliersparticularlyintheprocurementofcellsandcertainotherkeysystemparts.Whileweobtaincomponentsfrommultiplesourcesinsomecases,similartootherautomobilemanufacturers,manyofthecomponentsusedinourvehiclesarepurchasedbyusfromasinglesource.Inaddition,whileseveralsourcesofthebatterycellwehaveselectedforourbatterypacksareavailable,wehavecurrentlyfullyqualifiedonlyonecellsupplierforthebatterypacksweuseinourproductionvehicles.Weareworkingtofullyqualifyadditionalcellsfromothermanufacturers.

Weusevariousrawmaterialsinourbusinessincludingaluminum,steel,cobalt,lithium,nickelandcopper.Thepricesfortheserawmaterialsfluctuatedependingonmarketconditionsandglobaldemandforthesematerials.Webelievethatwehaveadequatesuppliesorsourcesofavailabilityoftherawmaterialsnecessarytomeetourmanufacturingandsupplyrequirements.

Energy StorageOurenergystorageproductsaremanufacturedatGigafactory1.Weleveragethesamesupplychainprocessandinfrastructureasweuseforourvehicles.The

batteryarchitectureandmanyofthecomponentsusedinourenergystorageproductsarethesameorsimilartothoseusedinourvehiclesbatterypack,enablingustotakeadvantageofmanufacturingefficienciesandsupplychaineconomiesofscale.ThepowerelectronicsandinvertersforthePowerwallandPowerpacksystemsarealsomanufacturedatGigafactory1,allowingustoshipdeployment-readysystemsdirectlytocustomers.

Solar Energy SystemsWecurrentlypurchasemajorcomponentssuchassolarpanelsandinvertersdirectlyfrommultiplemanufacturers.Wetypicallypurchasesolarpanelsand

invertersonanas-neededbasisfromoursuppliersatthen-prevailingpricespursuanttopurchaseordersissuedunderourmastercontractualarrangements.InDecember2016,weenteredintoalong-termagreementwithPanasonictomanufacturephotovoltaic(PV)cellsandmodulesatourGigafactory2inBuffalo,NewYork,withnegotiatedpricingprovisionsandtheintenttomanufactureatleast1.0gigawattofsolarpanelsannually.WehaverecentlystartedmanufacturingsolarpanelsinGigafactory2incollaborationwithPanasonic.

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Governmental Programs, Incentives and RegulationsVehicles

California Alternative Energy and Advanced Transportation Financing Authority Tax IncentivesWehaveenteredintomultipleagreementsoverthepastfewyearswiththeCaliforniaAlternativeEnergyandAdvancedTransportationFinancingAuthority

(CAEATFA)thatprovidemulti-yearsalestaxexclusionsonpurchasesofmanufacturingequipmentthatwillbeusedforspecificpurposesincludingtheexpansionandongoingdevelopmentofModelS,ModelX,Model3andfutureelectricvehiclesandexpansionofelectricvehiclepowertrainproductioninCalifornia.

Nevada Tax IncentivesInconnectionwiththeconstructionofGigafactory1inNevada,wehaveenteredintoagreementswiththeStateofNevadaandStoreyCountyinNevadathat

willprovideabatementsforsalesandusetaxes,realandpersonalpropertytaxes,andemployerexcisetaxes,discountstothebasetariffenergyrates,andtransferabletaxcredits.TheseincentivesareavailablefortheapplicableperiodsendingonJune30,2034,subjecttocapitalinvestmentsbyTeslaanditspartnersforGigafactory1ofatleast$3.50billionintheaggregateonorbeforeJune30,2024,whichweremetasofDecember31,2017,andcertainotherconditionsspecifiedintheagreements.Ifwedonotsatisfyoneormoreconditionsundertheagreements,Teslawillberequiredtorepaytotherespectivetaxingauthoritiestheamountsofthetaxincentivesincurred,plusinterest.

Tesla Regulatory CreditsInconnectionwiththeproduction,deliveryandplacementintoserviceofourzeroemissionvehicles,charginginfrastructureandsolarsystemsinglobal

markets,wehaveearnedandwillcontinuetoearnvarioustradableregulatorycredits.Wehavesoldthesecredits,andwillcontinuetosellfuturecredits,toautomotivecompaniesandregulatedentities.Forexample,underCaliforniasZero-EmissionVehicleRegulationandthoseofstatesthathaveadoptedCaliforniasstandard,vehiclemanufacturersarerequiredtoearnorpurchasecreditsforcompliancewiththeirannualregulatoryrequirements.Theselawsprovidethatautomakersmaybankexcesscredits,referredtoasZEVcredits,iftheyearnmorecreditsthantheminimumquantityrequiredbythoselaws.Manufacturerswithasurplusofcreditsmayselltheircreditstootherregulatedparties.PursuanttotheU.S.EnvironmentalProtectionAgencys(EPA)nationalgreenhousegas(GHG)emissionstandardsandsimilarstandardsadoptedbytheCanadiangovernment,carandtruckmanufacturersarerequiredtomeetfleet-wideaveragecarbondioxideemissionsstandards.Manufacturersmaysellexcesscreditstoothermanufacturers,whocanusethecreditstocomplywiththeseregulatoryrequirements.ManyU.S.stateshavealsoadoptedprocurementrequirementsforrenewableenergyproduction.TheserequirementsenablecompaniesdeployingsolarenergytoearntradablecreditsknownasSolarRenewableEnergyCertificates(SRECs).

RegulationVehicle Safety and TestingOurvehiclesaresubjectto,andcomplywithorareotherwiseexemptfrom,numerousregulatoryrequirementsestablishedbytheNationalHighwayTraffic

SafetyAdministration(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,andownersmanualrequirements.

TheAutomobileInformationandDisclosureActrequiresmanufacturersofmotorvehiclestodisclosecertaininformationregardingthemanufacturerssuggestedretailprice,optionalequipmentandpricing.Inaddition,this

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lawallowsinclusionofcityandhighwayfueleconomyratings,asdeterminedbyEPA,aswellascrashtestratingsasdeterminedbyNHTSAifsuchtestsareconducted.

OurvehiclessoldoutsideoftheU.S.aresubjecttoforeignsafetytestingregulations.ManyofthoseregulationsaredifferentfromthefederalmotorvehiclesafetystandardsapplicableintheU.S.andmayrequireredesignand/orretesting.TheEuropeanUnionhasproposednewrulesthat,ifapproved,maysignificantlychangethemannerthatvehiclesarecertifiedforcomplianceinEuropebycreatingmoreindividualcountry-by-countrytype-approvalrequirementsinsteadofthecurrentsingularEurope-widesystem.

