Tesla Motors' Big Crisis: Overblown?

It sure looked like a crisis: Shares of Tesla Motors (NAS: TSLA) dropped nearly 20% on Friday after Bloomberg reported that two key engineers working on the company's all-important Model S sedan had abruptly left the company.

Initially, Tesla's PR crew -- and CEO Elon Musk -- responded to the report dismissively, saying that the report was "overstated" and that the departures were no big deal. But the market didn't buy it, and on a day when the Dow Jones Industrial Average was down just a bit, Tesla's shares closed at their lowest price since August.

To the company's immense credit, its PR crew took the price drop seriously and responded by scheduling an hourlong call for media and analysts with most of Tesla's senior staff, including Musk, before markets opened on Tuesday. I said on Monday that we'd learn a lot from Tesla's response to this little crisis, and here's what I learned as I listened to the call: This was a PR mistake, apparently made by Musk himself. It's not a major source of worry.

In fact, executives explained, the company's fundamentals are right on track.

The scoop on those two executives
According to Musk, the two departed engineers, Peter Rawlinson and Nick Sampson, weren't part of the team that had done the Model S's intitial design, and Rawlinson was not the Model S's chief engineer as Bloomberg had reported. He was chief of the Model S's body and chassis team, not the whole project, and he and Sampson were both experts in "optimizing" those particular sections of the vehicle -- specifically, in reducing weight without reducing safety or performance.

Both men had previously worked for England's Lotus Cars, a boutique sports-car builder and engineering consultant that had done much of the engineering on (and had assisted with the production of) Tesla's first car, the Roadster. Lotus is world-famous for its expertise with lightweight auto designs and would have been a logical place for Tesla to seek that kind of expertise as it sought to improve the Model S's initial design.

But Musk said that their departure, rather than being a disruption, was part of the plan. Rawlinson "really did leave for personal reasons, and that's not a euphemism," he said, but the departure of both men -- who, coming from Lotus, had a small-manufacturer mindset -- was inevitable and expected as the company scaled up to higher-volume production.

The problem wasn't their departures; it was how those departures were communicated to the world.

How this became a "crisis"
Musk said that Tesla intended to announce the departures during the company's upcoming earnings call, in the normal course of business, but that the Bloomberg report "created the impression that Tesla was trying to dump news into the weekend." (The practice of announcing bad news on Friday afternoons is a standard public-relations tactic.)

Musk sounded a bit humbled by the experience and said he's learned a lesson -- that news like this needs to be communicated promptly and responsibly. And while there's arguably room to be a bit skeptical of the company's explanation, I found it convincing. I think this was a PR blunder, not a larger issue, and apparently so does the market -- the share price has already largely rebounded as I write this on Tuesday morning.

Of course, the other things Tesla executives talked about during the call probably have something to do with that rebound.

The larger update: Tesla remains on track
I don't have space here to go into detail on everything Tesla's managers said this morning -- I'll have more to say in another article on Wednesday. (Long story short, things are on track.) But it's worth reiterating, because it was a concern raised by the engineers' departure, what Musk and others said about the Model S's safety in the wake of the battery-pack fires that have happened with the Chevy Volt.

Tesla CTO JB Straubel said the Volt had a specific problem with its design that General Motors (NYS: GM) has explained in some detail and taken steps to correct, but that Tesla took the concerns seriously. He and Musk explained that Tesla has done, and continues to do, very extensive crash and safety testing of its battery packs, and that many of the company's design choices -- right down to its decision to use lots of small battery cells, rather than the small number of large ones used by most automakers -- were made with the management of overheating risks in mind.

There are more than 2,000 examples of Tesla's first car, the Roadster, out in the world, and as Musk noted, some of them have been involved in serious accidents. To date, none of those accidents has resulted in serious injury -- and none has resulted in the kind of fire seen in the crash-tested Volt. What's more, the battery packs that Tesla supplied to Daimler (OTC: DDAIF.PK) for its Smart and Mercedes-Benz A-Class electric have passed tough European crash tests and had no incidents in real-world operation.

Tesla is also working with Toyota (NYS: TM) to develop an electric version of the RAV4 SUV, and while Musk was understandably coy about the details and status of that program, he did say that no Volt-like problems have cropped up in Toyota's tests so far.

And as for the Model S? The company has conducted extensive in-house crash-testing of its new sedan already, and the car has mostly passed with flying colors. Tesla's goal is to get "five-star" crash ratings in all tests. Musk said that the company is already achieving five stars in most of the tests, and four stars in the rest -- and is working on refinements with the intention of acing all of the tests before the first car is delivered in July.

The upshot: Growing pains
Long story short, there was probably not much to see here. After a fumbled initial response, the company mustered a strong response to the Bloomberg article and appears to have successfully eased investors' concerns about the state of the Model S program.

While I continue to be skeptical of Tesla's prospects once the initial rush of orders for the Model S is filled, and of its ability to keep going once the inevitable competition arrives, I do think the company is continuing to execute quite well, all things considered -- and that its fate, for better or worse, is mostly in its own hands. It's possible that Friday's kerfuffle will be remembered as nothing more than a buying opportunity. Stay tuned.

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At the time thisarticle was published Fool contributor John Rosevear owns shares of General Motors. You can follow his auto-related musings on Twitter, where he goes by@jrosevear.Motley Fool newsletter serviceshave recommended buying shares of Tesla Motors and General Motors. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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