Tesla Under Fire: A Broader Look

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Shares of Tesla Motors (NASDAQ: TSLA  ) had one of their worst days ever on October 2 after an analyst downgrade and a video of a Tesla Model S on fire. However, the media has seized on the issue of the Model S on fire. But is this really a major threat to Tesla or is a larger perspective on auto fires in order? We'll take a look at real life numbers and the Tesla situation.

EV fears
Ever since the introduction of the latest wave of electric vehicles, there has been a fear among many people that the lithium-ion batteries powering the vehicle are ready to burst into flame. Internet videos surfaced all over of people causing lithium-ion laptop batteries to catch fire or explode. However many of these videos involved the video's creator abusing the battery in a way that would can any volatile storage device to explode.

The pre-launch testing of General Motors' (NYSE: GM  ) Chevrolet Volt stoked fears even more as a Volt went up in flames. However, the fire occurred three weeks after the PHEV had been crash-tested while engineers were monitoring for long-term effects. Since then, GM has made modifications to the Volt to prevent battery fires.

Today, it is rare to see commentary on Volt sales mention the fire from early testing. More often, sales of the Volt are linked to economic factors including MSRP and gas prices.

It's on fire!
To those who could not believe that a start-up automaker could make an electric car, the Model S fire served up a perfect dish of Tesla failure. However, the situation involving the Model S is far from the typical EV fear scenario.

Unlike the fears of li-ion batteries bursting into flame in your garage or exploding into a giant fireball in the event of a crash, the Model S fire occurred after a collision but did not involve any explosion. In fact, the car told the driver to pull over (however, the driver had already exited the vehicle) and the driver was able to exit the vehicle before the front end ignited later.The fire was then contained, thanks to the car's battery management system, which contained the fire to the front end of the vehicle with flames never entering the interior cabin.

In fact, the effectiveness of the containment goes much to the credit of the battery design. By selecting 18650 cells from Panasonic (NASDAQOTH: PCRFY  ) , Tesla was able to create a battery pack made up of thousands of small cells that could be more easily contained than if a large cell had been damaged. Additionally, the cylindrical shapes of Panasonic's 18650 cells create less direct contract between cells, helping to prevent a fire in one cell from igniting another.

Travel comparisons
Whenever we choose to travel, we have to accept varying degrees of risk. Getting on a plane? There's roughly a 1-in-11 million chance you will be killed. Taking the bus? There's a risk of a crash there. Opt to walk? You can never be certain you won't become a victim of street crime.

And when it comes to choosing cars, everything is about risk management. Therefore, we must look at the Model S incident in a broader context of automobile accidents.

According to the National Fire Prevention Association, there's an average of 17 car fires per hour. Just think, by the time you've read this article, another car has probably caught fire. The association also notes that while only 2% of fires come from fuel tanks and fuel lines (the closest thing to Tesla's battery), they account for around 15% of deaths. From the experience seen in this fire, the Model S did a remarkable job of warning the driver and containing the fire, drastically reducing the chance of death.

We should also address the cause of the fire. Unlike EV fears, which would have called for a spontaneous fire, the Model S collided with a large metallic object in the road that pierced the battery pack. In the interest of comparing the risk of driving various vehicles, we must consider that a large metallic object piercing a gas tank is also likely to pose a major safety risk.

In perspective
Looking at this Model S fire incident, it would at first seem that the fear of li-ion batteries is being confirmed. However, a closer look shows that Tesla's battery was significantly damaged in a way likely to cause adverse effects to an internal combustion vehicle as well. Furthermore, the effectiveness in containing the fire and warning the driver stand in contrast to many fires involving ICE vehicles where there is no management system to control a gas-fueled fire.

Tesla shares are now down around 10% from before the analyst downgrade and fire were reported. But based on the events surrounding this incident and comparisons to other existing vehicles, I view the safety fears involving the Model S to be greatly overblown. Investors with a similar perspective on the Model S should do their own research and, if they do choose to buy, look for an acceptable entry point.

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