Tesla shares were virtually unchanged in pre-market trading Monday morning, following ongoing challenges for the company in China.
Over the weekend, China’s vehicle safety authority, the State Administration for Market Regulation, announced that Tesla was implementing a voluntary recall, via a software update, to fix alleged safety issues with vehicle systems. driver assistance in 285,520 of its Model 3 and Model Y Vehicles in the country.
The recall encompassed 249,855 Model 3 sedans and Model Y crossovers made by Tesla in Shanghai, along with 35,665 Model 3 vehicles made by Tesla in the US and imported into China.
Due to the alleged failure in Tesla’s systems, the SAMR said, drivers could mistakenly turn on (or off) an active cruise control feature in their Model 3 or Model Y cars in certain situations. For example, the function could be turned on or off while making a sharp turn. If the features were unknowingly activated, a driver’s Tesla could suddenly accelerate in extreme cases and lead to collisions, according to SAMR’s recall announcement.
Tesla owners in China won’t have to take their vehicles to a service center to get the update, but the fix is still considered a recall. The SAMR site notes that Tesla “decided to take recall measures to eliminate potential safety hazards,” only after regulators “initiated a defect investigation.”
Tesla pioneered Internet-based software updates for cars and has enjoyed the status of a foreign luxury brand in China. But the company has been dealing with an erosion of its brand reputation there in recent months.
A series of high-profile crashes, price swings, quality complaints from Chinese customers and recalls have put pressure on Tesla in China in recent months.
Tesla can still export the cars it makes in Shanghai to buyers in Asia or Europe if demand is from China. But the growth of the company depends largely on its ability to remain in the goodwill of consumers and the Chinese authorities.
JL Warren Capital, an equity research firm that focuses on Chinese companies and US companies with significant exposure in China, wrote in a note on June 7: “Tesla is fully aware of the severity of the public relations crisis” that faces in China. The automaker has reportedly reached out to influencers on social media to try to get them to remove or retract its critical posts, including some from prominent automotive experts.
Miles Qianli Dong, a research analyst at JL Warren, said in an email to CNBC that this weekend’s “soft withdrawal” should not have a material impact on the company’s sales going forward.
He wrote: “We believe this is Tesla China’s subtle way of making concessions with Chinese consumers and the Chinese government in light of the recent public relations crisis.” The firm expects Tesla’s June delivery figures in China, an approximation of sales there, to approach March 2021 levels thanks to a recent funding rate cut.
Taylor Ogan of Snow Bull Capital, a Boston-based hedge fund focused on new vehicle technology in China, said this weekend’s recall could even work in Tesla’s favor.
“Most cars have recalls, but not all auto companies can offer a software patch without going to the physical dealership,” Ogan said. “Prospective buyers can see this as an advantage over competitors.”
