Tesla Q2 "Complications"
Embarrassing Recall in China to fix a problem Tesla has long denied; Inventory shuffles and rumors; Bitcoin still no "Store of Value"; Q2 Delivery numbers due this week
Tesla (TSLA) stock has clawed back from a multi-month decline to $689 per share. That’s still down 23% from its peak in January but off now just over 2% for the year.
Not so for Tesla’s controversial stake in embattled Bitcoin (BTC) which remains some 44% below its April peak with trading dipping below where Tesla purchased during the first quarter (see Tesla Is Falling and It Can't Get Up on 2/27/21 and Tesla Goes To Record Extremes To Create Q1 "Profits" on 4/28/21).
This is bad news for Tesla which certainly doesn’t need yet another gap in profitability to plug like further impairment charges owing to Bitcoin’s plunging value.
Remember Tesla already has to make up for lost energy credit revenue which has offset its massive losses for years as well as create every “profit” the company has ever reported (see Tesla: So Long, Free Money on 5/5/21).
This week the second quarter wraps up with expensive Model 3s sitting unsold on lots all over the US and Europe and an embarrassing recall of most every car Tesla has produced in China to fix a problem Tesla has consistently denied.
Tesla should report second quarter deliveries by week-end.
What Bad News?
Tesla investors seemed to shrug off troubling news over the weekend that Tesla has to recall 285,520 cars in China to fix an issue with cruise control which may cause unintended acceleration.
This includes “211,256 Model 3 sedans and 38,599 Model Y compact crossover utility vehicles that were built in China and 35,665 Model 3s that were imported. The cars were produced between December 2019 and this month.”
Tesla has long blamed such complaints on driver error, which seemed to be confirmed in a report published in January this year by the US National Highway Traffic Safety Administration (NHTSA) which analyzed several hundred reported episodes. NHTSA blamed drivers for “pedal misapplication.”
China’s State Administration for Market Regulation (SAMR) drew a different conclusion after studying several crashes in recent months which caused injuries and deaths. SAMR found that “under certain conditions drivers can activate cruise control by mistake when making a right turn.
This makes sense. Traffic-aware cruise control is activated in Models 3 and Y when you press down on the right hand stalk on the steering wheel, so it’s easy to understand how this might happen inadvertently.
SAMR explains that if cruise control is so activated, and the car is travelling slower than the cruise control setting, the car will accelerate. This “may lead to misjudgment of vehicle control, and in extreme cases may cause vehicle collisions.”
It is notable that Tesla accepted SAMR’s ruling, and even formally apologized on Saturday in a message to customers on the Chinese social media platform Weibo that warned “there are potential safety hazards in extreme cases:”
“We apologize for the inconvenience caused by this recall to all car owners. Tesla will continue to improve safety in strict accordance with national requirements.”
It may seem strikingly out of character for Tesla to publicly apologize for, or even acknowledge, problems in its cars which, as I have observed in multiple reports for years, have a long history of defects and poor reliability (last discussed in Tesla Is Falling and It Can't Get Up on 2/27/21).
Detroit News noted Tesla also “has a history of resisting federal safety efforts but also has found itself cited for problems on numerous occasions.” The NHTSA recently had to order Tesla to recall 135,000 cars because defective touch screens with key driver controls could go blank while driving, potentially causing a crash (see Tesla Forced to Recall 135K on Faulty Touchscreens on 2/2/21). I noted other sizable recalls in recent months in Tesla: Oh No You Didn’t on 1/28/21.
When Tesla took its arrogant act to China, however, it bombed badly. After months of ignoring and/or dismissing complaints from customers and regulators, SAMR took the rare action of summoning Tesla in February to answer for reported problems with its cars, including unexpected accelerations, battery fires, and abnormal over-the-air (OTA) upgrades (see Tesla Is Falling and It Can't Get Up on 2/27/21).
Message received. Tesla publicly apologized, saying it “sincerely accepted the guidance of government departments” and it had “deeply reflected on shortcomings.”
Such navel gazing only last a couple of months, however. Tesla is still Tesla, after all.
By late April Tesla was again in the crosshairs for failings in handling customer complaints. One customer became so angry over Tesla’s dismissals of her complaints about faulty brakes on her Model 3 that she staged a loud public protest by climbing on top of a Model 3 on display at the Auto Shanghai Expo:
The next day, China’s Central Political and Legal Affairs Commission “accused Tesla of arrogance and of endangering Chinese consumers by selling defective products.”
