Why a Tesla Recall Wouldn't Matter
Shares of Tesla Motors have been extra volatile lately following the National Highway Traffic Safety Administration's, or NHTSA, decision to launch a formal investigation into two of the recent Model S fires. On Tuesday, the NHTSA said it was evaluating potential risks associated with "undercarriage strikes" on Tesla cars. If the investigation leads to a recall, it could affect more than 13,000 Model S vehicles on U.S. roads today.
What's more, Tesla has lost nearly a third of its market value over the past month because of these fires. Still, a possible recall matters much less than you might think. Here are three key things to consider before selling into the panic.
Will this matter a year from now?
In a word: no. The EV maker and its outspoken CEO are already notably ahead of the situation. In a blog post on Monday, Elon Musk outlined the various actions Tesla is taking to quell fire safety concerns involving its Model S car. The first of these is a software update that changes the suspension of the car at highway speeds. While this "over-the-air update" has already taken place, the company says a second software overhaul is coming in January that will give drivers even more control over their cars' air suspension ride height.
Separately, Musk said the company amended its warranty policy to cover fire-related damages. "Our goal here is to eliminate any concern about the cost of such an event and ensure that over time the Model S has the lowest insurance cost of any car at our price point," he said in a public note.
This could lead to higher costs for Tesla and, ultimately, its shareholders, but in the end investors are betting on Musk's competence -- and if history is a reliable judge, that's a smart bet to take. Musk finished by saying, "Either our belief in the safety of our car is correct and this is a minor cost or we are wrong, in which case the right thing is for Tesla to bear the cost rather than the car buyer."
A recall at this point isn't likely, particularly because Tesla has already taken measures to increase the six-inch clearance between the ground and the undercarriage of its Model S cars. Yet even at the six inches, the Model S is higher off the ground than many other cars on the road today, including the "Mercedes CLA Class at 3.9 inches and a Dodge Charger at 5 inches," according to auto writer Tom Krisher.
The bigger issue hiding in the flames
Tesla doesn't have a safety problem; it has a perception problem. With news of Tesla's three fires being blown out of proportion, a potential recall is the last of Tesla's worries. The issue of more concern is what this negative press might do to Tesla's reputation for being the world's safest car. Earlier this year, the Model S achieved the best safety rating of any car ever tested.
It's not surprising, then, that Musk is fighting to protect Tesla's brand image. His reasoning is sound. In order to accelerate the switch to electric cars, the public needs to be confident in the safety of the technology. Tesla has gone to great lengths to make its cars the safest on the roads, even when that meant issuing a partial recall earlier this year for a small mounting bracket in the back seat of its Model S.
The level of detail this company has shown in regard to driver safety is awe-inspiring. Tesla isn't trying to cut corners; it's trying to build an excellent car company that paves the way for the future of transportation. Automakers issue recalls all the time, and as Tesla continues to ramp up production in the years to come, it too may face such setbacks.
But by focusing on the bigger picture, long-term investors can take advantage of these dips. Tesla's demonstrated its strength at turning obstacles into opportunities in the past, and I suspect Musk's company will continue to do so well into the future.
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The article Why a Tesla Recall Wouldn't Matter originally appeared on Fool.com.Fool contributor Tamara Rutter owns shares of Tesla Motors. The Motley Fool recommends Tesla Motors. The Motley Fool owns shares of Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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