Regulation Self DrivingTherearenofederalU.S.regulationspertainingtothesafetyofself-drivingvehicles;however,NHTSAhasestablishedrecommendedguidelines.Certain

U.S.stateshavelegalrestrictionsonself-drivingvehicles,andmanyotherstatesareconsideringthem.Thispatchworkincreaseslegalcomplexityforourvehicles.InEurope,certainvehiclesafetyregulationsapplytoself-drivingbrakingandsteeringsystems,andcertaintreatiesalsorestrictthelegalityofcertainhigherlevelsofself-drivingvehicles.Self-drivinglawsandregulationsareexpectedtocontinuetoevolveinnumerousjurisdictionsintheU.S.andforeigncountriesandmaycreaterestrictionsonourself-drivingfeatures.

RegulationBattery Safety and TestingOurbatterypackconformstomandatoryregulationsthatgoverntransportofdangerousgoods,definedtoincludelithium-ionbatteries,whichmaypresent

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

Weuselithium-ioncellsinourhighvoltagebatterypacks.Thecellsdonotcontainanylead,mercury,cadmiumorheavymetals.Ourbatterypacksincludecertainmaterialsthatcontaintraceamountsofhazardouschemicalswhoseuse,storage,anddisposalisregulatedunderfederallaw.Wecurrentlyhaveanagreementwithathirdpartybatteryrecyclingcompanytorecycleourbatterypacks.

Automobile Manufacturer and Dealer RegulationStatelawsregulatethemanufacture,distribution,andsaleofautomobiles,andgenerallyrequiremotorvehiclemanufacturersanddealerstobelicensedin

ordertosellvehiclesdirectlytoconsumersinthestate.AsweopenadditionalTeslastoresandservicecenters,wesecuredealerlicenses(ortheirequivalent)andengageinsalesactivitiestosellourvehiclesdirectlytoconsumers.Afewstates,suchasMichiganandConnecticut,donotpermitautomobilemanufacturerstobelicensedasdealersortoactinthecapacityofadealer,orotherwiserestrictamanufacturersabilitytodeliverorservicevehicles.Tosellvehiclestoresidentsofstateswherewearenotlicensedasadealer,wegenerallyconductthesaleoutofthestateviatheinternet,phoneormail.Insuchstates,wehaveopenedgalleriesthatserveaneducationalpurposeandarenotretaillocations.

AsweexpandourretailfootprintintheU.S.,someautomobiledealertradeassociationshavebothchallengedthelegalityofouroperationsincourtandusedadministrativeandlegislativeprocessestoattempttoprohibitorlimitourabilitytooperateexistingstoresorexpandtonewlocations.Weexpectthatthedealerassociationswillcontinuetomountchallengestoourbusinessmodel.Inaddition,weexpectthedealerassociationstoactivelylobbystatelicensingagenciesandlegislatorstointerpretexistinglawsorenactnewlawsinwaysnotfavorabletoTeslasownershipandoperationofitsownretailandservicelocations,andweintendtoactivelyfightanysucheffortstolimitourabilitytosellourownvehicles.

WhilewehaveanalyzedtheprincipallawsintheU.S.,EU,China,Japan,UK,andAustraliarelatingtoourdistributionmodelandbelievewecomplywithsuchlaws,wehavenotperformedacompleteanalysisofalljurisdictionsinwhichwemaysellvehicles.Accordingly,theremaybelawsincertainjurisdictionsthatmayrestrictoursalesandserviceoperations.

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Energy StorageTheregulatoryregimeforenergystorageprojectsisstillunderdevelopment.Nevertheless,therearevariouspolicies,incentivesandfinancialmechanismsat

thefederal,stateandlocallevelthatsupporttheadoptionofenergystorage.Forexample,energystoragesystemsthatarechargedusingsolarenergyareeligibleforthe30%taxcreditunderSection48(a)(3)oftheInternalRevenueCode,ortheIRC,asdescribedbelow.Inaddition,Californiaandanumberofotherstateshaveadoptedprocurementtargetsforenergystorage,andbehindthemeterenergystoragesystemsqualifyforfundingundertheCaliforniaSelfGenerationIncentiveProgram.

TheFederalEnergyRegulatoryCommission(FERC)hasalsotakenstepstoenabletheparticipationofenergystorageinwholesaleenergymarkets.In2011and2013,FERCremovedmanybarriersforsystemslikeenergystoragetoprovidefrequencyregulationservice,thusincreasingthevaluethesesystemscanobtaininwholesaleenergymarkets.Morerecently,inlate2016,FERCreleasedaNoticeofProposedRulemakingthat,ifitbecomesafinalrule,wouldfurtherbreakdownbarrierspreventingenergystoragefromfullyparticipatinginwholesaleenergymarkets.Finally,inJanuary2017,FERCissuedastatementsupportingtheuseofenergystorageasbothelectrictransmissionandaselectricgenerationconcurrently,thusenablingenergystoragesystemstoprovidegreatervaluetotheelectricgrid.

Solar Energy SystemsGovernment and Utility Programs and IncentivesU.S.federal,stateandlocalgovernmentshaveestablishedvariouspolicies,incentivesandfinancialmechanismstoreducethecostofsolarenergyandto

acceleratetheadoptionofsolarenergy.Theseincentivesincludetaxcredits,cashgrants,taxabatementsandrebates.

Thefederalgovernmentcurrentlyprovidesanuncappedinvestmenttaxcredit,orFederalITC,undertwosectionsoftheIRC:Section48andSection25D.Section48(a)(3)oftheIRCallowsataxpayertoclaimacreditof30%ofqualifiedexpendituresforacommercialsolarenergysystemthatcommencesconstructionbyDecember31,2019.Thecreditthendeclinesto26%in2020,22%in2021,andapermanent10%thereafter.WeclaimtheSection48commercialcreditwhenavailableforbothourresidentialandcommercialprojects,basedonownershipofthesolarenergysystem.Thefederalgovernmentalsoprovidesaccelerateddepreciationforeligiblecommercialsolarenergysystems.Section25DoftheIRCallowsahomeowner-taxpayertoclaimacreditof30%ofqualifiedexpendituresforaresidentialsolarenergysystemownedbythehomeownerthatisplacedinservicebyDecember31,2019.Thecreditthendeclinesto26%in2020and22%in2021,andisscheduledtoexpirethereafter.CustomerswhopurchasetheirsolarenergysystemsforcashorthroughoursolarloanareeligibletoclaimtheSection25Dinvestmenttaxcredit.

