Shares of electric vehicle maker Tesla Motors (NASDAQ:TSLA) fell into the close on Thursday after a report surfaced that the National Highway Traffic Safety Administration is probing a Model S suspension issue as well as a troublesome non-disclosure agreement. This report comes on the heels of a lengthy blog report from Daily Kanban, which can be read in its entirety here.
In quick summary, things started when a driver with a 2013 Model S had a suspension failure. Because the vehicle was out of warranty, the repair was sent to Tesla management for consideration, and management refused to cover it. Just a few days later, Tesla offered to pay 50% of the $3,100 repair bill in exchange for the driver's signature on a "Goodwill Agreement" - which basically stated that things would be kept confidential. More details can be seen in the article linked above, but here's the summary to the article which details the big issue with all of this:
Where Tesla crosses the line here is not the "crime" itself, but the cover-up. If Tesla used a TSB ("technical service bulletin") rather than a recall to fix a safety problem, if it has an institutional bias against ordering recalls and if it uses NDAs as a matter of course to prevent owners from reporting defects, this could become the biggest auto safety scandal since the GM (NYSE:GM) ignition switch affair. That's a lot of "ifs," but thus far the evidence indicates that these are very real possibilities. Watch this space for further developments in this troubling story.
What I find most interesting is the timing of all of this. The bottom of the article details an original publishing time of 11:52 PM on June 8th, which was Wednesday. Early on Thursday morning, we learned that Tesla was bringing back a less costly version of the Model S, for those that couldn't afford a more expensive vehicle. This cheaper version of the Model S dominated the news on Thursday, as I saw coverage of it on all of the major news outlets. It even made Facebook's (NASDAQ:FB) trending list for a couple of hours. It wouldn't surprise me if Tesla was trying to get all of the news coverage focused on the lower priced model to avoid the bad press coming. Unfortunately for Tesla shares, the bad news came just before market close, resulting in the decline.
There are a couple of items to worry about here for Tesla. First of course, is the safety issue, so Tesla needs to make sure its vehicles are safe. Second of course is the major problem if Tesla was trying to cover things up. Trust is a big issue when you are making a large purchase, especially in regards to a product that your life depends on everyday. The final issue of course is reliability. With the Model X already having a ton of issues, more Model S problems could cause consumers to think twice about Model 3 reservations. If Tesla can't produce a safe/reliable vehicle when manufacturing just a thousand or two per week, how is it going to do so on a much larger scale? With the future of the company relying on the Model 3, a cover-up that's compared to the GM ignition switch issue could certainly put Tesla in a precarious situation.
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