Tesla: China Hardware Issue A Bad Look

Summary

• China customers are upset about some delivered Shanghai made Model 3 vehicles containing an older version of Tesla's self-driving hardware.
• Supply chain reasoning doesn't add up.
• Management's responses seem a little problematic and entire situation could have been handled better.

When investors look at buying a stock, trust in management has to be a key consideration. If you cannot trust the leaders of the company to do the right thing, why should you put your money into the name? Electric vehicle maker Tesla (NASDAQ:TSLA) has had its issues over time, primarily thanks to a number of predictions and guidance items that never came close to reality. The funding secured tweet from CEO Elon Musk that got the name in hot water with regulators is probably the best example of this, and the head of the company is preparing to go to court over the SolarCity acquisition. Unfortunately, the company continues to act in bad faith with consumers, and management's response to critics only makes the situation worse.

Just in the past six weeks, Elon Musk and Tesla management have been all over the place with their actions. Company leaders said there was no need to raise capital on the Q4 conference call, then just about two weeks later there was a massive capital raise. Elon Musk has also dismissed the coronavirus as being just like a cold, but it likely will be a major excuse for the firm if sales don't come in as expected for Q1 2020. This week, things took another interesting turn in this story, based on the following Global Times tweet:

Tesla has never publicly stated that the coronavirus was causing any major supply chain issues, especially in China. The company has had plenty of opportunities to speak to investors about this, primarily at the recent capital raise, but management made it seem as if all was well. The following shouldn't even be an issue considering Elon Musk has previously stated that hardware 2.5 was phased out in 2019. Why is the company using old technology then in new products? Was this an effort just to get vehicles in China out the door and hope nobody noticed, or get the vehicle sale now and worry about the problem later? Interestingly enough, Elon Musk tweeted the following out on Wednesday:

(Source: Elon Musk Twitter, seen here)

This tweet from the CEO was in response to someone who commented that it was no big deal that vehicles in China were being shipped with hardware version 2.5, because anyone who purchases FSD would get the upgraded computer for free anyway. However, it is a big deal if you want to upgrade to full self driving and you have to wait weeks or even months to get a service appointment to upgrade to the better computer, or have to wait a long time for Tesla to get the hardware into its service centers. Tesla has significantly under invested in its service capabilities in recent years, leading to customer frustration around the globe.

Perhaps this confusion also stems from Tesla's previous tweet in April 2019 about all cars having the hardware needed for full self driving, or going back even further to October 2016 with this blog post that all cars have hardware needed for full self driving. Consumers want to believe that they are buying a vehicle that already has the hardware needed to do what they want, even if they don't purchase the full self driving feature right away, especially since these features are not yet working. Is Tesla telling customers upfront that when they buy or even pick up there vehicle that they'll have to come back later for the upgrade?

You would think that Tesla might want to clear up the issue, perhaps just to get some potentially bad press off the table. Unfortunately, a key company leader seems to have doubled down on these bad faith efforts. When one Twitter user asked Tesla's Head of Investor Relations to reiterate his stance from last week that there was no supply chain impacts, Tesla's IR head blocked the user instead of responding. Other users have asked for clarification as well but have gotten a similar response.

(Source: Luis Carruthers twitter page, seen here)

In the past couple of weeks, we've seen numerous companies come out and be extremely straightforward with investors about the impact of the coronavirus. Apple (AAPL), Microsoft (MSFT), and Mastercard (MA) are just a few of the names that have detailed that sales in the short term would be hurt with China sales and production being key problems. Tesla management stated in late January on the Q4 call that there was a week or two delay for China production due to the factory shutdown, but a lot has changed globally since then. Investors deserve an update if there are truly supply chain disruptions that are impacting production in China or the US.

On another front, Elon Musk and Tesla have spent the last three plus years pumping up the solar roof product. Shown off in late 2016 as a way to justify the SolarCity deal, production was supposed to ramp up in 2017 with meaningful customer deliveries starting that year. A few years later, only a handful of installations have actually happened, and Panasonic recently ended its relationship with Tesla at the Buffalo, New York factory that was supposed to be key for the solar roof. Tesla has been given a tremendous amount of financial support from New York State to get this factory going, but the state can't even determine if Tesla is meeting required job promise levels.

Tesla also faced some bad press last week in regards to the NTSB hearing over a fatal accident involving a Model X from a few years back. The head of the NTSB stated that Tesla has ignored safety recommendations as opposed to other automakers. Despite the promise of a million robo-taxis on the road this year, there still is no such thing as a self-driving Tesla, yet the company continues to collect thousands of dollars from consumers for this feature. The company continues to insist that drivers must keep their hands on the wheel at all times, yet CEO Elon Musk has done quite the opposite in major public appearances like the one below.

(Source: Tesla: The 60 Minutes Scare, seen here)

In the end, Tesla has given consumers and investors more reasons not to trust the company. The Global Times reported on Tuesday that the company is using old hardware in its China made Model 3 vehicles due to supply chain disruptions, but Tesla management has downplayed the coronavirus impact to date. While other companies are warning about the impact to their supply chains, Tesla's IR head just blocked someone on Twitter who asked for clarification on this issue. While the expectation is that the hardware will ultimately be replaced, it's just another bad look for the company. Stories are also coming out about the company blocking inspectors from the Nevada factory, despite police showing up with signed warrants. Investors will hope that Tesla management could be a bit more transparent about issues like this in the future, but given Tesla's history I will remain skeptical until proven otherwise.

Analyst’s Disclosure: I/we 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.

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