InadditiontotheFederalITC,manyU.S.statesofferpersonalandcorporatetaxcreditsandincentiveavailableforsolarenergysystems.

Regulation GeneralWearenotaregulatedutilityintheU.S.Tooperateoursystems,weobtaininterconnectionagreementsfromtheutilities.Inalmostallcases,

interconnectionagreementsarestandardformagreementsthathavebeenpre-approvedbythepublicutilitycommissionorotherregulatorybody.

Salesofelectricityandnon-saleequipmentleasesbythirdparties,suchasourleasesandPPAs,faceregulatorychallengesinsomestatesandjurisdictions.

Regulation Net MeteringThirty-eightstates,Washington,D.C.andPuertoRicohavearegulatorypolicyknownasnetenergymetering,ornetmetering,availabletosolarcustomers.

Netmeteringtypicallyallowssolarcustomerstointerconnecttheiron-sitesolarenergysystemstotheutilitygridandoffsettheirutilityelectricitypurchasesbyreceivingabillcreditforexcessenergygeneratedbytheirsolarenergysystemthatisexportedtothegrid.EachofthestateswherewecurrentlyservecustomershasadoptedanetmeteringpolicyexceptforTexas,wherecertainindividualutilitieshaveadoptednetmeteringorapolicysimilartonetmetering.Incertainjurisdictions,regulatorsorutilitieshavereducedoreliminatedthebenefitavailableundernetmetering,orhaveproposedtodoso.

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Regulation Mandated Renewable CapacityManystatesalsohaveadoptedprocurementrequirementsforrenewableenergyproduction,suchasanenforceablerenewableportfoliostandard,orRPS,or

otherpoliciesthatrequirecoveredentitiestoprocureaspecifiedpercentageoftotalelectricitydeliveredtocustomersinthestatefromeligiblerenewableenergysources,suchassolarenergysystems.Insolarrenewableenergycertificate,orSREC,statemarkets,theRPSrequireselectricitysupplierstosecureaportionoftheirelectricityfromsolargenerators.TheSRECprogramprovidesameansforSRECstobecreated.ASRECrepresentstherenewableenergyassociatedwith1,000kWhsofelectricityproducedfromasolarenergysystem.Whenasolarenergysystemgenerates1,000kWhsofelectricity,oneSRECisissuedbyagovernmentagency,whichcanthenbesoldseparatelyfromtheenergyproducedtocoveredentitieswhosurrendertheSRECstothestatetoprovecompliancewiththestatesrenewableenergymandate.

CompetitionVehicles

Theworldwideautomotivemarket,particularlyforalternativefuelvehicles,ishighlycompetitiveandweexpectitwillbecomeevenmoresointhefutureasweintroduceadditionalvehicles,includingModel3whichwillcompetewithlower-pricedvehicles.

Webelievethatourvehiclescompeteinthemarketbothbasedontheirtraditionalsegmentclassificationaswellasbasedontheirpropulsiontechnology.Forexample,ModelSandModelXcompeteprimarilyintheextremelycompetitivepremiumsedanandpremiumSUVmarketswithinternalcombustionvehiclesfrommoreestablishedautomobilemanufacturers,andModel3competeswithsmalltomedium-sizedsedans.Ourvehiclesalsocompetewithvehiclespropelledbyalternativefuels,principallyelectricity.

Manyestablishedandnewautomobilemanufacturershaveenteredorhaveannouncedplanstoenterthealternativefuelvehiclemarket.Overall,webelievetheseannouncementsandvehicleintroductionspromotethedevelopmentofthealternativefuelvehiclemarketbyhighlightingtheattractivenessofalternativefuelvehicles,particularlythosefueledbyelectricity,relativetotheinternalcombustionvehicle.Manymajorautomobilemanufacturershaveelectricvehiclesavailabletoday,andothercurrentandprospectiveautomobilemanufacturersarealsodevelopingelectricvehicles.ElectricvehicleshavealsoalreadybeenbroughttomarketinChinaandotherforeigncountriesandweexpectanumberofthosemanufacturerstoentertheU.S.marketaswell.Inaddition,severalmanufacturers,sellhybridvehicles,includingplug-inversionsoftheirhybridvehicles.

Energy StorageThemarketforenergystorageproductsisalsohighlycompetitive.Establishedcompanies,suchasAESEnergyStorage,Siemens,LGChemandSamsung,as

wellasvariousemergingcompanies,haveintroducedproductsthataresimilartoourproductportfolio.Thereareseveralcompaniesprovidingindividualcomponentsofenergystoragesystems(suchascells,batterymodules,andpowerelectronics)aswellasothersprovidingintegratedsystems.Wecompetewiththesecompaniesonprice,energydensityandefficiency.Webelievethatthespecificationsofourproducts,ourstrongbrand,andthemodular,scalablenatureofourPowerpack2productgiveusacompetitiveadvantagewhenmarketingourproducts.

Solar Energy SystemsTheprimarycompetitorstooursolarenergybusinessarethetraditionallocalutilitycompaniesthatsupplyenergytoourpotentialcustomers.Wecompete

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

Intellectual PropertyAspartofourbusiness,weseektoprotectourintellectualpropertyrightssuchaswithrespecttopatents,trademarks,copyrights,tradesecrets,including

throughemployeeandthirdpartynondisclosureagreements,and

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othercontractualarrangements.Additionally,wepreviouslyannouncedapatentpolicyinwhichweirrevocablypledgedthatwewillnotinitiatealawsuitagainstanypartyforinfringingourpatentsthroughactivityrelatingtoelectricvehiclesorrelatedequipmentforsolongassuchpartyisactingingoodfaith.Wemadethispledgeinordertoencouragetheadvancementofacommon,rapidly-evolvingplatformforelectricvehicles,therebybenefitingourselves,othercompaniesmakingelectricvehicles,andtheworld.

Segment InformationWeoperateastworeportablesegments:automotiveandenergygenerationandstorage.

Theautomotivesegmentincludesthedesign,development,manufacturing,andsalesofelectricvehicles.Theenergygenerationandstoragesegmentincludesthedesign,manufacture,installation,andsaleorleaseofstationaryenergystorageproductsandsolarenergysystems,andsaleofelectricitygeneratedbyoursolarenergysystemstocustomers.

EmployeesAsofDecember31,2017,Tesla,Inc.had37,543full-timeemployees.Todate,wehavenotexperiencedanyworkstoppages,andweconsiderour

relationshipwithouremployeestobegood.

