Why Tesla's China Recall Is A 'Black Eye' Moment For The EV Maker In The Key Region

Tesla Inc TSLA is facing a setback in China, a region that is key to its growth plans going forward.

The Tesla Analyst: Wedbush analyst Daniel Ives has an Overweight rating and a $1,000 price target for Tesla shares.

The Tesla Thesis: Tesla will have to implement a software fix on more than 285,000 cars in China, which would mean on almost all the cars it has sold in China over the years, Ives said in a note.

The recall, the analyst noted, was to address safety issues on autopilot identified by a Chinese regulator.

"The State Administration for Market Regulation stated that the Tesla autopilot systems can be activated automatically, potentially leading to crashes from sudden acceleration," the analyst wrote in the note.

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This is a "moment of truth" for Tesla, which has been plagued by negative PR issues around autopilot in China over the last year, Ives said.

The recall, according to the analyst, is a "black eye moment" for Tesla in this key region. Ives expects the recall to be handled remotely in most cases through an online update to the cars' active cruise control feature.

Tesla should now make sure these issues are in the rear-view mirror, correcting software/autopilot problems, Ives said. The EV maker should move forward so that the recall issue does not become a "defining negative chapter" in the Tesla China story, he added.

"We believe this situation overall is a bump in the road and does not derail the near-term or long-term bull thesis for Tesla China, however going forward it needs to be a smoother road on autopilot safety otherwise the PR black cloud will continue," Wedbush said.

TSLA Price Action: At last check, Tesla shares were adding 2.35% at $687.46.

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(Photo: Inside of Tesla Model 3 via Tesla)