Federal safety regulators opened a probe into a series of fires in Tesla Motors Inc. electric cars following crashes.

The National Highway Traffic Safety Administration said Tuesday that it would investigate why two of the expensive Tesla Model S sporty hatchbacks have caught fire this year following accidents in which the battery casing that serves as the undercarriage of the car cracked open.

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A third fire, which took place in Mexico, won’t be part of the investigation because it is outside the agency’s jurisdiction.


NHTSA noted that in the two U.S. fires, one in Seattle and the other in Nashville, the battery monitoring system in the cars warned the drivers, allowing them to pull over and safely exit the vehicles before the battery emitted smoke and fire.

The fires have become an issue for Tesla, contributing to 37% drop in the value of its stock since reaching a high of $193.37 on Sept. 30. The shares were down an additional 2% in overnight trading Tuesday.

Tesla Chief Executive Elon Musk said the automaker requested the investigation to refute fears that electric cars are more prone to fires than other vehicles.

[Updated 8:55 a.m. PST, Nov. 19: Tesla Chief Executive Elon Musk claimed that the automaker requested the investigation to refute fears that electric cars were more prone to fires than other vehicles.


But the NHTSA disputed that, saying its decision was an independent process.

“In regards to Tesla, the agency notified the automaker of its plans to open a formal investigation and requested their cooperation,” the agency said, “which is standard agency practice for all investigations.”

Tesla is already taking action, changing its warranty to cover damage due to a fire, even if due to driver error.

“Either our belief in the safety of our car is correct and this is a minor cost,” Musk said, “or we are wrong, in which case the right thing is for Tesla to bear the cost rather than the car buyer.”


The automaker believes the warranty change, which doesn’t apply if an owner purposefully sets the car on fire, will reassure buyers.]

“If a false perception about the safety of electric cars is allowed to linger, it will delay the advent of sustainable transport and increase the risk of global climate change,” Musk wrote in a post to his blog on the Tesla website Monday night.

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The automaker is taking advantage of the car’s electronic capabilities to execute a wireless update to the air suspension that will result in greater ground clearance at highway speeds, Musk said.


“This is about reducing the chances of underbody impact damage, not improving safety,” Musk said. “The theoretical probability of a fire injury is already vanishingly small and the actual number to date is zero.”

Another software update expected in January will give the driver direct control of the air suspension ride height transitions.

Musk also defended the automaker’s vehicles, writing that they have a lower fire risk than gasoline vehicles.

“Since the Model S went into production mid last year, there have been over 400 deaths and 1,200 serious injuries in the United States alone due to gasoline car fires, compared to zero deaths and zero injuries due to Tesla fires anywhere in the world,” Musk wrote.


[Updated 8:55 a.m. PST, Nov. 19: But others said the fires were cause for concern considering that other electric cars were not set ablaze by crashes.

“While only three Tesla fires have occurred, that’s three more than I’m aware of for the Nissan Leaf, which has sold in greater numbers while being on the market longer,” said Karl Brauer, senior analyst at Kelley Blue Book, the auto information company.]

The NHTSA probe is the latest setback for the Palo Alto car company, which until last month looked to be accelerating as fast as its high-powered Model S.

Tesla was once among the hottest stocks on Wall Street. It shares soared from $33.87 on Dec. 31 to its all-time high of $193.37 on Sept. 30.


The growth was powered by brisk Model S sales, a glowing review from Consumer Reports, top results in federal crash tests and more than $100 million in sales of regulatory environmental credits to other automakers. The company is on track to sell about 21,000 of its cars, which start at more than $70,000.

Investor concern about the fires is behind much of the recent sell-off.

But other issues have also contributed to the decline, including a battery supply bottleneck, heavy research and development spending, and declining sales of lucrative environmental credits.

Earlier this month, Tesla said it posted a loss of $38.5 million, or 32 cents per share, in the third quarter. That compares with a loss of $110.8 million, or $1.05 per share, in the same period a year earlier.


[Updated 8:55 a.m. PST, Nov. 19: “The company was valued too high to begin with,” said Thilo Koslowski, an analyst with Gartner Inc. “This is a correction that needs to take place anyway.”]

Several Wall Street analysts have cut their price targets for the company, and Efraim Levy of S&P Capital IQ has recommended selling the stock.

“We do not see a major potential near-term upside catalyst for the shares,” Levy wrote in a report to investors.

However, Levy said Tuesday that the probe could actually help Tesla by resolving concerns about the car and restoring confidence in the company.


Indeed, Tesla shares rose after the federal safety probe was announced, rising $5.48, or almost 5% to $127.06, in midday trading.

He also said the moves by management to change the suspension and add fire damage to its warranty coverage were “proactive” moves that would help Tesla’s reputation.

“As a customer, I get something that I didn’t pay for, I like that,” Levy said.

Normally, car fires are not significant events that influence investors. There are about 150,000 annually, according to the National Fire Protection Assn. However, safety officials have been tracking fires in electric cars, as well as computers and other equipment, out of concern that the lithium-ion battery systems might be fire-prone.


This year, federal regulators grounded Boeing 787 planes for four months after batteries on two planes overheated, with one catching on fire. Boeing later ordered modifications to the jets to increase ventilation and insulation near the batteries, but the company and investigators never determined the root cause of the overheating.

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