Available InformationWefileorfurnishperiodicreportsandamendmentsthereto,includingourAnnualReportsonForm10-K,ourQuarterlyReportsonForm10-QandCurrent

ReportsonForm8-K,proxystatementsandotherinformationwiththeSecuritiesandExchangeCommission(SEC).Suchreports,amendments,proxystatementsandotherinformationmaybeobtainedbyvisitingthePublicReferenceRoomoftheSECat100FStreet,NE,Washington,D.C.20549.InformationontheoperationofthePublicReferenceRoomcanbeobtainedbycallingtheSECat1-800-SEC-0330.Inaddition,theSECmaintainsawebsite(www.sec.gov)thatcontainsreports,proxyandinformationstatements,andotherinformationregardingissuersthatfileelectronically.Ourreports,amendmentsthereto,proxystatementsandotherinformationarealsomadeavailable,freeofcharge,onourinvestorrelationswebsiteatir.tesla.comassoonasreasonablypracticableafterweelectronicallyfileorfurnishsuchinformationwiththeSEC.TheinformationpostedonourwebsiteisnotincorporatedbyreferenceintothisAnnualReportonForm10-K.

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I TEM 1A. RISK FACTORS

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

Risks Related to Our Business and IndustryWe have experienced in the past, and may experience in the future, delays or other complications in the design, manufacture, launch and productionramp of new vehicles and other products such as Model 3, our energy storage products and the Solar Roof, which could harm our brand, business,prospects, financial condition and operating results.Wehavepreviouslyexperiencedlaunch,manufacturingandproductionrampdelaysorothercomplicationsinconnectionwithnewvehiclemodelssuchas

ModelS,ModelXandModel3,andnewvehiclefeaturessuchastheall-wheeldrivedualmotordrivetrainonModelSandthesecondversionofautopilothardware.Forexample,weencounteredunanticipatedchallenges,suchascertainsupplychainconstraints,thatledtoinitialdelaysinproducingModelX.Similarly,wehaveexperiencedcertainbottlenecksintheproductionofModel3inplaceslikethebatterymoduleassemblylineatGigafactory1,leadingtodelaysinitsramp.Ifsuchissuescontinuelongerthanexpected,ornewissuesariseorrecurwithrespecttoModel3oranyofourotherproductionvehicles,wecouldexperiencefurtherdelays.Inaddition,becauseourvehiclemodelssharecertainproductionfacilitieswithothermodels,thevolumeorefficiencyofproductionwithrespecttoonemodelmayimpacttheproductionofothermodels.

Wemayalsoexperiencesimilarfuturedelaysorothercomplicationsinbringingtomarketandrampingproductionofnewvehicles,suchasourTeslaSemitruck,ourplannedModelYandnewTeslaRoadster,ourenergystorageproductsandtheSolarRoof.Anysignificantadditionaldelayorothercomplicationintheproductionofourcurrentproductsorthedevelopment,manufacture,launchandproductionrampofourfutureproducts,includingcomplicationsassociatedwithexpandingourproductioncapacityandsupplychainorobtainingormaintainingregulatoryapprovals,couldmateriallydamageourbrand,business,prospects,financialconditionandoperatingresults.

We may experience delays in realizing our projected timelines and cost and volume targets for the production and ramp of our Model 3 vehicle, whichcould harm our business , prospects , financial condition and operating results.Ourfuturebusinessdependsinlargepartonourabilitytoexecuteonourplanstomanufacture,marketandselltheModel3vehicle,whichweareofferingat

alowerpricepointandwhichweintendtoproduceatsignificantlyhighervolumesthanourpresentproductioncapabilitiesfortheModelSorModelXvehicles.WecommencedproductionandinitialcustomerdeliveriesofModel3inJuly2017andaretargetingaforecastedproductionrateof5,000Model3vehiclesperweekbytheendofthesecondquarterof2018.

WehavenoexperiencetodateinmanufacturingvehiclesatthehighvolumesthatweanticipateforModel3,andtobesuccessful,wewillneedtocompletetheimplementationandrampofefficientandcost-effectivemanufacturingcapabilities,processesandsupplychainsnecessarytosupportsuchvolumes.Weareemployingahigherdegreeofautomationinourmaterialsconveyance,batterymoduleproductionandothermanufacturingprocessesforModel3thanwehavepreviouslyemployed,andinsomecaseswehaveimplementedinterimprocessessuchassemi-automatedmanufacturinglines,forwhichwearelikelytoincuradditionallaborcostsuntilwebringonlineourfullyautomatedprocesses.Moreover,ourModel3productionplanhasgenerallyrequiredandwillrequiresignificantinvestmentsofcashandmanagementresources.

OurproductionplanforModel3isbasedonmanykeyassumptions,including: thatwewillbeabletocompleterampinghighvolumeproductionofModel3attheTeslaFactorywithoutexceedingourprojectedcostsandonour

projectedtimeline; thatwewillbeabletocontinuetoexpandGigafactory1inatimelymannertoproducehighvolumesofqualitylithium-ioncellstobeintegratedinto

batterymodulesandfinishedbatterypacksanddriveunitcomponentsforModel3,allatcoststhatallowustosellModel3atourtargetgrossmargins;

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thattheequipmentandprocesseswhichwehaveselectedforModel3productionwillbeabletoaccuratelymanufacturehighvolumesofModel3

vehicleswithinspecifieddesigntolerancesandwithhighquality; thatwewillbeabletomaintainsuppliersforthenecessarycomponentsontermsandconditionsthatareacceptabletousandthatwewillbeableto

obtaincomponentsonatimelybasisandinthenecessaryquantitiestosupporthighvolumeproduction;and thatwewillbeabletoattract,recruit,hire,trainandretainskilledemployees,includingemployeesontheproductionline,tooperateourplanned

highvolumeproductionfacilitiestosupportModel3,includingattheTeslaFactoryandGigafactory1.

Ifoneormoreoftheforegoingassumptionsturnsouttobeincorrect,ourabilitytomeetourModel3projectionsontimeandatvolumesandpricesthatareprofitable,thenumberofcurrentandfutureModel3reservations,aswellasourbusiness,prospects,operatingresultsandfinancialcondition,maybemateriallyandadverselyimpacted.

