Tesla Motors' Big Crisis: Overblown?

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It sure looked like a crisis: Shares of Tesla Motors (Nasdaq: TSLA  ) dropped nearly 20% on Friday after Bloomberg reported that two key engineers working on the company's all-important Model S sedan had abruptly left the company.

Initially, Tesla's PR crew -- and CEO Elon Musk -- responded to the report dismissively, saying that the report was "overstated" and that the departures were no big deal. But the market didn't buy it, and on a day when the Dow Jones Industrial Average was down just a bit, Tesla's shares closed at their lowest price since August.

To the company's immense credit, its PR crew took the price drop seriously and responded by scheduling an hourlong call for media and analysts with most of Tesla's senior staff, including Musk, before markets opened on Tuesday. I said on Monday that we'd learn a lot from Tesla's response to this little crisis, and here's what I learned as I listened to the call: This was a PR mistake, apparently made by Musk himself. It's not a major source of worry.

In fact, executives explained, the company's fundamentals are right on track.

The scoop on those two executives
According to Musk, the two departed engineers, Peter Rawlinson and Nick Sampson, weren't part of the team that had done the Model S's intitial design, and Rawlinson was not the Model S's chief engineer as Bloomberg  had reported. He was chief of the Model S's body and chassis team, not the whole project, and he and Sampson were both experts in "optimizing" those particular sections of the vehicle -- specifically, in reducing weight without reducing safety or performance.

Both men had previously worked for England's Lotus Cars, a boutique sports-car builder and engineering consultant that had done much of the engineering on (and had assisted with the production of) Tesla's first car, the Roadster. Lotus is world-famous for its expertise with lightweight auto designs and would have been a logical place for Tesla to seek that kind of expertise as it sought to improve the Model S's initial design.

But Musk said that their departure, rather than being a disruption, was part of the plan. Rawlinson "really did leave for personal reasons, and that's not a euphemism," he said, but the departure of both men -- who, coming from Lotus, had a small-manufacturer mindset -- was inevitable and expected as the company scaled up to higher-volume production.

The problem wasn't their departures; it was how those departures were communicated to the world.

How this became a "crisis"
Musk said that Tesla intended to announce the departures during the company's upcoming earnings call, in the normal course of business, but that the Bloomberg report "created the impression that Tesla was trying to dump news into the weekend." (The practice of announcing bad news on Friday afternoons is a standard public-relations tactic.)

Musk sounded a bit humbled by the experience and said he's learned a lesson -- that news like this needs to be communicated promptly and responsibly. And while there's arguably room to be a bit skeptical of the company's explanation, I found it convincing. I think this was a PR blunder, not a larger issue, and apparently so does the market -- the share price has already largely rebounded as I write this on Tuesday morning.

Of course, the other things Tesla executives talked about during the call probably have something to do with that rebound.

The larger update: Tesla remains on track
I don't have space here to go into detail on everything Tesla's managers said this morning -- I'll have more to say in another article on Wednesday. (Long story short, things are on track.) But it's worth reiterating, because it was a concern raised by the engineers' departure, what Musk and others said about the Model S's safety in the wake of the battery-pack fires that have happened with the Chevy Volt.

Tesla CTO JB Straubel said the Volt had a specific problem with its design that General Motors (NYSE: GM  ) has explained in some detail and taken steps to correct, but that Tesla took the concerns seriously. He and Musk explained that Tesla has done, and continues to do, very extensive crash and safety testing of its battery packs, and that many of the company's design choices -- right down to its decision to use lots of small battery cells, rather than the small number of large ones used by most automakers -- were made with the management of overheating risks in mind.

There are more than 2,000 examples of Tesla's first car, the Roadster, out in the world, and as Musk noted, some of them have been involved in serious accidents. To date, none of those accidents has resulted in serious injury -- and none has resulted in the kind of fire seen in the crash-tested Volt. What's more, the battery packs that Tesla supplied to Daimler (OTC: DDAIF.PK) for its Smart and Mercedes-Benz A-Class electric have passed tough European crash tests and had no incidents in real-world operation.

Tesla is also working with Toyota (NYSE: TM  ) to develop an electric version of the RAV4 SUV, and while Musk was understandably coy about the details and status of that program, he did say that no Volt-like problems have cropped up in Toyota's tests so far.

