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How the Hype Over Tesla Could Backfire

Rick Newman
The Exchange

For most automakers, the safety of their cars draws attention only when something goes wrong. Upstart Tesla (TSLA) is thumping its chest over something gone right.

In a brash press release, Tesla is boasting about the crash-test score of its Model S sedan, which earned the highest rating ( 5 stars out of 5) in all three government crash tests, along with a 5-star ranking overall. Tesla went a step further by publicizing more-detailed data the government provides only to manufacturers. “The Model S set a new record for the lowest likelihood of injury to occupants,” Tesla declared, pointing out that the car even broke a roof-strength testing machine that was unable to bust its roof even while exerting a force far greater than the testing threshold.

Well done, Tesla. It’s encouraging that the electric-car maker founded by visionary entrepreneur Elon Musk takes safety so seriously. And the mainstream press, which is generally locked in a passionate embrace with the company, dutifully gushed over the crash-test news.

Be wise, beware

But Tesla and Musk would be wise to beware the unhappy experiences virtually all big carmakers have had with safety issues. For all the hype surrounding Tesla, it remains a tiny luxury automaker with just two models on the road, and a third on the way. Toyota (TM) and General Motors (GM) have roughly 40 models among their various divisions, in every price range.

When Tesla grows up and has more models to manage, it may discover it’s quite a bit harder to get the top score on every model. The fact that the Model S is an electric car, with no bulky gas engine under the hood, gives Tesla engineers more room to work with to maximize the car’s structural integrity, as Tesla acknowledges.

The price of the Model S — which starts at about $60,000 — gives Tesla a further edge. “With its price tag and small sales volume, Tesla can do some engineering that can't be accomplished in less expensive, mass-market cars,” says Michelle Krebs of car-research site Edmunds.com.

Tesla has only sold about 15,000 cars so far, which is roughly the number of vehicles GM sells every two days. As more Teslas hit the road, real-world conditions may reveal safety flaws that don’t show up in laboratory tests, which has happened to just about every other automaker. Toyota, long considered the benchmark for high-volume manufacturing expertise, discovered this unfortunate lesson when it turned out that low-tech problems with unanchored floor mats and sticky accelerated pedals in a variety of vehicles led to a number of “unintended acceleration” incidents in 2009 and 2010. Millions of recalls followed, generating the worst scandal in Toyota’s history. Legal proceedings around these incidents are ongoing; in July a California judge approved the historic settlement of more than $1 billion between Toyota and vehicle owners who sued the carmaker.

Ford (F) endured a similar fiasco in the early 2000s when it turned out that a certain combination of Ford SUVs and Firestone tires led to unusually high rates of fatal rollovers caused by tire failures, going back for nearly a decade.

Other pitfalls

There are other pitfalls. The government’s testing requirements are well-known to automakers, which allows them to “engineer to the test” so their cars earn high scores, even if there might be other safety weaknesses. Tesla acknowledges this as well, while also claiming it builds its cars to higher standards than the government requires. The real test, however, comes when the official safety tests change or get harder, which tends to produce a spate of low scores in vehicles that previously ranked high.

A good illustration of this is a new “small overlap frontal test” introduced in 2012 by the Insurance Institute for Highway Safety, a testing group funded by the insurance industry that strives to improve vehicle safety and therefore lower insurance payouts. Since the test is new, automakers haven’t yet been able to design vehicles with it in mind. As a result, several models that are otherwise top safety performers — including the Toyota Camry, Audi A4 and Ford Escape — have earned a “poor” rating on the small overlap test. Once those models are redesigned, it’s a safe bet they’ll score much better.

Automaker arrogance tends to compound the trouble once a safety issue flares up. Toyota enraged some customers who complained about sudden acceleration by basically dismissing them and insisting there was no problem with its vehicles. That led to bad press, Congressional hearings, government investigations and a lot of other things that can ruin the day of any auto-company CEO. Liability is an issue, since once an automaker admits there’s a problem with its vehicles, it may invite lawsuits. But denying there’s a problem can turn out even worse.

Tesla, at the moment, is in an enviable sweet spot. It has proved naysayers wrong by entering an intensely competitive business with breakthrough products both consumers and reviewers love. Its stock has been soaring and CEO Elon Musk has been deified as the next Steve Jobs--or even "more amazing" than Jobs. Maybe so, but boasting about safety now could backfire if a bug pops up, especially if Tesla engineers can't identify the problem right away.

Hairpin turns are everywhere in the car business, awaiting the overconfident.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.