We may be unable to meet our growing vehicle production and delivery plans, both of which could harm our business and prospects.Ourplanscallforsignificantincreasesinvehicleproductionanddeliveriestohighvolumesinashortamountoftime.Ourabilitytoachievetheseplanswill

dependuponanumberoffactors,includingourabilitytoutilizeinstalledmanufacturingcapacity,achievetheplannedproductionyieldandfurtherincreasecapacityasplannedwhilemaintainingourdesiredqualitylevelsandoptimizedesignandproductionchanges,andoursuppliersabilitytosupportourneeds.Inaddition,wehaveusedandmayuseinthefutureanumberofnewmanufacturingtechnologies,techniquesandprocessesforourvehicles,whichwemustsuccessfullyintroduceandscaleforhighvolumeproduction.Forexample,wehaveintroducedhighlyautomatedproductionlines,aluminumspotweldingsystemsandhigh-speedblowformingofcertaindifficulttostampvehicleparts.Wehavealsointroduceduniquedesignfeaturesinourvehicleswithdifferentmanufacturingchallenges,suchaslargedisplayscreens,dualmotordrivetrain,autopilothardwareandfalcon-wingdoors.Wehavelimitedexperiencedeveloping,manufacturing,sellingandservicing,andallocatingouravailableresourcesamong,multipleproductssimultaneously.Ifweareunabletorealizeourplans,ourbrand,business,prospects,financialconditionandoperatingresultscouldbemateriallydamaged.

Concurrentwiththesignificantplannedincreaseinourvehicleproductionlevels,wewillalsoneedtocontinuetosignificantlyincreasedeliveriesof,andservicingcapacityfor,ourvehicles.Althoughwehaveaplanfordeliveringandservicingsignificantlyincreasedvolumesofvehicles,wehavelimitedexperienceindeliveringahighvolumeofvehicles,andnoexperienceindeliveringandservicingvehiclesatthesignificantlyhighervolumesweanticipateforModel3,andwemayfacedifficultiesmeetingourdeliveryandgrowthplansintobothexistingmarketsaswellasnewmarketsintowhichweexpand.Ifweareunabletorampuptomeetourdeliveryandservicingneedsglobally,thiscouldhaveamaterialadverseeffectonourbusiness,prospects,financialconditionandoperatingresults.

We are dependent on our suppliers, the majority of which are single source suppliers, and the inability of these suppliers to deliver necessary componentsof our products according to our schedule and at prices, quality levels, and volumes acceptable to us, or our inability to efficiently manage thesecomponents, could have a material adverse effect on our financial condition and operating results.Ourproductscontainnumerouspurchasedpartswhichwesourcegloballyfromhundredsofdirectsuppliers,themajorityofwhomarecurrentlysinglesource

suppliers,althoughweattempttoqualifyandobtaincomponentsfrommultiplesourceswheneverfeasible.Anysignificantunanticipateddemandwouldrequireustoprocureadditionalcomponentsinashortamountoftime,andinthepastwehavealsoreplacedcertainsuppliersbecauseoftheirfailuretoprovidecomponentsthatmetourqualitycontrolstandards.Whilewebelievethatwewillbeabletosecureadditionaloralternatesourcesofsupplyformostofourcomponentsinarelativelyshorttimeframe,thereisnoassurancethatwewillbeabletodosoordevelopourownreplacementsforcertainhighlycustomizedcomponentsofourproducts.Moreover,wehavesignedlong-termagreementswithPanasonictobeourmanufacturingpartnerandsupplierforlithium-ioncellsatGigafactory1inNevadaandPVcellsandpanelsatGigafactory2inBuffalo,NewYork.IfweencounterunexpecteddifficultieswithkeysupplierssuchasPanasonic,

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andifweareunabletofilltheseneedsfromothersuppliers,wecouldexperienceproductiondelaysandpotentiallossofaccesstoimportanttechnologyandpartsforproducing,servicingandsupportingourproducts.

Thislimited,andinmanycasessinglesource,supplychainexposesustomultiplepotentialsourcesofdeliveryfailureorcomponentshortagesfortheproductionofourproducts,suchasthosewhichweexperiencedin2012and2016inconnectionwithourslower-than-plannedModelSandModelXramps.Furthermore,unexpectedchangesinbusinessconditions,materialspricing,laborissues,wars,governmentalchanges,naturaldisasterssuchastheMarch2011earthquakesinJapanandotherfactorsbeyondourandoursupplierscontrol,couldalsoaffectoursuppliersabilitytodelivercomponentstousonatimelybasis.Thelossofanysingleorlimitedsourcesupplierorthedisruptioninthesupplyofcomponentsfromthesesupplierscouldleadtoproductdesignchangesanddelaysinproductdeliveriestoourcustomers,whichcouldhurtourrelationshipswithourcustomersandresultinnegativepublicity,damagetoourbrandandamaterialandadverseeffectonourbusiness,prospects,financialconditionandoperatingresults.

Changesinoursupplychainhavealsoresultedinthepast,andmayresultinthefuture,inincreasedcost.Wehavealsoexperiencedcostincreasesfromcertainofoursuppliersinordertomeetourqualitytargetsanddevelopmenttimelinesaswellasduetodesignchangesthatwemade,andwemayexperiencesimilarcostincreasesinthefuture.Certainsuppliershavesoughttorenegotiatethetermsofthesupplyarrangements.Additionally,wearenegotiatingwithexistingsuppliersforcostreductions,seekingnewandlessexpensivesuppliersforcertainparts,andattemptingtoredesigncertainpartstomakethemlessexpensivetoproduce.Ifweareunsuccessfulinoureffortstocontrolandreducesuppliercosts,ouroperatingresultswillsuffer.

TheforegoingdiscussionappliestoModel3andourenergystorageproductsaswell.However,becauseweplantoproduceModel3atsignificantlyhighervolumesthanModelSorModelX,thenegativeimpactofanydelaysorotherconstraintswithrespecttooursuppliersforModel3couldbesubstantiallygreaterthananysuchissuesexperiencedwithrespecttoourotherproducts.AssomeofoursuppliersforModelSandModelXdonothavetheresources,equipmentorcapabilitytoprovidecomponentsfortheModel3inlinewithourrequirements,wehaveengagedasignificantnumberofnewsuppliers,andweneedsuchsupplierstorampanddeliveraccordingtoourschedule.Thereisnoassurancethatthesesupplierswillultimatelybeabletomeetourcost,qualityandvolumeneeds,ordosoatthetimesneeded.Furthermore,asthescaleofourvehicleproductionincreases,wewillneedtoaccuratelyforecast,purchase,warehouseandtransporttoourmanufacturingfacilitiescomponentsatmuchhighervolumesthanwehaveexperiencewith.Ifweareunabletoaccuratelymatchthetimingandquantitiesofcomponentpurchasestoouractualneeds,orsuccessfullyimplementautomation,inventorymanagementandothersystemstoaccommodatetheincreasedcomplexityinoursupplychain,wemayincurunexpectedproductiondisruption,storage,transportationandwrite-offcosts,whichcouldhaveamaterialadverseeffectonourfinancialconditionandoperatingresults.

