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Strike One for Tesla (NASDAQ: TSLA)

Brian Hicks

Written By Brian Hicks

Posted June 20, 2013

Tesla (NASDAQ: TSLA) has been riding high on success as of late, but a voluntary recall could place a wet blanket on CEO Elon Musk’s momentum.

ModelSMusk announced via Tesla’s blog that Model S vehicles manufactured from May 10, 2013 to June 8, 2013 will need to be brought in to reinforce the mounting brackets of the back seats. The seat itself could become loose if an accident occurs.

No passenger has been directly impacted by the safety breach thus far, and there have been no consumer complaints.

Tesla believes 1,228 Model S cars may have been compromised. Customers can arrange for their cars to be picked up by flatbed truck, with a replacement rental if needed, and repairs should not take any more than a few hours.

Tesla could shell out $150,000 for the extra repairs, Reuters reports.

Tesla stock went up 1.25% to $104.68 at close on Wednesday.

A Tesla Setback?

This isn’t the first time Tesla needed to recall its cars; 429 Tesla Roasters were voluntarily recalled in 2010 for power cable issues.

The latest recall is a slight blemish on Tesla’s safety record but not alarming enough to ruin the company’s reputation. If there were a problem with the lithium-ion battery, there would have been deeper issues at hand. Musk placed heavy investment in battery quality, and he has reassured the public through an excellent battery guarantee program.

A recall for newer model vehicles is not uncommon, and many big-name companies have come away fairly unscathed from more serious callbacks. Recently, Chrysler only recalled its Grand Cherokee (1993-2004) and Grand Liberty (2002-2007) after government pressure and oncoming public inquiries into several fatal accidents. The evidence and accusations are damning, but no one is predicting the downfall of Chrysler.

But when it comes to lessons in the PR department, Chrysler could certainly take cues from Tesla. Musk handled the situation without government intervention, promised swift action, and was courteous in issuing a public apology. Chrysler was in denial for too long, and the company should have acted sooner, especially in light of such serious charges.

Toyota (NYSE: TM) also underwent a PR nightmare that began in 2009 after reports came in of unintended acceleration and brake problems for its Camry and Corolla models. Despite litigation, intense media scrutiny, and millions of callbacks around the world, Toyota managed to salvage its reputation. Polls conducted after the recall showed that Americans still had a generally favorable view of Toyota.

If Toyota can walk away from such international embarrassment, Tesla will certainly not be stopped by a backseat recall.

And the Model S recall says nothing about electric cars, since the mounting bracket issue is something that can happen to any other car manufacturer.

Some would say Tesla should be held to a different standard, since it is a fairly new company, but Tesla has already proven it can compete with the big boys. When it comes to sales figures, the Model S beat GM’s (NYSE: GM) hybrid Chevy Volt, Mercedes-Benz’s S Class, BMW’s (ETR: BMW) 7 Series, and Nissan’s (OTC: NSANY) fully electric LEAF.

Since the Model S is in the spotlight, every action and decision by Tesla will be examined more intensely than other recalls.

The Model S is not only becoming a popular attraction to consumers and critics, but it is also introducing the public to a sleeker looking electric vehicle at an affordable price.

The Model S was granted Motor Trend’s best car of 2013 and Consumer Reports’ best car ever tested, receiving a near perfect score of 99 out of 100.

There are a fair number of Tesla detractors out there, but this recall is not something they can call out as a major blunder, since no electrical component of the vehicle has given any indication of failing.

But this could be considered strike one for Tesla, so to speak, and Musk better pray that there are no other future recalls related to the powertrain or battery. At a time when the Model S is being heavily analyzed by the media and critics, Tesla cannot afford to have more serious complaints or recalls.

The backseat callback will prove to be a slight bump in the road but not enough to begin halting Model S production.


Tesla Investors

Investors should not be too worried about the recall. It will have minimal impact on Model S sales as long as the problem is addressed and contained promptly.

There are no problems with the battery, and the Model S has beaten every other EV in charge time and battery life from competing car companies. The Model S will drive for 300 miles on a one hour charge.

Tesla celebrated its first profitable quarter in Q1 2013, and the Model S exceeded the company’s sales goal.

And Tesla’s guaranteed battery program will reassure potential buyers unsure about EVs.

The sticker price for a Tesla is $62,400 versus over $100,000 for other luxury EVs and hybrids with inferior battery life. The lease program allows more people to get into a Model S, with no down payment, $580 per month, and $310 per month for those who use it for business purposes. Customers can purchase and deal directly with Tesla, which will give buyers peace of mind.

And the SUV/mini-van inspired Model X is set to make its debut in 2014.

Despite the recall setback, Tesla’s horizons are still looking good.


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