Tesla has to face up to the torment of its Chinese customers” and stop “pretending to be oblivious to hidden dangers of which it’s well aware.
China Central Political and Legal Affairs Commission
Hours later, Tesla announced “We apologize for failing to resolve the problem of the car owner in time. We will try our best to learn the lessons of this experience.”
Really? Just a few weeks later Tesla publicly apologized to a customer who became trapped in his Tesla in the June summer heat when it lost all power while plugged into a charging station. “Wen found that the car was locked and could not be restarted with even the emergency handles failing to function as normal.”
The customer “spent nearly 15 minutes in the no air-conditioned car as the temperature began to climb, attempting all the means to unlock the car before someone helped to break the window to get him out.”
"I was suffocating and sweating all over, dripping down to my toes," Wen said.”
Tesla’s initial response was that the car was fine when its technician tested it, and that the doors can be opened with a handle in case of emergency, as if neither the trapped driver nor his rescuers bothered to think of that, much less try it, while they were trying to get him out.
No wonder China is more than irritated with Tesla’s attitude.
Indeed, the latest 285,520 car recall will be solved with a simple over-the-air software fix which adds a chime to alert the driver that autopilot is engaged. So why didn’t Tesla just do that before months of customer outrage drove regulators to act?
It’s no surprise that Tesla’s eroding reputation in China has resulted in a commensurate loss in market share over the past six months as customers are driven to the rapidly increasing stable of appealing rivals, including several strong competitors made in China (see Tesla’s Troubles in China Are Heating Up on 5/12/21).
As such, I have warned of disappointing June deliveries in China at 30,000, down 15% versus March. This implies 63,607 for the quarter down 8% versus the first quarter (see What The Market Is Missing About Tesla's Rebound in China Sales in May on 6/10/21).
Using the numbers published with the 285,520 recall notice specifically for total affected cars made in China, it looks like only 27,664 cars have been delivered so far with just days left June—tracking just below my estimate for the month.
Time’s Up
We won’t know China June sales for three weeks or so, but Tesla will likely announce deliveries for the June quarter later this week.
I warned again back in April that Tesla’s performance would be increasing pressured this year as easy comps fade versus with Covid-19 impacted 2020 results:
I expect similar results in the second quarter [versus the first quarter] and then a still slower than expected increase in the second half of the year. That’s when I expect stiff global competition will draw blood just as Tesla’s incremental contribution advantage fades as its sales lap last year’s results.
Tesla Reports Solid Beat With Strong Q121 Deliveries, But…, 4/4/21
I’m skeptical of speculation last week that Tesla has sold out Models 3 and Y through the second and potentially the third quarter. This seems to be based on Tesla’s delivery projections for orders on its website.
The trouble is, I found inventory still available today, two days before quarter-end, in major cities all over the US and in Europe, where Tesla has shipped thousands of excess MIC Model 3s it couldn’t sell in China (see What The Market Is Missing About Tesla's Rebound in China Sales in May on 6/10/21). Moreover, Tesla’s delivery and production schedules are notoriously fluid and quick to change, and they don’t always reflect demand trends. And finally, we still can’t dismiss recent reports that net orders in China are in steep decline.
I still estimate second quarter deliveries of 186,726, up just 1% versus March. I pegged 2021 deliveries near 775,500, up 60% but still well below Tesla guidance and market consensus (see What The Market Is Missing About Tesla's Rebound in China Sales in May on 6/10/21).
Tesla's 5.3% senior notes due 2025 are slightly lower since my last report but continue to trade near the call price at 103.2 (0.89% ytw; -4 bps). This offers no credible upside, particularly given good odds that the bonds get refinanced soon and likely at an inordinately cheap, unappealing yield (see why in Tesla Goes To Record Extremes To Create Q1 "Profits” on 4/28/21). There’s perhaps 5 points or more in downside risk in the old or refinanced bonds if Tesla’s operations & financial condition deteriorate as I expect. The bonds remain excessively valued versus, for example, even the BoA High Yield general index yield of 4.04% as Tesla is a weak B3/BB- issuer with “CCC” quality metrics on its underlying core profitability and leverage. Maintain "Underperform."
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