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Marketplace Morning Report

Elon Musk and Tesla under fire after latest mishap

David Weinberg Nov 11, 2013
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Last week a Tennessee man’s car caught fire and was destroyed after he ran over a metal trailer hitch. There are about 150,000 vehicle fires in this country every year, but this one made national headlines because it was a Tesla. This is the third Tesla to catch on fire. Within three days the company’s stock was down 22 percent.

For a company so focused on a single product, even just a few fires can have a huge impact. But no other car company has Elon Musk at the helm.

When the New York Times came out with an unfavorable review of the Model S, Tesla’s CEO accused the author of ethics violations, “which is sort of hilarious and also very Nixonian,” says jalopnik.com editor in chief Matt Hardigree. He wrote an article that compared Musk to the famously paranoid president, saying, “both Elon Musk and Richard Nixon had great Visions for the future.”

It’s that vision of the future that lots of people credit as the reason for Tesla’s success, which at the moment is built around a single product, the Model S electric car. “Whether that’s Ford and Henry’s model T or Volkswagen and Dr. Porsche’s Beetle, all the world’s largest car manufacturers started with one,” says analyst Eric Noble.

But with Tesla it’s a little different. What’s different, says Noble, is “there is a very strong argument that the cost of producing Model S is well above the transaction price for the vehicle.”

In other words, the company loses money on Model S. As a result, Tesla more than any other car company, relies on investor goodwill and high share prices to stay afloat. Those are things that can be influenced by a charismatic, visionary leader who’s great at generating buzz. But there are limits to that charisma.

When the company’s defining product burst into flames not once, but three times, the National Highway Traffic Safety Administration started considering an investigation. All three incidents were the result of punctured batteries and not product malfunctions, but nonetheless, investors are starting to worry.

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