Tesla shares shoulder the “smooth recall” of 285,000 vehicles in China

A Model Y vehicle on display in a Tesla flagship store in Shanghai, China on Jan. 4, 2021.

Gao Yuwen | Visual China Group | Getty Images

Tesla shares rose more than 2% on Monday after facing ongoing challenges in China.

Over the weekend, China’s vehicle safety agency, the State Administration for Market Regulation, announced that Tesla is conducting a voluntary recall – via a software update – to address alleged safety issues with driver assistance systems in 285,520 of its Model 3 and Model Y vehicles in the country.

The recall affected 249,855 Model 3 sedans and Model Y crossovers manufactured by Tesla in Shanghai and 35,665 Model 3 vehicles manufactured by Tesla in the United States and imported into China.

Due to the alleged bug in Tesla’s systems, according to the SAMR, drivers could inadvertently turn active cruise control on or off in their Model 3 or Y in certain situations. For example, the feature could turn on or off during a sharp turn. If the functions were switched on unknowingly, in extreme cases a driver’s Tesla could suddenly accelerate and lead to collisions, according to the recall message from SAMR.

Tesla owners in China don’t have to take their vehicles to a service center to get the update, but the fix is ​​still counted as a recall. The SAMR site notes that Tesla “decided to implement recall measures to address potential security risks” after regulators “opened a bug investigation.”

Tesla pioneered software updates for cars over the Internet and enjoys the status of a foreign luxury brand in China. But there the company has struggled with an erosion of its brand reputation in recent months.

A string of high profile crashes, price changes, quality complaints from Chinese customers, and recalls have put Tesla in China under pressure in the past few months.

Tesla can still export cars it makes in Shanghai to buyers across Asia or Europe if demand in China is threatened. However, the company’s growth depends largely on its ability to stay in the favor of Chinese consumers and authorities.

JL Warren Capital, an equity research firm focused on Chinese companies and US companies with significant exposure to China, wrote in a June 7 release: “Tesla is fully aware of the severity of the PR crisis” it is facing in China is facing. The automaker has reportedly reached out to social media influencers to get them to remove or revoke their critical posts, including some from renowned automotive experts.

Miles Qianli Dong, research analyst at JL Warren, said in an email to CNBC that the “soft recall” this weekend should not have a material impact on the company’s future sales.

He wrote, “We believe this is Tesla China’s subtle way of making concessions to Chinese consumers and the government in the face of the recent PR crisis.” The company expects Tesla’s June shipments in China, an approximation of sales there, to approach March 2021 levels thanks to a recent decrease in the funding rate.

Taylor Ogan of Snow Bull Capital, a Boston-based hedge fund focused on new vehicle technology in China, said the recall this weekend could even work in Tesla’s favor.

“Most cars have recalls, but not all automakers can offer a software patch without going to the physical dealer,” Ogan said. “Potential buyers can see this as an advantage over competitors.”

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