Will Reliability Concerns Sink Tesla's Growth Hopes?

"Consumer Reports" will no longer recommend the Model 3. Here's why that could be a big deal.

John Rosevear
John Rosevear
Feb 21, 2019 at 4:12PM

Tesla's (NASDAQ:TSLA) Model 3 is no longer on Consumer Reports' recommended list. The magazine said on Feb. 21 that it withdrew its recommendation for the baby Tesla after its latest automotive survey identified a number of problem areas with the car.

How much does this matter?

Too many problems to be recommended

Consumer Reports said that the latest edition of its widely watched annual reliability survey identified a number of problems with the Model 3, including issues with body hardware, trim, and paint. The problems showed up frequently enough in survey responses to drop the car's rating to "below average" -- too low to win a recommendation.

A red Tesla Model 3, a sleek compact luxury-sports sedan

No longer recommended: Consumer Reports downgraded the Tesla Model 3. Image source: Tesla.

This isn't an easily dismissed case of "bias." The Model 3 scored a strong 82 points on the magazine's road test, not far behind the class-leading Audi A4 (which scored 88 points), and it won high marks for owner satisfaction as well. And other Teslas have scored highly on Consumer Reports' road tests in the past.

But reliability is a key factor in the magazine's overall automotive ratings. The question is: How much of a factor is it in consumers' decision to buy a Tesla?

Consumer Reports has played a big role in the Tesla story

Longtime Tesla-watchers know that Consumer Reports' seal of approval has been a very big deal in the past. Tesla's sales (and its stock price) soared after the magazine published a glowing review of the Model S in 2013, giving it 99 out of a possible 100 points -- one of its highest ratings ever.

Some of that luster (and the Model S's score) eventually faded a bit, after -- you guessed it -- the magazine's surveys raised reliability concerns about the big Tesla sedan. But while Tesla's stock price took a hit after the Model S lost its "Recommended" status in October of 2015, sales weren't significantly dented: Tesla delivered just over 17,000 Model S units in the fourth quarter of 2015, up from about 11,500 in the quarter prior.

It's not a given that the Model 3 will prove similarly immune to reliability concerns, however. Back in 2015, Tesla was still selling mostly to "early adopters," enthusiasts who were willing to overlook some flaws. Its cars' prices were high and its sales numbers were fairly small.

But the Model 3 is a different product with a different mission -- and very different expectations.

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The Model 3 is different because Tesla is at a different stage of growth

It's generally accepted that new ideas and technologies spread through markets in several stages, starting with innovators and "early adopters" and progressing to larger swaths of the mainstream, or mass market. This is the "diffusion of innovations" theory, popularized by communications expert Everett Rogers almost 60 years ago, and since adopted as a framework by many modern students of technology adoption.

Geoffrey A. Moore, a Silicon Valley consultant who has written a series of influential books about technology adoption, has argued that the leap from early-adopter enthusiasts to the earliest-adopting portion of the mass market is an especially hard leap for companies with new technologies to make -- akin to "crossing a chasm." (Not surprisingly, Crossing the Chasm is the title of Moore's book about this stage of the tech-adoption cycle.)

Moore argues that the leap is difficult because early-adopter enthusiasts and mass-market buyers have different sets of expectations. We can see that easily in cars: The vehicles that rank highest in owner satisfaction (a proxy for owner enthusiasm) are generally niche models with enthusiastic fans -- vehicles like Jeeps, sports cars, and, yes, Teslas.

These score well on the things that matter to their fans, but don't necessarily score well on things that matter to non-enthusiasts who are just looking for a nice commuter vehicle -- qualities like reliability and durability. (They're related but different concepts: reliability measures are based on frequency of problems, while durability measures are based on how well a vehicle holds up over time.)

In the United States, a substantial subset of those non-enthusiasts will consult Consumer Reports' ratings early in their new-car shopping process. Why did Honda sell 379,000 CR-Vs in the U.S last year? Why do brands like Toyota and Subaru post good sales numbers and high resale values year in and year out? At least in part, it's because they're consistently among the brands that tend to place highly in the magazine's ratings.

The problem for Tesla: To meet its sales-growth expectations (and to justify its stratospheric market cap), it has to win over more and more of those Honda-driving non-enthusiasts, the people who care quite a lot about things like reliability and durability, every quarter.

Check out the latest Tesla earnings call transcript.

The upshot: This could have a big impact over time

Consumer Reports' decision to drop the Model 3 from its recommended list won't crush Tesla's sales or its stock price. But it's a powerful data point that adds to the growing sense that the Model 3 -- along with Tesla itself -- isn't quite ready for mass-market duty.

That's exactly the kind of thing that will impede Tesla's effort to cross the chasm, which it must do if it's to have any hopes of meeting its lofty sales goals.