And as for the Model S? The company has conducted extensive in-house crash-testing of its new sedan already, and the car has mostly passed with flying colors. Tesla's goal is to get "five-star" crash ratings in all tests. Musk said that the company is already achieving five stars in most of the tests, and four stars in the rest -- and is working on refinements with the intention of acing all of the tests before the first car is delivered in July.

The upshot: Growing pains
Long story short, there was probably not much to see here. After a fumbled initial response, the company mustered a strong response to the Bloomberg article and appears to have successfully eased investors' concerns about the state of the Model S program.

While I continue to be skeptical of Tesla's prospects once the initial rush of orders for the Model S is filled, and of its ability to keep going once the inevitable competition arrives, I do think the company is continuing to execute quite well, all things considered -- and that its fate, for better or worse, is mostly in its own hands. It's possible that Friday's kerfuffle will be remembered as nothing more than a buying opportunity. Stay tuned.

Tesla is an intriguing story, but the Fool's analysts have selected a different company that they believe is poised for tremendous growth in the coming year. You can learn more about this great stock in their new special report: "The Motley Fool's Top Stock for 2012." It's completely free for Fool readers.

Fool contributor John Rosevear owns shares of General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. Motley Fool newsletter services have recommended buying shares of Tesla Motors and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2012, at 11:46 PM, baldheadeddork wrote:

    "There are more than 2,000 examples of Tesla's first car, the Roadster, out in the world, and as Musk noted, some of them have been involved in serious accidents. To date, none of those accidents has resulted in serious injury -- and none has resulted in the kind of fire seen in the crash-tested Volt. What's more, the battery packs that Tesla supplied to Daimler (OTC: DDAIF.PK) for its Smart and Mercedes-Benz A-Class electric have passed tough European crash tests and had no incidents in real-world operation."

    Please, please, tell me someone on the call knew enough about Tesla's products to press Musk on this.

    The Roadster has its batteries mounted behind the seats and well inboard. The A-class mounts them in the floorboards, but AFAIK only the Model S intends for the battery cell to double as a side-impact beam.

    The claim about safety advantage in using smaller cells also reeks. First, even a cellphone Li-Ion battery can ignite if it's overheated, and the fire will set off any other cells that are nearby. Second, Tesla uses a unified cooling system for its thousand of small cells. If the battery pack loses coolant, those batteries will overheat and can catch fire. If it's a few relatively large cells or thousands of smaller cells doesn't make a difference.

    Next, Musk worked in tech - with eBay - for how long and he never picked up the importance of managing news announcements? C'mon.

    Rawlinson wasn't the chief engineer? That's a mistake they didn't get around to correcting until yesterday. Here are three videos _from Tesla_ with Rawlinson as VP-Vehicle Engineering one year ago. Did they also forget to announce that he had been demoted some time in the last year? And if so, who took his place since?

    The explanation that Rawlinson left because he had not worked on high volume production maker is preposterous. First, Rawlinson worked for Jaguar for a decade. (I got that from Tesla's press release when they hired him.) Second, Tesla has yet to build as many cars in its life as Lotus has built in any year in the last decade. They did this because need someone with experience on Volkswagen's scale?

    And as I said in another comment, not even the chief chassis engineer signs off on a car and hands it to another engineering team for pre-production testing. Think about this for a second. If the pre-pro team finds anything that has to be changed (and they will - even a wildly successful design will need hundreds of significant changes in pre-production testing), who do they go to if the original lead engineers are no longer there? Try to imagine how insanely inefficient it would be if the pre-production engineers had figure out every decision that went into designing that car by looking at the blueprints. Now imagine that the guys in charge of this had never seen the car before. It would be like they were reverse-engineering their own work.

    But maybe the biggest tell are the dogs that are not barking. If all this was planned and things really are great, where are Rawlinson and Sampson? If you were an executive at Tesla and this really was just a PR blunder, wouldn't your first call be to Rawlinson and Sampson asking them to call a reporter or two and clear it up?

    Elon Musk has shown in the past that he has no problem pulling things out of his backside, even when it might put him or his company at risk of a SEC investigation. (Remember the billion-dollar Toyota deal he brought up in an investor conference call?) How can you give him the benefit of the doubt when there are so many reasons to be skeptical?

  • Report this Comment On January 20, 2012, at 1:38 AM, spectechinvest wrote:

    Yea this was way over blown and I wish I wasn't at lunch when the stock tanked at the end of the day or I would have bought more! That was the perfect time to pick up shares.

    Here is some compiled data and speculation about the impending Model X:

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