How Tesla Beats Depreciation

Cars typically lose value over time as features become outdated. Tesla, the Silicon Valley automaker, actually adds capabilities to its vehicles. How? By pushing software updates to customers of its all-electric Model S sedan, similar to how Apple upgrades its operating systems.

On Thursday, Chief Executive Officer Elon Musk said Tesla would improve its system with a “range assurance application” and enhanced trip planning. In a few months, it will push out a version 7.0 of the car’s software including an overhaul to the user interface and computerised steering in specific circumstances, he said.

“This was yet another reminder of the increased software content going into light vehicles and of the need to be able to refresh the software through over-the-air updates,” said analyst Brian A. Johnson of Barclays in a research note Friday. Other automakers “have some work to do” before they can make similar improvements to parked cars while owners sleep.

Tesla, based in Palo Alto, California, is an unusual automaker already with its high-end cars and stated desire to lead a carbon-free revolution in personal transportation. But its ability to add functionality to cars is unique and should slow their depreciation.

Andrea James, an analyst at Dougherty & Co, said that when Tesla introduced a hardware update — such as when it announced the dual-motor version of the Model S last fall — some people who bought a two-wheel-drive Model S were annoyed. New software, on the other hand, automatically goes to everyone.

“When it’s a hardware update, people are bummed if they missed out,” said James in an interview Friday. “When it’s software, existing customers get to participate in the excitement. It has a cool factor.”

Tesla rose 1.2% Friday to close at $198.08 (R2403,38). On Thursday, some investors may have been disappointed that the upgrades didn’t go further, and the shares fell 2.5% to $195.65 (R2373,9). That was still 3.7% higher than before Musk tweeted on Sunday that a software upgrade would “end range anxiety,” the fear that an electric car will lose its charge and leave drivers stranded.

“A huge part of what Tesla is is a Silicon Valley software company,” Musk said Thursday. “People take it to be normal that your phone and laptop will keep improving, and that is the approach we’ve taken with the Model S. It is a fundamental paradigm shift from the way cars have been done in the past, where they are quite static and software really got a distant back seat.”

The updates are expected to help sales in China, where Tesla has struggled to overcome the perception that charging is difficult.

“Range anxiety is a significant factor in China,” said Musk. “We’ve added more superchargers in China than anywhere else in the world. I’m fairly optimistic about China in the long term. It’s on the upswing.”

-Bloomberg