Tesla Makes First Voluntary Recall of Model S

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Hardly any automaker has apologized for safety recall of vehicles and rarely any automaker has decided to recall vehicles on its own before receiving any customer complaints, regulatory warning or reports of accidents or injuries related to their defective vehicles. But it is Tesla Motors Inc. (TSLA), which made these smart moves and, as a result, its shares rose 1.2% to $104.68 yesterday despite announcing its first recall of Model S sedans in the U.S.

In an official filing with the National Highway Traffic Safety Administration, Tesla revealed that it would recall 1,228 Model S sedans due to a defect in the mounting bracket of their rear seat. The vehicles were manufactured between May 10 and June 8.

The company’s chief executive Elon Musk stated that that the company has discovered weakened bracket in some cars due to body-side alignment adjustments. A worker at the California assembly plant first noticed the problem.

The company suspected that about 20% of the recalled vehicles could have weakened welded section that may not hold in the event of a crash and lead to injury to passengers. According to the company spokeswoman Shanna Hendriks, the recall would cost roughly $150,000 to TSLA in the second quarter of the year.

Tesla made another modest move while announcing the recall. Musk tweeted that the company will itself contact the Model S owners and will undertake the entire responsibility of picking up as well as returning the vehicles at their convenience. He said that fixing the vehicle would only take a few hours.

Model S received a clean chit from the influential Consumer Reports magazine, which awarded the electric car a test score of 99 out of 100. Although the latest recall may put to doubt the scores given by the magazine, the smart handling of the recall by Tesla is bound to make customers happy. Previously, the automaker twice recalled its Roadster sports cars, its first model.

In this regard, if we consider what Chrysler did a few days back in making a voluntary recall, things would really look disappointing. The Detroit automaker, majority-owned by Italy’s Fiat SpA (FIATY), refused to recall about 2.7 million units of its Jeep vehicles even when National Highway Traffic Safety Administration sent a letter asking the company for a voluntarily recall.

Chrysler denied on the ground that the letter is based on “incomplete analysis of the underlying data” and the vehicles are completely safe. The company revealed that it has met all federal safety standards when the vehicles were manufactured. The company thus claimed the Jeeps were “among the safest vehicles of their era”. However, later Chrysler agreed to make a recall of 1.56 million Jeeps due to the problem.

Automotive safety recalls were brought into focus by media after Toyota Motor’s (TM) announcement of the largest-ever global recall of 3.8 million vehicles in Sep 2009, triggered by a high-speed crash that killed 4 members of a family. Later on, a string of recalls led Toyota to face numerous personal injury and wrongful death lawsuits in federal courts.

A few months ago, the Transportation Department of U.S. slapped a fine of $17.35 million on Toyota due to late response regarding a defect in its vehicles to safety regulators as well as delayed recall of those vehicles. According to the department, it was the maximum allowable fine under the law for not initiating a recall in a timely manner.

Tesla’s shares started soaring following the reports of its first-ever quarterly profit on May 8 and early loan repayment. They have more than tripled in the past six months.

Tesla reported a profit of $15.4 million, or 12 cents per share (on an adjusted basis) in the first quarter of 2013 compared with a loss of $79.3 million or 76 cents in the corresponding quarter of 2012. This indicated a whopping positive earnings surprise of 271.4% given the Zacks Consensus Estimate of a loss of 7 cents for the quarter.

Revenues jumped manifold to $561.8 million from $30.2 million in the first quarter of 2012, thanks to the impressive 5,000 units of Model S electric car sales during the quarter.

Shares of TSLA retain a Zacks Rank #3, which implies a short-term (one to three months) Hold rating. Currently, Toyota Motor and Fuji Heavy Industries Ltd. (FUJHY) are doing well in the broader industry with a Zacks Rank #1 (Strong Buy).

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