Earlier this month, Tesla (TSLA -1.11%) recalled more than 2 million electric vehicles (EVs) in the U.S. market. It was the largest recall in the young company's history, covering nearly all Tesla vehicles on U.S. roads. Based on a glance at the headlines, you couldn't be blamed for thinking it will be a massive ordeal for the company. But it might not be as big a deal as some investors think.
What's the problem?
This recall covers the Model S from the 2012 to 2023 model years, the Model X from 2016 to 2023, the Model 3 from 2017 to 2023, and the Model Y from 2020 to 2023. Those EVs are equipped with Autosteer -- a beta feature that detects lane markings, vehicles, and other objects to help the driver steer in some situations.
While Tesla didn't necessarily agree with the conclusions of the recall report, the EV maker did announce it would release an over-the-air software update to add more controls and alerts to encourage drivers to remain engaged in driving.
So how big of a deal is this for investors? There are a few things to consider.
By the numbers
While this recall is large, and Tesla also recently recalled 120,000 vehicles to fix an issue that could cause their doors to unlock during a crash, such events are a common feature of the automotive industry. In fact, just a week later, Honda recalled over 2.5 million vehicles for a fuel pump issue, and Ford Motor Company (F -1.92%), albeit with full-year data incomplete, looks likely to lead the industry in total recall volume for the third consecutive year.
Generally speaking, major automakers have long planned for warranty and recall situations, and often have reserve funds set aside for these developments. It's rare for a recall to impact financials enough to derail even a single quarter's earnings, although it can happen.
Further, as a rule of thumb for investors, hardware recalls that require vehicles to be brought to a dealership are much more expensive than software recalls that can be implemented via an over-the-air update. Because Tesla's large recall will be accomplished with over-the-air software adjustments, at least for now, its direct financial impact on the company will be fairly minimal. It's also worth noting that European regulators did not issue a recall order over the Autosteer concerns. The EU has different rules and standards about what driver-assist functions are allowable.
More to the story?
While the large recall is likely to have minimal direct impact on the company, investors should keep an eye open for indirect impacts. For instance, the recalls could threaten to undermine the company's defense in multiple high-profile lawsuits it faces due to crashes linked to Tesla's Autopilot.
Roughly half a dozen lawsuits are headed to trial over the next year in Florida, California, and Texas. Lawyers are sure to claim these recalls, although voluntary by Tesla, support their assertions that the Autopilot system is defective and contributed to multiple collisions, some of which resulted in fatalities.
Thus far, Tesla has prevailed in such suits using the defense that its owner's manuals and the company's online information state clearly that active driver engagement and supervision are still required when using those features. California courts sided with Tesla in trials for two separate crashes in which plaintiffs blamed Autopilot for steering vehicles off the road.
Not a big deal?
For investors who have a clearly defined thesis on whether Tesla is a quality investment or not, these headline-making recalls shouldn't alter their views. Their direct impacts and costs will be minimal, and their indirect impacts could also be minimal if they don't undermine Tesla's defenses in court cases.
Recalls and crashes are an unpleasant part of the automotive industry, but savvy investors would be wise to focus their attention on other developments such as the potential weakening of EV demand. At the end of the day, Tesla updating the software on 2 million vehicles won't be a big deal for the stock or your investment thesis.