Our future growth and success is dependent upon consumers willingness to adopt electric vehicles and specifically our vehicles, especially in the massmarket demographic which we are targeting with Model 3.Ourgrowthishighlydependentupontheadoptionbyconsumersofalternativefuelvehiclesingeneralandelectricvehiclesinparticular.Althoughwehave

successfullygrowndemandforModelSandModelX,haveseenverystronginitialdemandforModel3,andbelievethatwewillbeabletocontinuetogrowdemandseparatelyforeachoftheseandfuturevehicles,thereisnoguaranteeofsuchfuturedemandorthatourvehicleswillnotcompetewithoneanotherinthemarket.Moreover,themassmarketdemographicwhichwearetargetingwithModel3islarger,butmorecompetitive,thanthedemographicforModelSandModelX,andadditionalelectricvehiclesareenteringthemarket.

IfthemarketforelectricvehiclesingeneralandTeslavehiclesinparticulardoesnotdevelopasweexpect,ordevelopsmoreslowlythanweexpect,orifdemandforourvehiclesdecreasesinkeyandothermarkets,ourbusiness,prospects,financialconditionandoperatingresultscouldbeharmed.Themarketforalternativefuelvehiclesisrelativelynew,rapidlyevolving,andcouldbeaffectedbynumerousexternalfactors,suchas: perceptionsaboutelectricvehiclefeatures,quality,safety,performanceandcost; perceptionsaboutthelimitedrangeoverwhichelectricvehiclesmaybedrivenonasinglebatterycharge;

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competition,includingfromothertypesofalternativefuelvehicles,plug-inhybridelectricvehicles,andhighfuel-economyinternalcombustion

enginevehicles; volatilityinthecostofoilandgasoline; governmentregulationsandeconomicincentives;and accesstochargingfacilities.

Future problems or delays in expanding Gigafactory 1 or ramping operations there could negatively affect the production and profitability of ourproducts, such as Model 3.Tolowerthecostofcellproductionandproducecellsinhighvolume,wehaveverticallyintegratedtheproductionoflithium-ioncellsandfinishedbattery

packsforModel3andenergystorageproductsatGigafactory1.WhileGigafactory1beganproducinglithium-ioncellsforenergystorageproductsinJanuary2017andhassincebegunproducinglithium-ioncellsforModel3,wehavenootherdirectexperienceintheproductionoflithium-ioncells.Giventhesizeandcomplexityofthisundertaking,itispossiblethatfutureeventscouldresultinthecostofexpandingandoperatingGigafactory1exceedingourcurrentexpectationsandGigafactory1takinglongertorampproductionandexpandthanwecurrentlyanticipate.InordertoreachourplannedvolumeandgrossmarginforModel3,wemusthavesignificantcellproductionfromGigafactory1,which,amongotherthings,requiresPanasonictosuccessfullyrampitsall-newcellproductionlinestosignificantvolumesoverashortperiodoftime.AlthoughPanasonichasalongtrackrecordofproducinghigh-qualitycellsatsignificantvolumeatitsfactoriesinJapan,ithasneverbeforestartedandrampedcellproductionatafactoryintheU.S.likeatGigafactory1.Inaddition,wehavestartedproducingseveralcomponentsforModel3,suchasbatterymodulesincorporatingthelithium-ioncellsproducedbyPanasonic,atGigafactory1.Someofthemanufacturinglinesforsuchcomponentshavetakenlongerthananticipatedtoramptotheirfullcapacity.Weexpectthatwewillcontinuetoexperiencechallengesaswemovethroughtheramp,andwewillcontinuetofine-tuneourmanufacturinglinestoaddressthem.Whilewecurrentlybelievethatwewillreachourproductiontargets,ifweareunabletoresolverampingchallengesandexpandGigafactory1productioninatimelymannerandatreasonableprices,andifweorPanasonicareunabletoattract,hireandretainasubstantialnumberofhighlyskilledpersonnel,ourabilitytosupplybatterypacksorothercomponentsforModel3andourotherproductscouldbenegativelyimpacted.AnysuchproblemsordelayswithGigafactory1couldnegativelyaffectourbrandandharmourbusiness,prospects,financialconditionandoperatingresults.

If our vehicles or other products that we sell or install fail to perform as expected, our ability to develop, market and sell our products and services couldbe harmed.Ifourvehiclesorourenergyproductsweretocontaindefectsindesignandmanufacturethatcausethemnottoperformasexpectedorthatrequirerepair,or

certainfeaturesofourvehicles,suchasfullself-driving,takelongerthanexpectedtobecomeenabledorarelegallyrestricted,ourabilitytodevelop,marketandsellourproductsandservicescouldbeharmed.Forexample,theoperationofourvehiclesishighlydependentonsoftware,whichisinherentlycomplexandcouldconceivablycontainlatentdefectsanderrorsorbesubjecttoexternalattacks.Issuesexperiencedbycustomershaveincludedthoserelatedtothesoftwareforthe17inchdisplayscreen,thepanoramicroofandthe12voltbatteryintheModelSandtheseatsanddoorsintheModelX.Althoughweattempttoremedyanyissuesweobserveinourproductsaseffectivelyandrapidlyaspossible,sucheffortsmaynotbetimely,mayhamperproductionormaynotbeuptothesatisfactionofourcustomers.Whilewehaveperformedextensiveinternaltestingontheproductswemanufacture,wecurrentlyhavealimitedframeofreferencebywhichtoevaluatedetailedlong-termquality,reliability,durabilityandperformancecharacteristicsofourbatterypacks,powertrains,vehiclesandenergystorageproducts.Therecanbenoassurancethatwewillbeabletodetectandfixanydefectsinourproductspriortotheirsaletoorinstallationforconsumers.

Anyproductdefects,delaysorlegalrestrictionsonproductfeatures,orotherfailureofourproductstoperformasexpectedcouldharmourreputationandresultindeliverydelays,productrecalls,productliabilityclaims,significantwarrantyandotherexpenses,andcouldhaveamaterialadverseimpactonourbusiness,financialcondition,operatingresultsandprospects.Model3hasnotyetbeenevaluatedbyNHTSAforastarratingundertheNewCarAssessmentProgram,andwhilebasedonourinternalevaluationweexpecttoobtaincomparableratingstothoseachievedbyModelSandModelX,thereisnoassurancethiswilloccur.

