Tesla's Burning Problem

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
Read More.
a | A

Tesla Motors Inc. 's Roadster has given hope to those who would like to see a future beyond the internal combustion engine. In May, the company announced it was profitable. That profit came in part from selling credits under California's zero-emissions vehicle program, but the company has continued to exceed sales targets, and started to look like a real, viable auto company, albeit a small, high-end luxury manufacturer.

This week, however, the company seems to be hitting ... well, a bump in the road, if you'll forgive the expression. Recently, its cars seem to have a surprising tendency to catch fire.

To be sure, cars do that sometimes. But this is the third Tesla in six weeks to do so, and only 19,000 Tesla sedans are on the road. The government has opened an investigation.

Even if it turns out nothing is wrong with its engineering, Tesla could be in big trouble. Small, new companies are extraordinarily vulnerable to stories like this; they don't have brand loyalty, and a history of reliable products, to carry them through rumors, much less bad engineering decisions.

Consider the case of Audi, which in 1986 became the focus of a "60 Minutes" story on "sudden acceleration incidents," which is what trial lawyers call it when you step on the gas when you meant to step on the brakes. Eventually, the National Highway Transportation Safety Administration cleared Audi of any wrongdoing -- the worst it could be accused of is putting its brakes and gas pedals close to each other for the sake of quick stopping. But the company, which was new to the U.S. market, saw its sales plummet and took years to regain a foothold among American consumers. Arguably, it never did recover; absent the bogus "SAI" scare, it might have grown to a market share to rival BMW and Mercedes.

Toyota, which had a similar news-storm recently, weathered it due to a longstanding relationship with American consumers. But it hardly emerged unscathed; sales faltered, and the company had to recall a lot of cars to replace their floor mats and make other minor repairs that showed it was "doing something."

Tesla doesn't have the bankroll to weather that kind of problem. And that assumes that there's nothing wrong with the cars. If the government actually finds a design flaw, consumers may be unlikely to give Tesla a second chance to do it right.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net