Tesla's Troubles

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Posted: Apr 10, 2018 10:58 AM
Tesla's Troubles

It has not really been Tesla's year so far.

First, there's this:

"(Reuters) - A class action lawsuit by Tesla Inc shareholders against the electric car maker's chief executive, Elon Musk, and the company's board over the SolarCity deal was set to proceed after a Delaware judge refused to dismiss it.

Tesla agreed to buy solar panel installer SolarCity for $2.6 billion in an all-stock deal in 2016.

Musk was the biggest shareholder in both Tesla and SolarCity at that time, and his SolarCity shares were converted to $500 million of Tesla shares."

(from Yahoo)

Basically, Elon Musk used the assets of one corporation that he heads to buy out a failing company which he also headed. Big time conflict of interest move. Since it's shareholders' money, shareholders felt slighted by the deal and are suing in response.

Second, there's this:

"Tesla Inc. TSLA -2.10% is voluntarily recalling about 123,000 Model S sedans globally after discovering that certain corroding bolts in cold weather climates could lead to a power-steering failure.

The Silicon Valley auto maker on Thursday said the recall, believed to be the company’s largest ever, applies to Model S sedans built before April 2016. Tesla said the issue is known to have involved less than 0.02% of the potentially affected vehicles in the U.S.

Tesla has sold about 280,000 total vehicles through the end of last year."

(from WSJ)

A recall of 123k cars against a base of 280k sold is a big chunk. Though Tesla claims the issue is not dangerous to drivers, it looks like it could be pretty dangerous for the shareholders.

Just what was the issue?

"The recall on Thursday only involves the Model S. Tesla said its service center in Montreal began noticing the issue in Model S sedans and attributed the corrosion to the calcium or magnesium salts used to treat roadways during the winter months. If the bolts fail, the car can still be steered but requires additional force."

Yup, road salt. Apparently it corrodes the bolts. Did Tesla not know about road salt? Is this Marin myopia? It's hard to imagine car makers in Detroit failing to account for the corrosive effects of road salt.

But there's more:

"Tesla Inc. TSLA -2.10% on Tuesday revealed it missed a crucial production goal for its new Model 3 sedan, though the auto maker showed progress toward building its first mass-market car and reassured investors about its capital needs."

(from WSJ)

This was not the first production goal which has been unmet. Last year there were numerous complaints from investors of being misled about production delays, which I wrote about in this space.

Tesla's 'burn rate' is approximately 1 billion dollars per quarter, and they entered this year with only 3.4 billion in cash on hand. This means Tesla doesn’t have enough money to finish out the year at the current burn rate. Production delays are revenue delays, so it is not surprising that Moody cut their credit rating to levels which make the company's bonds so low-quality as to render them off-limits for many investors. (source)

And then there's a death:

"Two recent fatal crashes of cars with varying levels of autonomous-driving technology are focusing attention on vehicles that vest control in both humans and machines.

U.S. investigators are still completing their probes of an Uber Technologies Inc. self-driving vehicle with a safety operator behind the wheel that hit and killed a pedestrian March 18 in Tempe, Ariz., and of a Tesla Inc. TSLA -2.10% Model X sport-utility with its semiautonomous system engaged that collided with a highway barrier on March 23 near Mountain View, Calif., fatally injuring its driver."

(from WSJ)

Tesla argues, plausibly, that this was not a technological failure. There was a human at the wheel who could have taken control of the car. But in some ways, this is worse. If it was merely a tech glitch, a tech solution might work. But this is potentially a conceptual glitch - semi-autonomous cars present an ambiguous situation in which drivers may not be clear about when to grab the wheel and override the computer.

CEO Elon Musk, who has the gift of gab, hit a rare missed note by joking about bankruptcy on April Fool's Day.

But investors aren't laughing, nor should they be. But was the Tesla risk discernible for potential investors before all of this happened? We like to think so. I wrote about Tesla's problems last year.

What signs of trouble were there before these scandals and crises? There were plenty of warning signs, enough to take up at least another full column on their own. Up next, Tesla's financial shenanigans.