Reports of frequent driving unit replacements from owners of Tesla's (NASDAQ:TSLA) Model S were making rounds in the news a few weeks ago. Some investors wondered: Could one of 2013's most decorated cars end up facing a major drive unit recall? Or, worse yet: Is Tesla's reputation on the line?
But Tesla CEO Elon Musk soothed concerns during Tesla's second-quarter earnings call on July 31 when he shared perspective on the driving unit replacements. Since then, the problem has faded into the past and shares have soared more than 10%. Here is what you need to know about Tesla's driving unit replacements.
Where the concerns started
Concerns about Tesla's driving unit replacements initially began mounting when Edmunds.com detailed a list of problems with its Model S in July, including rapidly wearing tires, a battery that had to be replaced, a broken sunroof, and a driving unit that was replaced a whopping four times. Then, after a user posted the Edmunds story to Tesla's forums, customers began to talk about the issue. Sure enough, other drivers were reporting multiple driving unit swaps, too.
Considering that Tesla boasts a low maintenance profile for its Model S, the company is held to high standards when it comes to maintenance. Tesla has made some bold claims about the maintenance and service profile of its cars including this excerpt from one of its blog posts.
Model S is by design a low-maintenance vehicle. There are no spark plugs, timing belts or oil filters to replace. Model S will never need a smog check or a typical oil change. In fact, the only oil needing to be changed is in the gearbox, which on average needs replacement once every twelve years.
Model S has at least a thousand fewer moving parts than a traditional car -- no internal combustion engine, no transmission, no mufflers or catalytic converters -- thereby lowering the chances of things breaking down or wearing out. Thanks to regenerative braking, even brake pads will last longer on Model S than on other cars.
But a faulty driving unit could bring into question Tesla's claims about its vehicles having a low maintenance profile. So, it made sense that there was some concern among investors.
Tesla had plenty to say about driving unit problems during the earnings call. Fortunately, the added perspective makes the chances of a recall to Tesla's driving unit look incredibly unlikely.
Broadly, Musk acknowledged that "we definitely had some quality control issues in the beginning for the early serial number cars" as we were "basically figuring out how to make the Model S," but he insists that the company has now addressed the vast majority of these issues in current production cars.
With a nod to the driving unit reports, Musk said the frequent replacements have largely been a function of either replacing driving units that didn't need to be replaced because the problem was misdiagnosed, or replacing driving units for the sake of expediency instead of repairing them.
Musk gave an example during the call of early driving unit problems that were misdiagnosed:
And we had one particular case where there was vibration, and it was due to ... a cable detaching itself and touching the drive unit assembly and causing vibration to be transmitted to the body of the car. And it was somewhat pernicious because if the cable moved a little bit and so that it didn't provide a conductive path, then ... the vibration would go away. If you replace the drive unit, you temporarily tuck the cable back and think the problem was solved -- and it was. But then the cable would vibrate itself down and transmit the energy. So, I mean that, you know, the cable thing takes us like -- it's nothing to fix it. It's like, virtually, it's like a $3 cable tie to solve it.
"There are a bunch of things like that," Musk explained during the call. But Tesla says that experience is helping the company get better at diagnosing what's wrong.
Still, "a fair number of drive trains will need to be serviced," Musk said. But the particular problem he was referring to will be easy to fix, Musk insisted. It will simply consist of the insertion of a $0.50 shim by a technician.
Further, Tesla chief technology officer JB Straubel contends that the replacements aren't a business concern at all, anyway. In fact, it's more of a reflection of Tesla's efforts to provide rapid service, according to Straubel:
If I might add one thing on the drive unit replacements as well, I think it's important to note that the drive unit is a very complicated sort of assembly of different components, and the pieces that have needed service and failed internal to the drive unit are relatively not very expensive. And they're being replaced in order for expedience, so they get the car back on the road for the customer in the minimum time.
To Tesla's credit, actions like this simply aren't economical for internal combustion vehicles. Imagine replacing an internal combustion engine every time something small went wrong.
"But our optimization was customer happiness," Musk said during the call. So, instead of making customers wait for a driving unit to be repaired, the company just replaces it -- because Tesla can and because it can do it expediently. Comparing the replacement of an internal combustion engine to the replacement of an electric motor simply isn't comparing apples to apples.
Further, the cost to Tesla for replacing these drive units is nothing for investors to be concerned about.
"Just to add, from a cost perspective -- since these are not significant -- the overall impact on our warranty reserves has not been significant," explained Tesla chief financial officer Deepak Ahuja during the call.
But driving unit replacements may not even be needed to emphasize expediency in the future, Straubel explained during the call. "[G]oing forward, we're looking at ways to repair them and give people back their same drive unit very, very quickly, in about the same amount of time [as it takes us to replace them].
But what about the Edmunds car?
Tesla acknowledged that there were "definitely some genuine issues" with Edmunds' car, but Musk reminded investors during the call that it was "one of our early production units, and, in fact, most of the problems that they have encountered are not present in current cars." Also, the misdiagnosed drive unit issue that was really just a cable happened to the Edmunds car twice, Musk explained.
Further, Tesla said they were replacing parts with the Edmunds car sometimes "just on the off-chance something could go wrong." Being ultraproactive with the Edmunds car, however, may have resulted in being counterproductive, Musk said.
The downside of Tesla's proactive service mentality is that service frequency may remain high. But Model S owners, who gave the vehicle a 99 out of 100 rating in a Consumer Reports owner survey, don't seem to mind. Consumer Reports says this is the highest score of any owner survey in years. Perhaps the headache of service is soothed with the fully loaded loaner cars offered while a car is serviced, Tesla's efforts to approach service in a speedy Formula One pit crew fashion, or the occasional elf-like sneakiness of repairs that sometimes take place without an owner even having to drive their car to a service center and before the owner might even need the car.
Regarding the drive unit replacement concerns and the Edmunds' Model S maintenance, Tesla spokesperson Alexis Georgeson provided The Motley Fool with this statement:
Tesla considers service a top priority, and we err on the side of being proactive to ensure the best driving experience possible. That means we are particularly attentive in addressing potential issues, even if those issues appear to be very minor or have a low likelihood of causing any future problems. We take these actions with the customer's convenience and satisfaction top of mind and strive to go above and beyond the expected level of service. In addition and as we would with any owner, we also paid an unusual amount of servicing attention to the Edmunds car because it was under warranty, meaning we were able to make the improvements and deliver a high level of service to the customer at no extra cost.
Tesla will undoubtedly be working out the kinks of new technologies for some time. So, expect more bumps in the road. Further, the company's customer-focused approach to service is going to look far different than what owners are used to with internal combustion vehicles. But one thing is clear: Tesla is dead set on revolutionizing vehicle service -- and owner satisfaction seems to suggest that the new approaches Tesla is taking are working.
Tesla is confident that the low maintenance profile will shine through over time. After adding perspective about the drive unit replacements during the call, Musk boldly asserted, "[W]e're going to be at it hard core until that car is 10x better than any other car on the road."
So, should investors worry about driving unit replacements, maintenance, or service for Tesla vehicles? Not at all. In fact, these areas look poised to be aspects in which Tesla could potentially set the golden standard and build out competitive advantages.