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If we fail to scale our business operations and otherwise manage future growth and adapt to new conditions effectively as we rapidly grow our company,including internationally, we may not be able to produce, market, sell and service our products successfully.Anyfailuretomanageourgrowtheffectivelycouldmateriallyandadverselyaffectourbusiness,prospects,operatingresultsandfinancialcondition.We

continuetoexpandouroperationssignificantly,includinginternationally,includingbyatransitiontohighvolumevehicleproductionwiththerampofModel3andtheworldwidesales,deliveryandservicingofasignificantlyhighernumberofvehiclesthanourcurrentvehiclefleetinthecomingyears.Furthermore,wearedevelopingandgrowingourenergystorageproductandsolarbusinessworldwide,includingincountrieswherewehavelimitedornopreviousoperatingexperienceinconnectionwithourvehiclebusiness.Ourfutureoperatingresultsdependtoalargeextentonourabilitytomanageourexpansionandgrowthsuccessfully.Wemaynotbesuccessfulinundertakingthisglobalexpansionifweareunabletocontrolexpensesandavoidcostoverrunsandotherunexpectedoperatingcosts;establishsufficientworldwideautomobilesales,delivery,serviceandSuperchargerfacilitiesinatimelymanner;adaptourproductsandconductouroperationstomeetlocalrequirements;implementtherequiredinfrastructure,systemsandprocesses;andfindandhireasignificantnumberofadditionalmanufacturing,engineering,service,electricalinstallation,constructionandadministrativepersonnel.

If we are unable to achieve our targeted manufacturing costs for our vehicles, including Model 3, our financial condition and operating results willsuffer.Whilewehaveexperiencedandexpectinthefuturetorealizecostreductionsbybothusandoursuppliers,thereisnoguaranteewewillbeabletoachieve

sufficientcostsavingstoreachourgrossmarginandprofitabilitygoals.Weincursignificantcostsrelatedtoprocuringthematerialsrequiredtomanufactureourvehicles,assemblingvehiclesandcompensatingourpersonnel.Wemayalsoincursubstantialcostsorcostoverrunsinutilizingandincreasingtheproductioncapabilityofourvehiclemanufacturingfacilities,suchasforModel3.Furthermore,ifweareunabletoachieveproductioncosttargetsonourvehiclespursuanttoourplans,wemaynotbeabletomeetourgrossmarginandotherfinancialtargets.Manyofthefactorsthatimpactourmanufacturingcostsarebeyondourcontrol,suchaspotentialincreasesinthecostsofourmaterialsandcomponents,suchaslithium,nickel,andothercomponentsofourbatterycellsoraluminumusedtoproducebodypanels.Ifweareunabletocontinuetocontrolandreduceourmanufacturingcosts,ouroperatingresults,businessandprospectswillbeharmed.

We are significantly dependent upon revenue generated from the sale of a limited fleet of electric vehicles, which currently includes Model S, Model Xand Model 3.Wecurrentlygenerateasignificantpercentageofourrevenuesfromthesaleoftwoproducts:ModelSandModelXvehicles.Model3,forwhichweare

planningsignificantlyhighervolumesthanModelSorModelX,hasrequiredandwillcontinuetorequiresignificantinvestmentinconnectionwithitsongoingramp,andthereisnoguaranteethatitwillbecommerciallysuccessful.Historically,automobilecustomershavecometoexpectavarietyofvehiclesofferedinamanufacturersfleetandnewandimprovedvehiclemodelstobeintroducedfrequently.Inordertomeettheseexpectations,wemayinthefutureberequiredtointroduceonaregularbasisnewvehiclemodelsaswellasenhancedversionsofexistingvehiclemodels.Totheextentourproductvarietyandcyclesdonotmeetconsumerexpectations,orcannotbeproducedonourprojectedtimelinesandcostandvolumetargets,ourfuturesalesmaybeadverselyaffected.Thiscouldhaveamaterialadverseeffectonourbusiness,prospects,financialconditionandoperatingresults.

Our vehicles and energy storage products make use of lithium-ion battery cells, which have been observed to catch fire or vent smoke and flame, and suchevents have raised concerns, and future events may lead to additional concerns, about the batteries used in automotive applications.Thebatterypacksthatweproducemakeuseoflithium-ioncells.Onrareoccasions,lithium-ioncellscanrapidlyreleasetheenergytheycontainbyventing

smokeandflamesinamannerthatcanignitenearbymaterialsaswellasotherlithium-ioncells.Whilewehavedesignedthebatterypacktopassivelycontainanysinglecellsreleaseofenergywithoutspreadingtoneighboringcells,therecanbenoassurancethatafieldortestingfailureofourvehiclesorotherbatterypacksthatweproducewillnotoccur,whichcouldsubjectustolawsuits,productrecalls,orredesignefforts,allofwhichwouldbetimeconsumingandexpensive.Also,negativepublicperceptionsregardingthesuitabilityoflithium-ioncellsforautomotiveapplicationsoranyfutureincidentinvolvinglithium-ion

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cellssuchasavehicleorotherfire,evenifsuchincidentdoesnotinvolveourvehiclesorenergystorageproducts,couldseriouslyharmourbusiness.

Inaddition,westoreasignificantnumberoflithium-ioncellsatourfacilitiesandplantoproducehighvolumesofcellsandbatterymodulesandpacksatGigafactory1.Anymishandlingofbatterycellsmaycausedisruptiontotheoperationofourfacilities.Whilewehaveimplementedsafetyproceduresrelatedtothehandlingofthecells,therecanbenoassurancethatasafetyissueorfirerelatedtothecellswouldnotdisruptouroperations.Suchdamageorinjurycouldleadtoadversepublicityandpotentiallyasafetyrecall.Moreover,anyfailureofacompetitorselectricvehicleorenergystorageproductmaycauseindirectadversepublicityforusandourproducts.Suchadversepublicitycouldnegativelyaffectourbrandandharmourbusiness,prospects,financialconditionandoperatingresults.

Increases in costs, disruption of supply or shortage of materials, in particular for lithium-ion cells, could harm our business.Wemayexperienceincreasesinthecostorasustainedinterruptioninthesupplyorshortageofmaterials.Anysuchincrease,supplyinterruptionorshortage

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

manufacturedatourownfacilities;and fluctuationsinthevalueoftheJapaneseyenagainsttheU.S.dollarasourbatterycellpurchasesforModelSandModelXandsomerawmaterials

forcellsusedinModel3andenergystorageproductsarecurrentlydenominatedinJapaneseyen.

