Cars are smarter these days. Investors need to get smarter too.
There is no better illustration of this than Tesla's recalls. In the U.S., Tesla has recalled some 6.7 million cars over the past two years, accounting for roughly 14% of all recalls. That is significant because Tesla only accounts for roughly 1% of all the passenger vehicles on U.S. roads.
It sounds serious, but it isn't. More than 90% of Tesla recalls are handled with over-the-air software updates that don't require a visit to a dealer.
Tesla has recalled about 540,000 vehicles to correct hardware issues over the past two years, which is less than 2% of all hardware-related recalls over that span. In other words, Tesla runs into a hardware problem about as frequently as any other car maker.
Whether 6.2 million recalls for software updates is a lot, or not, isn't clear. Tesla is unique, operating the largest fleet of connected vehicles in the U.S., so there is no basis for comparison.
Many other auto makers just can't fix things with over-the-air software updates. About 16% of non-Tesla recalls over the past two years have involved software. Some of those vehicles still had to be taken to the dealer for the update.
Software is becoming more responsible for running more automotive functions that used to be controlled by machinery. Software-based recalls will be on the rise for years.
Tesla will lead the way by its nature as an all-electric start-up whose first truly mass-market vehicle, the Model 3, started shipping in 2017. That doesn't give Tesla a pass on its need to recall vehicles, but it does alter the narrative a little.
It means investors, like the cars, need to get a little smarter. Investors need to get used to the idea that while some recalls are less significant than others, they all count. The National Highway Traffic Safety Administration is going to pursue recalls regardless of the auto maker involved, the perceived severity of the issue, or how it is fixed.
And they need to recognize that like it or not, recalls by Tesla will get more news coverage than those from other auto makers. Tesla just occupies a bigger share of the mental real estate people are prepared to dedicate to cars.
Honda, for instance, recalled some 2.5 million vehicles for a fuel-pump issue this week. That is even more than the two million that Tesla just recalled to update warnings related to its driver assistance features.
The Honda recall, however, hasn't been covered as thoroughly as Tesla's. While the Tesla recall was referenced on the NPR news quiz "Wait Wait...Don't Tell Me!" and on "Last Week Tonight with John Oliver," it is almost unimaginable that a Honda recall would get similar treatment.
It makes sense because Tesla is valued at 15 times what Honda is worth. A problem at Tesla can wipe out hundreds of billions of dollars in stock market wealth. A problem at Honda can wipe out 10.
What is more, software-controlled cars are still a new thing. Everyone has to learn about them. They will be reported on until people are used to the technology. Tesla will be the teacher as the company with the most connected, software-centric vehicles on the roads.
Software-based recalls have one advantage over hardware. The completion rate on over-the-air software update-based recalls is, unsurprisingly, about 100%. The completion update of recalls that require a visit to a dealer is about 60%, according to Barron's analysis of NHTSA data.
That is an improvement, though it doesn't help or hurt Tesla stock. Most recalls don't matter for stock prices. Tens of millions of vehicles are recalled in the U.S. each year and every major auto maker has multiple recalls a year.
Investors looking for quality problems that can affect profit margins should pay more attention to warranty expenses. If Tesla is spending more to fix cars than others or if costs are rising, that would be noteworthy.
It isn't happening now. Tesla is paying less than 2% of sales on warranty expenses, while expense levels are stable. Ford Motor, for comparison, spends more than 2% of sales covering warranties.
Tesla bulls often argue that a software-based recall isn't really a recall because the word connotes a physical trip to a dealer. That might be true, but NHTSA just doesn't care about that, or about Tesla's stock price.
Its job is to keep cars safe, and its system of investigation and recall works well. The odds NHTSA will create a separate category for software-based recalls is low.
NHTSA didn't immediately respond to a request for comment about the idea.
Investors do appear to be getting the picture on recalls. The two million vehicle recall for driver-assistance warnings hasn't appeared to hit Tesla stock at all.
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