Tesla bulls versus NHTSA (and FTC, SEC, et cetera)
The short thesis at Tesla has many dimensions. Beyond the arguments which rely on financial and industry analysis, and equity valuation, there are also a range of qualitative arguments.
Qualitative arguments consider factors such as:
- Elon Musk’s personality.
- The culture of the firm.
- Executive turnover (see recent analysis of this by Bernstein).
- Brand value/brand destruction.
- Legal and regulatory matters.
Clearly, these qualitative elements are related to each other. As explained in my previous article, Seven Signs of Ethical Collapse at Tesla, I do not have a positive impression of the culture at Tesla.
Over the past week or two, another qualitative element has been brought to the fore: Tesla’s adversarial relationship with the authorities.
One of the trigger points for me to focus on this stock as a shorting opportunity was Musk’s attitude to the SEC, and disclosure of SEC/DOJ investigations of the company.
But the company has another front in its battle against the authorities: the National Highway Traffic Safety Administration (NHTSA).
Thanks to Freedom of Information requests by Plainsite, correspondence between Tesla and NHTSA is now publicly available.
NHTSA’s letter to Tesla dated October 17, 2018 says (amended for easier reading):
The NHTSA has recently become aware that your company has issued a number of misleading statements regarding the recent Government 5-Star Safety Ratings of the Tesla Model 3. This letter serves as notice that your use of NHTSA 5-Star Ratings and associated data is inconsistent with NHTSA’s Government 5-Star Ratings for Motor Vehicles Advertising & Communication Usage Guidelines. Because your company has also previously failed to conform to these Guidelines, we are also referring this matter to the Federal Trade Commission’s Bureau of Consumer Protection to investigate whether these statements constitute unfair or deceptive acts or practices.
Further in the email, NHTSA addresses Tesla’s claims that, among other things, the Tesla Model 3 “achieves the lowest probability of injury of any vehicle ever tested by NHTSA”.
NHTSA’s Guidelines explain that comparing frontal crash ratings or Overall Vehicle Scores of two or more vehicles with a weight differential of more than 250 pounds is inappropriate. This is because frontal crash tests involve crashing a vehicle into a fixed barrier, and therefore the results of the test are directly affected by the mass of the vehicle. The nature of the test makes it impossible to compare results of vehicles that vary in weight by more than 250 pounds. It is therefore inaccurate to claim that the Model 3 has “the lowest probability of injury of all cars” or that Model 3 participants are “less likely to get seriously hurt” or “have the best chance of avoiding injury
The Guidelines warn against comparison statements like these because such statements mislead consumers about the relative safety of different vehicle models. Frontal crash data cannot determine whether a Model 3 would fare better in a real world frontal collision with, for instance, a significantly heavier SUV. This is not without significance. When a vehicle with larger mass collides with a vehicle with smaller mass, the larger vehicle has a greater chance of survivability and injury avoidance. To say that Tesla’s midsize sedan has a lower probability of injury than, say, a larger SUV could be interpreted as misunderstanding safety data, an intention to mislead the public, or both.
This might strike you as a perfectly logical and reasonable stance by NHTSA.
But Tesla knows better. And unlike a normal company, which might admit its error and reform itself, Tesla knows better than the regulator.
Tesla’s response to NHTSA, dated October 31, 2018 reminds me very much of Musk’s legal filings during his battle with the SEC, when he argued that his very failure to seek permission to tweet important information about the company was itself evidence that he was complying with the terms of the settlement agreement.
Tesla argues that its previous statements “do not make any express or implied claims with regard to weight or the performance of other vehicles in other crashes”, despite acknowledging that it made claims such as that Model 3 occupants “are less likely to get seriously hurt in these types of crashes when in a Model 3 than in any other car“.
Putting it into plain English, Tesla’s argument seems to be “we didn’t mention weight, so you cannot accuse us of claiming the Model 3 was safer than heavier cars.”
Although we did not address weight, nor claim Model 3 would outperform substantially heavier vehicles in a frontal head-to-head crash, we do want to point out that Model 3, like other fully electric vehicles, is heavy relative to other mid-size sedans… the average weight of a light duty car OR truck in 2016 was 4,035 lbs. So although we never intended to comment on weight, the weight of Model 3 is closely associated with (and within 250 pounds of) the average vehicle it may impact as well.”
Are you following the logic? Tesla is arguing that because cars and trucks have an average weight that is not much heavier than a Model 3, that its claim to be the safest car is therefore perfectly reasonable.
But it hasn’t actually addressed the basic problem, which is that weight is a significant factor in the test result and that therefore, as NHTSA tried to explain on numerous occasions, comparisons between different models are misleading to consumers. A Model 3’s safety advantage in a frontal collision compared to a Mini or a Smart car (or a bicycle, for that matter) does not mean that the Model 3 deserves to be trumpeted as the safest car ever tested. Because of their weight, it is impossible for the other vehicles to outperform a Model 3.
NHTSA has developed its guidelines carefully to have a system of tests and advertising guidelines which are fair to all manufacturers, but Tesla knows better.
And so do Tesla bulls:
According to these bulls, “NHTSA just don’t want car manufacturers to stand out from the crowd.” Again, just like with the SEC, Tesla bulls think that normal rules don’t apply to their company.
All of which helps to copperfasten the argument that Tesla is a cult stock whose legal and regulatory battles are only just beginning.
In other news, the Audi e-tron has become the first all-electric vehicle to earn a Top Safety Pick+ award from the Insurance Institute for Highway Safety.
At the time of publication, Graham has a short position in TSLA.