Tesla (NASDAQ:TSLA) has been in the news a lot lately due to three collision related fires with their Model S. Although I have been long Tesla in the past, the potential for continuing negative fallout from this sort of news is a serious threat to the high levels of long-term growth required for Tesla's current valuation. Notably, even if Tesla cars have less frequent fire-related incidents than the average car, the amount of publicity that those fires receive may overwhelm any stats-based defence in the minds of the general public.
It may seem strange to mention the Tesla Model S (with its five star safety rating and high customer satisfaction scores) in an article with the Ford (NYSE:F) Pinto (listed as one of the worst cars of all time and with a reputation as a death trap). However, studies have shown that the Ford Pinto was largely a victim of media attention that gave it a far worse reputation than it deserved. I do agree with Elon Musk that the media attention for the Tesla Model S fires is largely overblown, but there is a significant risk that the general public will start to unfairly associate Tesla cars with a high risk of fires, especially as more and more Tesla vehicles are delivered into service.
The Ford Pinto Story
One of the more memorable cars from the past is the Ford Pinto, which received a reputation as a "lethal car" due to its propensity to catch fire in rear-impact collisions. However, while the Pinto was certainly not the safest car on the streets, its reputation was largely out of line with reality.
The Ford Pinto was actually around average among subcompact cars for fatality rate per million registered vehicles in 1975 and 1976. It was on par with the Toyota (NYSE:TM) Corolla and had a fatality rate that was 17% lower than the Volkswagen (OTCQX:VLKAY) Beetle. As well, the Ford Pinto represented 1.9% of cars on the road in the U.S. and were involved in 1.9% of all fatal accidents with fires. The Ford Pinto did perform worse than average with rear-impact collisions, accounting for 4.1% of all deaths from rear-impact collisions with fires. However, rear-impact collisions with fires were responsible for only 1.3% of all fatalities in a Ford Pinto. While it was a flaw with the Ford Pinto, it had a fairly limited effect on overall safety.
Due to media attention surrounding the rear-impact collisions, the Ford Pinto gained a long-lasting reputation as a deadly firetrap despite it not being any more dangerous as a whole than other subcompact cars from that period. The Toyota Corolla and Volkswagen Beetle are still popular cars today, but the Ford Pinto will never be resurrected as a model name.
The Tesla Model S Fires
The three Tesla Model S fires involved high-speed collisions with substantial objects.
October 1: A Tesla Model S hits a large metal object at highway speed in Washington. The object punched a 3 inch diameter hole through the quarter inch armor plate on the underside of the car. The driver followed the car's instructions to pull off the highway and bring the car to a stop and was uninjured, while the fire was contained to the front of the car.
October 18: A Tesla Model S crashes through a concrete wall at a high speed (100 MPH according to Tesla) in Merida, Mexico and then hits a tree before catching fire. The driver walks away from the accident with no permanent injuries.
November 6: A Tesla Model S drives over a three-pronged trailer hitch at 70 miles per hour. The ball punctures the underside of the vehicle and may have lifted the vehicle off the ground a bit. The driver gets a message to pull over and is able to exit safely with his belongings. The flames do not reach the cabin.
These three events contributed to Tesla's stock price decreasing by 6.2%, 4.0%, and 7.5% respectively on the days that the news of the fires came out.
Shaping Popular Opinion
Tesla vehicles are not particularly prone to catching fire overall. Gasoline powered vehicles have a fire rate that is six times that of the Tesla Model S, although that may not be a completely fair comparison since the average gasoline powered vehicle is 11 years old and thus more prone to malfunctions. However, the Tesla Model S is statistically more prone to collision related fires than the average gasoline powered vehicle as noted in an MIT article.
Media coverage of the Tesla fires has been quite intense and may shape the views of people who are not very familiar with Tesla yet. The pictures and videos about Tesla cars on fire and the news coverage surrounding those events may be the first things that many people hear about Tesla. This negative first initial impression can be hard to overcome. Barclays' analyst Brian Johnson noted that "Sales can take about a 10% to 20% hit, even if the allegations later prove to be unfounded" as a result of high-profile investigations. Those are with brands that the public has already formed solid opinions about, so the effect on future Tesla sales (to those currently unfamiliar with Tesla) could be much worse.
The Mass Market Tesla
Nearly everyone agrees that Tesla will need to reach the mass market and sell several hundred thousand vehicles per year to justify its current valuation. Being able to crack the mass market will become significantly tougher if the first impression is that Tesla vehicles are prone to fires.
By the time Tesla is producing 150,000 cars per year, it will likely have between 500,000 and 1,000,000 cars on the road. For the purposes of this exercise, we will assume 750,000 cars. The average rate of fires per gasoline powered vehicle is approximately 1 per 1300 vehicles each year.
If Tesla cars have fires at the rate of 1 per 2,000 vehicles each year (slightly lower than the average vehicle fire rate), then there would be 375 Tesla fires per year, over one per day. If the fire rate was 1 in 10,000 Tesla vehicles per year, then there would be 75 fires per year, or about 1.5 every week. Even if the fire rate was 1 in 25,000 Tesla vehicles per year (nearly 20x less than the average vehicle, and on par with the average vehicle rate of collision related fires only), there would still be 30 fires per year, or 2.5 every month.
Fire Incident Rate
Fires Per Year
1 in 2,000
1 in 5,000
1 in 10,000
1 in 25,000
Given the amount of attention given to three fires so far, one can only imagine how much coverage there would be if there were another 1-2 Tesla cars catching fire each week. There would be lots of jokes about the car and endless pictures and videos posted to the Internet. While Tesla could point out that the rate of Tesla fires is still six times better than the average car, unfortunately stats usually tend to be ignored in favor of visual imagery.
Priced For Perfection
Tesla's stock is currently priced to already assume substantial future growth. That means that Tesla would need to make significant inroads into the mass market. Tesla's current market is unlikely to be fazed by the fire reports. Customer satisfaction rates are extremely high and innovators will have done lots of research. However as Tesla moves further along the adoption curve, potential customers are less likely to be risk takers with new technologies and the impact of countless fire stories and videos may potentially have a substantial effect on future sales.
To overcome this problem and get the mass market to adopt this new technology, Tesla cars need to be very close to perfect themselves. Elon Musk can mention that a fire rate of 1 in 8,000 is much better than gasoline powered vehicles. However, the reality is that a 1 in 8,000 rate is probably not sufficient given the media coverage. The rate really needs to be 1 in 50,000 or 1 in 100,000 to avoid reports of another Tesla fire each week as more Tesla vehicles are produced. Since Tesla's valuation assumes mass market penetration, I am hesitant to invest in Tesla while this issue that can seriously affect mass market adoption is still outstanding.
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.