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

We may become subject to product liability claims, which could harm our financial condition and liquidity if we are not able to successfully defend orinsure against such claims.Althoughwedesignourvehiclestobethesafestvehiclesontheroad,productliabilityclaimscouldharmourbusiness,prospects,operatingresultsand

financialcondition.Theautomobileindustryinparticularexperiencessignificantproductliabilityclaimsandwefaceinherentriskofexposuretoclaimsintheeventourvehiclesdonotperformasexpected.Asistrueforotherautomakers,ourcarshavebeeninvolvedandweexpectinthefuturewillbeinvolvedincrashesresultingindeathorpersonalinjury,andsuchcrasheswhereautopilotisengagedarethesubjectofsignificantpublicattention.Wehaveexperiencedandweexpecttocontinuetofaceclaimsrelatedtomisuseorfailuresofnewtechnologiesthatwearepioneering,includingautopilotinourvehicles.Moreover,asoursolarenergysystemsandenergystorageproductsgenerateandstoreelectricity,theyhavethepotentialtocause

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injurytopeopleorproperty.Asuccessfulproductliabilityclaimagainstuscouldrequireustopayasubstantialmonetaryaward.Ourrisksinthisareaareparticularlypronouncedgiventherelativelylimitednumberofvehiclesandenergystorageproductsdeliveredtodateandlimitedfieldexperienceofourproducts.Moreover,aproductliabilityclaimcouldgeneratesubstantialnegativepublicityaboutourproductsandbusinessandcouldhavematerialadverseeffectonourbrand,business,prospectsandoperatingresults.Inmostjurisdictions,wegenerallyself-insureagainsttheriskofproductliabilityclaimsforvehicleexposure,meaningthatanyproductliabilityclaimswilllikelyhavetobepaidfromcompanyfunds,notbyinsurance.

The markets in which we operate are highly competitive, and we may not be successful in competing in these industries. We currently face competitionfrom new and established domestic and international competitors and expect to face competition from others in the future, including competition fromcompanies with new technology.Theworldwideautomotivemarket,particularlyforalternativefuelvehicles,ishighlycompetitivetodayandweexpectitwillbecomeevenmoresointhe

future.Thereisnoassurancethatourvehicleswillbesuccessfulintherespectivemarketsinwhichtheycompete.ManyestablishedandnewautomobilemanufacturerssuchasAudi,BMW,Daimler,GeneralMotors,ToyotaandVolvo,aswellasothercompanies,haveenteredorarereportedtohaveplanstoenterthealternativefuelvehiclemarket,includinghybrid,plug-inhybridandfullyelectricvehicles,aswellasthemarketforself-drivingtechnologyandapplications.Insomecases,suchcompetitorshaveannouncedanintentiontoproduceelectricvehiclesexclusivelyatsomepointinthefuture.Mostofourcurrentandpotentialcompetitorshavesignificantlygreaterfinancial,technical,manufacturing,marketing,vehiclesalesnetworksandotherresourcesthanwedoandmaybeabletodevotegreaterresourcestothedesign,development,manufacturing,distribution,promotion,saleandsupportoftheirproducts.Increasedcompetitioncouldresultinlowervehicleunitsales,pricereductions,revenueshortfalls,lossofcustomersandlossofmarketshare,whichcouldharmourbusiness,prospects,financialconditionandoperatingresults.Inaddition,ourModel3vehiclefacescompetitionfromexistingandfutureautomobilemanufacturersintheextremelycompetitiveentry-levelpremiumsedanmarket,includingAudi,BMW,LexusandMercedes.

Thesolarandenergystorageindustriesarehighlycompetitive.Wefacecompetitionfromothermanufacturers,developersandinstallersofsolarandenergystoragesystems,aswellasfromlargeutilities.Decreasesintheretailpricesofelectricityfromutilitiesorotherrenewableenergysourcescouldmakeourproductslessattractivetocustomersandleadtoanincreasedrateofcustomerdefaultsunderourexistinglong-termleasesandPPAs.Moreover,solarpanelandlithium-ionbatterypriceshavedeclinedandarecontinuingtodecline.Asweincreaseourbatteryandsolarmanufacturingcapabilities,includingatGigafactory1andGigafactory2,futurepricedeclinesmayharmourabilitytoproduceenergystoragesystemsandsolarsystemsatcompetitiveprices.

If we are unable to establish and maintain confidence in our long-term business prospects among consumers, analysts and within our industries, then ourfinancial condition, operating results, business prospects and stock price may suffer materially.Consumersmaybelesslikelytopurchaseourproductsnowiftheyarenotconvincedthatourbusinesswillsucceedorthatourserviceandsupportandother

operationswillcontinueinthelongterm.Similarly,suppliersandotherthirdpartieswillbelesslikelytoinvesttimeandresourcesindevelopingbusinessrelationshipswithusiftheyarenotconvincedthatourbusinesswillsucceed.Accordingly,inordertobuildandmaintainourbusiness,wemustmaintainconfidenceamongcustomers,suppliers,analystsandotherpartiesinourlong-termfinancialviabilityandbusinessprospects.Maintainingsuchconfidencemaybeparticularlycomplicatedbycertainfactors,suchasourlimitedoperatinghistory,unfamiliaritywithourproducts,competitionanduncertaintyregardingthefutureofelectricvehiclesorourotherproductsandservicesandourquarterlyproductionandsalesperformancecomparedwithmarketexpectations.Manyofthesefactorsarelargelyoutsideourcontrol,andanynegativeperceptionsaboutourlong-termbusinessprospects,evenifexaggeratedorunfounded,wouldlikelyharmourbusinessandmakeitmoredifficulttoraiseadditionalfundsifneeded.

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Our plan to generate ongoing growth and demand, including by expand ing our network of Tesla stores, galleries, delivery centers, service centers andSuperchargers, will require significant cash investments and management resources and may not meet expectations with respect to additional sales orinstallations of our products or availability of Superchargers.Weplantogenerateongoinggrowthanddemand,includingbygloballyexpandingournetworkofTeslastores,galleries,deliverycenters,servicecenters,

mobileserviceofferingsandSuperchargers.Theseplanswillrequiresignificantcashinvestmentsandmanagementresourcesandmaynotmeetourexpectationswithrespecttoadditionalsalesorinstallationsofourproducts.Thisongoingglobalexpansion,whichincludesplannedentryintomarketsinwhichwehavelimitedornoexperienceselling,delivering,installingand/orservicingourproducts,andwhichmayposelegal,regulatory,labor,culturalandpoliticalchallengesthatwehavenotpreviouslyencountered,maynothavethedesiredeffectofincreasingsalesandinstallationsandexpandingourbrandpresencetothedegreeweareanticipating.Furthermore,theincreas