A recent tweet caught our attention. In a nutshell, a Model 3 reservation holder complained to Musk about his VIN being “unmatched” to him because of “paint issues”, and he wasn’t given a replacement timeline. Musk responded with this:
Sorry, we’ve put pretty extreme rules in place for paint & quality in general. If need be, we’re repainting/replacing entire sections of car or building whole new cars. Got to be done.
— Elon Musk (@elonmusk) 31 August 2018
It’s interesting that a carmaker would have trouble with paint, but it highlights how new Tesla is to the auto game – which is why they’ve got “extreme rules in place for paint & quality in general”, I guess.
But the real issue it underlines is how careful Tesla needs to be with respect to quality. Recalls are a part of every automaker’s business, and all the major global players have had their fair share of them. Here are just a few of them from this year alone:
FCA’s Dodge Ram – Brake Transmission Shift Interlock (BTSI) pin overheating when brake is pressed for a prolonged time when the truck is in park. 181,000 trucks recalled in February 2018.
FCA’s Dodge Ram – Defect in the power-locking mechanism for the tailgate, which could cause it to “fly open” while the vehicle is in motion. Recall of 1.1 million trucks in August 2018.
Ford’s “Select 2018 Ford F-150, Expedition and Lincoln Navigator vehicles equipped with a 3.5-liter GTDI V6 engine for high-pressure fuel pumps with misaligned welds.” Recall of 7,580 vehicles in North America in June, 2018.
Ford’s “Select 2018 Ford F-650 and F-750 vehicles with hydraulic brake systems for missing brake hose corrosion protection plating.” Recall of 1,485 vehicles in North America in June, 2018.
These recalls are not cheap. One study from two years ago showed that the average cost of a recall is in the range of $20 million:
“According to the National Highway Traffic and Safety Administration, the average number of auto recalls per million registered U.S. vehicles has risen steadily from 3.10 in the 1980s to 11.79 from 2000 to 2010. Each auto recall has a potential economic consequence of more than $20 million.”
$20 million may not seem like much for a company valued in excess of $55 billion, but the intangible costs of a massive recall can damage a company beyond monetary impact. And Tesla can’t afford to have a major recall at this point, not when it is on the verge of finally showing bottomline profitability in Q3 and Q4 2018. Besides the exercise causing a dent in the bottom line, a recall would tarnish Tesla’s already delicate image. The average observer of the Tesla media melee doesn’t know whether the company is going to declare bankruptcy or declare a profit in the next few months. The sides are so strongly divided that analysts are now sitting on this:
“11 Buy-equivalent ratings, 10 Sell-equivalent ratings and 11 Hold-equivalent on the books.”
That’s how evenly the bear and bull camps are divided. It wasn’t always this way. Tesla had it much worse in the past, but things have tilted in their favor after the Model 3 was actually rolled out of the factory last year. They’ve gotten even better now that delivery numbers are on a steep upward slope. But the bears remain, and they’ve got nearly $10 billion bet on Tesla stock declining.
“Tesla short interest in dollars, calculated using the number of shares sold short and the share price, stood at $9.93 billion, on Thursday, just shy of $9.95 billion for Amazon, S3 Partners data showed.”
And that’s why Tesla is being excessively critical of its own work before any of its cars roll out of the factory. It’s either that or a major backlash down the road, and Tesla certainly doesn’t want that.
