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Don't Worry About Tesla's Model X Recall

By Evan Niu, CFA - Apr 11, 2016 at 3:30PM

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The third-row seat issue is nothing to fret about.

Model X. Image source: Tesla.

Tesla's (TSLA -5.88%) Model X continues to be a headache in numerous ways for the EV maker. The latest is a new recall affecting 2,700 SUVs due to an issue where the third-row seat may fold over in an accident. Tesla discovered the flaw during internal crash testing, and says that it is not aware of any incidents involving the third-row seats.

The supplier of the seats will cover the cost of repairs, so Tesla does not anticipate any impact to its financial results. Only Model X SUVs that were built prior to March 26 are affected by the recall, and the repair should only take a couple of hours for customers.

The upside of slow production
Ironically, the Model X's admittedly slow production ramp is actually a small saving grace in this context, since it has minimized the number of vehicles affected by the recall. In the grand scheme of vehicle recalls, 2,700 units is a small drop in the bucket.

As of the end of the first quarter, Tesla had only delivered about 2,606 Model X SUVs, so the recall includes some vehicles that were produced before the end of the quarter but delivered after the end of the quarter.

The good news
Since the issue had been resolved as of March 26, the good news is that the most recent vehicles coming off the production line are unaffected, and the resolution should already be factored into the Model X production rate of 750 per week that Tesla exited the quarter with. The overall production rate is unaffected, according to the company.

Model X. Image source: Tesla.

It's also comforting to know that the recall isn't related to the headlining falcon wing doors, which have already caused plenty of delays (and lawsuits) on their own. Any issues related to the falcon wing doors would deserve more attention, since they're such a flagship feature and extremely complex.

This is just noise
While there was a negative gut reaction from investors, ultimately this recall is a nonevent. Traditional automakers issue constant recalls that affect a much larger number of vehicles.

Tesla just happens to garner a disproportionate amount of media attention for just about everything it does, for better or for worse. For example, remember the instance of a Model S battery fire from 2013 that took shares down a few notches? No one was injured, the vehicle proactively warned the occupants, and the fire was the result of running over a large piece of road debris. Tesla now installs titanium underbody shields for increased battery protection, and the widely publicized incident paled in comparison with the number of annual gas-powered car fires (164,000 that year in the U.S., resulting in 300 civilian deaths).

That being said, the recall does suggest that Tesla is still working out the kinks with Model X, but hopefully no major issues pop up going forward.

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