Tesla disrupted by traditional mechanics - Reuters

A Tesla electric vehicle (EV) drives past a crossing in Shanghai, China March 9, 2021. REUTERS/Aly Song/File Photo - RC2WIN94V64E

Tesla (TSLA.O) is discovering that even new carmakers can suffer old problems. The electric-car maker’s China orders nearly halved in May from a month earlier, The Information reported on Thursday, after jitters over its quality controls in the country. This week’s triple recall in the United States will make another dent in its reputation. Even disruptors like Elon Musk’s marque must confront crises all too familiar to traditional carmakers.

The triple whammy suggests the company is facing something more than a political or public-relations problem in the People’s Republic. The recalls were caused by shortcomings in seat belts and other basic hardware. Literally messing up the nuts and bolts calls into question Tesla’s ability to master more complex features such as autonomous driving.

Every carmaker hits such bumps in the road, and this is a relatively tiny pothole: the three recalls involve around 14,000 cars, whereas Tesla sold just shy of half a million vehicles last year. Seasoned automakers have seen far worse. In 2010, Toyota Motor (7203.T) had to recall over 12 million units, and the Takata airbag disaster affected more than 100 million products.

But electric-car makers could be more vulnerable than their predecessors as they strive to build trust in a new technology. And Tesla’s situation in China is already precarious. Poor handling of a customer complaint about its brakes earlier this year saw the brand battered by both netizens and state media. It is also unusually exposed to scrutiny as an American carmaker that wholly owns its Chinese operations, and dominates the local electric-vehicle market.

This snafu won’t be the last. Nobody is immune, because the pace of innovation is frantic. Nio (NIO.N) plans to double spending on research and development this year, and Chief Executive William Li says he needs to hire as many senior engineers as possible. As rivals jostle to keep up in the fast-growing market, mistakes may be hard to avoid, and their consequences on the road could be tragic.

The bad news wiped more than $30 billion off Tesla’s market capitalisation on Thursday. Yet stocks are still cruising: Tesla shares trade at more than 100 times estimated earnings. Even loss-making peers such as Xpeng (XPEV.N) are priced around 15 times historical sales. Shareholders should brace for whiplash.

Follow @KatrinaHamlin on Twitter

CONTEXT NEWS

- Tesla’s vehicle orders in China dropped to about 9,800 in May from more than 18,000 in April, The Information reported on June 3, citing internal data.

- On the same day the electric-car maker announced two U.S. recalls for seatbelt issues, involving 7,696 cars. On June 2, the National Highway Traffic Safety Administration said Tesla was recalling 5,974 vehicles to address loose bolts that could cause reduced tire pressure.

- Tesla’s shares fell 5.3% on June 3.

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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Tesla disrupted by traditional mechanics - Reuters
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