Editor's note: Following several disputes on the author's characterization of the recent Tesla battery fire as an 'explosion', we have removed the term from this article.
Tesla (NASDAQ:TSLA), which has had a huge run-up, was recently in the news for negative reasons involving a battery fire. We believe Tesla faces some big potential legal liabilities in the billions if these types of accidents occur again due to poor design of the vehicles which they claimed are the 'safest on the road'. As you can see from the video here, the battery area is too close to the ground. Incidents are common in gas based vehicles, but companies such as Ford (NYSE:F) and GM (NYSE:GM) have established long time plans in place to counteract a number of scenarios. We do not believe Tesla is prepared to recall a large number of their vehicles if certain problems continue to pop up.
Will Tesla vehicles need to be recalled? It's too early to tell. The conditions for a recall are as follows:
"If the NHTSA decides that a safety defect is present, a public meeting is held in which members of the public and the manufacturer can discuss the issue. The manufacturer may dispute the claim and even present new information to the NHTSA Administrator in charge of making the final decision. In the end, it's all up to the NHTSA's Administrator to determine whether to issue a safety defect recall. The manufacturer can challenge the NHTSA's decision, but the issue then goes to a Federal District Court for the final ruling.
The issue doesn't always go to the courts, though. As mentioned earlier, some manufacturers decide to initiate the recall process based on their own investigations. For instance, the manufacturer may determine that a vehicle isn't compliant with a known federal safety standard, or it may discover and decide to correct a safety defect before any problems arise.
So while it can seem like recalls permeate the news headlines, in a way, they're proof that manufacturers are making an effort to keep you safe. And in the case of automotive recalls, it's an attempt to reduce your risk of injury and property damage -- and a way to keep roadways as safe as possible, too."
We propose that it is not an issue about the safety of electric cars whatsoever, but about the safety of Tesla cars. The location of the battery and poor design of these Tesla models can lead to other unnecessary accidents and potential deaths. The long-term effects of this car design are unknown and the Federal Government should be investigating. Will stranded passengers know the complex procedures involved of what to do when their car battery is on fire? We don't think so.
Will the average Tesla driver not trained in firefighting know what to do when in a major emergency with no firefighters nearby? We think not.
We predict that Tesla may have to spend a lot of their cash on hiring new designers and lawyers if this issue pops up again in the form of more battery fires which are too difficult to put out by drivers and even quite hard for firefighters to contain. We are also a bit skeptical of Mr. Musk's response to the fire:
"For consumers concerned about fire risk, there should be absolutely zero doubt that it is safer to power a car with a battery than a large tank of highly flammable liquid," says Elon Musk, responding to the battery fire in the Model S earlier this week. "The combustion energy of our battery pack is only about 10% of the energy contained in a gasoline tank and is divided into 16 modules with firewalls in between. As a consequence, the effective combustion potential is only about 1% that of the fuel in a comparable gasoline sedan."
As stated in MIT Technology Review:
"First, the fire illustrated once again how difficult lithium ion battery fires are to put out. Firefighters thought they had it put out, but it reignited. There are a couple of schools of thought among battery experts about why this happens. In a battery fire, the main thing that's burning is the liquid electrolyte, which burns best when it's exposed to air. One school of thought is that even in the absence of air there other oxidants within the battery that can create and sustain a fire. It's thought that the battery electrodes themselves can release oxygen, fueling the fire from within. If this is the case, all firefighters can do is to work to keep the fire from spreading and wait for the reactants to burn up. Other research suggests that this isn't the case. Instead, what might happen is that even once the fire is put out, the cells stay very hot and keep releasing more electrolyte in the form of vapor. Once firefighters turn off the water and oxygen can once more come into contact the vapor, it can reignite. It seems clear that we need to do more tests and learn the best ways to put out battery fires, especially as battery-powered cars proliferate."
In conclusion, we believe that Tesla may need to design a number of new vehicles, while allowing customers to give back their old ones if this issue re-occurs a number of times. Does Tesla have the ability to withstand a vehicle recall? It is unclear if they have any strategy or new designs that would replace current inherently unsafe battery location. This scenario will cause major losses for shareholders. Investors are certainly not pricing this scenario in and the company has very little back-up plan when something like this goes wrong unless they release new designs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.