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Tesla Motors Inc (TSLA) Feels the Heat – Model 3 Could Add Fuel to Fire

Tesla Motors inc (TSLA) Model 3

Tesla Motors Inc is special but lately the firm is feeling the heat. Just as the stock price has recovered and is reaching toward all-time highs, news has broken that reminds us all that the company is not perfect. Still, most everything about the firm screams “special”. Tesla is the first successful automobile startup in almost three decades – and Tesla is not just building cars, it is building electric cars. CEO, Elon Musk has wildly ambitious dreams that include eliminating combusting engines, nuking Mars and putting humans on the planet, and he is not afraid to bet his fortune on his goals.

Tesla Motors built its brand on innovation, personalized customer services, and a charismatic leader that is not afraid to be audacious. Tesla has woven a nice tapestry of being almost perfect and it has an almost cult-like following among its fans and customers. However, we occasionally see some holes in the tapestry – holes that reveal the vulnerabilities of a firm doing all within its power to maintain a public image and keep up appearances.

Tesla motors inc (NASDAQ:TSLA) Tesla Model 3

Tesla’s imperfection is hidden in plain sight

Tesla Motors has had a number reliability issues with its cars. Consumer Reports has written extensively about how users have been facing reliability issues with Tesla’s cars. Last October, Consumer Reports revealed that the Model S is the best-performing car it has ever tested but that it cannot guarantee its reliability. Consumer Reports noted that the firm’s vehicles have a worse than average overall problem rate down from an “average” rating from 2014.

Consumer Reports notes that owners have reported problems with the power equipment, drive train, charging equipment, leaks, squeaks and rattles. Consumer Reports noted that it “received about 1,400 survey responses from Model S owners who chronicled an array of detailed and complicated maladies”. The fact that EVs are silent further worsens the case for owners. One driver noted that “The car is so very silent when driving that minor squeaks and rattles that you wouldn’t be able to hear in a gasoline engine car become very annoying.”

The Model X was dead on arrival with a number of quality control issues. The SUV was plagued with series of indefensible delays that had many people waiting for their cars for as much as two years. When the SUV was finally delivered, only a handful (six to be precise) were shown to the world and the Tesla has been working round the clock to ramp up production. However, many of the Model X owners have complained about doors that won’t open and a huge panoramic windshield that offers little protection against the sun.

In the news this week were reports about possible defects in the suspension control arms of Tesla’s cars and those reports seem to have been substantiated. Daily Kanban conducted an investigation into the case of another suspension problem in which the “left front hub assembly separated from the upper control arm.” Daily Kanban observed that Tesla did not take responsibility for the defects but it “offered to pay 50% of the $3,100 repair bill in exchange for his signature on a “Goodwill Agreement” – the said good will agreement is basically an NDA designed to keep the Model S owner quiet.

Tesla’s car are not just pricey, they are unreliable

Earlier this week, Tesla Motors made the Brandz list of Top 10 Car brands globally after edging Volkswagen and Lexus out of the coveted list. Toyota sits comfortable at the number 1 position on the list because it entered the American auto market with a focus on quality and reliability. Tesla on the other hand seems to be focused on creativity and innovation, sometimes at the expense of reliability. Even CEO Elon Musk admitted that he went over and beyond in building the Model X and that he wished he had included fewer innovations.

Edward Niedermeyer an automobile industry analyst thinks that Tesla would face huge problems with scaling its business. Niedermeyer noted that the same principles that leads to success when building software might not necessarily lead to success in building cars. However, Tesla is building cars but it is applying the same principles that software firms are using. In his words,

“with software, you have a fixed cost of development that is oftentimes quite high, but once you have a viable product and you pay off that fixed cost, your variable cost to scale beyond that is almost nonexistent. You’re literally just copying code. With automobiles, not only do you have immense fixed costs in research and development, tooling up factories, creating testing, but once you’ve done all the development work for a car, you still have a process of scaling. Not only are the variable material and labor costs much higher than in software, but you also have a lot of details that can go wrong”.

Many of the people that bought Tesla’s Roadster and early bird Model S are early adopters who had a passionate desire to see Tesla succeed. Many of them had other cars, and if their Roadster or Model X broke down, they’ll gladly pick their Mercedes Benz while waiting for Tesla to fix the ride.

However, the firm is not reaching out to a wider market and the imperfections in its cars are becoming a constant fixture in tech news each week. It won’t be long before buyers start to worry that the firm is no longer the meticulous consumer-centric firm that it was when it started out.

Mass market Model 3 will reveal more holes in the Tesla tapestry

Tesla Motors has started taking reservations for its mass-market Model 3, the firm already has about 400,000 preorders backed by $1000 deposits. The fact that about half a million people trust Tesla enough to part with $1000 each for a car that they haven’t even seen speaks volume about consumer perception on its brand. However, Tesla is moving into the mass market where buyers are less likely to be patient with an unreliable car.

Many of the people buying the $35,000 Model 3 are likely to be people for whom the car would be the only car or daily driver. Such people are less likely to be patient with Elon Musk if the Model 3 is plagued with quality and reliability issues. Neidermeyer notes that “it’s a common misperception that the more expensive the car, the more people expect out of it. The opposite is true: the cheaper the car, the more people tend to rely on it, and the more reliability and quality come into play”.

Poor quality and reliability issues are likely to affect Tesla’s bottom line if the firm doesn’t make a concerted effort to fix its production system to keep errors and mistakes to the barest minimum. The business of making cars has a high risk-reward ratio. Firms would need to invest huge amount of money into R&D, setting up factories and assembly line, and marketing their brand. However, the return from building cars is low-margin and automobile firms don’t usually book profits in the mass-market until they scale.

Disclaimer: The above should not be considered or construed as individualized or specific investment advice. Do your own research and consult a professional, if necessary, before making investment decisions.

Victor Alagbe owns no shares of Tesla Motors Inc (TSLA) at the time of writing, but positions can change at any time.

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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Adam Green is an experienced writer and fintech enthusiast. He he worked with LearnBonds.com since 2019 and covers a range of areas including: personal finance, savings, bonds and taxes.

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