The headline, "All Tesla Cars Being Produced Now Have Full Self-Driving Hardware", seems to imply that the Company is far ahead of its competitors and a revolution may be in the offing. Key element of the PR reads:
"We are excited to announce that, as of today, all Tesla vehicles produced in our factory - including Model 3 - will have the hardware needed for full self-driving capability at a safety level substantially greater than that of a human driver. Eight surround cameras provide 360 degree visibility around the car at up to 250 meters of range. Twelve updated ultrasonic sensors complement this vision, allowing for detection of both hard and soft objects at nearly twice the distance of the prior system. A forward-facing radar with enhanced processing provides additional data about the world on a redundant wavelength, capable of seeing through heavy rain, fog, dust and even the car ahead.
To make sense of all of this data, a new onboard computer with more than 40 times the computing power of the previous generation runs the new Tesla-developed neural net for vision, sonar and radar processing software. Together, this system provides a view of the world that a driver alone cannot access, seeing in every direction simultaneously and on wavelengths that go far beyond the human senses.
Model S and Model X vehicles with this new hardware are already in production, and customers can purchase one today."
This is powerful narrative and it is easy to see that the press and analyst community could fall for this dog and pony show. But, does this narrative have any real merit?
We do not believe so.
It is also clear that this event was rushed (more on this later) with the event being postponed once and a video that Musk thought to be critical was not even ready at launch. One has to ask: "why the rush?"
The very first thing to note is that further down the PR, Tesla says:
"Before activating the features enabled by the new hardware, we will further calibrate the system using millions of miles of real-world driving to ensure significant improvements to safety and convenience. While this is occurring, Teslas with new hardware will temporarily lack certain features currently available on Teslas with first-generation Autopilot hardware, including some standard safety features such as automatic emergency breaking, collision warning, lane holding and active cruise control. As these features are robustly validated we will enable them over-the-air, together with a rapidly expanding set of entirely new features."
For any technology industry veteran, this description should come as quite a shocker. Customers routinely expect product feature set to improve with a new release, not become worse.
Tesla says this is "temporary". So, how long will Tesla take to regain the feature set of the Tesla cars from the prior generation?
It depends on the type of Autopilot system customers want to buy. If they want to buy the basic version (Enhanced Autopilot), here is what Tesla has to say:
Note that, this feature is subject to regulatory approval - something we have not seen before. Readers are free to guess the chances of this software being released in December 2016.
However, if customers want this feature, they need to shell out $5,000 at the time of ordering (when they do not know when they feature set will start working. Or, they can pay $6,000 at a later date.
How about that promised utopia of Level 4 or Level 5? What does such a system constitute? Cost? And, become available?
Once again, here is what Tesla has to say:
This feature costs an additional $3,000 at the time order or $4,000 after delivery. This is quite an ask for a feature that gets regulatory approval in 2018? 2019? 2020?
Essentially, Tesla is selling $5,000/$6,000 option that may start working in a few months or an $8,000/$10,000 options that may start working at some undetermined time in the future. Why introduce new hardware when the software is not ready?
It is quite puzzling that Tesla has de-featured its Model S and Model X on what appears to be speculative future availability at a much higher cost. Why is Tesla rushing out this product that is clearly not ready? That too in a traditionally high demand fourth quarter?
This is not how things are done in manufacturing. To avoid disruption to manufacturing, product cut-overs are done during low demand quarters like the Q1 and the Q2. This move to AP 2.0, especially in what would normally be a busy Q4, does not seem to make much sense. Why would Tesla do this?
We see several possibilities:
- Tesla's relationship with Mobileeye was terminated abruptly and put Tesla in a position where they had to do a premature release of new system even though the product was not ready.
- The Company's discussions with regulatory agencies in the US, Germany, or other countries are not going well and the Company sees considerable regulatory risk with the current AP technology
- The Company's counsel is advising the Company that the current Autopilot is so fundamentally flawed that it is untenable to continue with it due to risk management reasons
- The demand in Q4 is so slow that it is a convenient time to make the product transition
- There is no better excuse on why the Company will miss Q4 delivery guidance than promote an futuristic product and use that as an excuse for guidance shortfall.
Setting aside the rationale and timing of the introduction, there are also some serious technology concerns about the solution being proposed.
Firstly, as far as Level 4 and Level 5 autonomy goes, the product release is tied to regulatory issues. It does not matter when Tesla has its technology ready, the Company will not be able to meaningfully deploy the technology without proper regulatory clearances (as a converse, this also means that the Company is unlikely to experience any meaningful time to market advantage as regulatory items are typically the long pole items on such issues).
Secondly, investors should realize there is virtually no IP in installing additional sensors and other hardware for autonomous driving. Any automotive vendor can do what Tesla is doing today but they will likely not go that path as the cost of additional hardware is not justified at the current point in time.
Thirdly, it should be noted that Autopilot is more about software than hardware although there is a minimum level of hardware that would be necessary and sufficient to deliver the required functionality. Once a set of sensors on the automobile are adequate, the main task of the autonomous systems falls on software.
Even at this basic level, we are skeptical that Tesla has the proper sensor suite to enable Level 5 functionality. Our key concern has to do with the limited range offered by the sensors that Tesla is adding (see image below).
Tesla Autopilot Update Is Not What It Seems
In summary, nothing that Tesla did in the context of this particular PR event makes much sense in the context of a properly managed product roll out.
Tesla is trying to push a capital raise and a merger through and, when coupled with vendor (Mobileeye) and regulatory problems, we see this whole PR effort as a snow job on the part of Tesla.
As we have already forecasted, Q4 is going to be ugly.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.