Has Elon Musk given up hope that he can still sustain growth in the crucial final days of the quarter? Tesla’s CEO is banking on more drivers opting for its expensive Full Self-Driving technology – an optional $12,000 extra – and is even willing to accept a decline in car sales.
“Almost no one realizes how well FSD (supervised) works,” he told staff in an internal email. “From now on, in North America it will be mandatory to install and activate FSD V12.3.1 and take customers on a short test drive before handing over the car. I know this will slow down the delivery process, but it’s still a difficult requirement.”
According to the CEO, it won’t just be new owners who will have the chance to participate: “All FSD-compatible US cars will be enabled for a one-month trial this week.”
There is a financial incentive to request an FSD demo upon delivery.
(Tesla’s average selling price is $45,000; manufacturing cost is $36,000; incremental sales of $12,000 software add-ons significantly increase gross margin)
But strategic considerations are probably of primary importance.
A happy… https://t.co/Wgd1qeBJmI
— Brett Winton (@wintonARK) March 25, 2024
Demand for FSD has struggled after initial enthusiasm in late 2022, when Tesla opened beta testing to anyone willing to pay after initially limiting its testing program to U.S. customers with high safety scores.
However, the beta version that allows FSD to be activated on all roads, not approved for use outside North America, has proven to be highly unreliable from update to update.
Interest thus remained largely limited to die-hard Tesla enthusiasts willing to pay the high cost – at one point $15,000 – for the privilege of being a tester at the cutting edge of the technology.
Talks to license it to other automakers also proved fruitless.
In January, Musk estimated the total number of cars on North American roads with beta FSD installed at more than 400,000.
If true, the number would have remained virtually unchanged in about a year.
Improved gradual change with new AI-enabled software
Things may now start to change with the move in December 2023 from commands coded in C++ software to a neural network.
Hopes have since risen that Tesla may finally celebrate its “ChatGPT moment” in which cars could drive completely on their own without human supervision.
While this hasn’t happened yet, version 12.3 was recently released to overwhelmingly positive response.
Musk also further raised hopes that the software can be iterated quickly now that Tesla, in his words, AI training was no longer limited by computation.
Such a turnaround would go a long way toward justifying Tesla’s lofty valuation, especially now that growth has stalled, as software margins can be notoriously high, reaching double digits.
This is because FSD has initial costs for development and ongoing upgrades, but each additional license does not incur incremental costs.
FSD is therefore, in theory, easily scalable thanks to over-the-air updates distributed to the fleet, since every Tesla built is equipped with the necessary computer and the software can be installed after purchase.
Increased demand for FSD is much needed as it appears increasingly likely that quarterly sales will decline year over year for the first time since the pandemic triggered a mild decline in the second quarter of 2020.
Brett Winton, senior analyst at ARK Invest, supported the automaker’s decision to make a more concerted push with its proprietary technology.
“People will probably see this as an attempt by Tesla to sell FSD,” he said he wrote on Monday. “The reality is that FSD will sell Tesla.”