Tesla’s stock fell nearly 22% from its 52 week high of about $1,795 in the week ending July 24.
On July 23, I cited four reasons not to buy the stock. That day, a reader, Ben Gordon, informed me that I had missed one — what I call the Tesla Paradox: people who own Tesla vehicles are so excited about them that they are willing — within limits — to live with their serious quality problems.
How so? David Sargent, VP, Global Automotive at J.D. Power & Associates, told me in a July 24 interview that Tesla’s quality problems are worse than those of any other manufacturer in its recent survey.
Will Gordon buy another Tesla? And why are Tesla’s warranty expenses as a percent of revenue going down?
I requested comment from Tesla and will update this post should I receive a response.
The Tesla Paradox
Despite the worst quality in the industry, people love their Tesla vehicles. That’s the surprising insight from recent J.D. Power research.
How so? The manufacturing quality of Tesla vehicles is low according to the J.D. Power annual Initial Quality Study released June 24. According to the Wall Street Journal, the survey found that “Tesla vehicles, in their first time appearing in the survey, were found to have 250 problems per 100 vehicles compared with an industry average this year of 166 problems.”
That is the worst performance in the industry. As David Sargent, VP, Global Automotive at J.D. Power, told me in a July 24 interview, “Tesla’s score of 250 was the highest of any manufacturer in the study. Why the poor quality? It’s not the fact that they are making an electric vehicle. It’s the basics. On the outside of the vehicle [there are problems with] door closures, panel fit, wind noise, and paint quality. On the inside it’s the interior finish that’s not completely attached, rattles and squeaking that are more noticeable in an electric vehicle because it’s quiet.”
Do these quality problems matter? The answer is not enough to dim customer enthusiasm, according to the second part of the J.D. Power survey — Automotive Performance, Execution and Layout Study.
According to the Wall Street Journal, “In the survey measuring cars’ appeal, Tesla scored 896 out 1,000 points, better than any other brand. The next highest score went to Volkswagen AG ’s Porsche, with 881, which ranked as the top premium brand, and Dodge, with 872, to stand atop the mass-market ranking.”
Tesla’s emotional appeal comes from being “hilariously” fun to drive. As Sargent explained, “We got our data on customer attitudes towards Tesla by asking them what they think about 46 attributes such as exterior styling, performance, price, comfort of the interior, and the entertainment system. Tesla drivers say it is hilariously fun to drive — it accelerates so fast, it’s instant power. It holds onto the road because it has a low center of gravity. And they love the all-in-one dashboard, the styling and the quality of the interior.”
A Reader’s Mind-Bogglingly Bad Tesla S Quality Problems
A frustrated Tesla owner, Gordon, sent me pages of email correspondence with his Tesla dealer regarding his Model S which he purchased in 2013.
His Tesla experience sounds too frustrating to bear. Over the last several years, he has suffered “over 30 service issues with the Tesla, ranging from the battery stopping to the windows not closing to the door handles not working to the screen malfunctioning. There’s a lengthy email chain documenting it all for Tesla service, which ignored it.”
Here are two of the worst that jumped out at me:
- Windows and doors would not open so he got into the car by crawling through the trunk. In August 2019, he wrote his dealer, “This morning the back seat doors didn’t open. And none of the windows would open. As a result, I was late for my Monday morning meeting, which was embarrassing. Then when I tried to get into my car to drive home, I discovered that none of the front doors would open either. I had to open the trunk and climb through.”
- Car stopped running despite having 200 miles of charge left. In October 2017, he wrote his Tesla dealer, “My car just broke down. It stopped working altogether. I got a message that said the 12 volt battery is not charged. And to contact Tesla Service immediately. I had to walk home and leave my car at a restaurant…taking my ten-year-old son home with me! Not cool. The car was just charged and has nearly 200 miles of charge in it.”
Gordon still can’t shut off the Tesla “true believer” part of his mind. As he wrote last August, “Can you please have this fixed, or better yet replaced, today? I won’t be able to get to work tomorrow without a replacement. And I really want to be a happy customer and champion for Tesla.”
His local “service team” has been less than helpful. “The Florida service team has continued to argue with me, has failed to fix the problem despite all of my documentation and service history, and has devolved into arguing about ‘customer pay’ for problems that clearly predate the warranty expiration,” he told me.
Should Tesla Fix Its Quality Problems?
Tesla does not go out of its way to respond to such complaints. As the Journal wrote, “Tesla has previously brushed aside complaints about quality by pointing to its own internal data and has said it takes customer feedback seriously and is quick to address issues.”
J.D. Power takes a charitable view of Tesla’s quality problems. “We have seen bad first time results from companies, such as Kia, when they came to the U.S. for the first time in the late 1980s. Now Kia is close to the top. Generally speaking, companies that are new to the industry or to the U.S. market will struggle in our survey. Tesla has been at it for eight years, Toyota has been doing this for 100 years. Tesla’s results are not surprising — if [the company is] committed to improving quality, it will get there,” Sargent told me.
Tesla chooses to trade off quality for rapid growth. “In theory, it’s easier to get these problems right. Tesla ramped up production fast and it’s hard to keep quality in check while doing it. They’re not going to slow down to get quality. A traditional car company would not allow these [kinds of quality problems] to get out the door,” Sargent concluded.
Tesla’s Warranty Accounting In Question
J.D. Power points out that quality problems should show up in Tesla’s financial statements in the form of a warranty expense. As Sargent said, “Tesla has a three year warranty during which time the manufacturer is on the hook for repairs. This should show up in the P&L as warranty expense and they have set aside money in anticipation.”
Car companies record warranty expenses on an accrual basis — meaning they reduce reported earnings for anticipated repair costs before the repairs actually happen. “Estimating warranty costs ahead of time gives investors a better sense of the underlying profitability of car operations,” according to Barron’s.
Tesla’s warranty expense as a percent of revenue has been dropping over the last year. The figure was 2.9% in the second quarter of 2019, 2.7% in Q3 2019 — when Tesla earned a surprise profit, according to Barron’s, and 2.4% in the first quarter of 2020, according to its first quarter 2020 quarterly statement.
These declines have come to the attention of those who are skeptical of Tesla’s accounting.
Will Gordon’s Next Car Be A Tesla?
No it will not. As he wrote me on July 25, “My next car will definitely not be a Tesla. The manufacturing defects are one issue. The poor service is another. Inability to fix recurring problems is a pretty bad sign.”
Gordon is not happy about this outcome. As he said, “The sad part is that I was an early adopter. I bought in 2013, when Tesla sold just 22,000 cars worldwide, out of 85 million. They were a tiny company then, with a market share of 0.0026%.”
He bought his Tesla for many reasons. “I liked the idea of electric cars, I supported the environmental benefit, I wanted to buy American, I thought strengthening American national security by reducing foreign oil dependency was important, and I was impressed with the Tesla’s design. It was a beautiful car that seemed well-designed. An early adopter has to be a bit of a true believer.”
His feelings about Tesla do not bode well for the company’s future. “So when Tesla trashes its true believers and tries to convince them that bad manufacturing and worse service is the norm, it reflects poorly on the company. And it signals bigger risks ahead,” concluded Gordon.