Critics of Tesla say the main reason investors buy its stock is because they like the company’s story. So what would it take for the company’s story to fall apart? At the Virtual Fraud Fest at the Berkeley Center for Law and Business, experts discussed Tesla CEO Elon Musk and his refusal to answer questions from critics and the press. They also talked about how Tesla shapes the narrative about itself.
Battery problem at Tesla
Tesla stock is approaching $1,000 again today, rising alongside stock indices today. The Tesla story is going strong despite last week's article from Linette Lopez of Business Insider indicating that the company knew about a design flaw with the Model S battery in 2012 but didn't fix it.
ARK Invest is known for targeting high-growth technology companies, with one of its most recent additions being DraftKings. In an interview with Maverick's Lee Ainslie at the Robinhood Investors Conference this week, Cathie Wood of ARK Invest discussed the firm's process and updated its views on some positions, including Tesla. Q1 2021 hedge fund letters, Read More
She briefly discussed the article during the Virtual Fraud Fest. Leaked emails from 2012 indicate that Tesla knew about a flaw with the Model S battery that could result in fires and breakdowns. However, it continued to sell the cars despite that flaw. She said it isn't clear when the company fixed the flaw, which could cause leaks in the battery.
Lopez explained that the issue was the cooling mechanism, and two different third-party companies identified the problem. She said IMR Test Labs tested the cooling mechanism in 2012 and found that the "end fittings on the cooling coils didn't meet chemical requirements for a regulation strength aluminum alloy."
Even though the company received the report, it kept pushing cars out of the factory, delivering over 250 Model S sedans in the third quarter of 2012. The part was tested by Exponent in August 2012 and found to have tiny pinholes that could cause coolant leaks. Lopez said Tesla continued to see coils that were leaking in various production stages through the end of that year, according to internal documents.
Problems with Tesla vehicles continue
Lopez noted during the Virtual Fraud Fest panel that Tesla is now selling the Model Y, and customers are reporting problems with the vehicles fresh off the assembly line. This isn't a new issue. Many of the problems are the same issues that have been reported with previous Tesla vehicles. It's interesting that the Tesla story remains as strong as ever even though the company keeps promising to fix the issues but fails to do so.
"The argument for Elon Musk has always been, he's going to get better, he's going to get more organized to manufacturing, you know, it's going to get more together, they're going to be better at designing these things…" she said during the panel. "But what I know from my reporting, that was just published, it's not getting better. The same problems that we're seeing with the Model S, we're seeing with the Model Y, from stupid little paint problems and problems with, you know, very obvious problems that most big car manufacturers would never make. But it makes you wonder what's under the hood."
Shaping the Elon Musk/Tesla story
Lopez said it took her almost two years to find sources who could corroborate the story she published last week. She emphasized that Tesla stock is a story.
"Elon Musk has had a firm grasp on that story," she said. "And his grasp has changed over the past year. And it changed because he no longer really interacts with the press in any way that could jeopardize his story. He doesn't answer our questions. He doesn't answer our emails, there really is no textbook press team."
Lopez said the company releases communication but doesn't respond to questions from reporters. She believes Tesla figured out that the better way to deal with the press is to just make them constantly second-guess whether Musk is telling the truth. She also believes that Tesla has realized that if no one is going to force it to be responsible to the public, then they don't have to be.
Covering up SolarCity's failure
Litigator Randy Baron also participated in the panel about Tesla at the Virtual Fraud Fest. He will soon by litigating a case brought against Tesla over its acquisition of SolarCity. He reminded listeners of the three-sided pyramid showed years ago which had Tesla, SpaceX and SolarCity on it.
Baron said Musk probably would've said that if one of the companies fails, then they all fail, so instead of allowing SolarCity to fail, he had Tesla buy it. He said Tesla stock supports the story Musk can tell.
"So even though SolarCity did fail, it was able to sort of be this drop this drop of ink in this ocean that he's able to cover up, and that's sort of what Elan musk does," Baron said.
He noted that Musk doesn't talk about SolarCity anymore and that the business has "pretty much gone away."
Elon Musk and the narrative for Tesla's story
Baron also pointed to the way Musk treats those who ask difficult questions that could impact the Tesla story.
"When you look at how he talks to analysts, and, you know, when he sort of turned from being a Silicon Valley whiz kid, to actually business analysts starting to ask him hard questions, he just got mad at them and started insulting them," Baron said. "And he wouldn't answer the questions as to, you know, what their, what their margins were, what their likelihood of success was, what the business plan was, so I think that really is the story of Elon Musk, which is, you know, I am selling this dream and telling you, this is the hardest dream anyone's done, and I'm going to do it, and people keep believing them."
Lopez was asked whether Musk and Tesla manipulate the press, and she said the way he acts aggressively and retaliates against people is all about controlling the narrative. She added that it's suspect to anyone who follows the business would that someone would behave the way he does.
She also said there are two ways to interpret his behavior. One is that he's simply very passionate about what he does. The other is that he has something to hide and is defending himself.
This post first appeared on ValueWalk Premium.