Tesla Trips Up in China

In China, it’s impossible to say for sure whether any move by authorities is motivated purely by economics or politics – often it’s both.

For the longest time, electric vehicle maker Tesla had been having a field day in the Middle Kingdom on the back of soaring demand for its electric vehicles.

While China had built the formidable Great Firewall of China to keep out U.S. tech giants like Google (+0.01%), Facebook (-0.53%) and Amazon (-1.38%), it has worked closely with Microsoft (-0.63%)and appeared to be embracing Tesla, despite itself nurturing its own organic electric vehicle industry.

But over the weekend, Tesla’s aspirations in China were dealt a major blow after the government ordered that almost all the cars it’s ever sold in the country, estimated at over 285,000, be fixed to address a safety issue.

In a statement, the Chinese State Administration for Market Regulation said that Tesla’s autopilot systems had the potential to be activated automatically, possibly leading to crashes from sudden acceleration.

Fortunately, in most cases, the fix should be able to be made remotely with an online update to Tesla’s active cruise control feature, which Tesla will provide as a free software upgrade.

Tesla investors can take some comfort from the fact that this will essentially serve as a “stress test” for Tesla’s business model when it comes to selling vehicles.

Whereas in the past, upgrades and recalls could cost an automaker millions of dollars, working with dealerships to facilitate swapping parts, because the issue is a software issue, the patch can be rolled out just like any other software update, remotely, and relatively cheaply.

Tesla has faced multiple setbacks as it’s expanded in China, including a spate of crashes and a protest at the Shanghai auto show which unfortunately went viral.

Like other tech giants, including Google and Amazon, Tesla is finding that the world’s second largest economy, while an enticing and lucrative market, is full of hazards.

And with geopolitical tensions between the U.S. and China set to rise, the odds of Tesla becoming collateral damage will rise as well.

In March, Teslas were banned from some Chinese military complexes and housing compounds on concerns over its built-in cameras collecting and storing data, but Tesla immediately sought to reassure authorities that any data collected in China was stored locally.

Regardless, most investors are still bullish on Tesla, with Credit Suisse (+1.86%) saying in a note that its price target for US$800 for Tesla still remained, with the key downside risk being international demand and any issues with its brand new Model Y.

Tesla’s stock soared some 743% last year and is up about 5% since January.