Tesla Betting The Farm On Autonomy
Elon Musk’s risky bet on robotaxis could sideline Tesla's mass market dream
According to recent Reuter report (link), Tesla has abruptly shifted gears, sidelining its much-anticipated affordable electric vehicle (EV) in favor of a full-throttle push into the commercialization of self-driving robotaxis. The market's reaction to Tesla's strategic pivot was swift and stark, with Tesla’s stock taking a -6% hit post-announcement.
Musk have since come out and said the report is not true, though the subsequent announcement to unveil the robotaxi on 8/8 suggests that the reporting isn’t an outright lie. I suspect that the $25k EV is not “dead”, but it has taken a back seat against the robotaxi for now. In fact, the announcement is likely a rallying cry for one of Musk famous “surges” to achieve something incredibly daunting under seemingly impossible timeline.
This isn’t the first time Elon Musk, Tesla's visionary CEO, has made a bold bet. In the past 20 years, his penchant for high-stake gambles has reshaped industries. However, this latest bet might just be his most controversial yet, potentially marking a significant strategic misstep for the electric auto giant.
The High Stakes of Autonomy & The Promised Land of Affordable EVs
The narrative of Tesla has always been supported by 2 pillars:
achieving full self-driving
releasing an affordable EV for the mass market
The road to realize full self driving is a path riddled with complex engineering challenges and regulatory hurdles. While FSD have come a long way, even the latest version (v12.3) is still very far from driving itself. The entire industry, including Musk himself, has a terrible track record of predicting the arrival of fully autonomous driving. Even if the technology is good enough, solving for the regulatory and insurance hurdle will also take time and is a major risk for commercialization. As a result, FSD has always been viewed as an option for the future. It would be incredible feat if achieved, but it’s not a requirement for Tesla to grow.
The affordable electric car, however, is. The promise of the “Model 2” has been a cornerstone of its brand allure, promising to bring sustainable transportation to the masses. With an expected price tag of around $25,000, the “Model 2” was poised to be a game-changer, opening the floodgates to mass-market adoption and securing Tesla's dominance in the burgeoning EV space. This dream, repeatedly teased by Musk, has been a tantalizing vision of the future, not just for consumers but for investors banking on Tesla's continued growth.
In Morgan Stanley’s latest investor note, they had accounted for Model 2 to contribute 40% of future incremental volume growth from FY24 through FY30. By 2030, it’s projected to account for 36% of global sales volume.
Tesla's abrupt pivot raises a critical question: Is forsaking the affordable EV market for the speculative future of robotaxis a strategic blunder? The company's financial health and market position could be compromised if it fails to deliver on the robotaxi promise or if the market for autonomous vehicles does not mature as quickly as Musk anticipates.
Meanwhile, the affordable EV segment is ripe with potential, promising not only volume sales but also a broader adoption of electric mobility. By sidelining its plans for a more accessible Tesla, the company risks alienating a significant segment of the market and ceding ground to competitors, especially agile and increasingly dominant Chinese automakers like BYD, who are quickly filling the void with affordable and appealing electric models.
The Global Race for EV Dominance
While Tesla has been focusing on premium segments and now autonomous driving, BYD has capitalized on the mass-market appeal, aggressively expanding its lineup with models that cater to a broader audience. This strategy has paid off. BYD has long surpassed Tesla in terms of overall sales volume, selling over 3 million vehicles vs Tesla’s 1.8 million vehicles in 2023. In Q4 2023, BYD also surpassed Tesla in BEV segment for the first time ever, selling 526,000 vehicles vs Tesla’s 484,000. This marked a historic shift, as Tesla, once the undisputed leader in the global electric vehicle market, found itself playing catch-up in terms of volume.
While this fierce competition is largely isolated in China today, that is also changing quickly. China’s overall BEV exports rose 70 percent in 2023, reaching $34.1 billion. The European Union (EU) is the largest recipient of Chinese BEV exports, accounting for nearly 40 percent of them.
Admittedly, today, majority of these exported vehicles are Tesla and other Made in China EVs with foreign logos on them (i.e. MG, Polestar etc.) With time, that will change as more domestic Chinese brands establish sales network abroad.
This development underscores the critical nature of the affordable EV market segment, which Tesla seems to be sidelining. As the demand for electric vehicles expands globally, the ability to offer competitive, accessible, and diverse EV options becomes increasingly crucial. In this context, Tesla’s decision to deprioritize “Model 2” in favor of robotaxis could be seen as a strategic misstep, potentially limiting its growth in a market that is rapidly democratizing and diversifying.
In Conclusion: A Risky Gamble with High Stakes.
Elon Musk's bet on robotaxis is undeniably bold, in line with his reputation as a disruptor. However, this move might be prematurely sidelining a critical market segment and betting the farm on a future that is still out of focus. While autonomous vehicles, particularly robotaxis, represent a significant advancement in technology with the potential to redefine urban mobility, the market for such technology is in its infancy. In contrast, the demand for affordable EVs is here and now, growing rapidly and increasingly serviced by Tesla's competitors.
The race for EV dominance is no longer a one-horse race with Tesla at the lead; it's a global marathon with numerous automakers vying for the top spot. Tesla's recent strategy shift, especially in light of BYD's recent sales achievements, highlights the competitive pressures and market dynamics at play.
As Tesla navigates this pivotal juncture, the broader question looms: Will Musk's gamble on robotaxis propel Tesla into a new era of transportation, or will it be a strategic misstep that sidelines the company in the race for EV dominance? Only time will tell, but for now, the decision to forgo the mass-market EV in favor of autonomous taxis is a high-stakes strategy that could redefine—or derail—Tesla's journey.